Form 10QSB for IPVoice Communications, Inc.

10QSB 1 ipvoice.htm Form 10QSB for IPVoice Communications, Inc.

U.S. Securities and Exchange Commission
Washington, D.C. 20549

Form 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarter ended September 30, 2001

Commission file no. 0-27917

IPVoice Communications, Inc.

(Name of small business issuer in its charter)

Nevada 65-0729900
(State or other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or organization)

7585 E. Redfield Road, Suite 202
Scottsdale, Arizona 85260
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (480) 948-1895

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

Name of each exchange on
Title of each class which registered
------------------- ----------------

None

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

Common Stock, $.001 par value
(Title of class)

Copies of Communication Sent to:
I. Douglas Dunipace
Jennings, Strouss & Salmon, P.L.C.
Two North Central Avenue, Suite 1600
Phoenix, Arizona 85004-2393
Tel: (602) 262-5911
Fax: (602) 253-3255

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

Yes X No

As of September 30, 2001, there are 27,728,315 shares of voting stock of
the registrant issued and outstanding.

PART I

Item 1. Financial Statements.
---------------------------------------

The Condensed Consolidated Financial Statements of IPVoice Communications, Inc.
for the period ending September 30, 2001 are unaudited and are attached and
incorporated by this reference as Item 1.

Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------------------------
and Plan of Operations.
-----------------------

This analysis should be read in conjunction with the condensed consolidated
financial statements, the notes thereto, included in this on Form 10-QSB and the
financial statements and notes thereto included in IPVoice Communications,
Inc.'s December 31, 2000 Annual Report on Form 10-KSB.

All non-historical information contained in this Form 10-QSB is a
forward-looking statement. The forward looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.

Discussion and Analysis

IPVoice Communications, Inc. ("IPVC"), as the parent company, and IPVoice
Communications, Inc. ("IPVCDE"), as a wholly-owned subsidiary, are collectively
referred to herein as "the Company". IPVCDE was incorporated in Delaware in
December of 1997. In March 1998, IPVCDE entered into a reorganization agreement
with Nova Enterprises, Inc., which was incorporated February 1997 in the State
of Nevada ("Nova"). Under the reorganization agreement, the shareholders of
IPVCDE exchanged all of the outstanding common shares of IPVCDE for 9,000,000
shares of Nova. IPVCDE became a wholly-owned subsidiary of Nova. Nova changed
its name to "IPVoice.com, Inc." in May 1999 and to IPVoice Communications, Inc.
in January 2001. The reorganization agreement was accounted for as a
reorganization of IPVCDE.

In general terms a reverse acquisition is a transaction in which the inactive
public entity acquires an operating company and then changes its name as the
surviving parent corporation to the name of the subsidiary and allows the
subsidiary to appoint management in the surviving public entity. Thereafter, the
subsidiary may formally merge with the parent or may continue to operate as a
separate operating subsidiary. In this case, the subsidiary transferred all of
its assets to the parent.

The Company is quoted on the OTC Bulletin Board under the symbol "IPVC". The
Company conducted business from its headquarters in Denver, Colorado until
August 1999, when it relocated to Phoenix, Arizona.

Since inception the Company has been engaged in the business of developing its
MultiCom Business Management Software ("MultiCom(TM)") for use in Internet
Protocol telephony applications (telephone, fax, data, images and video over the
Internet). MultiCom(TM)is the business management system behind the Company's
TrueConnect(TM), SuperConnect(TM)and UltraConnect(TM)Gateway products
("Gateway"), for which trademark protection is being sought. Gateway provides a
mechanism for bridging the public telephone system with the Internet. The
Company's business was developed on the premise that traditional telephone
systems wasted precious resources by assigning each call a "nailed down"
circuit. The Company's Gateway allows a packet of information (voice, video,
e-mail, data, images, etc.) to cross multiple networks on its way to its final
destination. Thus, instead of having one dedicated circuit for a call, the
entire network is shared. The Company continues to research the availability of
additional innovative products in the Internet Protocol telephony and related
industries for development, distribution or acquisition.

It is the Company's intention to (i) continue to market its network
concentrating on International markets and continue to offer a competitive
product for domestic use; (ii) to conduct research to further develop the
MultiCom product and (iii) to develop further "add-ons" which will enhance and
expand the Gateway product by overlaying MultiCom on other switching equipment.
Current activities include software and International network development,
raising additional equity, and negotiating with key personnel to expand our
opportunities, be it acquisition, merger, partnerships and more competitive
facilities-based providers.

The Company at the beginning of this year took extreme but necessary measures to
change the way we had been doing business. After installing multiple network
sites in the US it became apparent that because of our limited ability to
provide access on a local dial-up basis to the USA and because of the down turn
in the market, especially Internet and tech stock, IPVoice needed to change its
overall business strategy and implement it quickly. The redirection of business
strategy was implemented first by cutting operational costs and concentrating
sales on international markets in order to increase revenues quickly. Bridge
financing was then obtained and the Company continues to align itself with
network partners to expand the business. The Company continues to develop and
implement this plan by acquiring necessary operating assets while the Company
continues to look for strategic alliances such as companies that offer larger
networking opportunities. The company can cut operational costs by taking
advantage of these opportunities and still supply customers with the quality of
service that they enjoyed previously from IPVoice products. In return the
majority of the new alliances partners benefit from IPVoice development tools,
experience and technical expertise necessary to them to compete effectively in
the Internet Protocol telephony market. There is no assurance that any benefit
will result from such activities. The Company's management expects to receive
limited operating revenues and continue to incur expenses during the first part
of 2001 while efforts are concentrated on International market sales and
redevelopment of our product offerings.

The Company had installed Gateways in New York, Los Angeles, Atlanta, Dallas,
Phoenix, Chicago, Miami and London prior to the third quarter of 2000, received
revenues from Flat25, Calling Cards and the Company's involvement in the
wholesaling of prepaid calling cards, per minute products and Flatrate products.
In the first quarter, 2001 we began to take the domestic network down which cut
our operating cost as well as revenues from the sale of the Company's products.
In the second quarter he Company aligned with Achieve to use the Genuity network
nationwide for dial-up Wholesalers and have brought the New York, Los Angeles
and Phoenix sites back up to support International product offerings and
alliances.

Results of Operations

Comparison of Three Months Ended September 30, 2001 and 2000

Overview

The Company is in the development stage. From its inception, the Company has
incurred losses from operations. As of September 30, 2001, the Company had
cumulative net losses totaling $8,723,000. We have only recently commenced
operations of the IPVoice System and have not yet begun generating any
significant revenues. We expect to continue to generate losses until our
revenues increase.

Revenues

Revenues for the three-month periods ended September 30, 2001 and 2000 were
$6,487 and $6,220, respectively. Revenues for the nine months ended September
30, 2001 were $94,866 compared to $114,193 for the same period in the prior
year. Gross profit for the quarters ended September 30, 2001 and 2000 were
comparable. Gross profit for the first nine months of 2001 was $30,848 versus
$10,217 for the first nine months of 2000. The increase is gross profit is
attributable to greater sales of the Company's telephony products in proportion
to wholesale calling card sales.

Operating Expenses

Operating expenses for the three months ended September 30, 2001 were $301,663
compared to $995,125 for the third quarter of fiscal 2001. The net loss was
$367,889 and $979,809 for the three months ended September 30, 2001 and 2000,
respectively.

Operating expenses for the three months ended September 30, 2001 decreased by
about $693,000 versus the comparable period in 2000 primarily because all
officers of the Company took pay reductions and significantly lower consulting
costs. The net loss for the third quarter of 2001 decreased by $612,000 as
compared to the third quarter of 2000 for the same reasons operating costs
decreased.

Financial Condition, Liquidity and Capital Resources

At September 30, 2001, the Company had cash of $9,000 compared to $111,000 at
December 31, 2000. The Company is in the process of trying to secure additional
funding from several sources to continue to sustain its operations.

In the second quarter 2000, the Company made a Tender Offer to the holders of 46
Units that had been issued in the spring of 1999. Each unit consisted of (i) a
two-year note in the principal amount of $24,900 bearing interest at 9% per
year, (ii) a warrant to purchase 18,750 shares of common stock at an exercise
price of $.9875, and (iii) 25 shares of senior convertible (Series A) preferred
stock with a conversion feature providing that in the event of an uncured
default in the payment on the notes, the outstanding senior convertible (Series
A) preferred stock would be converted into common stock in an amount of shares
which, immediately after issuance would equal 51% of the Company's issued and
outstanding common stock on a fully diluted basis. Holders of the Units were
given three options: (1) convert each Unit into 17,832 shares of common stock,
(2) surrender the Series A preferred stock, retain the warrant and exchange the
note for an amended note that is convertible into common stock at a conversion
price of $7.00 per share, or (3) retain the Unit without modification. As a
result of the Tender Offer, the Company issued 543,876 shares of common stock in
exchange for the surrender of 950 shares of Series A preferred stock and
cancellation of $759,450 of debt.

During the second quarter of 2000, the Company received $2,084,000, net of
expenses of $416,000, from the issuance of 2,500 shares of convertible Series B
preferred stock with a 7.5% dividend rate. At the election of the shareholders,
the Series B preferred stock may be converted into shares of common stock by
dividing the purchase price by the conversion price. The conversion price equals
the lesser of: (1) 110% of the lowest closing bid price for the common stock for
the five trading days prior to the date of issuance or (2) 75% of the average of
the three lowest closing bid price for the common stock for the thirty
consecutive trading days preceding the conversion date. The Company has recorded
a beneficial conversion feature discount on the issuance of convertible Series B
preferred stock in the amount of $833,333 in accordance with EITF Topic D-60.
Based on the Series B preferred stockholders' agreement, the Company is
recording the Series B preferred stock dividend over 180 days from May 22, 2000.
Also, on the conversion date, the Series B preferred stockholders have an option
to acquire up to $2,500,000 of common stock at the conversion price. The Company
is currently evaluating the financial statement effects of this option.
Furthermore, in accordance with the Series B preferred stockholders' agreement,
the Company issued 350,000 warrants to purchase common stock at an exercise
price of $2.136 per share. Additional information about this financing is set
forth in the Form 8-K Report filed with the Securities and Exchange Commission
on June 16, 2000.

In July of 2000, the Company and a previously unrelated third party agreed to
terminate the consulting agreement, including the outstanding warrants, in
exchange for 700,000 shares of common stock.

Impact of the Year 2000 Issue

The Year 2000 Issue was the result of potential problems with computer systems
or any equipment with computer chips that use dates where the date has been
stored as two digits (e.g. 98 for 1998). On January 1, 2000, any clock or date
recording mechanism including date sensitive software which used only two digits
to represent the year, might have recognized the date using 00 as the year 1900
rather than the year 2000. This could have resulted in a system failure or
miscalculations causing disruption of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar activities.

The Company was aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approached. All software
used for the Company's systems has been supplied by software vendors or outside
service providers. The Company had confirmed with such providers that its
present software was Year 2000 Compliant.

The Company believes, after investigation, that all software and hardware
products that it is currently in the process of developing (directly through
vendors) are Year 2000 compliant. The Company believes, after investigation,
that its own software operating systems are Year 2000 compliant and in fact, has
experienced no Year 2000 problems since January 1, 2000. Further the Company has
experienced no difficulties or adverse effects due to untimely conversion or
failure to convert by any other company upon which it relies.

The Company believes that is has disclosed all required information relative to
Year 2000 issues relating to its business and operations.

Forward-Looking Statements

This Form 10-QSB includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements, other than
statements of historical facts, included or incorporated by reference in this
Form 10-QSB which address activities, events or development which the Company
expects or anticipates will or may occur in the future, including such things as
future capital expenditures (including the amount and nature thereof), demand
for the Company's products and services, expansion and growth of the Company's
business operations, and other such matters are forward-looking statements.
These statements are based on certain assumptions and analyses made by the
Company in light of its experience and its perception of historical trends,
current conditions and expected future developments as well as other factors it
believes are appropriate in the circumstances. However, whether actual results
of developments will conform with the Company's expectations and predictions is
subject to a number of risks and uncertainties, general economic market and
business conditions; the business opportunities (or lack thereof) that may be
presented to and pursued by the Company; changes in laws or regulation;
competition in the high technology area; and other factors, most of which are
beyond the control of the Company. Consequently, all of the forward-looking
statements made in this Form 10-QSB are qualified by these cautionary statements
and there can be no assurance that the actual results or developments
anticipated by the Company will be realized or, even if substantially realized,
that they will have the expected consequence to or effects on the Company or its
business or operations.

Plan of Operations

Management is currently restructuring its operations in line with actual sales
levels and available working capital. Management expects to raise funding which
will allow it to move forward with its plan to reach cash profitability within
the next year. Within this timeframe, management will need to secure additional
funding to maintain its position in the market and to allow it to make several
strategic alliances or acquisitions currently under discussion.

The Company does not plan to make material investments into its products, sales
and marketing research and development at this time . The Company anticipates
increasing its number of employees over the next 12 months to include clerical
and other administrative services, sales and technical personnel provided actual
sales levels supports this expense.

The historical background and general description of business is more
particularly set out in the last filed 10-KSB/A Report for the Company, which
was filed on April 17, 2001 as of December 31, 2000. A copy of this filing or
other filings to date under the Securities Act of 1934 by the Company will be
made available by the Company to any shareholder requesting the same, or to
other interested parties. All filed documents of the Company may further be
retrieved "on line" through the Internet at the SEC homepage at:
http://www.sec.gov.

Until the Company achieves a sustained level of profitability, it must be
considered a start-up entity. The Company remains dependent on continuing to
obtain financing for cash flows to meet certain operating expenses and no
assurance of financial success or economic survival of the Company can be
assured during this period.

It should also be noted that as a start up entity, the Company has and will
necessarily continue to incur certain types of start up costs, including costs
related to the commencement of business, legal and accounting fees, initial
filing fees, and advertising and marketing fees which may not constitute ongoing
fees; or, if ongoing, may not be incurred at the same level or percentage of
revenues as experienced in the initial start-up period.

Management's general discussion of operations is limited by and should be
considered within the context of the actual Financial Statements and Notes
attached thereto and incorporated as part of Item 1 above.

PART II

Item 1. Legal Proceedings.
------------------------------------

On April 7, 1999, the Company acquired all of the issued and outstanding common
stock of SatLink 3000, Inc., d/b/a Independent Network Services, a Nevada
Corporation (INS). The Company issued 250,000 shares of redeemable convertible
preferred shares. Each share is convertible, on or after one year after Closing,
into one share of the Company's common stock or, at the shareholder's option,
redeemable by the Company at a price of $2 per share, giving a total valuation
of $500,000 to this transaction.

During the course of the audit of the SatLink 3000, Inc. 1998 financial
statements, certain information was disclosed to the Company. Based on this
information, the Board of Directors elected, on October 29, 1999, to rescind the
acquisition transaction ab initio. The Board also nullified the acquisition and
employment agreements with the President and Chief Executive Officer of SatLink
3000, Inc. These transactions are being treated as if they never occurred,
except for the assumption of an office space lease and the write off of a
receivable of $48,532.

In December 1999, SatLink filed a lawsuit alleging breach of contract as a
result of the rescission of the acquisition in October 1999. In December 1999,
the former CFO of the Company filed a lawsuit alleging breach of contract as a
result of the rescission of the employment agreement in October 1999.

On April 25, 2000, Michael McKim filed a lawsuit against the Company alleging
breach of employment contract and fraud. [Michael McKim v. IPVoice
Communications, Inc., a/k/a IPVoice.com, Inc., United States District Court,
Western District of Kentucky, at Louisville, 3:00CV-229-H] The Company formerly
employed Mr. McKim as Vice President of Research and Development. In addition,
for a period of time, he was a member of the Company's Board of Directors. As a
part of his compensation, Mr. McKim was to receive 300,000 shares of common
stock, followed by an additional 750,000 shares of common stock over a
three-year period, subject to various limitations.

In his complaint, Mr. McKim alleges that the Company failed to issue the 300,000
shares to him, thereby breaching the employment agreement. In addition, he
alleges that, in failing to provide the shares to him, the Company committed
fraud. The Company filed its answer on June 19, 2000 denying the allegations of
the complaint. The Company also filed a counterclaim against Mr. McKim alleging
that, during the course of his employment, Mr. McKim engaged in intentional
misrepresentation, breach of fiduciary duty and intentional interference with
business relationships. Recently, the Company secured new counsel. No
depositions have been taken and no settlement conference has yet occurred. A
plan for discovery has been agreed upon and will begin shortly. The Company
intends to vigorously defend the lawsuit and aggressively pursue its
counterclaim.

In February 2001, Satlink 3000, Inc. and its individual shareholders, including
Peter Stazzone, filed a lawsuit against IPVoice and a number of other
individuals and entities at Maricopa County Cause No. CV 2001-005262. This
lawsuit arises from the decision by IPVoice to rescind a share exchange
agreement with Satlink 3000, Inc., along with terminating Mr. Stazzone. The
plaintiffs have sued for breach of contract, breach of fiduciary duty, wrongful
interference with contractual relations, fraud and misrepresentation and
defamation. This suit is completely defendable and IPVoice fully expects
resolution in its favor.

In May 2001, Star Telecommunications, Inc., a Delaware corporation, filed a
lawsuit against the Company and a number of other individuals and entities at
Santa Barbara Superior Court Case No. 01042915. This litigation arises from the
carrier services provided by Star Telecommunications. They have sued for breach
of contract; account stated; money had and received; work, labor, services
rendered; and unjust enrichment. This lawsuit is completely defendable and the
Company expects resolution in its favor.

Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------------------------

On April 14, 2000 an existing stockholder exercised warrants to purchase 120,000
shares of common stock at a price of $1.00 per share. The proceeds were used for
general corporate purposes. In connection with the issuance of its common stock,
the Company relied on Section 4(2) of the Securities Act of 1933 and Rule 506.

On May 5, 2000, the Company created Series B convertible preferred stock. The
preferences, limitations and relative rights are set forth in Exhibit 3.(i).6 to
the Company's Form 10-QSB report filed May 15, 2000.

On May 19, 2000, the Company completed a tender offer for its outstanding Units
originally issued in the spring of 1999. A description of the tender offer is
contained in Item 2 of Part I under the caption "Financial Condition, Liquidity
and Capital Resources" and is incorporated herein by reference. In connection
with the issuance of its common stock in exchange for the Units, the Company
relied on the exemption from registration contained in Section 3(a)(9) of the
Securities Act of 1933.

On May 22, 2000, the Company issued 2,500 shares of Series B convertible
preferred stock to two institutional investors. A description of the issuance is
contained in Item 2 of Part I under the caption "Financial Condition, Liquidity
and Capital Resources" and is incorporated herein by reference. In connection
with this offering, the Company relied on the exemption from registration
contained in Section 4(2) of the Securities Act of 1933 and Rule 506.

On June 14, 2000, two existing stockholders exercised warrants to purchase
18,750 shares of common stock at a price of $.9875 per share. Proceeds were used
for general corporate purposes. In connection with the issuance of its common
stock, the Company relied on Section 4(2) of the Securities Act of 1933 and Rule
506.

During the second quarter of 2000, the Company received $2,084,371, net of
expenses of $415,629, from the issuance of 2,500 shares of convertible Series B
preferred stock with a 7.5% dividend rate. At the election of the shareholders,
the Series B preferred stock may be converted into shares of common stock by
dividing the purchase price by the conversion price. The conversion price equals
the lesser of: (1) 110% of the lowest closing bid price for the common stock for
the five trading days prior to the date of issuance or (2) 75% of the average of
the three lowest closing bid price for the common stock for the thirty
consecutive trading days preceding the conversion date. The Company has recorded
a beneficial conversion feature discount on the issuance of convertible Series B
preferred stock in the amount of $833,333 in accordance with EITF Topic D-60.
Based on the Series B preferred stockholders' agreement, the Company is
recording the Series B preferred stock dividend over 180 days from May 22, 2000.
Also, on the conversion date, the Series B preferred stockholders have an option
to acquire up to $2,500,000 of common stock at the conversion price. The Company
is currently evaluating the financial statement effects of this option.
Furthermore, in accordance with the Series B preferred stockholders' agreement,
the Company issued 350,000 warrants to purchase common stock at an exercise
price of $2.136 per share.

In July 2000, the Company and International Investment Partners Ltd. (IIP)
agreed to terminate the consulting agreement, effective May 31, 2000, under
terms which excused IIP from providing any further services and discontinued the
Company's obligation to make the monthly payments for such services. In
addition, IIP agreed to exchange both outstanding warrants for 700,000 shares of
common stock.

In October 2000, the Company entered into an agreement with Marie Peregrim to
provide sales and marketing management consulting services throughout Europe,
excluding the United Kingdom in exchange for 300,000 shares of common stock
valued at $273,000.

On February 14, 2001, the Company's SB-2 was declared effective by the
Securities and Exchange Commission ("SEC"). This SB-2 was filed primarily to
register shares of common stock underlying the 2,500 shares of convertible
Series B preferred stock and related dividends and warrants associated with the
issuance.

On February 20, 2001, the Company's Board of Directors adopted the 2001 Stock
Award Plan ("Plan") under which 2,256,000 shares of common stock are reserved.
The Plan was effective upon adoption. Under the Plan, shares of common stock may
be awarded to employees and consultants for services rendered. For purposes of
the Plan, the shares of common stock were valued at $0.38 per share. A
registration on Form S-8 was filed with the SEC on February 20, 2001 so that the
shares of common stock, when awarded, will be freely marketable by the
individual recipients. Our officers and directors are eligible to participate in
the Plan. In consideration of their personal guarantees of several obligations
of the Company, Mr. Howson and Ms. Will have each been awarded 500,000 shares of
common stock under the Plan. The remaining shares have been awarded to four
consultants for services, including 1,120,000 to Jeremy Feakins, a principal of
International Investment Partners, Ltd.

On April 24, 2001 the Company's Board of Directors amended the 2001 Stock Award
Plan to reserve an additional 3,504,417 shares of common stock. This amendment
was effective upon adoption. For purposes of the Plan, these shares of common
stock were valued at $.15 per share pursuant to a registration statement filed
with the SEC on Form S-8 on April 24, 2001. Such shares when awarded will be
freely marketable by the recipient. In consideration for Mr. Howson and Ms Will
providing personal guarantees and certain collateral to secure borrowings for
the Company, each have been awarded 1,000,000 share of common stock under the
Plan. The remaining shares were issued to Company employees as part of severance
arrangements or for accepting certain wage concessions.

Item 5. Other Information.
------------------------------------

In April 2000, J. Michael Scott began serving as the Vice President of Sales &
Marketing.

In June 2001, Michael V. Perry began serving as Corporate Counsel.

On May 5, 2000, Barbara S. Will (President, Chief Operating Officer and a
Director), Anthony K. Welch (Senior Vice President and a Director) IPVoice
Communications, Inc. and Condor Worldwide, Ltd., assigned to the Company all of
their respective interests in the intellectual property constituting the
Multicom Business Management Software, a telecommunications software program,
which uses an Internet interface with the public telephone system and provides
real time billing, administration and control of the long distance telephone
calls, including any and all modifications and future improvements. James K.
Howson is the Chairman and CEO of Condor Worldwide, Ltd.

Effective May 31, 2000 the Company and IIP agreed to terminate the consulting
agreement under terms which excused IIP from providing any further services and
discontinued the Company's obligation to make the monthly payments for such
services. In addition, IIP agreed to exchange both outstanding warrants for
700,000 shares of Common Stock.

On June 1, 2000, the Company entered into a financial and business management
consulting agreement with Growth Capital Resources.com, LLC. The agreement is
terminable with thirty days notice. GCR is compensated on an hourly basis, plus
out-of-pocket expenses, for time spent by its staff in providing services to the
Company.

Item 6. Exhibits.
---------------------------

(a) Exhibits, as described in the following index of exhibits, are filed
herewith or incorporated herein by reference, as follows:

Exhibit No. Description
--------------------------------------------------------------------------------

10.59 * Loan Agreement dated May 31, 2001 with Augustine Fund, L.P.
and The Shaar Fund Ltd.
10.60 * Convertible Promissory Note dated May 2001 with Augustine
Fund, L.P.
10.61 * Convertible Promissory Note dated May 2001 with The Shaar
Fund, Ltd.

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

* Filed herewith

(b) No Reports on Form 8-K were filed during the quarter.

SIGNATURES

In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Date November 16, 2001 IPVoice Communications, Inc. (Registrant)
-----------------

/s/ Barbara S. Will
-----------------------------------------
Barbara S. Will
Director, President and Chief Operating
Officer

/s/ James Howson
-----------------------------------------
James Howson
Chairman, Chief Executive Officer

/s/ Dennis A. Surovcik
-----------------------------------------
Dennis A. Surovcik
Acting Chief Financial Officer

IPVoice Communications, Inc.

(f/k/a IPVoice.com, Inc.)

ITEM I

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets- September 30, 2001 (Unaudited) ...............F-1

Consolidated Statements of Operations (Unaudited) .........................F-2

Consolidated Statements of Stockholders' Equity (Deficiency) (Unaudited) ..F-3

Consolidated Statements of Cash Flows (Unaudited)..........................F-4

Notes to Consolidated Financial Statements ................................F-5

(f/k/a IPVoice.com, Inc.)
(A Development Stage Enterprise)
Consolidated Balance Sheets

September 30, 2001 December 31, 2000
------------------ --------------
ASSETS Unaudited

CURRENT ASSETS
Cash $ 8,841 $ 111,150
Certificates of deposit - restricted - 25,619
Accounts receivable 21,220 2,145
Inventory - -
Prepaid expenses and deposits 69,011 93,916
------------- --------------
Total current assets 99,073 152,165
------------- --------------

FIXED ASSETS
Computer equipment 730,043 730,043
Office equipment 50,454 50,454
Furniture & fixtures 47,740 47,740
------------- --------------
Property & equipment, at cost 828,237 828,237
Less accumulated depreciation (256,871) (172,047)
------------- --------------
Property & equipment, net 571,366 656,190
------------- --------------
INTANGIBLE ASSETS 260,959 240,000
------------- --------------

Total Assets $ 931,398 $ 1,129,020
============= ==============

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES
Accounts Payable
Trade $ 619,541 $ 526,252
Officer 123,086 5,439
Related party 4,000 41,075
Accrued dividends 251,313 114,063
Accrued interest - stockholders 5,000 5,000
Deferred revenue 6,465 10,500
------------- --------------
Total current liabilities 1,009,405 702,329
------------- --------------

LONG-TERM LIABILITIES
Notes payable 900,260 385,950
Capitalized leases 198,260
------------- --------------
Total long-term liabilities 1,098,520 385,950
------------- --------------
Total liabilities 2,107,925 1,088,279
------------- --------------

STOCKHOLDERS' EQUITY (DEFICIENCY)

Senior convertible preferred stocks,
$.001 par value, authorized 10,000,000 shares
Series A, 200 and 1,150 issued and
outstanding shares at September 30, 2001 and
December 31, 2000
Series B, 2,340 and 0 issued and outstanding
shares at September 30, 2001 and
December 31, 2000 3 3
Common stock, $.001 par value, authorized
50,000,000 outstanding; 27,728,315 and
18,866,384 issued and outstanding
shares at Septemver 30, 2001 and 27,728 18,866
December 31, 2000
Beneficial conversion feature discount 997,913 833,333
Additional paid-in capital 7,605,540 6,019,085
Deficit accumulated in the development stage (9,807,711) (6,830,546)
------------- --------------
Total stockholders' equity (deficiency) (1,176,527) 40,741
------------- --------------
Total Liabilities and Stockholders'
Equity (Deficiency) $ 931,398 $ 1,129,020
============= ==============

The accompanying notes are an integral part of the financial statements

F-1

IPVoice Communications, Inc.
(f/k/a IPVoice.com, Inc.)
(A Development Stage Enterprise)
Consolidated Statements of Operations

Period from
February 19, 1997
(Inception)
Three Months Ended September 30, Nine Months Ended September, through
-------------------------------- ----------------------------- ------------------
2001 2000 2001 2000 September 30, 2001
-------------------------------- ----------------------------- ------------------
Unaudited Unaudited Unaudited Unaudited Unaudited

NET SALES $ 6,487 $ 6,220 $ 94,866 $ 114,193 $ 594,774
COST OF SALES - - 64,018 103,976 484,237
------------- ------------- ------------- ------------- --------------
Gross Profit 6,487 6,220 30,848 10,217 110,537
------------- ------------- ------------- ------------- --------------

OPERATING EXPENSES
Compensation
Officers 62,300 100,416 1,038,958 277,759 1,953,703
Other 95,030 85,860 474,350 182,770 906,277
Consulting 94,832 437,782 105,563 649,077 1,769,344
Consulting - related party 4,000 74,031 489,280 430,225 1,216,096
General and administrative 14,233 246,099 462,840 565,484 2,263,567
Research and development 2,993 - 10,493 28,160 136,056
Organizational expense -
related party - 0 - - 14,000
Depreciation and amortization 28,275 50,937 84,824 98,639 256,871
------------- ------------- ------------- ------------- --------------
Total operating expenses 301,663 995,125 2,666,308 ,232,114 8,515,914
------------- ------------- ------------- ------------- --------------
Loss from operations (295,176) (988,905) (2,635,460) (2,221,897) (8,405,377)
------------- ------------- ------------- ------------- --------------

OTHER INCOME (EXPENSE)
Interest expense (72,713) (10,662) (205,167) (56,750) (334,153)
Interest income - 19,758 712 37,268 64,997
Write-off of receivable - - - - (48,532)
------------- ------------- ------------- ------------- --------------
Total other income (expense) (72,713) 9,096 (204,455) (19,482) (317,688)
------------- ------------- ------------- ------------- --------------
Net Loss $ (367,889) $ (979,809) $ (2,839,915) $ (2,241,379) $ (8,723,065)
============= ============= ============= ============= ==============

Loss per common share, Basic $ (0.02) $ (0.05) $ (0.13) $ (0.13)

Number of weighted average common
shares outstanding 22,474,210 18,330,514 22,586,238 17,815,927
============= ============= ============= =============

The accompanying notes are an integral part of the financial statements

F-2

IPVoice Communications, Inc.
(f/k/a IPVoice.com, Inc.)
(A Development Stage Enterprise)
Consolidated Statements of Stockholders' Equity (Deficiency)

Par Value
---------------------------
Additional
Number of Shares Preferred Common Paid-in
--------------------------- Stock Stock Capital
BEGINNING BALANCE Preferred Common
February 19, 1997 (Inception) - - $ - $ - $ -
2/97 - founder's serv. ($0.001/sh.) - 9,000,000 - 9,000 -
3/97 - cash ($0.01/sh.) - 1,400,000 - 1,400 12,600
Net loss - - - - -
------------------------------------------------------------------------
BALANCE, 12/31/97 - 10,400,000 - 10,400 12,600
3/19 - donated-rel. party $0.001/sh.) - (9,000,000) - (9,000) 9,000
3/19 - acquisition ($0.001) - 9,000,000 - 9,000 (9,000)
3/20 - cash received - - - - -
2nd qtr, - cash ($1.00/sh.) - 144,000 - 144 143,856
3rd qtr. - cash ($1.00/sh.) - 10,000 - 10 9,990
3rd qtr. - cash ($0.75/sh.) - 53,333 - 53 39,947
3rd qtr. - cash ($0.50/sh.) - 20,000 - 20 9,980
3rd qtr. - cash ($0.25/sh.) - 100,000 - 100 24,900
3rd qtr. - cash $0.10/sh.) - 627,000 - 627 62,073
3rd qtr. - services ($0.10/sh.) - 473,000 - 473 46,827
4th qtr. - cash ($0.15/sh.) - 396,666 - 397 59,103
4th qtr. - services ($0.15/sh.) - 275,000 - 275 40,975
4th qtr. - cash ($0.19/sh.) - 80,000 - 80 14,920
Net loss - - - - -
------------------------------------------------------------------------
BALANCE, 12/31/98 - 12,578,999 - 12,579 465,171
1st qtr. - cash ($0.22/sh.) - 687,499 - 687 149,313
1st qtr. - services ($0.87/sh.) - 493,760 - 494 429,070
2nd qtr. - cash received - - - - -
2nd qtr. - cash ($4.00/sh.) 1,150 - 1 - 4,599
2nd qtr. - cash ($0.15/sh.) - 2,005,000 - 2,005 293,995
3rd qtr. - cash ($0.40/sh.) - 437,500 - 438 174,562
3rd qtr. - cash received - - - - -
3rd qtr. - services ($1.00) - 10,000 10 9,990
4th qtr. - services ($0.21) - 210,000 210 43,540
Net loss - - - - -
------------------------------------------------------------------------
BALANCE, 12/31/99 1,150 16,422,758 1 16,423 1,570,240
1st qtr. - cash ($1.00/sh.) - 386,000 - 386 385,614
1st qtr.. - cash ($.99/sh.) - 75,000 - 75 73,988
1st qtr. - services/deposits
($2.92/sh.) - 250,000 - 250 730,528
1st qtr. - services ($2.92/sh.) - 50,000 - 50 145,950
2nd qtr. - cash ($1.00/sh.) - 120,000 - 120 119,880
2nd qtr. - cash ($.99/sh.) - 18,750 - 18 18,496
2nd qtr. - Conversion due to Tender
Offer (950) 543,876 (1) 544 678,208
Issuance of Series B - cash 2,500 - 3 - 1,190,848
3rd qtr. - issuance of shares for
warrant - 700,000 - 700 (700)
4th qtr. - services ($0.91/sh.) - 300,000 - 300 272,700
Series B preferred stock dividend - - - - 833,333
Net loss - - - - -
------------------------------------------------------------------------
BALANCE, 12/31/2000 2,700 18,866,384 $ 3 $ 18,866 6,019,085
1st qtr. - services ($.38/sh.) 2,256,000 2,256 855,024
1st qtr.-Conversion of Series B
Preferred Stock (20) 98,217 98 (98)
2nd qtr. - services ($.38/sh.) 3,504,418 3,504 6,874,011
2nd qtr.-Conversion of Series B
Preferred Stock (90) 1,058,905 1,059 (1,059)
2nd qtr.-issuance of shares for
interest 126,631 127 28,441
Series B preferred stock dividend
2nd qtr. Beneficial Conversion
Feature Discount
3rd qtr. -issuance of shares for
interest 143,195 143 8,443
3rd qtr. -Conversion of Series B
Preferred Stock (50) 1,674,565 1,675 (1,675)
Net loss
------------------------------------------------------------------------
BALANCE, 9/30/2001 ( Unaudited ) 2,540 27,728,315 $ 3 $ 27,728 $ 7,605,540
========================================================================

-Continued-

Deficit
Beneficial Accumulated Total
Stock Conversion During the Stockholders'
Subscription Feature Development Equity
Receivable Discount Stage (Deficiency)

$ - $ - $ - $ -
- - - 9,000
(12,274) - - 1,726
- - (22,981) (22,981)
--------------------------------------------------------------------------------
(12,274) - (22,981) (12,255)
- - - -
- - - -
12,274 - - 12,274
- - - 144,000
- - - 10,000
- - - 40,000
- - - 10,000
- - - 25,000
(62,700) - - -
- - - 47,300
- - - 59,500
- - - 41,250
- - - 15,000
- - (507,685) (507,685)
--------------------------------------------------------------------------------
(62,700) - (530,666) (115,616)
- - - 150,000
- - - 429,564
60,000 - - 60,000
- - - 4,600
- - - 296,000
- - - 175,000
2,700 - - 2,700
- - - 10,000
- - - 43,750
- - (1,973,834) (1,973,834)
--------------------------------------------------------------------------------
- - (2,504,500) (917,836)
- - - 386,000
- - - 74,063
- - - 730,778
- - - 146,000
- - - 120,000
- - - 18,514
- - - 678,751
- 833,333 - 2,024,184
- - - -
- - - 273,000
- - (947,396) (114,063)
- - (3,378,650) (3,378,650)
--------------------------------------------------------------------------------
$ - $ 833,333 $(6,830,546) $ 40,741
857,280
-

28,568
(93,375) (93,375)
164,580 164,580
8,586
0
(2,839,915) (2,839,915)
--------------------------------------------------------------------------------

$ - $ 997,913 $(9,807,711) $(1,176,527)
================================================================================

F-3

The accompanying notes are an integral part of the financial statements

IPVoice Communications, Inc.
(f/k/a IPVoice.com, Inc.)
(A Development Stage Enterprise)
Consolidated Statements of Cash Flows

Period from
February 19, 1997
(Inception)
Nine Months Ended June 30, through
--------------------------------- --------------------
2001 2000 September 30, 2001
--------------------------------- --------------------
Unaudited Unaudited Unaudited
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,839,915) $ (2,241,379) $ (8,723,065)
Adjustments to reconcile net loss to net cash used by
Operating activities:
Stock issued for services/deposits - related party 1,327,129 730,778 2,189,521
Stock issued for services - other 268,188 146,000 1,136,438
Depreciation 84,824 98,639 256,871
Interest credited to certificate of deposit - (1,252) (1,768)
Amortization of beneficial conversion feature discount 164,580 - 164,580

Changes in operating assets and liabilities:
(Increase) decrease in inventory - 7,586 -
(Increase) decrease in accounts receivable (19,075) 93,550 (21,220)
(Increase) decrease in prepaid expenses and deposits 24,905 (88,682) (69,011)
Increase (decrease) in accounts payable - trade 93,289 (114,901) 619,541
Increase (decrease) in accounts payable - officers 117,647 280 123,086
Increase (decrease) in accounts payable - related party (37,075) (17,071) 4,000
Increase (decrease) in deferred revenue (4,035) (7,821) 6,465
Increase (decrease) in accrued payroll taxes - (1,005) -
Increase (decrease) in accrued interest - (6,690) 5,000
-----------------------------------------------------

Net cash used by operating activities (819,539) (1,401,968) (4,309,563)
-----------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificate of deposit - (25,000) (50,000)
Maturity of cetificate of deposit 25,619 - 51,768
Purchase of property and equipment - (410,154) (828,237)
Purchase of intangibles (20,959) (199,972) (260,959)
-----------------------------------------------------
Net cash used by investing activities 4,660 (635,126) (1,087,428)
-----------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 712,570 - 1,857,970
Common stock issued for cash - 598,577 1,524,803
Professional services in connection with Tender Offer - (80,699) (80,699)
Preferred stock issued for cash, net of expenses - 2,084,371 2,028,784
Proceeds from stock subscription receivable - - 74,974
-----------------------------------------------------

Net cash provided by financing activities 712,570 2,602,249 5,405,832
-----------------------------------------------------

Net increase (decrease) in cash and equivalent (102,309) 565,155 8,841

CASH, beginning of period 111,150 98,592 -
CASH, end of period $ 8,841 $ 663,747 $ 8,841
=====================================================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid in cash $ 3,436 $ 63,440 $ 127,422
=====================================================

Non-Cash Financing Activities:
Conversion of debt to common stock due to Tender
Offer $ - $ 759,450 $ 759,450
=====================================================

Series B preferred stock dividend $ 137,250 $ 673,668 $ 1,084,646
=====================================================

Issuance of common stock for warrants $ - $ - $ 700
=====================================================

Common stock issued to pay interest $ 37,154 $ - $ 37,154
=====================================================

Donated capital - related party $ - $ - $ 9,000
=====================================================

Inventory transferred to property and equipment $ - $ - $ 152,980
=====================================================

The accompanying notes are an integral part of the financial statements

F-4

IPVoice Communications, Inc.
(f/k/a IPVoice.com, Inc.)
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Principles
The Company IPVoice Communications, Inc., (the "Company"), is a Nevada
chartered development stage corporation which conducts business from its
headquarters in Scottsdale, Arizona. The Company was incorporated on
February 19, 1997 as Nova Enterprises, Inc., and changed its name to
IPVoice Communications, Inc. in March of 1998 and then to IPVoice.com, Inc.
in May of 1999 then back to IPVoice Communications, Inc. in January of
2001. The Company is principally involved in the Internet telephone
industry. The Company is in the development stage. Although the Company has
received revenue, it is not yet considered material to its intended
operations. The Company has received limited operating revenues and will
continue to incur expenses during its development, possibly in excess of
revenue.

The following summarize the more significant accounting and reporting
policies and practices of the Company:

a) Use of estimates The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. In
preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the statements of financial condition,
and revenues and expenses for the year then ended. Actual results may
differ from those estimates.

b) Significant acquisition In March 1998, IPVoice.com, Inc., a Nevada
corporation, acquired 100% of the issued and outstanding shares of the
common stock of IPVoice Communications, Inc., a Delaware corporation, in a
reverse merger, which was accounted for as a reorganization of the Delaware
Company. In January 2001, IPVoice.com, Inc. changed its name to IPVoice
Communications, Inc.

c) Principles of consolidation The consolidated financial statements
include the accounts of IPVoice Communications, Inc. and its wholly owned
subsidiary. All intercompany balances and transactions have been
eliminated.

d) Net loss per share Basic net loss per weighted average common share is
computed by dividing the net loss by the weighted average number of common
shares outstanding during the period.

e) Stock compensation for services rendered The Company issues shares of
common stock in exchange for services rendered. The costs of the services
are valued according to generally accepted accounting principles and have
been charged to operations.

F-5

f) Inventory Inventory consists of unused telephone time related to the
prepaid calling cards sold. The Company receives transaction reports by
activated PIN codes from the long distance provider.

g) Property and equipment All property and equipment is recorded at cost
and depreciated over their estimated useful lives, using the straight-line
method. Upon sale or retirement, the costs and related accumulated
depreciation are eliminated from their respective accounts, and the
resulting gain or loss is included in the results of operations. Repairs
and maintenance charges, which do not increase the useful lives of the
assets, are charged to operations as incurred.

h) Intangibles. In the second quarter of 2000, the Company engaged a law
firm for the preparation and filing of the required applications for rates
and tariffs with the state regulatory authorities in 48 continental United
States, Hawaii, the District of Columbia and the U.S. FCC at a total cost
of over $260,000, in accordance with APB 17. The Company intends to
amortize this cost over a twelve-month period beginning with the initiation
of operations, as these rates and tariffs are renewed on an annual basis.

i) Revenue recognition The Company currently has two revenue streams: 1)
prepaid telephone calling cards and other calling services and 2) the sale
of its "Gateways". The Company recognizes revenue on the prepaid telephone
cards and other calling services based upon actual usage since, as provided
in reports detailing usage by activated PIN codes. Since the Company
requires payment in full by the wholesaler or customer upon PIN code
activation, in blocks or individually, the amount received by the Company
in excess of that reported by the provider is classified as deferred
revenue. Revenue from the sale of the Company's "Gateways" is recognized
upon acceptance of the equipment by the purchaser. Although the accounting
for the two revenue streams is different, they are both part of the
Company's single line of business.

j) Research and development Research and development costs are expensed in
the period incurred.

i) Interim financial information The financial statements for the nine
months ended September 30, 2001 and 2000 are unaudited and include all
adjustments which in the opinion of management are necessary for fair
presentation, and such adjustments are of a normal and recurring nature.
The results for the nine months are not indicative of a full year results.

(2) Stockholders' Equity The Company has authorized 50,000,000 shares of $0.001
par value common stock and 10,000,000 shares of $0.001 par value preferred
stock. Rights and privileges of the preferred stock are to be determined by
the Board of Directors prior to issuance. The Company had 27,728,315 and
18,866,384 shares of common stock issued and outstanding at September 30,
2001 and December 31, 2000, respectively. The Company had 200 and 1,150
shares of Series A preferred stock issued and outstanding at September 30,
2001 and December 31, 2000, respectively. The Company had 2,340 and 2,500
shares of Series B preferred stock issued and outstanding at September 30,
2001 and December 31, 2000, respectively. In February 1997, the Company
issued 9,000,000 shares to its founder for services rendered to the Company
valued at par value, or $9,000. In March 1997, the Company completed a
Regulation D Rule 504 Placement for 1,400,000 shares in exchange for
$14,000 cash.

F-6

In March 1998, a majority shareholder donated 9,000,000 shares of common
stock to the Company. 9,000,000 shares were simultaneously issued for the
acquisition of IPVoice Communications, Inc., a Delaware corporation (Note
(1)(b). During the second quarter of 1998, the Company issued 144,000
shares of common stock for $144,000 in cash. The Company issued 473,000
shares of common stock for services rendered, valued at the current market
rate of $47,300, during the third quarter of 1998. Also during the third
quarter, the Company issued 183,333 shares of common stock for $85,000 in
cash, and 627,000 shares of common stock for a subscription receivable of
$62,700. In the fourth quarter of 1998, the Company issued 275,000 shares
of common stock for services rendered, valued at the current market rate of
$41,250. In the same quarter, 476,666 shares of common stock were issued
for $121,800 in cash.

In January 1999, the Company issued 93,760 shares of common stock in
exchange for services, valued at $14,064. In January and February 1999, the
Company issued 499,999 shares of common stock in exchange for $75,000 in
cash. In March 1999, the Company issued 187,500 shares of common stock for
$75,000 in cash. These issuances were to then current stockholders. In
March 1999, the Company issued 400,000 shares of common stock for services,
valued at the current market rate of $415,500, to three previously
unrelated entities.

In April 1999, the Company issued 250,000 shares of common stock to an
existing stockholder for $100,000 cash. In April 1999, an existing
stockholder exercised a warrant for 155,000 shares of common stock by
tendering $100,000 cash. In April 1999, an existing stockholder exercised a
warrant for 1,600,000 shares of common stock by tendering $96,000 in cash.
In the second quarter, the Company completed a Regulation D Rule 506
Private Placement for units, which included the issuance of 1,150 shares of
senior convertible (Series A) preferred stock in exchange for $4,600 in
cash. These senior convertible (Series A) preferred shares, as a group,
were convertible into common shares equaling 51% of the issued and
outstanding common shares after conversion, in the event of an uncured
default of the notes payable. In July 1999, the Company discovered that it
had failed to issue and record 10,000 shares of common stock in exchange
for legal services, valued at $10,000 in 1997, as originally contracted.
These shares were recorded in July 1999. In August 1999, the Company issued
437,500 shares of common stock for $175,000 cash. All common stock shares
issued in exchange for cash, except the two warrant exercises, were
subscribed for in January 1999. In November 1999, the Company issued 10,000
shares of common stock in exchange for services valued at $23,750. In
December 1999, the Company discovered that it had failed to issue and
record 200,000 shares of common stock for services valued at $20,000, which
had been contracted for in October 1998, and were recorded in December
1999.

In the first quarter 2000, an existing shareholder exercised warrants for
386,000 shares of common stock for $386,000 cash. In the first quarter
2000, an existing 506 investor exercised his warrants for 75,000 shares of
common stock by tendering $74,063 cash. In the first quarter 2000, the
Company issued 300,000 shares of common stock for services/deposits, valued
at the current market rate of $876,778, to two entities one related party
($730,778) and the other unrelated ($146,000).

In the second quarter 2000, an existing shareholder exercised warrants for
120,000 shares of common stock for $120,000 cash. In the second quarter
2000, an existing 506 investor exercised his warrants for 18,750 shares of
common stock by tendering $18,514 cash.

F-7

In the second quarter 2000, the Company made a Tender Offer to the senior
convertible (Series A) preferred stockholders who were given the option of:
(1) converting all of the units into 17,832 shares of common stock, (2)
converting a portion of the units to shares of common stock and amend the
notes or (3) retain the units and not to agree to the offer. As a result of
the Tender Offer, the Company issued 543,876 shares of common stock in
exchange for the cancellation of 950 shares of Series A preferred stock and
$759,450 of debt.

During the second quarter of 2000, the Company received $2,084,371, net of
expenses of $415,629, from the issuance of 2,500 shares of convertible
Series B preferred stock with a 7.5% dividend rate. At the election of the
shareholders, the Series B preferred stock may be converted into shares of
common stock by dividing the purchase price by the conversion price. The
conversion price equals the lesser of: (1) 110% of the lowest closing bid
price for the common stock for the five trading days prior to the date of
issuance or (2) 75% of the average of the three lowest closing bid price
for the common stock for the thirty consecutive trading days preceding the
conversion date. The Company has recorded a beneficial conversion feature
discount on the issuance of convertible Series B preferred stock in the
amount of $833,333 in accordance with EITF Topic D-60. Based on the Series
B preferred stockholders' agreement, the Company is recording the Series B
preferred stock dividend over 180 days from May 22, 2000. Also, on the
conversion date, the Series B preferred stockholders have an option to
acquire up to $2,500,000 of common stock at the conversion price. The
Company is currently evaluating the financial statement effects of this
option. Furthermore, in accordance with the Series B preferred
stockholders' agreement, the Company issued 350,000 warrants to purchase
common stock at an exercise price of $2.136 per share.

In July 2000, the Company and International Investment Partners Ltd. (IIP)
agreed to terminate the consulting agreement, effective May 31, 2000, under
terms which excused IIP from providing any further services and
discontinued the Company's obligation to make the monthly payments for such
services. In addition, IIP agreed to exchange both outstanding warrants for
700,000 shares of common stock.

In October 2000, the Company entered into an agreement with Marie Peregrim
to provide sales and marketing management consulting services throughout
Europe, excluding the United Kingdom in exchange for 300,000 shares of
common stock valued at $273,000.

On February 14, 2001, the Company's SB-2 was declared effective by the
Securities and Exchange Commission ("SEC"). This SB-2 was filed primarily
to register shares of common stock underlying the 2,500 shares of
convertible Series B preferred stock and related dividends and warrants
associated with the issuance.

F-8

On February 20, 2001, the Company's Board of Directors adopted the 2001
Stock Award Plan ("Plan") under which 2,256,000 shares of common stock are
reserved. The Plan was effective upon adoption. Under the Plan, shares of
common stock may be awarded to employees and consultants for services
rendered. For purposes of the Plan, the shares of common stock were valued
at $0.38 per share. A registration on Form S-8 was filed with the SEC on
February 20, 2001 so that the shares of common stock, when awarded, will be
freely marketable by the individual recipients. Our officers and directors
are eligible to participate in the Plan. In consideration of their personal
guarantees of several obligations of the Company, Mr. Howson and Ms. Will
have each been awarded 500,000 shares of common stock under the Plan. The
remaining shares have been awarded to four consultants for services,
including 1,120,000 to Jeremy Feakins, a principal of International
Investment Partners, Ltd.

On April 26, 2001 the Company's Board of Directors adopted the 2001 Stock
Award Plan II ("Plan II") to reserve an additional 3,504,417 shares of
common stock. Plan II was effective upon adoption. For purposes of Plan II,
these shares of common stock were valued at $.20 per share pursuant to a
registration statement filed with the SEC on Form S-8 on April 26, 2001.
Such shares when awarded will be freely marketable by the recipient. In
consideration for Mr. Howson and Ms Will providing personal guarantees and
certain collateral to secure borrowings for the Company, each have been
awarded 1,000,000 shares of common stock under this Plan II. The remaining
shares were issued to Company employees as part of severance arrangements
or for accepting certain wage concessions.

(3) Income Taxes Deferred income taxes (benefits) are provided for certain
income and expenses which are recognized in different periods for tax and
financial reporting purposes. The Company had net operating loss
carry-forwards for income tax purposes of approximately $8,723,000, which
expire beginning December 31, 2117. There may be certain limitations on the
Company's ability to utilize the loss carry-forwards in the event of a
change of control, should that occur.

The amount recorded as a deferred tax asset, cumulative as of June 30,
2001, is $3,489,000, which represents the amount of tax benefits of the
loss carry-forwards. The Company has established a valuation allowance for
this deferred tax asset of $3,489,000, as the Company has no history of
profitable operations. The significant components of the net deferred tax
asset as of September 30, 2001 are:

--------------------------------- --- -------------------
Net operating losses $3,489,000
--------------------------------- --- -------------------
--------------------------------- --- -------------------
Valuation allowance (3,489,000)
--------------------------------- --- -------------------
--------------------------------- --- -------------------
Net deferred tax asset $0
--------------------------------- --- ===================

(4) Related Parties At September 30, 2001 and December 31, 2000, the Company
owed officers $123,086 and $5,439, respectively for reimbursement of
expenses paid on behalf of the Company and unpaid salaries. These amounts
are reflected in Accounts Payable - Officer. At December 31, 2000, the
Company owed two shareholders $41,075 for consulting services performed and
reimbursement of expenses paid on behalf of the Company. Both amounts were
repaid by the Company in the first half of fiscal 2001. Total consulting
fees incurred by two shareholders during the year ended December 31, 2000
amounted to $404,525. Consulting fees amounting to $29,500 and $104,925,
respectively were paid to an officer during the nine months ended September
30, 2001 and year ended December 31, 2000.

F-9

(5) Significant Acquisition On April 7, 1999, the Company acquired all of the
issued and outstanding common stock of SatLink 3000, Inc., d/b/a
Independent Network Services, a Nevada Corporation (INS). The Company
issued 250,000 shares of redeemable convertible preferred shares. Each
share is convertible, on or after one year after Closing, into one share of
the Company's common stock or, at the shareholder's option, redeemable by
the Company at a price of $2 per share, giving a total valuation of
$500,000 to this transaction.

During the course of the audit of the SatLink 3000, Inc. 1998 financial
statements,certain information was disclosed to the Company. Based on this
information, the Board of Directors elected, on October 29, 1999, to
rescind the acquisition transaction ab initio. The Board also nullified the
acquisition and employment agreements with the President and Chief
Executive Officer of SatLink 3000, Inc. These transactions are being
treated as if they never occurred, except for the assumption of an office
space lease and the write off of a receivable of $48,532.

(6) Private Offering of Securities During the second quarter of 1999, the
Company raised $1,150,000 through the issuance of forty-six investment
units in the amount of $25,000. Each unit consisted of a two-year note in
the principal amount of $24,900, with a maturity of June 3, 2001, with
interest payable quarterly at 9% per annum; a warrant for 18,750 shares of
common stock of the Company; and twenty-five senior convertible (Series A)
preferred shares. These preferred shares, as a group, were convertible into
common shares equaling 51% of the issued and outstanding common shares
after conversion, in the event of an uncured default of the notes payable.
The note payable maturity can be extended for two additional years at the
option of the Company, with no consideration to the unit holders. During
the second quarter the Company completed a Tender Offer, which reduced the
debt from $1,145,400 to $385,950 and cancelled 950 shares of senior
convertible (Series A) preferred stock.

During the second quarter of 2000, the Company received $2,084,371 net of
expenses of $415,629, from the issuance of 2,500 shares of convertible
Series B preferred stock with a 7.5% dividend rate. At the election of the
shareholders, the Series B preferred stock may be converted into shares of
common stock by dividing the purchase price by the conversion price. The
conversion price equals the lesser of: (1) 110% of the lowest closing bid
price for the common stock for the five trading days prior to the date of
issuance or (2) 75% of the average of the three lowest closing bid price
for the common stock for the thirty consecutive trading days preceding the
conversion date. Also, on the conversion date, the Series B preferred
stockholders have an option to acquire up to $2,500,000 of common stock at
the conversion price. Furthermore, in accordance with the Series B
preferred stockholders' agreement, the Company issued 350,000 warrants to
purchase common stock at an exercise price of $2.136 per share.

During the second quarter of 2001, the Company entered into a loan
agreement with the same parties who purchased the Series B Preferred stock
in 2000. The loan agreement provides a facility for the Company to borrow
up to $695,574 by issuing an 8% convertible note which is due in full on
May 31, 2004. Quarterly interest payments are required to be made beginning
on September 30, 2001. The Lender has the option of converting the notes at
any time into the Company's common stock at a conversion price equal to 75%
of the average of the three (3) lowest closing bid prices for the common
stock for the thirty (30) consecutive trading days immediately preceding
the conversion date. In order to secure this credit facility, Mr. Howson
and Ms. Will signed personal guarantees and provided certain collateral to
the Lenders. The Company borrowed $514,311 under this loan facility through
September 30, 2001. The Company established a $164,580 beneficial
conversion feature discount due to the discount from market price upon
conversion. The Company immediately amortized the $164,580 beneficial
conversion feature discount as an interest rate adjustment because the loan
facility is immediately convertible.

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(7) Restricted Certificates of Deposit In October 1999, the Company purchased a
$25,000 one-year Certificate of Deposit (CD), which bears interest at the
rate of 4.89%. The Company has pledged this CD as collateral to a letter of
credit in the amount of $25,000 issued in favor of the supplier of prepaid
telephone card services as a guarantee of payment. This contract was
cancelled in July 2000 and the restriction on the CD was released. In June
2000, the Company purchased a $25,000 one-year CD, which bears interest at
the rate of 4.89%. The Company has pledged this CD as collateral to a
Letter of Credit in the amount of $25,000 issued in favor of the
co-location, PRI lines and Internet connections.

(8) Commitment and Contingencies

a) Consulting agreements - related parties In December 1997, the Company
entered into a consulting agreement with a previously unrelated company
controlled by the present Chairman of the Board of Directors of the
Company. This agreement, as amended, called for the payment of $5,000 per
month for six years. This agreement was subsequently amended by verbal
agreement, increasing the payment to $12,500 per month and in September
1999, reduced to $7,500 per month. The Company is obligated to pay a total
of $150,000 in 2001 and $137,500 in 2002. In September 2000, the Company
entered into a consulting agreement with the former Senior Vice President
and current Director. In 2000, the Company paid $30,000 under this
agreement, which may be terminated at any time on thirty days notice.

In October 1998, the Company entered into a consulting agreement with a
previously unrelated party. This agreement called for the issuance of
350,000 shares of common stock valued at $35,000, an option for 1,600,000
shares of common stock at an exercise price of $0.06 per share, an option
for 350,000 shares of common stock at an exercise price of $3.90 per share,
a five-year warrant for common stock shares equal to five per cent of the
then issued and outstanding common stock at exercise with a strike price of
$1.00 per share and consulting fees for a 30 month period, beginning in
September 1998, in the amounts of : $4,000 per month for the first 6
months, $6,000 per month for the next 12 months, and $8,000 for the last 12
months. The Company was obligated for payments totaling $90,000 in 2000,
and $24,000 in 2001. This contract was terminated in July 2000 in exchange
for the issuance of 700,000 shares of common stock.

At the end of the first quarter of 1999, the Company entered into three
marketing agreements with three previously unrelated companies. Those
agreements called for the issuance of 100,000, 200,000 and 100,000 shares
of common stock. One agreement also called for the performance based
issuance of up to 150,000 shares of common stock and the performance based
issuance of warrants for up to 450,000 shares of common stock, with an
exercise price of $2.50 per share.

b) Consulting agreements - other In June 1999, the Company entered into a
one-year consulting agreement with an unrelated individual for a total
consideration of $100,000. In 1999, the Company paid $45,800 of this fee
and paid the $54,200 balance in 2000.

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In October 2000, the Company entered into an agreement with Marie Peregrim
to provide sales and marketing management consulting services throughout
Europe, excluding the United Kingdom in exchange for 300,000 shares of
common stock valued at $273,000.

c) Leases In July 2000, the Company entered a three-year lease for new
office space in Scottsdale, Arizona, which calls for a monthly payment of
$11,950. Previously, the Company leased office space in Phoenix. That lease
had expired on July 31, 2000. In November 1999, the Company entered into a
one-year lease for an apartment for the Company's use. This lease was
renewed for one year in November 2000 at a rate of $880 per month. The
Company paid $110,000 and $37,000 for the years ended December 31, 2000 and
1999, respectively, for the rental of real property. The Company is
obligated to pay $158,000 in year 2001 and $155,000 in year 2002 for the
rental of real property.

During 2000, the Company entered into several leases for office equipment
and furniture. Lease payments amounted to $15,000 for the year ended
December 31, 2000. The Company is obligated to the following payments:
$37,000 in 2001; $37,000 in 2002; $33,000 in 2003; $17,000 in 2004 and
$10,000 in 2005 for office equipment and furniture.

In January 2000, the Company entered into a three-year operating lease for
the Company's "Gateway" equipment located in New York City and Los Angeles
with a stockholder of the Company. This lease called for a fair market
value purchase at lease end. The Company was obligated to the following
payments: $36,800 in 2000; $40,000 in 2001; $40,000 in 2002 and $3,300 in
2003. In July 2000, the Company purchased the equipment at its fair market
value from the lessor.

The Company has entered into a sale-leaseback agreement with Creative
Capital Leasing Group ("Lessor") in February 2001. The Lessor purchased
certain equipment from the Company at a price of $300,000; the book value
of the assets is in excess of $300,000. The Company is required to make
monthly payments commencing February 1, 2001 in the amount of $11,288 for
66 months. The President of the Company has personally guaranteed the lease
and has pledged personal assets as collateral. The Company expects to
account for this transaction in accordance with SFAS 28 or SFAS 13, as
applicable.

d) Lawsuits In December 1999, SatLink filed a lawsuit alleging breach of
contract as a result of the rescission of the acquisition in October 1999,
as discussed in Note 5 above. In December 1999, the former CFO of the
Company filed a lawsuit alleging breach of contract as a result of the
rescission of the employment agreement in October 1999, as discussed in
Note 5 above.

On April 25, 2000, Michael McKim filed a lawsuit against the Company
alleging breach of employment contract and fraud. The Company formerly
employed Mr. McKim as Vice President of Research and Development. In
addition, for a period of time, he was a member of the Company's Board of
Directors. As a part of his compensation, Mr. McKim was to receive 300,000
shares of common stock, followed by an additional 750,000 shares of common
stock over a three-year period, subject to various limitations.

F-12

The Company believes these suits have no merit and intends to vigorously
defend them.

e) Employment agreements In April 1998, the Company entered into three-year
employment agreements with the President and the Senior Vice President.
These agreements call for salaries in the amount of $150,000 per year for
each of those officers. In September 1999, those officers voluntarily
reduced their base salaries to $90,000 per year. The reduction agreements
did not call for an accrual and payment of the difference. In September
2000, the Senior Vice President agreed to terminate the employment
agreement. In November 1999, the Company entered into a two-year employment
agreement with its Executive Vice President, (EVP), which calls for a
minimum salary of $78,000 per year, but has voluntarily reduced to $70,000
per year and granted the EVP options for 50,000 shares of common stock,
with an exercise price of $1.21. The Company is obligated to pay a total of
$88,000 in 2001, under these employment agreements.

f) Stock option plan In December 1999, the stockholders adopted an
executive incentive plan the "Option Plan" or "2000 Executive Incentive
Plan") under which 1,000,000 shares of common stock are reserved for grants
under the Option Plan. The Option Plan took effect on January 1, 2000 and
terminates on December 31, 2005. Options granted under the Option Plan may
qualify as "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended, and become exercisable in
accordance with the terms approved at the time of the grant. To be
eligible, a grantee must be an employee, officer, director, or consultant
of the Company. It is intended that all options be granted at fair market
value on a particular date determined by the Compensation and Option
Committee of the Board of Directors. As of December 31, 2000 and September
30, 2001, outstanding options to purchase 305,000 and 235,000 shares,
respectively, were granted to 7 employees and a director at an exercise
price of $1.21 per share.

(9) Going Concern As shown in the accompanying consolidated financial
statements, the Company has incurred a net loss of over $8,700,000 since
inception. At September 30, 2001, the Company reflects negative working
capital of approximately $910,000. These conditions raise substantial doubt
as to the ability of the Company to continue as a going concern. The
ability of the company to continue as a going concern is dependent upon
increasing sales and obtaining additional capital and financing. The
financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern. The Company has
retained the services of a registered broker/dealer and is in negotiations
with investment groups to raise additional capital.

F-13

F-14