<PAGE>

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

                                  FORM 10-KSB
(Mark One)

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

                  For the fiscal year ended December 31, 2000
                                      OR
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                  For the transition period______ to ________

                        Commission file number 0-27751

                           WORLDQUEST NETWORKS, INC.
                (Name of small business issuer in its charter)

           Delaware                                       75-2838415
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                        Identification No.)

            16990 Dallas Parkway, Suite 220, Dallas, Texas   75248
            (Address of principal executive offices)         (Zip Code)

        Issuer's telephone number, including area code:  (972) 818-0460

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES X   NO____
   ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none 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 its most recent fiscal year were: $12,906,173.

The aggregate market value of the voting common stock held by non-affiliates of
the issuer, based on the closing sales price of $2.6875 per share, was
$8,807,615 as of December 31, 2000.

At March 1, 2001, the registrant had outstanding 6,381,199 shares of par value
$.01 common stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-KSB incorporates certain information
by reference from the definitive Proxy Statement for the registrant's 2001
Annual Meeting of Stockholders.

Transitional Small Business Disclosure Format (check one):

                   Yes ______              No  X
                                             ------
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                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
<S>                                                                                                      <C>
ITEM 1.       DESCRIPTION OF BUSINESS.....................................................................     1
ITEM 2.       DESCRIPTION OF PROPERTY.....................................................................    11
ITEM 3.       LEGAL PROCEEDINGS...........................................................................    11
ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................    11

                                        PART II
ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................    12
ITEM 6.       MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...................................    13
ITEM 7.       FINANCIAL STATEMENTS........................................................................    23
ITEM 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE.........................................................    23

                                       PART III
ITEM 9.       DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL........................................    24
              PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT..................................    24
ITEM 10.      EXECUTIVE COMPENSATION......................................................................    24
ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................    24
ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................................    24
ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K............................................................    24
</TABLE>

                                      -i-
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                           WORLDQUEST NETWORKS, INC.

                                    PART I

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

General

         We were incorporated in October 1996 as a Texas corporation. We
reincorporated in Delaware in October 1999. Our executive offices are located at
16990 Dallas Parkway, Suite 220, Dallas, Texas 75248. Our telephone number is
(972) 818-0460 and our Web site can be found at www.wqn.com. The information on
our Web site is not part of this Form 10-KSB.

         We are an international Internet telephony company. We sell virtual
prepaid calling cards through our interactive and easy to use Web site and
transmit long distance calls at discounted rates through our Internet and
traditional networks. We also market and sell our WebOrganizer, an intelligent
address book and calendar that enables customers to make domestic and
international phone calls and send faxes on line with two clicks of a computer
mouse from anywhere in the world. We advertise, sell and deliver our products
worldwide through the Internet.

         All of our calls are made from phone-to-phone over our networks. The
voice quality of our Internet carried calls is virtually the same as an
international telephone call carried over a traditional telephone line. We
believe consumers are more familiar and comfortable using telephones to make
calls, as opposed to computers which have historically been used for Internet
telephony.

         We focus on the international long distance market, with particular
emphasis on the calling patterns between the United States and various
countries. Our virtual calling cards and the WebOrganizer may be used to call
from the United States to other countries, to call from other countries to the
United States, or to call between countries outside the United States.

         We also buy, at a discount, virtual calling cards processed through
other companies' platforms and sell them to our customers.

Forward Looking Statements

         This Form 10-KSB includes certain statements that are not historical
facts and are deemed to be "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934. See Item 6 - "Management's
Discussion and Analysis or Plan of Operations -- Forward Looking Statements" for
a further discussion of these "forward-looking statements."

Industry Overview

         The Internet is an increasingly significant interactive global medium
for communication, information and commerce. International Data Corporation, a
market research firm, estimates that the number of users who make purchases over
the Internet worldwide will grow from 31 million in 1998 to more than 183
million in 2003.

         Emergence of Internet Telephony. Internet telephony has emerged as a
low cost alternative to traditional long distance telephony. Internet telephone
calls are less expensive than traditional international long distance calls
primarily because these calls are routed over the Internet or through data
networks. The use of the Internet bypasses a significant portion of
international long distance networks and the relevant tariffs. Also, routing
calls over the Internet is more cost-effective than routing calls over
traditional circuit-switched networks, because the packet-switching technology
that enables Internet telephony is more efficient than traditional
circuit-switched voice technology. Packet-based networks, unlike circuit-based
networks, do not require a fixed amount of bandwidth to be reserved for each
call. This allows voice and data calls to be pooled, which means that packet
networks can carry more

                                      -1-
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calls with the same amount of bandwidth. This greater efficiency creates network
cost savings that can be passed on to the consumer in the form of lower long
distance rates.

         Prepaid Calling Card Industry. The market for prepaid calling cards has
grown significantly since 1993. This growth is attributed to three trends
according to industry sources. First, the larger telecommunications companies
have come to understand the strategic and financial benefits of prepaid calling
cards. Second, consumers are becoming more aware of various advantages of
prepaid cards. Third, businesses are beginning to purchase prepaids as a means
of controlling telephony costs and simplifying record keeping. We believe that
the affordable pricing, convenience and enhanced features of prepaid calling
cards has attracted price sensitive customers, business travelers, international
callers and other users of long distance service. Also, while prepaid calling
cards are relatively new in the United States, they have been a widely used and
accepted method of making telephone calls in Europe and Asia since the 1970s.

Our Telephone Service Products

         We sell virtual prepaid calling cards over the Internet. They are
virtual because we do not issue a physical card. Rather, we electronically issue
a personal identification number, or PIN, to the customer when the electronic
purchase transaction is completed. Once sold, the virtual calling card can be
used immediately to make international and domestic long distance calls.
Historically, substantially all of the minutes purchased on our virtual calling
cards have been used within 31 days of purchase. We believe this rapid use and
the convenience of our Web site and our "buy it now, use it now" capability
fosters repeat purchases and repeat customers.

         Our system functions as follows. A potential customer accesses our Web
site follows the prompts to enter the credit card information to purchase the
virtual calling card, we verify the credit card within seconds and the
confidential PIN and a toll free number is displayed for the customer to record,
and the virtual calling card can be used immediately to place a call. The
customer information becomes part of our data base for future reference.

         Our virtual calling cards give us the flexibility of promptly changing
the rates and features to respond to changing consumer demand, rather than
having an inventory of physical cards with set features that cannot be changed
until all are recalled or used. This also allows us to offer and test several
different types of virtual calling cards with varying pricing features, thus
providing a greater selection to our customers.

         Our Web site is accessible 24 hours per day, seven days a week, so we
are not constrained by the hours that a retail store would be open for business.
Our Web site may also be reached from the customer's home or office. The
customer is not required to physically travel to another location to make a
purchase and receive delivery. Our online purchasing and delivery also allows us
to deliver a broad selection of products to customers worldwide in rural or
other locations that do not have convenient access to physical stores.

         U.S. Access. Our U.S. Access virtual calling cards provide access to
our network for calls from the United States to more than 241 countries and
territories. When using the U.S. Access virtual calling card for a call from the
United States to another country, the customer uses a touch tone telephone to
dial a toll free number and enters the PIN and the telephone number the customer
seeks to reach. Our enhanced services platform determines the virtual calling
card is valid and the number of call minutes remaining on it, based on the rate
for the country being called. The platform then completes the call and reduces
the available credit balance on the virtual calling card at the conclusion of
the call.

         World Access. When using the World Access virtual calling card for a
call from another country to the United States or from country to country
outside the United States, the customer initiates the call through the Internet
by accessing our Web site and going to the world access page on their
WebOrganizer. On the world access page, a virtual card is displayed and the
customer enters the telephone number where he or she is, the telephone number he
or she wants to call and his or her PIN and then "clicks" on the call button.
This information is transmitted over the Internet to our platform. The platform
determines the virtual calling card is valid and has a sufficient balance and
then routes a call to the customer at the number where he or she is. When the
customer answers, the platform completes the call by connecting to the number
the customer wanted to call. From their WebOrganizer, these features allow
customers to make calls from anywhere in the world at our international United
States long distance rates using the virtual calling card and Internet access to
our Web site and platform.

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         In certain countries where we have an Internet gateway, we can e-mail
to customers a local telephone number to dial. This number connects to our
platform the same as if the toll free number in the United States had been
dialed and the process is the same from that point. This feature allows a
customer to place a call from that country to the United States or another
country with a touch tone telephone and without the need for Internet access to
our Web site and platform. These calls are also at our international United
States long distance rates.

         WebOrganizer(TM). A service we developed and made available on our Web
site in the fourth quarter of 1999 is our WebOrganizer(TM). The WebOrganizer is
an intelligent electronic address book and calendar with names, telephone
numbers and scheduled events which is maintained by us on our secure Web site.
This service is a membership club and is interactive so the customer can add and
delete names, numbers and events. The WebOrganizer enables an approved customer
to make an international long distance call or PC generated facsimile
transmission from any country to any other country at our international United
States long distance rates, or domestic calls or PC facsimile transmissions
within the United States, by simply accessing our Web site and following the
prompts to the page for the WebOrganizer for such customer, selecting the number
where the customer is located and then "clicking" the name and number of the
person to be called or to whom the facsimile transmission is to be sent.
Additional services are currently being developed and tested for the
WebOrganizer. These services will allow WebOrganizer customers to send, receive
and forward faxes directly from their PC's, recharge their prepaid calling
account, receive and retrieve voice-mail, send and receive e-mail from their
existing e-mail service and have calls forwarded to them anywhere in the world.
Most of these services will be equally accessible from a telephone or from the
Internet.

         Resale of Virtual Calling Cards. We also buy virtual calling cards
processed through other companies' platforms. We buy them at a discount and sell
them to our customers on our Web site as our virtual calling cards. We sell
these virtual calling cards for calls from the United States to other countries
where we have not established our own Internet network and where our negotiated
rates with our international long distance carriers are not as favorable. We
estimate that approximately 72.5% and 70.5%, respectively, of our revenues for
the fiscal years ended December 31, 2000 and 1999 were generated from these
virtual calling cards processed through other companies' platforms. As we
increase our infrastructure and negotiate better rates with international
carriers, it is expected that the resale of these virtual calling cards will
become a less significant part of our total business.

Our International Networks

         Our Enhanced Services Platform. Our enhanced services platform is a
specialized telephone switch. It is connected to our Web site and data base and
to our network of outgoing and incoming telephone lines and Internet lines. It
sets up all customer account and PIN information when a virtual calling card is
purchased and immediately activates the virtual calling card so it can be used
at the time of purchase. The platform also accepts and evaluates all calls from
virtual calling card holders over the toll free number and over the Internet and
confirms the validity of the virtual calling card and remaining balance. We have
also programmed into the platform a lowest cost routing matrix. This matrix
automatically routes each call over the route most economical to us. This means
it will select our international carrier with the lowest rate or the Internet if
we have a gateway in the call destination country. We believe our platform can
currently support approximately 288 simultaneous calls and over 4 million
minutes of traffic per month. Our platform is expandable to carry more traffic
by adding additional telephone trunks and line cards. Focusing on the
international market, the use of our platform is spread throughout the day as a
result of the different world time zones.

         We plan to develop and offer new products and services which may
require modifications and enhancements to our platform. For any modification or
enhancement, we will either contract with the manufacturer to develop new
software or we may develop the software, or a combination of both. In the past,
we have experienced delays when we have tried to upgrade our platform. If the
software cannot be developed cost effectively, or there will be significant
delays, we may elect to abandon a potential product or service in favor of one
that can be timely developed on a cost effective basis. There can be no
assurance that we can successfully develop the software to enable us to offer
new products or services.

         Our Internet Gateway Network. As of March 1, 2001, we had international
gateways operational in Mexico, Sri Lanka, India, Pakistan, Bangladesh, United
Arab Emirates, Philippines and Jamaica. As of such date, we also had domestic
gateways operational in Dallas and in Newark, New Jersey. We intend to place
Internet gateways in

                                      -3-
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various other countries. Before we place a gateway in another country, we enter
into contractual relationships with local persons or entities to operate them.
We typically own or lease the gateway or have the right to purchase it and the
local person or entity is responsible for procuring local Internet provider
connection and local telephone lines and complying with local law. Our contracts
with the local person or entity are generally for a one year term and are
renewable unless either party declines to renew. We pay the local person or
entity a negotiated rate per minute for terminating or originating calls through
the gateway. During fiscal 2000, we entered into joint venture agreements with
two Internet telephony companies for the development and use of Internet
gateways in certain countries for both our retail and wholesale business. We
split the profits from the wholesale revenues of each joint venture equally with
our joint venture partner.

         Our gateways allow for voice quality transmission through the Internet.
The historical poor sound quality of Internet voice transmission is due to the
Internet not being created for simultaneous voice traffic. Unlike conventional
voice communication circuits, in which the entire circuit is reserved for a
call, Internet telephony uses packet switching technology, in which voice data
is divided into discrete packets that are transmitted over the Internet. These
packets must travel through several routers in order to reach their destination,
which may cause misrouting, and delays in transmission and reception. The
software in our gateways connect the packet switched data transmitted over the
Internet to circuit switched public telephone networks in such a manner that
virtually eliminates the delay in transmission normally involved in Internet
voice transmission and the resulting pause and echo effect. We also select
Internet service providers with Internet connections that permit us to limit the
delay between their Internet connections and ours to less than 200 to 400
milliseconds. This also improves the voice quality of our transmissions over the
Internet.

         Our Internet gateways enable us to route voice quality calls through
our enhanced services platform to and from the country via the public Internet
or private intranet networks such as a frame relay network. The cost of these
calls is based on the local telephone rates for the country where the gateway is
located. They are not based on international or local long distance rates.

         Our Leased Lines Network. We also lease international telephone lines
to transmit calls. Our lease agreements obligate the carriers to terminate calls
routed by us to them at different rates for different countries and territories.
With these agreements, we have access to more than 241 countries and
territories. Leased capacity is typically obtained on a per-minute basis or
point-to-point fiscal cost basis. Our agreements are typically one year
agreements with 30-day cancellation rights by either party. Rates are adjusted
approximately every 30 days, are based on volume and our rates generally decline
as volume increases. We are dependent on these carriers to terminate our calls,
and the loss of one or more of them as a source for terminating calls could have
a material adverse affect on us. However, we believe there are numerous
international long distance carriers that transport calls to the countries we
desire to target and we believe we could replace any of the carriers we lost. If
the rates of any replacement carrier are higher, or our existing carriers raise
their rates, our profit margins would decrease. We also sell to other long
distance carriers any excess line capacity we have. Excess line capacity is the
remaining capacity on our telephone lines not used by us to terminate our own
calls during any given month.

         Our Third Party Contracts. Our success depends, in part, on our ability
to continue to lease long distance telephone capacity from third parties at
economic rates to serve the foreign countries we target. It also depends, in
part, on our ability to maintain our contractual relationships with local
terminating parties in those countries where we have Internet gateways. If we
lose our leases or contracts or if these parties are unable to provide these
services, we believe we could replace them. However, it would cause a disruption
of our business until they are replaced. Also, any replacement leases or
contracts may not be at rates or on terms as favorable to us.

Credit Card Processing Arrangements

         All sales of our virtual calling cards are made over the Internet
through credit card purchases. We use credit card processing companies to verify
credit cards. These companies are connected to our platform and data base and
verification or denial is usually accomplished within seconds. We pay these
processing companies a percentage of sales as their fee. We have used a portion
of the proceeds of our recently completed initial public offering to further
increase our allowed base for credit card sales by increasing the deposits we
maintain with our processing companies.

                                      -4-
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Sales and Marketing

         We have developed a marketing strategy based on increasing customer
traffic to our Web site and strengthening our brand name.

         Internet Advertising. We have taken a selective approach in our
advertising strategy. We attempt to maximize the return from promotional
expenditures by choosing advertising media based on the cost relative to the
likely audience and ability to generate increased traffic for our Web site. We
identify a country and customer group to whom we desire to market our virtual
calling cards.

         We place advertisements on various Web sites and Internet portals
frequently visited by this customer group in the United States and abroad. These
advertisements usually take the form of banner ads that encourage readers to
click through directly to our Web site. We believe that placing banner
advertising on these Web sites and portals may significantly increase our
targeted exposure to prospective customers and increase our name identity.

         Customer Electronic Mail Broadcasts. We actively market to our base of
customers through e-mail broadcasts. All new virtual calling card purchasers are
automatically added to our electronic mailing list, which consists of over
150,000 prior purchasers as of March 1, 2001 and Internet customers of our local
Internet service providers in other countries. We e-mail messages on a periodic
basis to our customers announcing new rates, new countries, new products and new
features.

         Electronic Mail to Select Mailing Lists. We also deliver e-mail
broadcasts to certain select mailing lists from time to time announcing
pertinent information, including the addition of a new country, new products and
rates.

         Other Methods. We will continually review other potential
cost-effective methods of advertising and marketing our products and services
through the Internet. Such methods may include the use of an affiliate program,
chat rooms, video e-mail and other methods.

         WebOrganizer(TM). During the fourth quarter of 1999, we released
WebOrganizer(TM). WebOrganizer(TM) is an intelligent address book and calendar
that enables customers to make domestic and international phone calls and some
faxes online with two clicks of a computer mouse from anywhere in the world. Our
WebOrganizer(TM) is currently available in English, Spanish and Portugese. We
also plan to make it available in other languages.

Customer Support and Service

         We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat purchases is dependent, in
part, on the strength of our customer support and service operations and staff.
Our customer support and service personnel are available from 6:00 a.m. to
midnight Central Time, five days a week to provide assistance via e-mail or
telephone. They are responsible for handling all customer inquiries.

         We provide pre- and post-sales support via both e-mail and telephone
service during business hours. If a customer has encountered a problem in
ordering or using our products, our customer service department will take the
call, or the e-mail, and respond immediately. If the virtual calling card is
from our own inventory and operates on our enhanced services platform, problems
can be resolved immediately and usually within one business day. For virtual
calling cards that we sell as a reseller, directing traffic through someone
else's switch, we are able to respond to the customer immediately but resolution
of the matter may take two or more business days.

         Our Web site has been designed around industry standard architectures
to reduce downtime in the event of outages or catastrophic occurrences. Our Web
site provides 24 hour a day, seven day a week availability. Our Web site
operations staff consists of systems administrators who manage, monitor and
operate our Web site. The continued uninterrupted operation of our Web site is
essential to our business, and it is the job of the site operations staff to
ensure, to the greatest extent possible, the reliability of our Web site. We
provide our own connection to the Internet through MCI Worldcom/UUNET's backbone
and through SAVVIS's backbone. We believe that these telecommunications and
Internet service facilities are essential to our operation and we anticipate
upgrading these facilities as volume and demand for our services grow.

                                      -5-
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Technology

         We use a combination of our own proprietary software applications and
commercially available licensed technology to conduct our Internet and telephone
routing operations.

         Proprietary Technology. We have developed proprietary customer software
which permits a customer to purchase a virtual calling card on our Web site
using a credit card and to have the virtual calling card delivered while on our
Web site. We have also developed proprietary customer software to allow our
world access virtual calling cards and phone collect PINs to initiate calls
through regular telephone lines using our Web site and enhanced services
platform, and we have developed various proprietary credit and fraud management
applications which aid us in checking credit and limiting fraudulent
transactions.

         Our engineering staff consists of software development engineers and
consultants. We historically have developed and expect to continue to develop
proprietary software internally. Our engineering strategy focuses on the
development of our Web site, which includes the enhancement of features and
functionality of our existing software components, the development of additional
new software components, and the integration of off-the-shelf components into
our systems.

         Commercially Available Licensed Technology. Our strategy has also been
to license commercially available technology whenever possible rather than seek
a custom-made or internally-developed solution. We believe that this strategy
enables us to reduce our operating costs and to respond to changing demands due
to growth and technological shifts. This strategy also allows us to focus our
development efforts on creating and enhancing the specialized, proprietary
software applications that are unique to our business. Listed below are some of
our key architectural components:

     -   High speed links to the Internet through MCI Worldcom/UUNET's and
         SAVVIS's backbones;

     -   Dell clustered Servers for Web and data base applications running
         Windows NT, Windows 2000 and Microsoft SQL Server 7.0;

     -   Microsoft Internet Information Server 4.0 has been chosen for its
         ability to secure sensitive customer information through SSL
         encryption; and

     -   Microsoft SQL Server 7.0 is a relational database. All customer names
         and addresses, PINs, number of purchases and call records are stored
         within this data base.

        We depend on Internet service providers to provide Internet access to us
and our customers. As of March 1, 2001, we had two Internet service providers in
Dallas. Our local terminating parties in foreign countries also rely on local
Internet service providers for access to the Internet in their countries. If we
lost our connection with both of our Dallas Internet service providers, we could
not sell our virtual calling cards through our Web site, and Web initiated calls
could not be made by our customers, until the connection was reestablished. If a
local terminating party in a foreign country loses its Internet connection, we
could not route calls over the Internet to that destination until the connection
was reestablished. These failures could cause us to lose customers and our
ability to sell virtual calling cards and telephone services would be affected.

     Our customers also rely on Internet service providers for access to the
Internet. If our customers cannot access the Internet, they cannot access our
Web site to purchase virtual calling cards or make Web initiated calls.

Government Regulation

     Regulation of the Internet. The United States Congress and the Federal
courts have taken actions that, in some cases impose some forms of regulation on
the Internet, and in other cases protect the Internet from regulation. For
example, Congress has adopted legislation that regulates certain aspects of the
Internet. This includes restrictions on some forms of content. These regulations
have had mixed success in the Federal courts. The Supreme Court has struck down
some restrictions on indecent content, but has upheld other restrictions on
harassing Internet messages.

                                      -6-
<PAGE>

Conversely, Congress passed legislation in 1998 that imposed a three year
moratorium on the imposition of new taxes on Internet transactions. At the same
time, numerous new bills have been proposed that would further regulate various
aspects of Internet commerce, and ensure the continued deregulation of others.
It is impossible to say at this time whether and to what extent the Internet may
ultimately be regulated by the United States government.

     The European Union has also enacted several directives relating to the
Internet, including one permitting European consumers to sue in their own
country persons from another country retailing goods over the Internet. On the
other hand, the G8 countries have recommended that digital products (such as our
virtual calling cards) should be exempt from all import taxes and custom duties.
As with the United States Congress, the European Union, and the governments of
individual foreign countries, are actively considering proposed legislation that
could result in new regulations on the Internet. Increased regulation of the
Internet may decrease its growth, which may negatively impact the cost of doing
business via the Internet or otherwise materially adversely affect our business,
results of operations and financial condition. In addition, applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, jurisdiction to
sue, libel, obscenity and personal privacy is uncertain. The vast majority of
such laws were adopted prior to the advent of the Internet and related
technologies. As a result, these laws do not contemplate or address the unique
issues of the Internet and related technologies.

     Potential Regulation of Internet Telephony. To our knowledge, there are
currently no domestic and few international laws or regulations that prohibit
the transmission of voice communications over the Internet. If Congress, the
FCC, state regulatory agencies or governments of other countries impose
substantial regulations relating to Internet telephony, the growth of our
business could be adversely affected. In the United States, several efforts have
been made to enact federal legislation that would either regulate or exempt from
regulation telecommunication services provided over the Internet. State public
utility commissions may also attempt to regulate the provision of intrastate
Internet telephony services. In late 1998 and early 1999, however, the FCC
issued two decisions that suggest that all transmissions over the Internet may
be jurisdictionally interstate, and these decisions may restrict the ability of
state public utility commissions to regulate Internet telephony. Recently,
however, a Colorado court ruled that Internet telephony companies would be
subject to payment of originating and terminating access charges to the
incumbent provider. Imposition of such charges on our services would increase
our costs. Internationally, a number of countries that currently prohibit
competition in the provision of voice telephony have also prohibited Internet
telephony. Other countries permit but regulate Internet telephony.

     On April 10, 1998, the FCC issued a Report to Congress concerning its
implementation of the universal service provisions of the Telecommunications
Act. In the Report, the FCC indicated that it would examine the question of
whether any forms of "phone-to-phone" Internet Protocol telephony are
information services, which are unregulated, or telecommunications services,
which are fully regulated. The Report noted that the FCC did not have, as of the
date of the Report, an adequate record on which to make any definitive
pronouncements. The FCC did, however, note that the record before it suggested
that some forms of phone-to-phone Internet telephony appear to have the same
functionality as non-Internet Protocol telecommunications services.

     While the FCC found that it needed a more complete record to establish new
rules, it tentatively concluded that providers of phone-to-phone Internet
telephony services should be treated like other providers of telephone service.
This means that they should be required to make payments into Federal universal
service subsidy programs. To date, the FCC has taken no further action, and has
not imposed this obligation on Internet telephony providers. It may do so at
some time in the future, however, and such a decision could have a material
adverse effect on our business, increasing our costs, and the price at which we
can offer our Internet telephony services.

     Regulation of Leased Lines and Carriers. When we lease long distance
telephone capacity from third-party carriers, we rely on them to comply with
local laws and regulations. We have no control over the manner in which these
companies operate in these countries. Foreign regulatory, judicial, legislative
or political entities may raise issues regarding the compliance of these
companies with local laws or regulations, or limit their ability to carry our
calls.

     State Laws. Several states have also proposed legislation that would limit
the uses of personal user information gathered online or require online services
to establish privacy policies. Changes to existing laws or the passage of new
laws intended to address these issues could reduce demand for our services or
increase the cost of doing business. In

                                      -7-
<PAGE>

addition, because our services are accessible worldwide, and we facilitate the
sale of goods to users worldwide, other jurisdictions may claim that we are
required to comply with their laws. We are qualified to do business in Delaware
and Texas only, and failure by us to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or regulation,
or the application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a material adverse effect on our
business, financial condition and operating results.

     Sales Taxes. We do not currently collect sales or other similar taxes for
virtual calling cards or other services sold through our Web site, other than
for virtual calling cards sold to Texas residents. However, one or more states
may seek to impose sales tax or similar collection obligations on out-of-state
companies, such as ours, which engage in Internet commerce. A number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of online commerce,
and could adversely affect our opportunity to derive financial benefit from such
activities. Moreover, a successful assertion by one or more states or any
foreign country that we should collect sales or other taxes on the sale of
virtual calling cards or services on our system could have a material adverse
effect on our operations.

     Legislation imposing a moratorium on the ability of states to impose new
taxes on Internet-based transactions was passed by the United States Congress in
1998. The tax moratorium will be in effect only until October 2001 but
legislation is currently pending in Congress to extend the moratorium. If the
moratorium expires at the end of its three-year term, there can be no assurance
that the moratorium will be renewed at the end of such period. Failure to renew
the moratorium could allow various states to impose new taxes on Internet-based
commerce. The imposition of such taxes could have a material adverse effect on
our business, financial condition and operating results. The same legislation
that imposed the moratorium also established an Advisory Commission to consider
methods by which states could impose sales taxes on Internet transaction.

Competition

     With respect to prepaid calling cards, we compete with many of the largest
telecommunications providers, including AT&T, MCI WorldCom, Cable & Wireless and
Sprint. These companies are substantially larger and have greater financial,
technical, engineering, personnel and marketing resources, longer operating
histories, greater name recognition and larger customer bases than we do. We
also compete with smaller, emerging carriers in the prepaid calling card market,
including Ursus Telecom Corporation, RSL Communications, IDT Corp. and ValuComm
Communications Corp. We may also compete with large operators in other
countries. These companies may have larger, more established customer bases and
other competitive advantages. Deregulation in other countries could also result
in significant rate reductions. We believe that additional competitors will be
attracted to the prepaid card market. These competitors include Internet-based
service providers and other telecommunications companies. Competition from
existing or new competitors could substantially reduce our revenues from the
sale of these cards. A general decrease in telecommunication rates charged by
international long distance carriers could also have a negative effect on our
operations.

     An increasing number of large, well-capitalized companies are entering the
market for Internet telephony products and services. As a result, we may not be
able to compete effectively with our competitors in this market, or to increase
our customer base. Various major long distance providers, including AT&T, Bell
Atlantic Corporation and Deutsche Telekom AG, as well as other major companies,
including Motorola, Inc., Intel Corporation and AOL-Time Warner, Inc., have all
entered or plan to enter the Internet telephony market, in some cases by
investing in companies engaged in the development of Internet telephony
products. Our competitors also include a number of companies that have
introduced services that make Internet telephony solutions available to
businesses and consumers. Net2Phone, Delta Three, ITXC Corp., iBasis, Inc. and
MCI WorldCom provide a range of Internet telephony services to consumers and
businesses that are similar to the ones we offer. Several other companies,
including AT&T, Sprint and Qwest Communications, have announced their intention
to offer these services on a wider basis in both the United States and
internationally.

     In addition, we compete in the market for Internet telephony services with
companies that produce software and other computer equipment that may be
installed on a user's computer to permit voice communications over the

                                      -8-
<PAGE>

Internet. Current Internet telephony products include VocalTec Communications,
Ltd.'s Internet Phone, QuarterDeck Corporation's WebPhone and Microsoft's
NetMeeting. Also, a number of large companies, including Cisco Systems, Inc.,
Lucent Technologies, Inc., Northern Telecom Limited, Nuera Communications,
Clarent Corporation and Dialogic Corp. offer or plan to offer server-based
Internet telephony products. These products are expected to allow communications
over the Internet between parties using a multimedia PC and a telephone and
between two parties using telephones.

     We believe that the principal competitive factors affecting our market in
no particular order are:

     -    price and rates;

     -   quality of transmission;

     -   product accessability and ease of use;

     -   customer service;

     -   brand recognition;

     -   Web site convenience and accessibility;

     -   targeted marketing directly to probable users of the services;

     -   quality of search tools; and

     -   system reliability.

     Increased competition may result in reduced operating margins, loss of
market share and diminished value in our brand. We cannot assure you that we
will be able to compete successfully against current and future competitors. As
a strategic response to changes in the competitive environment, we may, from
time to time, make certain pricing, service or marketing decisions that could
have a material adverse effect on our business, financial condition and
operating results.

     New technologies and the expansion of existing technologies may increase
competitive pressures by enabling our competitors to offer lower-cost services.
Certain Web-based applications that direct Internet traffic to other Web sites
may channel users to services that compete with us. In addition, companies that
control access to transactions through network access or Web browsers could
promote our competitors or charge us substantial fees for inclusion. The
occurrence of any of these events could have a material adverse effect on our
business, financial condition and operating results.

Possible Growth Through Acquisitions

     We may seek to grow our business through acquisitions of other companies in
our business or a similar business. We review acquisition candidates from time
to time. If a candidate meets our criteria, we may elect to acquire it using
cash, Common Stock, or a combination of both.


Intellectual Property and Other Proprietary Rights

     Our success depends in part upon our ability to protect our proprietary
technology and other intellectual property rights. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our products and
services. We protect our proprietary software through United States copyright
laws, and the source code for our proprietary software is protected under trade
secret laws. In December 1996, we applied to the United States Patent and
Trademark Office to register the

                                      -9-
<PAGE>

trademarks: "WorldQuest" and "WorldQuest Networks." We received a registration
for the trademark "WorldQuest" from the U.S. Patent and Trademark Office on
November 23, 1999. In October 1997, the Patent and Trademark Office issued a
notice of publication regarding our application to register "WorldQuest
Networks" as a trademark. In response to that notice, Qwest Communications filed
a notice of opposition in September 1998, which is currently pending before the
Patent and Trademark Office. In July 2000, Qwest Communications instituted a
cancellation proceeding in the Patent and Trademark Office for the registered
trademark "WorldQuest." The cancellation proceeding for the registered trademark
"WorldQuest" and the opposition proceeding in the trademark application for
"WorldQuest Networks" will most likely be consolidated by the Patent and
Trademark Office into a single proceeding in the next several months. If we do
not prevail, the registration for "WorldQuest" will be cancelled, we will not be
able to obtain a registered trademark for "WorldQuest Networks" and we could be
required to stop using the names or pay a fee to Qwest for permission to use the
names. Effective trademark, service mark, copyright and trade secret protection
may not be available in every country in which our services are made available
online, and thus, the steps that we take may be inadequate to protect our
rights. We cannot assure you that we will be issued any of these trademarks and
may find that such marks are unavailable.

     We currently hold various Internet domain names relating to our operations,
including "wqn.com," "creditcardphone.com," "click2call.net,"
"phone-2-phone.com," "click-n-dial.com," and "phonecollect.com." Governmental
agencies and their designees are responsible for regulating the acquisition and
maintenance of domain names. For example, the National Science Foundation has
appointed Network Solutions, Inc. as the current exclusive registrar for the
".com," ".net" and ".org" generic top-level domains in the United States. The
regulation of domain names in the United States and other countries may change
in the near future. Such changes in the United States are expected to include a
transition from the current system to a system that is controlled by a
non-profit corporation and the creation of additional top-level domains.
Governing bodies may establish additional top-level domain name registrars or
modify the requirements for holding domain names. As a result, we may be unable
to acquire or maintain relevant domain names in countries in which we conduct
business. Furthermore, the relationship between regulations governing domain
names and laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain names
that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights.

     We have entered into confidentiality and assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with whom
we conduct business. We do this in order to limit access to and disclosure of
our proprietary information. These agreements are designed to make it clear that
we own any technology developed by our employees and contractors during their
engagement by us and to protect us against unauthorized disclosure of our
proprietary information. We cannot assure you that these contractual
arrangements or the other steps taken by us to protect our intellectual property
will prove sufficient. To date, we have not actively policed unauthorized use of
our technology. This is because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted.

     In the future, we may license certain of our proprietary rights to third
parties. While we will attempt to ensure that the quality of the WorldQuest
Networks' brand is maintained by such licensees, we cannot assure you that such
licensees will not take actions that might materially adversely affect the value
of our proprietary rights or reputation, and have a material adverse effect on
our business, financial condition and operating results. We also rely on certain
technologies that we license from third parties. These may include suppliers of
key database technology, enhanced services platforms, gateway server platforms,
operating systems and specific hardware components for our service. We cannot
assure you that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of such technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect our
business, financial condition and operating results.

     On July 9, 1999 and on May 23, 2000, we filed patent applications with the
United States Patent and Trademark office for the architecture of certain of our
software applications. These applications allow customers to Web initiate calls
using our world access virtual calling cards and to Web initiate collect calls
using our phone collect product.

                                      -10-
<PAGE>

Research and Development

     We consider the amounts spent by us for research and development during
2000 and 1999 to be immaterial.

Environmental Matters

     Environmental contingencies are not expected to have a material adverse
effect on our results of operations or financial condition.

Employees

     As of December 31, 2000, we had 20 full-time employees. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our employee relations to be good.

     Our future performance depends in significant part upon the continued
service of our key technical and senior management personnel, none of whom are
bound by an employee agreement requiring service for any defined period of time.
The loss of services of one or more of our key employees could have a material
adverse effect on our business, financial condition and operating results. Our
future success also depends in part upon our continued ability to attract, hire,
train and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that we
can retain our key personnel in the future.


ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

     Our executive offices are presently located in Dallas, Texas, where we
lease approximately 4,000 square feet under a lease at a monthly rental of
approximately $6,500. The lease expires January 31, 2002. We believe our space
is adequate for our current needs. As we expand, we expect that suitable
additional space will be available on commercially reasonable terms, although no
assurance can be made in this regard. We also believe our property is adequately
covered by insurance.

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

     We occasionally become involved in litigation arising out of the normal
course of business. There are no material pending legal proceedings against us.


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

None.


                      [This Space Intentionally Left Blank]

                                      -11-
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------

     WorldQuest's Common Stock has traded on the Nasdaq National Market under
the symbol "WQNI" since February 4, 2000, the effective date of our registration
statement, filed on Form SB-2 under the Securities Act of 1933 (no. 333-93019)
relating to our initial public offering of our Common Stock. The following table
sets forth the per share range of high and low sales prices of our Common Stock
for the periods indicated:

                                                 Common Stock Price Range
                                                 ------------------------
                                                 High                 Low
                                                 ----                 ---

Year ended December 31, 2000
First Quarter (since February 4 only).........   $38.375           $13.00
Second Quarter ...............................     25.50             6.00
Third Quarter.................................      7.25           3.4375
Fourth Quarter................................     5.125             1.25

     As of March 1, 2001, there were approximately 34 stockholders of record of
our Common Stock and approximately 2,300 additional beneficial owners of our
Common Stock.

Dividend Policy

     We have never paid cash dividends on our Common Stock and anticipate that
we will continue to retain our earnings, if any, to finance the growth of our
business.

Use of Proceeds of Initial Public Offering

     As noted above, the effective date of our first registration statement,
filed on Form SB-2 under the Securities Act of 1933 (no. 333-93019) relating to
our initial public offering of our Common Stock, was February 4, 2000. A total
of 3,162,500 shares of our Common Stock were sold at a price of $13.00 per share
to an underwriting syndicate led by Kaufman Bros., L.P., John G. Kinnard and
Company Incorporated and WestPark Capital, Inc. The offering commenced on
February 4, 2000 and the sale of 2,750,000 shares was closed on February 9, 2000
and the sale of an additional 412,500 shares, representing the over-allotment
option, was closed on February 22, 2000. The initial public offering resulted in
gross proceeds of $41.1 million, $3.1 million of which was applied toward the
underwriting discount. Expenses relating to the offering, including a
non-accountable expense reimbursement to the underwriters, totaled approximately
$1.7 million. Net proceeds to WorldQuest were $36.3 million. From the time of
receipt through December 31, 2000, the net proceeds were applied toward:

     -    repayment of indebtedness, $2,946,195;

     -    equipment purchases including additional back-up systems, $2,958,191;

     -    software development, $280,412; and

     -    general corporate purposes, including payment of outstanding payables,
          payoffs of capital leases, liability insurance premiums, development
          of strategic relationships and research and development of new
          products, $2,723,935.

     The remaining proceeds are being used as working capital or are being held
in high quality, short-term investment instruments such as short-term corporate
investment grade or United States Government interest-bearing securities.

     Of the $2,946,195 paid for repayment of indebtedness, $867,647 was paid to
Eagle Venture Capital, LLC, which owns approximately 42% of our Common Stock and
is controlled by B. Michael Adler, our Chairman of the Board and Chief Executive
Officer.

                                      -12-
<PAGE>

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

Overview

     General. We are an international Internet telephony company. We sell
virtual prepaid calling cards through our interactive and easy to use Web site
and transmit long distance calls at discounted rates through our Internet and
traditional networks. We advertise, sell and deliver our virtual calling cards
worldwide exclusively through the Internet.

     We were incorporated in October 1996 and began offering services for sale
in December of that year. We were formed when the principal shareholder of Eagle
Venture decided to pursue Internet telephony opportunities. In conjunction with
our formation, Eagle Venture contributed cash and other assets valued at
approximately $185,000 (the estimated fair value) in exchange for 100% of our
then outstanding common stock. During 1997, Eagle Venture contributed an
additional $316,000 to further capitalize us, but received no additional shares
of common stock.

     We started our company to develop an international fax business. In May
1998, we changed our business model to focus on providing Internet based
telephone services. We began selling prepaid virtual calling cards on our Web
site in May 1998. We began routing calls over our enhanced services platform in
August 1998. During June 2000, the Company entered into two joint venture
arrangements for the purpose of installation and operation of Internet gateways
in foreign locations. The Company owns a controlling interest in these joint
ventures and accordingly has consolidated the financial position and results of
operations in the accompanying financial statements, with the ownership
applicable to the joint venture partners recorded as a minority interest.

     Revenues. We receive revenue from two sources, the sale of virtual calling
cards and the sale of excess line capacity to other long distance carriers. Our
virtual calling cards are sold to our customers worldwide over the Internet
through our Web site primarily through credit card purchases. Our wholesale
traffic and other revenues are derived from the sale of excess line capacity to
other long distance carriers pursuant to short-term contracts and the
transmission of facsimile traffic. Excess line capacity is the remaining
capacity on our telephone lines not used by us to terminate our calls during any
given month. Revenues from the sale of prepaid virtual calling cards is deferred
and recognized as calling services are used. Wholesale traffic revenue is
recognized as calls are processed.

     All sales of our virtual calling cards are made over the Internet primarily
through credit card purchases. We use credit card processing companies to verify
credit cards.

     Accounts receivable consists of amounts owed by credit card processing
companies relating to prepaid virtual calling card sales, and amounts owed by
long distance carriers for processed call traffic. At December 31, 2000 and
1999, two credit card processing companies accounted for 8% and 64% of total
accounts receivable. At December 31, 2000, one long distance carrier accounted
for 63% of total accounts receivable, but no long distance carrier accounted for
more than 10% of accounts receivable at December 31, 1999. Customers purchase
our virtual prepaid calling cards primarily using major credit cards which are
reimbursed by credit card processing companies. Accordingly, we do not routinely
perform on-going credit evaluations of our customers, but do perform evaluations
of our credit card processors. The Company's receivables are generally
unsecured. During1999, no one customer accounted for more than 10% of total
sales. During 2000, one wholesale traffic customer accounted for $2,067,135, or
16%, of total sales. This customer ceased transmitting traffic through the
Company's network in February 2001.

          Expenses. Due to our changing business model from fax services to
Internet telephony services, we substantially expanded our infrastructure and
increased our capital expenditures and capital lease obligations relating to
property and equipment. During 2000, our capital expenditures and payments on
capital leases totaled $3,758,366. These capital expenditures and payments on
capital leases were $395,000 during 1999. As we continue to grow, we expect to
expand our infrastructure by increasing our capital expenditures and leases. We
expect these expenditures will represent a smaller percentage of sales as our
sales volume grows.

     Since inception, we have incurred significant losses and, as of December
31, 2000, had an accumulated deficit of $(10.6) million. We expect operating
losses and negative cash flow to continue through at least the second quarter of
2001. We expect to incur additional costs and expenses related to:

                                      -13-
<PAGE>

     -    marketing and advertising related to traffic generation and brand
          development;

     -    purchases of equipment for our operations and network infrastructure;

     -    the expansion of our telecommunications network into other countries;

     -    the continued development of our Web site transaction processing and
          network infrastructure;

     -    development and improvement of additional products and services;

     -    the hiring of additional personnel; and

     -    the payment of commissions to various Internet portals and Internet
          service providers for marketing our address book/calendar product to
          their customers.

     We have a limited operating history on which to base an evaluation of our
business and prospects. You must also consider our prospects in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in new and rapidly evolving
markets such as e-commerce. Such risks for us include, but are not limited to,
an evolving and unpredictable business model and management of growth. To
address these risks, we must, among other things, maintain and expand our
customer base, implement and successfully execute our business and marketing
strategy, continue to develop and upgrade our technology and systems that we use
to process customers' orders and payments, improve our Web site, provide
superior customer service, respond to competitive developments and attract,
retain and motivate qualified personnel. We cannot assure stockholders that we
will be successful in addressing such risks, and our failure to do so could have
a material adverse effect on our business, prospects, financial condition and
results of operations.

Results of Operations

     The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated:

                                                               Year ended
                                                              December 31,
                                                          -------------------
                                                          1999           2000
                                                          ----           ----
     Retail prepaid calling card revenue                   92.5%          61.2%
     Wholesale traffic                                      7.5           38.8
     Other                                                   --            --
                                                          -----          -----
       Total revenue                                      100.0          100.0

     Cost of sales                                         84.6           86.1
                                                          -----          -----
     Gross margin                                          15.4           13.9

     Selling, general and administrative                   43.7           46.5
                                                          -----          -----
     Operating loss                                       (28.3)         (32.6)
     Interest income (expense)                             (7.7)          10.7
     Other expense                                           --           (2.3)
                                                          -----          -----
     Net loss before extraordinary loss                   (36.0)         (24.2)
     Extraordinary loss                                      --          (12.6)
                                                          -----          -----
     Net loss                                             (36.0)%        (36.8)%
                                                          =====          =====


                                      -14-
<PAGE>

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenue

     Revenue increased to $12.9 million for the year ended December 31, 2000
from $5.6 million for 1999 as a result of the significant growth of our network
and retail customer base. The growth in revenue of $7.3 million represents $4.6
million from additional wholesale traffic, and $2.7 million from additional
retail sales. Of the $12.9 million revenue for the year ended December 31, 2000,
$7.9 million represents prepaid virtual calling card revenue and the remainder
represents wholesale traffic of $5.0 million and other revenue of $11,000. Of
the $5.0 million in wholesale traffic, approximately $2.1 million was
attributable to one customer who ceased transmitting traffic over our network in
February 2001.


Cost of Sales

     Cost of sales consists primarily of the costs of termination of long
distance traffic over our networks. Cost of sales increased to $11.1 million for
the year ended December 31, 2000 from $4.8 million for 1999. This $6.3 million
increase was primarily attributable to our increased sales volume in both retail
and wholesale. We expect cost of sales to increase in future periods to the
extent that our sales volume increases.

Operating Expenses

     Selling, General and Administrative. Selling, general and administrative
expenses consist of advertising and promotional expenditures, payroll and
related expenses for executive and administrative personnel, facilities
expenses, professional services expenses, travel and other general corporate
expenses. Selling, general and administrative expenses increased to $6.0 million
for 2000 from $2.5 million for 1999. These expenses for 2000 included a non-cash
charge of $1.9 million for the value of warrants issued related to the signing
of marketing agreements with two Internet portals. Excluding this non-cash item,
selling, general and administrative expenses decreased to 32% of revenues in
2000, from 43.7% in 1999. These expenses for 1999 included a write off of
$300,000 of deferred costs associated with a previous public offering
registration statement which was withdrawn. Selling, general and administrative
expenses are expected to continue to decrease as a percentage of revenue in
future periods because our sales of calling cards are based on e-commerce which
allows increases in calling card purchases without having to incrementally add
overhead. We expect these expenses to increase in absolute dollars as we
continue to pursue advertising and marketing efforts, expand our network
termination locations worldwide, expand our staff and incur additional costs
related to the growth of our business and being a public company.


   Interest Income (Expense), Net

     Interest income for 2000 amounted to $1.4 million and consisted of $1.7
million income from short-term investments of cash on hand, less interest
expense of $336,000 attributable to borrowings under a credit facility with our
principal stockholder, unsecured subordinated convertible promissory notes
issued in a private offering in December 1999, and capital leases. The increase
to $1.4 million of interest income for the year ended December 31, 2000 from
$438,000 interest expense for 1999 is attributable to the proceeds from the
Company's initial public offering on February 4, 2000.


   Other Expense

     Other expense consists of a $300,000 charge taken on the value of
investments in foreign termination arrangements not yet in operation at December
31, 2000.


   Net Loss After Extraordinary Item

     We incurred a net loss of $(4.7) million for the year ended December 31,
2000 as compared to $(2.0) million

                                      -15-
<PAGE>

for 1999. Net loss for 2000 was affected by a $1.8 million non-cash charge for
the value of warrants issued in connection with certain marketing agreements
with Internet portals, a $1.6 million extraordinary loss for the value of
warrants and issue costs relating to unsecured subordinated convertible
promissory notes issued in a private offering in December 1999, and a $300,000
non-operating charge taken on the value of investments in foreign termination
arrangements not yet in operation at December 31, 2000.

   Income Taxes

     As of December 31, 2000, we had approximately $9.3 million of net operating
loss carryforwards for federal income tax purposes, which expire beginning in
2011. We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of uncertainty
regarding its future realizability. Limitations on the utilization of these
carryforwards may result if we experience a change of control, as defined in the
Internal Revenue Code of 1986, as amended, as a result of changes in the
ownership or our common stock.

Recent Developments

     During 2000, one wholesale customer accounted for 16% of our total sales.
This customer ceased transmitting traffic through our network in February 2001.
At March 1, 2001, this customer owed us approximately $820,000 for traffic
transmitted during 2001. We anticipate that litigation will be necessary to
collect this receivable. There can be no assurance that we can collect this
receivable.

Liquidity and Capital Resources

     As of December 31, 2000, we had approximately $29.0 million of cash and
cash equivalents. As of that date, our principal commitments consisted of
obligations under leases and contracts for long distance transmissions and our
credit facility with our principal stockholder.

     Outstanding amounts owed to our principal stockholder as of December 31,
2000 and 1999 were $1.1 million and $2.0 million, respectively. In May 1999, we
amended our credit facility with our principal stockholder to convert $1.1
million to a term loan bearing interest at 8% per annum with interest and
principal payable May 5, 2002. Our principal stockholder also agreed at such
time to convert $200,000 of the loan into 60,061 shares of our common stock, at
a conversion price of $3.33 per share.

     Our initial public offering of Common Stock closed in February 2000. We
sold 3,162,500 shares of Common Stock at a price of $13.00 per share. After
underwriting discounts and expenses of the offering, the net proceeds to us were
$36.3 million.

     In December 1999, we raised $1.9 million, before offering costs of
$255,000, through the private placement of units consisting of promissory notes
with a face value of $1.9 million and common stock purchase warrants. The notes
bear interest at 8% per annum and mature and became immediately due and payable
upon closing of our initial public offering. The fair value of the stock
purchase warrants of $1.5 million was recognized as additional interest expense
over the term of the promissory notes. These notes were fully repaid during
February and March 2000 from the proceeds of our initial public offering. The
remaining unamortized amount of the fair value of the stock purchase warrants
and deferred offering costs of approximately $1.6 million were expensed as an
extraordinary loss in 2000.

     Net cash used in operating activities was $1.7 million for the year ended
December 31, 2000 and $1.1 million in 1999. Net cash used in operating
activities for 2000 and 1999 primarily consisted of net operating losses as well
as increases in other assets, offset by increases in accounts payable, accrued
expenses and accrued interest.

     Net cash used in investing activities consists of additions to property and
equipment, including computer equipment and Internet gateways for voice over the
Internet transmission. Net cash used in investing activities was $3.6 million
for the year ended December 31, 2000 and $223,000 in 1999. During 2001, we
expect to spend approximately $3.0 million in capital expenditures, of which
$800,000 will be for telephony switching equipment, $700,000 for gateway
servers, $500,000 for data base servers, $500,000 for software and $500,000 in
miscellaneous other equipment and licenses.

                                      -16-
<PAGE>

     Net cash provided by financing activities was $33.2 million for the year
ended December 31, 2000 and $2.5 million for 1999. Net cash provided by
financing activities for 2000 was impacted by the proceeds of the Company's
initial public offering, and 1999 was affected by higher levels of borrowings
under our credit facility with our principal stockholder and proceeds from the
private placement of common stock and the issuance of unsecured subordinated
convertible promissory notes.

     We currently anticipate that the net proceeds of our initial public
offering, together with our other available funds, will be sufficient to meet
our anticipated needs for working capital and capital expenditures through at
least the next 18 months. We may need to raise additional funds prior to the
expiration of such period if, for example, we pursue business or technology
acquisitions or experience operating losses that exceed our current
expectations. If we raise additional funds through the issuance of equity,
equity-related or debt securities, such securities may have rights, preferences
or privileges senior to those of the rights of our common stock and our
stockholders may experience additional dilution. We cannot be certain that
additional financing will be available to us on favorable terms when required,
or at all.

Recent Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Similar
Financial Instruments and for Hedging Activities," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivative and hedging activities. We will be required to adopt this standard
effective January 1, 2001. As the Company does not currently hold or utilize
derivative instruments, the adoption of this standard will not have a
significant effect on the Company's results of operations or financial position.


Risk Factors That May Effect Results of Operations and Financial Condition

     You should carefully consider the risks and uncertainties described below
and the other information in this Form 10-KSB. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may
also impair our business, financial condition and operating results.

     We have a limited operating history with which to judge our performance.

     We were incorporated in October 1996. We began selling prepaid virtual
calling cards on our Web site in May 1998. We began routing calls over our
enhanced services platform in August 1998. Accordingly, we have a limited
operating history. We may also encounter risks and difficulties frequently
encountered by early stage companies in new and rapidly evolving markets. We
cannot assure stockholders that our business strategy will be successful or that
we will successfully address these risks. Our failure to do so could materially
adversely affect our business, financial condition and operating results.


     We have a history of losses and we anticipate future losses and negative
cash flow.

     Since inception, we have incurred operating losses, and as of December 31,
2000, we had an accumulated deficit of $(10.6) million. We incurred net losses
from operations of $(3.1) million and $(2.0) million for the fiscal years ended
December 31, 2000 and 1999, respectively.

     We expect operating losses and negative cash flow to continue through at
least the second quarter of 2001. However, there can be no assurance that we
will be profitable beginning in the third quarter of 2001, because we expect to
incur additional costs and expenses related to:

     -   marketing and advertising related to traffic generation and brand
         development;

     -   purchases of equipment for our operations and network infrastructure;

                                      -17-
<PAGE>

     -   the expansion of our telecommunications network into other countries;

     -   the continued development of our Web site transaction processing and
         network infrastructure;

     -   development and improvement of additional products and services;

     -   the hiring of additional personnel; and

     -   evaluating and completing potential acquisitions of other companies.


     Our future profitability depends on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. If
we do achieve profitability, we cannot assure stockholders that we will be able
to sustain it or improve upon it on a quarterly or annual basis for future
periods.

     Our quarterly operating results are subject to significant fluctuations and
our future operating results are unpredictable.

     Our operating results are unpredictable and have fluctuated significantly
on a quarterly basis. We expect to continue to experience significant
fluctuations in our quarterly results of operations due to a variety of factors,
many of which are outside of our control. As a result, period-to-period
comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.

     Because of our limited operating history, we cannot accurately forecast our
net sales. We rely upon limited historical financial data to predict our future
operating results. Sales and operating results are difficult to forecast because
they generally depend on the volume of traffic on our network and the volume and
timing of sales of our virtual calling cards. Because of these factors, we may
be unable to adjust our spending in a timely manner to adjust for any unexpected
revenue shortfall.

     Our operations will be negatively affected if our enhanced services
platform fails to operate properly.

     All our calls are routed through our enhanced services platform. Our
success is dependent on our platform working properly. If our platform fails for
any reason, we could not route calls until the failure is corrected. From time
to time, we have experienced short term failures or malfunctions in our
platform. We cannot assure stockholders that future failures will not occur.

     If we do not increase the number of Web sites and portals upon which we
advertise our anticipated expansion could be adversely affected.

     We market our virtual calling cards and services on third-party Web sites
and portals using banner ads. The banner ads connect directly to our Web site
when "clicked" by the customer. If we cannot continue to cost effectively market
our virtual calling cards and services, our ability to expand our customer base
would be adversely affected.

     The telecommunications and Internet telephony markets are highly
competitive and our failure to compete effectively could adversely affect us.

     With respect to prepaid calling cards, we compete with the largest
telecommunications providers in the United States, as well as smaller, emerging
carriers. We may also compete with large operators in other countries. An
increasing number of large, well-capitalized companies are entering the market
for Internet telephony products and services. These competitors include a number
of companies that have introduced services that make Internet telephony
solutions available to businesses and consumers, and that permit voice
communications over the Internet. Many of our competitors are substantially
larger and have greater financial, technical, engineering, personnel and
marketing resources, longer operating histories, greater name recognition and
larger customer bases than we do. Competition from existing or new competitors
could reduce our revenues from the sale of our virtual prepaid calling cards and
other services. A general decrease in telecommunication rates charged by
international long distance carriers could also have a negative effect on our
operations. Our ability to compete also depends on our ability to anticipate and

                                      -18-
<PAGE>

adapt to rapid technological and other changes occurring in the
telecommunications industry.

     We may not be able to compete with providers that can bundle long distance
services with other offerings.

     Our competitors may be able to bundle services and products that we do not
offer together with long distance or Internet telephony services. These services
could include wireless communications, voice and data services, Internet access
and cable television. This form of bundling would put us at a competitive
disadvantage if these providers can combine a variety of service offerings at a
single attractive price. In addition, some of the telecommunications and other
companies that compete with us may be able to provide customers with lower
communications costs or other incentives with their services reducing the
overall cost of their communications packages, and significantly increasing
pricing pressures on our services. This form of competition could significantly
reduce our revenues.


     We may be vulnerable to technical malfunctions which could adversely affect
our operations.

     We depend upon our software systems, communications hardware and enhanced
services platform to conduct our virtual calling card sales and telephone
routing, manage our network, track virtual calling card balances and perform
other vital functions. Our systems, communications hardware and platform are
vulnerable to damage or interruption from:

     -   natural disasters;

     -   power loss;

     -   telecommunication failures;

     -   loss of Internet access;

     -   physical and electronic break-ins;

     -   hardware defects;

     -   computer viruses; and

     -   intentional acts of vandalism and similar events.

     If we experience substantial technical difficulties with our hardware or
software, we may not succeed in routing traffic effectively, or in tracking
virtual calling card balances accurately, which could adversely affect our
operations. We have experienced periodic system interruptions, which we believe
will continue to occur from time-to-time. Since our operations depend on our
ability to successfully expand our network and to integrate new technologies and
equipment into our network, there is an increased risk of system failure as well
as a natural strain on the system.

     Our systems may not accommodate significant growth in the number of users
which could have a negative effect on our operations.

     Our success depends on our ability to handle a large number of simultaneous
calls. We expect that the volume of simultaneous calls will increase
significantly as we expand our operations. If this occurs, additional stress
will be placed upon the network hardware and software that manages our traffic.
We cannot assure stockholders of our ability to efficiently manage a large
number of simultaneous calls. If we are not able to maintain an appropriate
level of operating performance, or if our service is disrupted, then we may
develop a negative reputation and our business, results of operations and
financial condition would be materially adversely affected.

     If the Internet telephony and prepaid calling card markets do not gain
market acceptance by potential customers our business will be adversely
affected.

     We cannot be certain that Internet telephone service will gain market
acceptance or prove to be a viable alternative to traditional telephone service.
If the Internet telephony market fails to develop or develops more slowly

                                      -19-
<PAGE>

than we expect, then our future revenues would be adversely affected.

     The market for prepaid calling cards is an emerging business with a large
number of market entrants. Therefore, it is difficult to accurately determine
what the demand will be for our products and services in this area. Substantial
markets may not continue to develop for prepaid calling cards, and we may not be
able to sustain or increase our sales of these products and services.

     If the e-commerce market does not continue to develop and gain market
acceptance our revenues may be negatively affected.

     We anticipate that e-commerce will continue to account for substantially
all of our future revenues. Our business will suffer if e-commerce does not grow
or grows more slowly than expected. A number of factors could prevent acceptance
of e-commerce, including:

     -   e-commerce is at an early stage and buyers may be unwilling to shift
         their purchasing from traditional vendors to online vendors;

     -   increased government regulation or taxation may limit the growth of e-
         commerce; and

     -   adverse publicity and consumer concern about the security of e-commerce
         transactions may discourage its acceptance and growth.

     These factors could impair our ability to generate revenues from our online
sales of virtual calling cards, online transmission of telephone calls and other
e-commerce activities.

     If the Internet and Internet infrastructure do not continue to develop as
anticipated our operations will be negatively affected.

     For the Internet to be commercially viable in the long-term, the size of
the network infrastructure, enabling technologies, necessary performance
improvements and user security will need to be continually addressed. To the
extent that the Internet continues to experience an increased number of users,
frequency of use or increased bandwidth requirements, we cannot assure
stockholders that the performance or reliability of the Internet will not be
adversely affected. Furthermore, the Internet has experienced a variety of
outages and other delays as a result of damage to portions of its
infrastructure, and could face such outages and delays in the future. These
outages and delays could adversely affect the level of Internet usage and affect
the level of traffic, the processing of orders and the transmission of calls on
our Web site.

     We cannot assure stockholders that the infrastructure or complementary
products or services necessary to make the Internet a viable commercial
marketplace for the long term will be developed. Even if these products and
services are developed, we cannot assure stockholders that the Internet will
become a viable commercial marketplace for our virtual calling cards and
services. If not, our business, financial condition and operating results will
be materially adversely affected. Also, we may be required to incur substantial
expenditures in order to adapt our products and services to changing Internet
technologies, which could have a material adverse effect on our business,
financial condition and operating results.

     The failure to manage our growth in operations and hire additional
qualified employees could have a material adverse effect on us.

     The expected growth of our operations place a significant strain on our
current management resources. To manage this expected growth, we will need to
improve our:

     -   transaction processing methods;

     -   operations and financial systems;

                                      -20-
<PAGE>

     -   procedures and controls; and

     -   training and management of our employees.

     Competition for personnel is intense, and we cannot assure stockholders
that we will be able to successfully attract, integrate or retain sufficiently
qualified personnel. Our failure to attract and retain the necessary personnel
or to effectively manage our employee and operations growth could have a
material adverse effect on our business, financial condition and operating
results.

     Our potential customers may have concerns about Internet commerce security
which could inhibit our growth and we may incur losses resulting from credit
card fraud.

     Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To securely transmit confidential information, such as customer
credit card numbers, we rely on encryption and authentication technology that we
license from third parties. We cannot predict whether events or developments
will compromise or breach the technology that protects our customer transaction
data. If our security measures do not prevent security breaches, this could have
a material adverse effect on our business, financial condition and operating
results.

     To date, we have suffered minimal losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders. Under current credit card practices, a merchant
is liable for fraudulent credit card transactions where the merchant does not
obtain a cardholder's signature. We do not obtain the signature of the
cardholder when we process orders. Although we have implemented mechanisms to
try to detect credit card fraud, we cannot assure you that our efforts will be
successful. Our inability to adequately detect credit card fraud could
materially adversely affect our business, financial condition and operating
results.

     To the extent that our activities involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
expose us to a risk of loss or litigation and possible liability. We do not
presently carry insurance policies to reimburse us for losses caused by security
breaches. We cannot assure stockholders that our security measures will prevent
security breaches. Our failure to prevent security breaches could have a
material adverse effect on our business, financial condition and operating
results.

     The market price for our common stock may be volatile, which could cause
stockholders to lose substantial portions of their investment.

     The market prices of the securities of Internet-related and online commerce
companies have been especially volatile. The trading prices of many Internet
companies' stocks fell dramatically during 2000 any may still reflect valuations
substantially above historical levels. We cannot assure stockholders that these
trading prices will not continue to be volatile or that valuations will be
sustained. Broad market and industry factors may materially and adversely affect
the market price of our common stock, regardless of our operating performance.

     Our business may be adversely affected if we are not able to protect our
intellectual property and other proprietary rights from infringement.

     Our success depends in part upon our ability to protect our proprietary
technology and other intellectual property rights. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights. We received a
registration for the trademark "WorldQuest" from the U.S. Patent and Trademark
Office on November 23, 1999. We have a pending trademark application on file
with the Patent and Trademark Office for "WorldQuest Networks." This application
was challenged by Qwest Communications, who filed a notice of opposition
currently pending before the Patent and Trademark Office. Qwest Communications
has also instituted a cancellation proceeding in the Patent and Trademark Office
for our registered trademark "WorldQuest". The opposition and cancellation
proceedings will most likely be consolidated by the Patent and Trademark Office
into a single proceeding in the next several months. If we do not prevail, the
registration for "WorldQuest" will be cancelled, we will not be able to obtain a
registered trademark for "WorldQuest Networks" and we could be required to stop
using the names or pay a fee to Qwest for permission to use the names. Effective

                                      -21-
<PAGE>

trademark, service mark, copyright and trade secret protection may not be
available in every country in which our services are made available online.
Therefore, the steps that we take may be inadequate to protect our rights.

     The Internet industry may become subject to increased government regulation
which could have a negative effect on our operations.

     Various actions have been taken by the United States Congress and the
Federal courts that, in some cases impose some forms of regulation on the
Internet, and in other cases protect the Internet from regulation. Domestic and
international authorities regularly consider proposed legislation that could
result in new regulations on the Internet. It is impossible to say at this time
whether and to what extent the Internet may ultimately be regulated domestically
or internationally. Increased regulation of the Internet may decrease its
growth, which may negatively impact the cost of doing business via the Internet
or otherwise materially adversely affect our business, results of operations and
financial condition.

     In addition, because our services are accessible worldwide, and we
facilitate the sale of goods to users worldwide, other jurisdictions may claim
that we are required to comply with their laws. We are qualified to do business
in Delaware and Texas only, and failure by us to qualify as a foreign
corporation in a jurisdiction where we are required to do so could subject us to
taxes and penalties for the failure to qualify.


     Sales tax collection by states may adversely affect our growth.

     We do not currently collect sales or other similar taxes for calling cards
or services sold through our Web site, other than for calling cards sold to
Texas residents. However, one or more states may seek to impose sales tax or
similar collection obligations on out-of-state companies, such as ours, which
engage in Internet commerce. A successful assertion by one or more states or any
other country that we should collect sales or other taxes on the sale of cards
or services on our system could have a material adverse effect on our
operations.

     The loss of key personnel could adversely affect our business.

     We believe that our success will depend on the continued services of our
senior management team, especially B. Michael Adler and Michael R. Lanham. We do
not have employment agreements with any of our key personnel. We carry $2.0
million of key person life insurance on the lives of each of B. Michael Adler
and Michael R. Lanham. The loss of the services of any of our senior management
team or other key employees could adversely affect our business, financial
condition and operating results.

     We may not be able to raise needed additional capital in the future.

     We require substantial working capital to fund our business. Our working
capital requirements and cash flow provided by operating activities can vary
from quarter to quarter depending on revenues, operating expenses, capital
expenditures and other factors. We anticipate that the net proceeds of our
initial public offering will be sufficient to meet our anticipated needs through
at least the next 18 months. Thereafter, we may need to raise additional funds.

     We may also need to raise additional funds sooner than anticipated to:

     -   fund more rapid expansion;

     -   develop new or enhanced services or products; and

     -   respond to competitive pressures.

     If additional funds are raised through the issuance of equity or
convertible debt securities the rights and ownership in our company by existing
stockholders may be reduced.

     We cannot assure stockholders that additional financing will be available
on terms favorable to us or at all. If

                                      -22-
<PAGE>

adequate funds are not available, or are not available on acceptable terms, we
may not be able to fund planned expansion, take advantage of available
opportunities, develop or enhance services or products or respond to competitive
pressures. Such inabilities could have a material adverse effect on our
business, financial condition and operating results.


Forward Looking Statements

     Certain statements in this Form 10-KSB, including statements of our and
management's expectations, intentions, plans, objectives and beliefs, including
those contained in or implied by "Management's Discussion and Analysis or Plan
of Operation", are "forward-looking statements", within the meaning of Section
21E of the Securities Exchange Act of 1934, that are subject to certain events,
risks and uncertainties that may be outside our control. These forward-looking
statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans" and similar expressions. They include
statements of our future plans and objectives for our future operations and
statements of future economic performance, information regarding our expansion
and possible results from expansion, our expected growth, our capital budget and
future capital requirements, the availability of funds and our ability to meet
future capital needs, the realization of our deferred tax assets, and the
assumptions described in this report underlying such forward-looking statements.
Actual results and developments could differ materially from those expressed in
or implied by such statements due to a number of factors, including without
limitation, those described in the context of such forward-looking statements,
our expansion and acquisition strategy, our ability to achieve operating
efficiencies, our dependence on network infrastructure, capacity,
telecommunications carriers and other suppliers, industry pricing an technology
trends, evolving industry standards, domestic and international regulatory
matters, general economic and business conditions, the strength and financial
resources of our competitors, our ability to find and retain skilled personnel,
the political and economic climate in which we conduct operations, the risks
discussed above under "Risk Factors That May Effect Results of Operations and
Financial Condition," and other risk factors described from time to time in our
other documents and reports filed with the Securities and Exchange Commission
(the "Commission"). We do not assume any responsibility to publicly update any
of our forward-looking statements regardless whether factors change as a result
of new information, future events or for any other reason. We advise you to
review any additional disclosures we make in our 10-QSB, 8-K and 10-KSB reports
filed with the Commission. We also suggest that you listen to our quarterly
earnings release conference calls with financial analysts. You may find
information on how to access these calls at our website www.wqn.com.


ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

        The financial statements required by this item begin at Page F-1 hereof.

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

        None.






                      [This Space Intentionally Left Blank]

                                      -23-
<PAGE>

                                   PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------

        The information regarding the directors and executive officers of
WorldQuest in the Proxy Statement relating to WorldQuest's 2001 Annual Meeting,
which will be filed with the Commission within 120 days after December 31, 2000,
is incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

        The information regarding executive compensation in the Proxy Statement
relating to WorldQuest's 2001 Annual Meeting, which will be filed with the
Commission within 120 days after December 31, 2000, is incorporated herein by
reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

        The information regarding the security ownership of certain beneficial
owners and management in the Proxy Statement relating to WorldQuest's 2001
Annual Meeting, which will be filed with the Commission within 120 days after
December 31, 2000, is incorporated herein by reference.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information regarding certain relationships and related transactions
in the Proxy Statement relating to WorldQuest's 2001 Annual Meeting, which will
be filed with the Commission within 120 days after December 31, 2000, is
incorporated herein by reference.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

        (a)      The following documents are filed as part of this Annual Report
                 on Form 10-KSB:

                  1.     Financial Statements: The financial statements filed as
        part of this report are listed in the "Index to Financial Statements" on
        Page F-1 hereof.

                  2.     Exhibits required to be filed by Item 601 of Regulation
        S-B:

Exhibit
Number            Description of Exhibits
------            -----------------------
3.1               Certificate of Incorporation of WorldQuest, filed as Exhibit
                  3.1 to WorldQuest's Form SB-2 Registration Statement, File No.
                  333-82721 (the "Prior Registration Statement"), and
                  incorporated herein by this reference.
3.2               Bylaws of WorldQuest, filed as Exhibit 3.2 to the Prior
                  Registration Statement, and incorporated herein by this
                  reference.
4.1               Specimen common stock certificate, filed as Exhibit 4.1 to the
                  Prior Registration Statement, and incorporated herein by this
                  reference.
4.2               Amended and Restated Note dated May 5, 1999 payable to
                  WorldQuest Networks, LLC (now known as Eagle Venture Capital,
                  LLC), filed as Exhibit 4.2 to the Prior Registration
                  Statement, and incorporated herein by this reference.
4.3.1             Representatives' Warrant dated February 4, 2000 granted to
                  John G. Kinnard and Company Incorporated for 68,750 shares of
                  common stock, filed as Exhibit 4.3.1 to WorldQuest's Annual
                  Report on Form 10-KSB for the fiscal year ended December 31,
                  1999, and incorporated herein by this reference.
4.3.2             Representatives' Warrant dated February 4, 2000 granted to
                  Kaufman Bros., L.P. for 178,750 shares of common stock, filed
                  as Exhibit 4.3.2 to WorldQuest's Annual Report on Form 10-KSB
                  for the fiscal year ended December 31, 1999, and incorporated
                  herein by this reference.

                                      -24-
<PAGE>

Exhibit
Number            Description of Exhibits
------            -----------------------

   4.3.3          Representatives' Warrant dated February 4, 2000 granted to
                  WestPark Capital, Inc. for 27,500 shares of common stock,
                  filed as Exhibit 4.3.3 to WorldQuest's Annual Report on Form
                  10-KSB for the fiscal year ended December 31, 1999, and
                  incorporated herein by this reference.
   4.4            Amended and Restated Note date August 15, 1999 payable to
                  Eagle Capital Venture, LLC, which replaces the Amended and
                  Restated Note filed as Exhibit 4.2, filed as Exhibit 4.4 to
                  the Prior Registration Statement, and incorporated herein by
                  this reference.
   4.5            Form of Unsecured Subordinated Convertible Promissory Note
                  issued in the private placement closed in December 1999 (the
                  "Private Placement"), filed as Exhibit 4.5 to WorldQuest's
                  Form SB-2 Registration Statement, file no. 333-93019 (the
                  "Second Registration Statement"), and incorporated herein by
                  this reference.
   4.6            Form of Warrant issued in the Private Placement, filed as
                  Exhibit 4.6 to the Second Registration Statement, and
                  incorporated herein by this reference.
 * 4.7            Warrant to Purchase 50,000 shares of common stock granted to
                  Advanced Multimedia Group, Inc. on March 16, 2000.
 * 4.8            Warrant to Purchase 50,000 shares of common stock granted to
                  Advanced Multimedia Group, Inc. on April 26, 2000.
  10.1            Joint Venture Agreement dated April 9, 1999 between WorldQuest
                  and BDC, LLC, filed as Exhibit 10.1 to the Prior Registration
                  Statement, and incorporated herein by this reference.
  10.2            Amended 1997 Stock Option Plan, filed as Exhibit 10.2 to the
                  Prior Registration Statement, and incorporated herein by this
                  reference.
  10.3            Stock Option Agreement dated December 7, 1998 granted to
                  Michael R. Lanham by WorldQuest, filed as Exhibit 10.3 to the
                  Prior Registration Statement, and incorporated herein by this
                  reference.
  10.4            Stock Transfer Agreement dated December 7, 1998 between
                  WorldQuest Communications, Inc., WorldQuest Networks, LLC and
                  WorldQuest, filed as Exhibit 10.4 to the Prior Registration
                  Statement, and incorporated herein by this reference.
  10.5            Amendment and Clarification Agreement dated September 27, 1999
                  between WorldQuest Communications, Inc., WorldQuest and Eagle
                  Venture Capital, LLC amending and clarifying the Stock
                  Transfer Agreement filed as Exhibit 10.4, filed as Exhibit
                  10.7 to the Prior Registration Statement, and incorporated
                  herein by this reference.
  10.6            Form of Registration Rights Agreement executed in connection
                  with the Private Placement, filed as Exhibit 10.6 to the
                  Second Registration Statement, and incorporated herein by this
                  reference.
  10.7            Purchase Agreement dated April 17, 2000 between WorldQuest and
                  BDC, LLC, filed as Exhibit 10.1 to WorldQuest's Quarterly
                  Report on Form 10-QSB for the fiscal quarter ended March 31,
                  2000, and incorporated herein by this reference.
  10.8            2001 Stock Option Plan, filed as Exhibit 4.8 to WorldQuest's
                  Form S-8 Registration Statement, File No. 333-54498, and
                  incorporated herein by this reference.
 *10.9            Joint Venture Agreement of WQIA Joint Venture dated June 8,
                  2000.
 *10.10           Joint Venture Agreement of WorldQuest/Everest Joint Venture
                  dated June 30, 2000.
 *21.1            List of Subsidiaries.
 *23.1            Consent of Ernst & Young LLP.

-----------------------
* Filed herewith.


         (b)      Reports on Form 8-K

                  No reports on Form 8-K were filed during the fourth quarter of
                  2000.

                                      -25-
<PAGE>

                                  SIGNATURES

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


                              WORLDQUEST NETWORKS, INC.



March 6, 2001                 By:      /s/ B. Michael Adler
                                       ------------------------------
                                       B. Michael Adler, Chief Executive Officer
                                       (Principal Executive Officer)



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

March 6, 2001                 /s/ B. Michael Adler
                              --------------------------------------------------
                              B. Michael Adler
                              Director (Chairman)

March 6, 2001                 /s/ Michael R. Lanham
                              --------------------------------------------------
                              Michael R. Lanham
                              Director

March 7, 2001                 /s/ E. Denton Jones
                              --------------------------------------------------
                              E. Denton Jones
                              Director

March 7, 2001                 /s/ Elizabeth H. Buchler
                              --------------------------------------------------
                              Elizabeth H. Buchler
                              Director

March 7, 2001                 /s/ Nabil N. El-Hage
                              --------------------------------------------------
                              Nabil N. El-Hage
                              Director

March 8, 2001                 /s/ Robert A. Farmer
                              --------------------------------------------------
                              Robert A. Farmer
                              Director

March 6, 2001                 /s/ Mark C. Levy
                              --------------------------------------------------
                              Mark C. Levy
                              Chief Financial Officer (Principal Financial and
                              Accounting Officer)

                                      -26-
<PAGE>

                           WorldQuest Networks, Inc.

                  Index to Consolidated Financial Statements

                                   Contents

<TABLE>
<S>                                                                                                           <C>
Report of Independent Auditors..............................................................................  F-2
Consolidated Balance Sheets as of December 31,  2000 and 1999...............................................  F-3
Consolidated Statements of Operations for each of the two years in the period ended December 31, 2000.......  F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for each of the two years in the
period ended December 31, 2000..............................................................................  F-5
Consolidated Statements of Cash Flows for each of the two years in the period ended December 31, 2000.......  F-6
Notes to Consolidated Financial Statements..................................................................  F-7
</TABLE>

                                      F-1
<PAGE>

                        Report of Independent Auditors


Board of Directors
WorldQuest Networks, Inc.

     We have audited the accompanying consolidated balance sheets of WorldQuest
Networks, Inc., as of December 31, 2000 and 1999 and the related consolidated
statements of operations, changes in stockholders' equity (deficit), and cash
flows for each of the two years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WorldQuest
Networks, Inc., at December 31, 2000 and 1999, and the consolidated results of
it's operations and cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.


                                                  /s/ Ernst & Young LLP

February 2, 2001
Dallas, Texas

                                      F-2
<PAGE>

                           WORLDQUEST NETWORKS, INC.

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                 December 31,     December 31,
                                                                                     1999             2000
                                                                                     ----             ----
<S>                                                                              <C>              <C>
                                     ASSETS
Current assets:
     Cash and cash equivalents.............................................       $ 1,159,995     $ 29,012,196
     Accounts receivable...................................................           113,688        1,248,619
                                                                                  -----------     ------------
Total current assets.......................................................         1,273,683       30,260,815
Property and equipment, net................................................           574,573        4,275,289
Other assets...............................................................         1,144,777        1,193,802
                                                                                  -----------     ------------
Total assets...............................................................       $ 2,993,033     $ 35,729,906
                                                                                  ===========     ============

                                   LIABILITIES
Current liabilities:
   Accounts payable........................................................       $ 1,532,293     $  1,217,027
   Accrued expenses........................................................           466,083          646,559
   Accrued interest........................................................                --          320,436
   Deferred revenue........................................................           159,201          316,073
   Note payable............................................................           266,814               --
   Line of credit from principal stockholder...............................           888,725               --
   Current portion of capital lease obligation.............................            98,815               --
   Subordinate promissory notes............................................           494,568               --
                                                                                  -----------     ------------
Total current liabilities..................................................         3,906,499        2,500,095
Term loan..................................................................         1,100,000        1,100,000
Accrued interest...........................................................           199,814               --
Capital lease obligation...................................................            28,660               --

Minority interests in joint ventures                                                       --          666,998
                                                                                  -----------     ------------
Commitments and contingencies                                                       5,234,973        4,267,093

Stockholders' equity (deficit):
   Preferred stock, par value $0.01 per share:
   Authorized shares--10,000,000; none issued and outstanding at
     December 31, 1999 and 2000............................................                --               --
   Common stock, par value $.01 per share:
   Authorized shares--50,000,000; issued and outstanding shares--3,196,699
     at December 31, 1999 and 6,381,199 December 31, 2000..................            31,967           63,812
   Additional capital......................................................         3,571,622       41,989,644
   Accumulated deficit.....................................................        (5,845,529)     (10,590,643)
                                                                                  -----------     ------------
Total stockholders' equity (deficit).......................................        (2,241,940)      31,462,813
                                                                                  -----------     ------------
Total liabilities and stockholders' equity (deficit).......................       $ 2,993,033     $ 35,729,906
                                                                                  ===========     ============
</TABLE>


                            See accompanying notes.

                                      F-3
<PAGE>

                           WORLDQUEST NETWORKS, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                                    1999              2000
                                                                 -----------      -----------
<S>                                                              <C>              <C>
Retail prepaid calling card revenue........................      $ 5,223,523      $ 7,903,650
Wholesale traffic..........................................          412,528        4,991,139
Other......................................................           13,185           11,384
                                                                 -----------      -----------
   Total revenue...........................................        5,649,236       12,906,173
Cost of sales..............................................        4,776,487       11,109,317
                                                                 -----------      -----------
Gross margin...............................................          872,749        1,796,856
Selling, general and administrative........................        2,469,788        5,997,757
                                                                 -----------      -----------
Operating loss.............................................       (1,597,039)      (4,200,901)
Interest income (expense), net.............................         (438,447)       1,381,154
Other expense..............................................               --         (300,000)
                                                                 -----------      -----------
Loss before extraordinary loss.............................       (2,035,486)      (3,119,747)
Extraordinary loss.........................................               --       (1,625,367)
                                                                 -----------      -----------
Net loss...................................................      $(2,035,486)     $(4,745,114)
                                                                 ===========      ===========
Weighted-average common shares outstanding--basic
   and diluted.............................................        3,130,653        6,021,480
                                                                 ===========      ===========
Net loss per share before extraordinary loss--basic
   and diluted.............................................      $     (0.65)     $     (0.52)
                                                                 ===========      ===========
Net loss per share--basic and diluted......................      $     (0.65)     $     (0.79)
                                                                 ===========      ===========
</TABLE>


                            See accompanying notes.

                                      F-4
<PAGE>

                           WORLDQUEST NETWORKS, INC.

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
                For the years ended December 31, 1999 and 2000

<TABLE>
<CAPTION>
                                                       Common     Common                                      Stockholders'
                                                       Stock      Stock      Additional      Accumulated         Equity
                                                       Shares     Amount       Capital         Deficit          (Deficit)
                                                     ---------   --------   ------------    -------------     -------------
<S>                                                  <C>         <C>        <C>             <C>               <C>
Balance at December 31, 1998....................     3,000,000   $30,000     $1,265,253      $(3,810,043)     $(2,514,790)
   Fair value of services provided
     by shareholder.............................            --        --        145,833               --          145,833
   Compensation and other expense
     on stock options...........................            --        --         56,310               --           56,310
   Conversion of line of credit
     from shareholder...........................        60,061       601        199,399               --          200,000
   Sale of common stock.........................       136,638     1,366        453,634               --          455,000
   Fair value of warrants issued in
     connection with capital lease
     and note payable...........................            --        --        396,256               --          396,256
   Cancellation of stock purchase
     Warrants...................................            --        --       (408,253)              --         (408,253)
   Fair value of warrants issued in connection
     with the Subordinate promissory
      notes.....................................            --        --      1,463,190               --        1,463,190
   Net loss.....................................            --        --             --       (2,035,486)      (2,035,486)
                                                     ---------   --------   ------------  -------------      ------------
Balance at December 31, 1999....................     3,196,699     31,967     3,571,622      (5,845,529)       (2,241,940)
   Sale of common stock in connection
     with initial public offering...............     3,162,500     31,625    36,204,942              --        36,236,567
    Exercise of warrants issued in
     connection with subordinate                        17,000        170       101,830              --           102,000
     promissory notes...........................
   Exercise of employee stock options...........         5,000         50         4,950              --             5,000
   Fair value of warrants issued for
     services...................................            --         --     2,106,300              --         2,106,300
   Net loss.....................................            --         --            --      (4,745,114)       (4,745,114)
                                                     ---------   --------   ------------  -------------      ------------
Balance at December 31, 2000....................     6,381,199   $ 63,812   $ 41,989,644  $ (10,590,643)     $ 31,462,813
                                                     =========   ========   ============  =============      ============
</TABLE>


                            See accompanying notes.

                                      F-5
<PAGE>

                           WORLDQUEST NETWORKS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                For the years ended December 31, 1999 and 2000

<TABLE>
<CAPTION>
                                                                Twelve months ended
                                                                    December 31
                                                         --------------------------------
                                                             1999                 2000
                                                         -----------          -----------
<S>                                                      <C>                  <C>
Operating Activities
Net Loss                                                 $(2,035,486)         $(4,745,114)
Extraordinary loss                                                 -            1,625,367

Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
      Depreciation and amortization                          558,659              919,068
      Goodwill write-off                                     139,747                    -
      Fair value of warrants issued for services             145,833            1,868,500
      Fair value of shareholder services                      56,310                    -
Changes in operating assets and liabilities:
      Accounts receivable                                    121,556          (1,134,931)
      Accrued interest                                       175,456              120,622
      Accounts payable and accrued expenses                  726,187            (134,790)
      Deferred revenue                                        63,236              156,872
      Other assets                                        (1,058,812)            (353,055)
                                                         -----------          -----------
Net cash used in operating activities                     (1,107,314)          (1,677,461)

Investing Activities
Net additions to property and equipment                     (222,647)          (3,630,891)
                                                         -----------          -----------
Net cash used in investing activities                       (222,647)          (3,630,891)

Financing Activities
Borrowings from line of credit                               450,629             (888,725)
Capital leases                                              (161,506)            (127,475)
Notes payable                                               (173,000)            (266,814)
Promissory notes                                           1,900,000           (1,900,000)
Proceeds from exercise of stock options and warrants               -              107,000
Sale of common stock                                         455,000           36,236,567
                                                         -----------          -----------
Net cash provided by financing activities                  2,471,123           33,160,553

Increase in cash and cash equivalents                      1,141,162           27,852,201
Cash and cash equivalents at beginning of period              18,833            1,159,995
                                                         -----------          -----------
Cash and cash equivalents at end of period                $1,159,995          $29,012,196
                                                         ===========          ===========

Supplemental Disclosure of Cash Flow Information
Interest paid                                            $    13,062          $   118,589
                                                         ===========          ===========
</TABLE>


                            See accompanying notes.

                                      F-6
<PAGE>

                           WORLDQUEST NETWORKS, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    Years ended December 31, 1999 and 2000

1.   Organization and Description of Business

     WorldQuest Networks, Inc. (WorldQuest or the Company) was incorporated as a
Texas corporation effective October 14, 1996, and reincorporated as a Delaware
corporation effective October 28, 1999. In February 2000, the Company completed
its initial public offering, selling a total of 3,162,500 shares of common
stock, at a price of $13 per share. The initial public offering resulted in net
proceeds of approximately $36 million to the Company. Prior to the completion of
the initial public offering, the majority of the common stock of the Company was
owned by Eagle Venture Capital, LLC (Eagle) (formerly WorldQuest Networks, LLC),
a limited liability company controlled by the Company's chief executive officer.

     WorldQuest is an international Internet telephony company that sells
virtual prepaid calling cards through its Internet website and transmits long
distance calls over its own enhanced services platform using its own network or
leased capacity from other long distance carriers. The company also markets an
intelligent address book and calendar that enables customers to make domestic
and international phone calls and send faxes from anywhere in the world through
its website. Additionally, the Company sells its excess capacity on its networks
to other long distance carriers.

     As of December 31, 2000 tangible assets located in foreign locations
totaled 4% of total consolidated assets.

2.   Significant Accounting Policies

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company,
its subsidiaries and joint ventures in which the Company owns a controlling
interest. All significant intercompany balances and transactions have been
eliminated in consolidation.

Cash Equivalents

     Cash equivalents include money market mutual funds and other highly liquid
investments purchased with maturities of six months or less.


Depreciation and Amortization

     Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Amortization
of capital leases and leasehold improvements is provided on a straight line
basis over the lives of the related assets or the life of the lease, whichever
is shorter, and is included with depreciation expense. Goodwill is amortized
over its estimated economic life, currently estimated to be five years.

     Depreciation expense totaled $539,678 and $328,546 for 2000 and 1999,
respectively. Amortization expense totaled $84,095 for 2000.

                                      F-7
<PAGE>

                           WORLDQUEST NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Impairment of Long-lived Assets

     The Company evaluates long-lived assets, including goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable and the undiscounted cash flows to be generated
by these assets are less than the carrying amounts of these assets.


Income Taxes

     Income taxes are determined using the liability method, which gives
consideration to the future tax consequences associated with differences between
the financial accounting and tax basis of assets and liabilities. This method
also gives immediate effect to changes in income tax laws.


Revenue Recognition

     Retail prepaid phone card revenue is deferred when the customer purchases
the cards and recognized as calling services are used. Wholesale traffic revenue
is recognized as calls are processed.

Business Risk

     The Company is subject to risks and uncertainties common to growing
technology based companies, including rapid technology change, growth and
commercial acceptance of commerce transacted over the Internet, dependence on
third party technology, new product and service introductions, activities of
competitors, dependence on key personnel, international expansion and limited
operating history.

     A substantial portion of the Company's revenues are derived from the sale
of prepaid phone cards through the Company's web site. The Company relies on
unrelated service entities to process and remit these revenues. Discontinuance
of these services could result in disruption of the Company's business and
accordingly have a material adverse effect on its results of operations,
financial position and cash flows.

Research and Development Costs

     Research and development costs are expensed as incurred and consist
primarily of salaries, supplies and contract services. Research and development
costs totaled approximately $160,000 for the year ended December 31, 1999 and
were not significant during 2000.

     The Company capitalizes certain costs incurred during an internal-use
software development project, including costs related to applications,
infrastructure and graphics developments for the Company's Web sites.
Capitalizable costs consist of (a) certain external direct cost of materials and
services incurred in developing or obtaining internal-use computer software, (b)
payroll and payroll-related costs for employees who are directly associated with
and who devote time to the project and (c) interest cost incurred. Costs that
are considered to be related to research and development activities, are
incurred during the preliminary project stage, or for data conversion
activities, training, maintenance and general administrative or overhead costs
are expensed as incurred. Costs that cannot be separated between maintenance of,
and relatively minor upgrades and enhancements to, the Company's Web sites are
also expensed as incurred.

                                      F-8
<PAGE>

                           WORLDQUEST NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Reclassifications

     Certain reclassifications have been made to the 1999 financial statements
to conform to the 2000 presentation.

Advertising Costs

     The Company expenses the cost of advertising as incurred. Advertising
expense for the years ended December 31, 1999 and 2000, was $157,944 and
$445,528, respectively.

Stock-Based Compensation

     The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," in the primary financial
statements and has provided supplemental disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (see Note 10).

     In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" (FIN 44), an interpretation of APB 25. FIN 44, which was adopted
prospectively by the Company as of July 1, 2000, requires certain changes to the
previous practice regarding the accounting for certain stock compensation
arrangements. FIN 44 does not change APB 25's intrinsic value method, under
which compensation expense is generally not recognized for grants of stock
options to employees with an exercise price equal to the market price of the
stock at the date of grant, but it has narrowed its application. The adoption of
FIN 44 did not have a significant effect on the Company's existing accounting
for its employee stock options.

Net Loss per Share

     Basic and diluted net loss per share is computed using the Company's net
loss for each period presented divided by the average common shares outstanding
during the period. Stock options and warrants convertible into 1,470,567 and
865,031 shares of the Company's common stock for the years ended December 31,
2000 and 1999, respectively, were not considered in the calculation of average
common shares outstanding as the effect would be anti-dilutive due to the
Company's net loss for all periods presented.

Comprehensive Income

    Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For the years ended December 2000 and 1999, the Company
realized no transactions other than those reported in net income.

                                      F-9
<PAGE>

                           WORLDQUEST NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Concentration of Credit Risks

     Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents and accounts
receivable. Accounts receivable consist of amounts owed by credit card
processing companies relating to prepaid phone card sales, and amounts owed by
telephone companies for processed call traffic. At December 31, 2000 and 1999,
one credit card processing company accounted for 8% and 64%, respectively, of
total accounts receivable. At December 31, 2000, one long distance carrier
accounted for 63% of total accounts receivable, but no long distance carrier
accounted for more than 10% of accounts receivable at December 31, 1999.
Customers purchase the Company's prepaid calling cards primarily using major
credit cards, which are reimbursed by credit card processing companies.
Accordingly, the Company does not routinely perform on-going credit evaluations
of its customers but does perform evaluations of its credit card processors. The
Company's receivables are generally unsecured.

Significant Customers

     During 1999 no one customer accounted for more than 10% of total sales.
During 2000 one wholesale traffic customer accounted for $2,067,135, or 16%, of
total sales. This customer ceased transmitting traffic through the Company's
network in February 2001.

Fair Value of Financial Instruments

     The Company's financial instruments consist primarily of cash equivalents,
accounts receivable, and accounts payable and long-term debt. At December 31,
2000 and 1999, the carrying amount of the Company's financial instruments is
representative of their fair values due to their short maturities. The Company's
line of credit with Eagle bears interest at market rates and thus management
believes the carrying amount approximates fair value.

New Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Similar
Financial Instruments and for Hedging Activities" (SFAS 133), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company will be required to adopt SFAS
133 effective January 1, 2001. As the Company does not currently hold or utilize
derivative instruments, the adoption of SFAS 133 will not have a significant
effect on the Company's results of operations or financial position.

Use of Estimates

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

                                      F-10
<PAGE>

                           WORLDQUEST NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


3.   Property and Equipment

     Property and Equipment consists of the following as of December 31, 1999
and 2000:

<TABLE>
<CAPTION>
                                                  Estimated      December 31,      December 31,
                                                    Useful           1999              2000
                                                                     ----              ----
                                                    Lives
                                                   (Years)
                                                   -------
          <S>                                     <C>            <C>               <C>
          Leasehold improvements................    2 to 5        $  17,442          $  18,453
          Switches and other network equipment..    2 to 3        1,047,226          5,236,306
          Furniture and fixtures................      5              37,721             58,694
          Capitalized software..................      5             230,120            536,845
                                                                  ---------          ---------
           Total................................                  1,332,509          5,850,298
             Less: accumulated depreciation and
               Amortization.....................                   (757,936)        (1,575,009)
                                                                  ---------        -----------
                                                                  $ 574,573        $ 4,275,289
                                                                  =========        ===========
</TABLE>

4.   Other Assets

     Other Assets consists of the following as of December 31, 1999 and 2000:

<TABLE>
<CAPTION>
                                                                        December 31,      December 31,
                                                                            1999              2000
                                                                        ------------      ------------
     <S>                                                                <C>               <C>
     Prepaid Calling Cards. .........................................   $   35,945          $  82,303
     Goodwill (Note 8)...............................................           --            494,194
     Deposits........................................................      164,517            117,935
     Deferred debt offering cost.....................................      239,104                 --
     Deferred initial public offering cost...........................      630,422                 --
     Prepaid Expenses................................................        7,400            116,023
     Investment in foreign termination arrangements..................           --            283,100
     Other...........................................................       67,389            100,247
                                                                        ----------        -----------
                                                                        $1,144,777        $ 1,193,802
                                                                        ==========        ===========
</TABLE>

5.   Costa Rican Operation

     In January 1997, the Company and a Costa Rican national formed a Costa
Rican corporation, owned 50% by each party, to provide facsimile termination
service. In January 1998, the Company purchased 40% of such interest from the
other party for $125,000 resulting in 90% ownership. The purchase consideration
was in the form of a note payable to the other party, of which $25,000 was paid
in January 1998.

     During the first quarter 1999, this operation ceased terminating traffic
due to the loss of available circuits, resulting in the cessation of its
operations. Accordingly, the Company wrote-off its remaining goodwill of
$139,747 associated with this operation in 1999.

     In June 2000, the Company retired the note payable to the Costa Rican party
and removed all assets and liabilities from the balance sheet, recognizing a net
gain of approximately $100,000.

                                      F-11
<PAGE>

                           WORLDQUEST NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


     During 2000, the Company expensed certain investments totaling $300,000 in
foreign termination arrangements, which were not placed into operation. This
amount is reported as other expense in the accompanying statement of operations.

6.   Accrued Expenses

     Accrued Expenses consist of the following as of December 31, 1999 and 2000:

                                                      1999            2000
                                                      ----            ----
     Sales tax payable........................     $  46,158        $ 96,646
     Long distance carrier charges............       168,036         398,105
     Accrued payroll expenses.................        33,781          39,556
     Other ...................................       199,814         122,252
                                                   ---------       ---------
                                                   $ 466,083       $ 646,559
                                                   =========       =========

7.   Debt

     During 1996, the Company entered into a $2,000,000 line of credit agreement
with Eagle. During 1999, Eagle and the Company amended the credit facility
whereby $1,100,000 was converted into a term loan with interest and principal
due May 5, 2002 and the line of credit agreement was reduced to $1,400,000,
under which borrowings of $888,725 were outstanding at December 31, 1999. There
were no borrowings under the line of credit at December 31, 2000.

     During 1999, Eagle converted $200,000 of borrowings under the line of
credit into 60,061 shares of common stock, at a conversion price of $3.33 per
share.

     During 1999, the Company converted certain trade accounts payable totaling
$252,000 into an interest bearing promissory note due February 15, 2000, of
which borrowings of $192,000 were outstanding as of December 31, 1999. In
conjunction with the note, the Company granted vested warrants to acquire 30,000
shares of its common stock with an exercise price of $13 per share. The fair
value of the warrants was recognized as additional interest expense over the
life of the promissory note.

     In December 1999, the Company raised $1.9 million, before offering costs of
$255,000, through the private placement of 8% unsecured subordinated convertible
promissory notes due the earlier of December 31, 2000 or the successful
completion of an initial public offering and common stock purchase warrants. The
fair value of the stock purchase warrants of approximately $1.5 million was
accounted for as a discount on the debt and amortized as additional interest
expense over the term of the notes.

     Using proceeds from the initial public offering (see notes 1 and 10), the
Company retired all debt outstanding at December 31, 1999 during 2000, excluding
the $1,100,000 term loan due Eagle. Upon retirement of the 8% unsecured
subordinated convertible promissory notes, the unamortized fair value of the
common stock purchase warrants and deferred offering costs of approximately $1.6
million were expensed as an extraordinary loss.

     Interest expense recognized by the Company during 2000 and 1999,
respectively, totaled approximately $336,567 and $438,447.

                                      F-12
<PAGE>

                           WORLDQUEST NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8.   Related Party Transactions

General

     The Company's founder and Chief Executive Officer (CEO) holds a controlling
interest in Eagle, which in turn holds approximately 2.7 million outstanding
shares of the common stock of the Company as of December 31, 1999 and 2000.

     The founder and CEO elected to forego a cash salary until November 1999.
$145,833 of salary expense was recorded in 1999 for services rendered by the CEO
prior to November. Management believes that this amount approximates the fair
value of the services rendered to the Company by the founder and CEO.

Consulting Fees

     During 1999, the Company entered into an agreement pursuant to which the
Company agreed to grant warrants to a consulting company managed by one of the
Company's directors at an exercise price of $6 per share for up to 250,000
shares of common stock upon the execution of Internet portal agreements between
the Company and select Internet portals introduced to the Company by the
consulting company. During 2000, the Company granted warrants to acquire a total
of 100,000 shares of the Company's common stock as compensation for the
execution of two Internet portal agreements arranged by the consulting company.
The fair value of these warrants, approximately $1.9 million, was expensed as
selling, general and administrative costs during 2000.

     In April 1999, the Company formed a joint venture with BDC, LLC, a company
owned by a director of the Company. The Company owned 60% of the joint venture.
On April 17, 2000, the Company reached an agreement to purchase the remaining
40% interest in the joint venture for $600,000, which has been recorded as
goodwill to be amortized over 5 years.

9.   Income Taxes

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

<TABLE>
<CAPTION>
                                                                   December 31,   December 31,
                                                                      1999           2000
                                                                      ----           ----
          <S>                                                    <C>             <C>
          Deferred tax assets:
          Deferred revenue..................................     $    54,128        $35,478
          Depreciation and amortization.....................          97,264         75,640
          Other.............................................         148,395        336,969
          Net operating loss carry forwards.................       1,500,451      3,431,631
                                                                 -----------     ----------
              Total deferred tax assets.....................       1,800,238      3,879,918
          Valuation allowance...............................      (1,800,238)    (3,879,918)
                                                                 -----------     ----------
          Net deferred tax assets...........................     $        --     $       --
                                                                 ===========     ==========
</TABLE>

     The Company has U.S. net operating loss carry forwards of approximately
$9.3 million as of December 31, 2000, which expire beginning in 2011. The
Company has not recognized a deferred tax asset in the accompanying balance
sheet due to the uncertainty of future realization. Accordingly, no tax benefit
has been recognized in the accompanying statements of operations. No other
significant reconciling items exist between the actual effective tax rate and
the expected effective tax rate. During 2000 and 1999, the valuation allowance
increased by approximately $2,079,000 and $650,000, respectively.

                                      F-13
<PAGE>

                           WORLDQUEST NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10.  Stockholders' Equity (Deficit)

Common and Preferred Stock

     On October 14, 1996, the Company was incorporated with authorized share
capital consisting of 10,000,000 shares of common stock with par value of $0.10
per share, and 5,000,000 shares of preferred stock with par value of $0.10 per
share. As of the incorporation date, 10,000 shares of Common Stock were issued
and outstanding.

     On October 28, 1999 the Company reincorporated as a Delaware corporation,
with authorized share capital consisting of 50,000,000 shares of common stock
with par value of $0.01 per share, and 10,000,000 shares of preferred stock with
par value of $0.01 per share. The impact of the Company's reincorporation has
been retroactively reflected in the financial statements for all periods
presented.

     During May 1999, the Company sold 136,638 shares of its common stock for
$3.33 per share. In addition, as discussed in Note 7, $200,000 owed to Eagle
under the line of credit was converted into 60,061 shares of common stock, at a
conversion price of $3.33 per share.

     In February 2000, the Company completed a successful initial public
offering, selling a total of 3,162,500 shares of common stock at a price of $13
per share. The offering commenced on February 4, 2000, with the closing of
2,750,000 shares February 9, 2000 and the sale of an additional 412,000 shares,
representing the over-allotment option, closing on February 22, 2000. The
initial public offering resulted in net proceeds of approximately $36.2 million
to the Company.

Warrants

     At December 31, 2000, the Company has warrants outstanding to purchase a
total of 1,470,567 shares of the Company's common stock. (See notes 7, 8 and
12).

Stock Options

     The Company has a stock option plan (Option Plan) under which the Company
may grant Directors and key employees options to purchase up to 500,000 shares
of the Company's common stock at an amount at least equal to the fair value of
the Company's common stock on the date of grant. All options have a seven-year
term.

  The following table summarizes the employee stock option transactions for the
years ended December 31, 2000 and 1999 under the Option Plan:


<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                    ------------------------------------------------
                                            2000                           1999
                                    ------------------------------------------------
                                                  Weighted-                Weighted-
                                                   Average                  Average
                                    Options         Price      Options       Price
                                    -------         -----      -------       -----
<S>                                 <C>           <C>          <C>         <C>
Outstanding at January 1            293,164         $3.10      128,500        $2.79
Granted                             235,636         10.68      166,164         3.33
Exercised                            (5,000)         1.00           --           --
Canceled                            (33,100)         3.69       (1,500)        1.00
                                    -------                    -------
Outstanding at December 31          490,700         $6.71      293,164        $3.10
                                    =======                    =======
Exercisable options outstanding at
  December 31                       152,804         $6.38       72,233        $2.49
                                    =======                    =======
</TABLE>


                                     F-14
<PAGE>

                           WORLDQUEST NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about the stock options outstanding
at December 31, 2000 under the Option Plan:

<TABLE>
<CAPTION>
                                    Options Outstanding                Options Exercisable
                     ---------------------------------------------     -------------------
                                       Weighted-      Weighted-                  Weighted-
         Range of                       Average        Average                   Average
         Exercise                     Remaining        Exercise                  Exercise
          Prices     Shares          Life (years)       Price.         Shares     Price
         --------    ------          ------------     ---------        ------   ----------
         <S>         <C>             <C>              <C>              <C>      <C>
          $1.00      23,000              3.0          $ 1.00           23,000    $ 1.00
           1.44      75,000              7.0            1.44               --      1.44
           2.31       4,720              6.9            2.31               --      2.31
           3.33      90,164              4.2            3.33           76,054      3.33
       5.75-11.00    48,000              6.5            7.20               --      7.20
          13.00     155,000              5.6           13.00           53,750     13.00
          19.13      75,000              6.3           19.13               --     19.13
          21.63      12,316              6.2           21.63               --     21.63
          23.50       7,500              6.2           23.50               --     23.50
                  ---------                                           -------
Total               490,700              5.7          $ 6.71          152,804    $ 6.38
                  =========                                           =======
</TABLE>

     In December 1998, the Company issued options outside of the Option Plan to
purchase 167,867 shares of its common stock to its Chief Operating Officer (the
COO) at an exercise price of $3.33. These options have a seven-year term and
vest 20% on the first anniversary date, 30% on the second anniversary date and
50% on the third anniversary date. These options vested immediately upon the
closing of the Company's initial public offering. At December 31, 2000, all of
these options remained outstanding.

     Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation", ("SFAS 123") requires the disclosure of pro forma net less
and loss per share computed as if the Company had accounted for its employee
stock options under the fair value method set forth in SFAS 123.

      The Company's pro forma net loss and net loss as reported for the years
ending December 31, 1999 and 2000 are as follows:

                                                       1999            2000
                                                  -------------    ------------

Net loss:
     As reported............................      $(2,035,486)     $(4,745,114)
     Pro forma..............................       (2,087,552)      (6,081,642)
Net loss per share:
     As reported-- basic and diluted........      $     (0.65)     $     (0.52)
     Pro forma-- basic and diluted..........      $     (0.67)     $     (1.01)

     In determining the fair value of options granted for purposes of the
preceding pro forma disclosures, the Company used the minimum value
option-pricing model for periods prior to the completion of the initial public
offering with the following weighted-average: risk-free interest rate of 6% and
5%, dividend yield of zero, and an expected option life of 4 years. For periods
subsequent to the completion of the initial public offering, the fair value of
options granted was determined using the Black-Scholes option pricing model with
the following weighted average assumptions: risk free interest rate of 6%,
dividend yield of zero, volatility factor of 1.5, and a weighted-average
expected life of 4 years. The options granted during 2000, and 1999 had a
weighted average fair value of $9.34 and $0.86 per share, respectively.

                                     F-15
<PAGE>

                           WORLDQUEST NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     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 and requires the input of highly subjective
assumptions including the expected share 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.

Reserved Capital Shares

     The Company has reserved the following shares of common stock as of
December 31, 2000 (unaudited):

          Stock Option Plan........................................    500,000
          Stock Purchase Warrants..................................    791,000
          Options issued outside of Stock Option Plan..............    188,867
                                                                     ---------
          Total....................................................  1,479,867
                                                                     =========

11.  Commitments

     The Company has operating leases relating principally to office facilities.
Future minimum lease commitments at December 31, 2000, for leases with initial
or remaining terms of more than one year are summarized by fiscal year as
follows:

                                                        Operating
                                                         Leases
                                                         ------
          2001........................................   $77,735
          2002 .......................................     6,478
                                                         -------
                                                         $84,213
                                                         =======

     Rental expense under operating leases was approximately $60,663 and $77,216
for fiscal years 1999 and 2000 respectively.

     During the first quarter of 2000, the Company paid off the balance of its
capital lease obligations. At December 31, 1999 the present value of the minimum
lease payments was $127,475.

12.  Joint Ventures

     During 2000, the Company entered into two joint venture arrangements for
the purpose of installation and operation of Internet gateways in foreign
locations. The Company owns a controlling interest in these joint ventures and
accordingly has consolidated the financial position and results of operations of
the joint ventures in the accompanying financial statements, with the ownership
applicable to the joint venture partners recorded as a minority interest.

     During 2000, the Company granted a joint venture partner options to acquire
50,000 shares of common stock, with exercise prices of $4.56 to $8.50, upon the
completion of ten new Internet circuit installations by the joint venture
partner. The fair value of these options, approximately $237,800, was recorded
as an additional cost of installation of the circuits and capitalized as
property and equipment.

                                     F-16
<PAGE>

                           WORLDQUEST NETWORKS, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     At December 31, 2000, the Company had receivables of approximately $392,867
from its joint venture partners, relating to amounts collected on behalf of the
joint ventures by the partners.


13.  Contingencies

     In October 1997, the Patent and Trademark Office issued a notice of
publication regarding our application to register "WorldQuest Networks" as a
trademark. In response to that notice, Qwest Communications (Qwest) filed a
notice of opposition in September 1998, which is currently pending before the
Patent and Trademark Office. In July 2000, Qwest Communications instituted a
cancellation proceeding for the Company's registered trademark "WorldQuest." If
the Company does not prevail, the registration "WorldQuest" will be cancelled,
it will not be able to obtain a registered trademark for "WorldQuest Networks"
and could be required to stop using the names or pay a fee to Qwest for
permission to use the names.

     The Company is a defendant from time to time in lawsuits and disputes
arising in the ordinary course of their business. The Company believes that
resolution of all known contingencies is uncertain, and there can be no
assurance that future costs related to such litigation would not be material to
the Company's financial position or results of operations.

                                     F-17