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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended June 30, 2004

OR

Commission File No. 000-33471

YAK COMMUNICATIONS INC.

(Exact name of registrant as specified in its charter)

(647) 722-2752

(Registrant’s telephone number, including area code)

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

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

Common Stock, par value $.01 per share

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

Non-affiliates of YAK Communications Inc. held 8,144,716 shares of Common Stock as of June 30, 2004. The fair market value of the stock held by non-affiliates is $72.9 million based on the sale price of the shares on June 30, 2004.

As of September 23, 2004, 12,893,250 shares of Common Stock, par value $.01, were outstanding.

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Description

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ITEM 1. BUSINESS

Yak Communications Inc. (“Yak” or the “Company”), was incorporated in Florida in 1998. We provide various discount long distance telecommunication services in Canada and the United States to residential and small-to-medium business enterprises, as well as telecommunication management services to large enterprises in Canada. We primarily concentrate our marketing efforts towards residential consumers that make significant amounts of international calls directly targeting ethnic markets and communities in major urban centers. We began operations in Toronto during July 1999, and embarked on a systematic growth strategy to all of the major centers across Canada. During the first quarter of 2004, we expanded our services to include major centers in the east coast of Canada, and thus became a coast to coast provider of long distance services. As of June 2004, we operate in all states in the continental United States. In July of 2003, we purchased Argos Telecom Inc. (renamed “Yak for Business”) and Contour Telecom Inc. and expanded our offerings to include telecom services to small and medium business customers and telecommunications management services to large enterprises. Our principal operations and the majority of our customers and sources of revenue are currently based in Canada.

Our principal offerings are “dial-around” services (also known as “casual calling”) with both variable and flat rate pricing. Casual calling allows our customers to dial-around their existing long distance carrier on any call by entering a few digits prior to making the call, without permanently switching long distance carriers. We also offer the ability to permanently switch all of their calls from their existing long distance carrier to our long distance service, known as “1+ billing” or “picked lines.” As of June 30, 2004, we have approximately 805,000 monthly “dial-around” users and approximately 5,800 “1+ billing” subscribers.

Long distance services to international destinations, commonly referred to as “international calls,” are provided through switching and transmission facilities that automatically route calls to circuits based upon a predetermined set of routing criteria. The call typically originates from the caller’s Local Exchange Carrier’s (“LEC”) network and is routed on that network to the caller’s long distance carrier. The long distance provider picks up the call at its international gateway switch and sends it directly through one or more other long distance providers to a corresponding gateway switch operated in the country of destination. Once the traffic reaches the country of destination, it is then routed to the party being called through that country’s domestic telephone network. International long distance providers can generally be categorized by their ownership and use of switches and transmission facilities. The largest U.S. carriers, such as AT&T Corporation, MCI, Inc., and Sprint Corp., primarily utilize their own switches and transmission facilities. Historically, only the very large carriers have transmission facilities that have worldwide coverage. Typically, mid-size carriers both own and operate their own switches and facilities, and also rely on resale agreements with other long distance carriers to terminate their traffic.

We purchase our long distance calling capacity at wholesale rates from both the large and mid-sized carriers, and provide long distance telephone services through our own gateway switches that have direct access to the carrier networks. By aggregating volume and gaining access to the carrier networks, we are able to buy time on those networks at deep discounts. We market and resell that access to our customers in the form of discounted long distance phone calls using a “dial-around” service.

We use a “next generation” SanteraOne softswitch from Tekelec that has access to several carrier networks. Our switches receive the calls made by our customers and route them to the appropriate carrier from whom we purchase calling time. Our use of carriers is based on the location to which a call is made depending upon the price and toll quality of the route being offered by the carrier. Our acquisition of the carrier time is at a substantial discount from regular retail rates and we resell the time to our customers at a discount from the cost the customer would have to pay the carrier directly. Our billing and collection for these calls is performed by the LEC, and is included as a part of the customer’s regular phone bill. We have entered into agreements with LECs in our principal markets. See “Billing and Collection Agreements,” below.

We intend to continue to capitalize on the increasing demand for high quality international telecommunication services resulting from the increase in immigrant populations, the globalization of the world economies, the worldwide trend towards telecommunication deregulation and the growth of international voice and data traffic.

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Operating Highlights and Accomplishments in 2004:

THE INDUSTRY

The resale of long distance calling capacity was first permitted in the North American market (Canada and U.S.) in the 1980s. This enabled the emergence of new international long distance providers. The highly competitive and rapidly changing international telecommunications market (deregulation, privatization, the expansion of the resale market and other trends) has created a significant opportunity especially for carriers that can offer high-quality, low-cost international long distance service. This market has been driven by decreased termination costs, a proliferation of routing options, and increased competition.

Meaningful competition in long distance telephone services in Canada has been in effect since the 1990s. After hundreds of new companies entered the marketplace, there was a “shakeout” leaving five very large providers of long distance services: Bell Canada, Telus Corporation, Sprint Canada Inc., Allstream Inc. (formerly AT&T Canada Corp.), and Primus Telecommunications Canada Inc.; collectively, these carriers dominate the Canadian long distance calling market. For calendar 2003, the long distance market in Canada was approximately $4.1 billion.

Canada’s telecommunications sector is among the most advanced in the world. While the industry is still growing, competitive forces have reduced prices and the market has declined from approximately $13 billion to $12 billion. In the same three-year period, the new, non-traditional segments (wireless, Internet and data transmission) grew from $11 billion to $13.7 billion. We believe that most of the growth in wireless, Internet and data services in the Canadian telecom sector will be driven by business customers. The telecom market continues to grow, despite difficult economic conditions. Competition has lead to service innovation, declining prices and significant industry restructuring. Telecom infrastructure has undergone massive modernization, driven by increased competition and government telecom policy aimed at extending broadband deployment.

Over the past few years, the legacy voice market sector has not experienced significant entry and, in fact, has witnessed noteworthy consolidation. However, the introduction and deployment of Voice over Internet Protocol (‘VoIP’) promises to disrupt this balance. VoIP services are revolutionizing the market and are providing both a challenge to incumbent providers and an opportunity to new entrants.

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The five primary providers of long distance services, Bell Canada, Telus Corporation, Sprint Canada, MTS Allstream (resulting from the merger of MTS and Allstream, formerly AT&T Canada Corp.) and Primus Telecommunications, have maintained their relative market position. The overall size of the traditional market has reduced by approximately 8%, primarily due to declining prices. Bell Canada and Telus have approximately 55% market share, Allstream, Sprint Canada and Primus combined have approximately 24% of the market. The other provincial-based incumbent telephone companies – Aliant and SaskTel – collectively have approximately 12%, and the remaining alternative carriers have approximately 9%.

Dial-around long distance services, wherein a long distance caller inputs a series of digits to route their call to an alternative long-distance provider, remains a viable and innovative alternative to traditional 1+ long distance services. Yak Communications (Canada) Inc. is the dominant provider of Canadian dial-around services, with an estimated 80% of the $115 million Cdn. market.

Stability in relative market share has been reinforced by consolidation within the industry. The merger of MTS and Allstream, effectively positions the carrier as a third national network provider. 360 Networks (Group Telecom) sold its Canadian network assets and part of its customer base to Bell Canada, thus augmenting Bell Canada’s network presence in Telus’ operating territory.

Canada enjoys one of the highest Internet penetration rates in the world; however, this Internet penetration lags somewhat at the bottom of the SME market (1-49 employees). Within the Canadian telecom market, dial-up access through conventional phone lines is declining, while high speed Internet service is currently and is expected to emerge as the sole growth “driver” in the Internet access market. We believe that offering broadband VoIP telephony services over high speed Internet access presents an opportunity for growth.

The relative stability and gradual consolidation of the traditional voice and data markets is being threatened by the rapid entry of independent VoIP providers. VoIP is a telecommunications service that allows customers to make telephone calls using a broadband Internet connection rather than the traditional analog telephone line. It is therefore dependant on the end-user having access to a broadband Internet connection. With VoIP, human voice is digitalized into data packets that are formed and sent. At the destination, the VoIP packets are unpacketized and the data stream is reconverted into analog voice signals. VoIP data packets use transmission control protocol (Internet Protocol) as the transmission mechanism to reach their destination.

VoIP providers are increasingly positioning their offerings as a replacement to fixed line local voice services and Canada’s major cable operators, Rogers Cable and Shaw, have both announced plans to enter the local voice services market using VoIP technology. The current North American market leader is Vonage Holdings, which claims approximately 155,000 lines in service. In Canada, the first significant VoIP entrant was Primus Canada and it claims approximately 10,000 lines. Although, these figures represent a small fraction of the total number of lines in service connecting homes and businesses, there is significant potential for growth especially given rate of broadband penetration in Canada and the United States (estimated to be 36% of homes in Canada and 21% of homes in the United States). Analysts are increasingly bullish about VoIP and its potential impact on the telecommunications market.

STRATEGY

Our operations began through our wholly-owned subsidiary, Yak Communications (Canada) Inc., which was established to provide international long distance discount services primarily using dial-around access. Our focus has been principally the penetration into the ethnic-based international calling markets of the major Canadian cities. Initially, we began operations in Toronto during July 1999 and gradually began moving west into other metropolitan areas. During the first quarter of 2004, we completed our coverage of Canada by providing services in the Eastern and Atlantic Provinces. We have followed a similar strategy (on a limited basis) in various metropolitan areas in the United States. We expect that calls to international markets (which currently make up two-thirds of our revenues) will continue to comprise our core user market.

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In the near and medium term, we expect our growth to come from several sources:

We expect to continue to generate increased revenue, positive net income, and strong cash flow from our core dial-around business. These results will serve to fund our growth into the U.S. market and the development of our VoIP services. We will focus on customers with significant communications needs (international and domestic voice, Internet and data), including SMEs, multinational corporations and residential customers, no matter where located in the ever-expanding global marketplace.

In the first quarter of fiscal 2005, we expect to launch our 1+ service in the U.S. market, in an attempt to increase our presence and gain market share. In addition, we may consider acquisitions in the U.S. as opportunities arise and in the event it is more cost effective to expand our operations in the U.S. through acquisitions. For a discussion of our ability to finance these potential acquisitions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” below.

We plan to offer our services to a greater number of Canadian SMEs by capitalizing on our large dial-around customer base, as well as our “coast-to-coast” presence which includes all major Canadian markets. Our focus in the SME market will be concentrated in the 1-to-20 employee segment. That segment accounts for more than 900,000 (or almost 90%) of Canada’s more than one million small businesses. Based on IDC Canada’s survey data of small business telecom and Internet spending, telecommunications services consumed by the 1-20 employee segment were $1.6 billion (excluding wireless) in 2003.

Our medium to long-term strategy is to invest in and deploy our broadband telephony initiative by providing services over high speed Internet access which we believe will allow for higher growth and higher margins. We intend to accomplish this by leveraging the existing network, switch and operational cost infrastructures and relationships that we currently have in place. This would include our technical team, the strong relationships we currently enjoy with the major carriers, and the customer base we have developed to date. Our broadband initiative contemplates benefits to our customers beyond cheaper long distance calls. Our converged, single PSTN / IP media gateway and network platform is expected to allow customers to use a simple portal to interact with us electronically to use a feature, change their service or check or pay a bill whenever they want from any location in the world.

COMPETITION

Both in Canada and the U.S. there are several other “dial-around” companies competing in the marketplace.

Canada

In Canada, our key competitors include Alterna-Call, a division of Sprint Canada which offers a dial-around service and the principal product offering of Alterna-Call is a domestic (North American) fixed, flat rate calling service, e.g., 15 minutes of calling to Canada or the U.S. for $1 (CDN) with an increased rate per minute thereafter. In contrast, our principal product offering is a “pay-as-you-go” program, e.g., $.05 (CDN) per minute,

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with no minimums or maximums. Given that the average North American telephone call for our core user market lasts approximately 6 to 7 minutes we believe our product offering is more attractive to the average consumer. In 1998 Telehop began offering a dial-around service, in addition to its traditional, regional flat-rate long distance calling service. Their annual revenues are approximately $11.1 million (USD) in the fiscal year ended December 31, 2003 and their product offering is similar to Alterna-Call. It offers 20 minutes of calling for $1 (CDN) and $.05 for each minute thereafter. Both of these competitors have arrangements with the LECs for their billing and collection of call records.

During the first and second quarters of fiscal 2003 we introduced a competing product to the AlternaCall and Telehop offerings called “LooneyCall.” Our product offers consumers 38 minutes of calling time anywhere in Canada, the U.S., China and Hong Kong for $1 (CDN) with a rate of $.05 (CDN) for each minute thereafter. We introduced this product to compete with AlternaCall and Telehop with an emphasis on increasing our market share and providing our customers with additional value especially for those that wish to make longer calls. We believe this product provides us with a wider product offering allowing all of our customers’ calling patterns to be serviced. With LooneyCall we introduced and loaded a new access code 10-15-565 and also have billing arrangements with the LECs (Bell Canada, Telus, Sasktel, MTS, and Alliant) for the billing and collection of these calls. As of the end of fiscal year 2004, our LooneyCall revenue accounted for approximately 14.2% of our total dial-around revenue. Since the introduction of the LooneyCall product offering in November 2002, we have experienced continued growth in our core, per minute dial-around product offering. We do not currently offer LooneyCall or a comparable product in the U.S. market.

United States

In the U.S. there are many established companies offering “dial-around” services including: large companies such as AT&T Corporation, Sprint Corp., and MCI, Inc.; medium sized companies such as VarTec Telecommunications, Inc. and Americatel Corporation, and numerous small companies typically offering their dial-around service in a particular local geographic area. The product offerings of these companies vary with different calling plans and rates, which also often depend on the time of day when the call is made. Most of these companies have placed a large emphasis on their North American calling rates, (principally for calling inter-state and intra-state within the U.S.) with rates varying at different times of day, and mostly advertising flat rate calling (packaged minutes for a set amount of cost). We believe that even though the U.S. market already has numerous significant telecommunication industry players in the dial-around segment, there is room for a company specializing in a “pay-as-you-go” program for international discount calling without the myriad of access and service charges.

VoIP/Broadband

Competition from traditional telecommunication companies and non-traditional start-ups entering the broadband VoIP telephony market is at an early stage, but this market is showing signs of growth which may be indicative of a material change in the telecommunications marketplace. Because this market is at such an early stage of development, no market models have emerged to properly gauge competition; therefore, it is difficult to estimate a pattern of competition in this market. Despite the start up nature of this market, several relatively small companies have begun to market innovative Internet telephone calling services that make use of existing high-speed services, including Primus and a variety of U.S.-based startups, such as Vonage Holdings Corp., 8x8, Inc., BroadVox, LLC and Deltathree Inc.

Several large telecommunication service providers have begun to provide VoIP telephone service in the United States. Earlier this year, AT&T Corp. recently announced that it had commenced its IP telephone service in portions of Texas and New Jersey and expects to increase to 100 markets by the end of 2004. Verizon Communications Inc. has launched its broadband offering, VoiceWing, which offers unlimited local and domestic long distance for $39.95 per month. Qwest Communications International Inc. has begun offering VoIP services in Minnesota and intends to expand this service to 13 other states in 2004.

We believe that Vonage (a private company for which public information is limited) currently has more than 155,000 customers, primarily in the United States, subscribed to its broadband VoIP telephone service. Vonage’s “Unlimited Local” package includes unlimited local and regional calling and 500 long-distance minutes, including

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six free “touch tone” services such as call waiting and caller ID, all for a flat rate of $24.99 per month. Vonage began testing a Canadian service targeted to small businesses along the Canada-U.S. border in late 2003 and has announced regional introductions of its service in the Canadian market.

Primus Telecommunications Canada was one of the first Canadian-based telecom providers to launch an exclusive voice-over-high speed internet service in Canada and unveiled its “Talk Broadband” service for residential and SME users earlier this year. Incumbent carriers are also pursuing this market. Bell Canada and Telus Communications Inc. have also announced they are also pursuing this market. Canada’s two largest cable television companies; Shaw Communications Inc. and Rogers Communications Inc. have also announced plans to enter into this market with VoIP services targeted to consumers and small businesses.

We believe that our current business with its existing customer base and network infrastructure, carrier relationships, and our technical team along with our free cash flow, will allow us to promptly and efficiently develop and introduce our broadband VoIP telephony offerings into the marketplace. We plan to mirror our strategy from the dial-around market by targeting ethnic communities that make a large amount of international calls, providing them with a technologically progressive, feature-rich broadband product.

DESCRIPTION OF COMPANY’S PRODUCTS AND SERVICES

In order to meet the changing demands of the telecommunications customer, we are continually developing new products.

Current Products:

Yak Dial-Around

Our dial-around service offers competitively priced long distance services. Customers in Canada and the U.S. dial an access code before placing domestic or international long distance calls. The charges for the calls appear on the customer’s current phone bill. A customer is not required to switch their carrier, and there are no access and connection fees. In November of 2003 we launched a dial-around service in Peru by way of a 19-10 access code.

LooneyCall^™

We offer a flat rate long distance dial-around product aimed at customers who make long duration long distance calls. LooneyCall enables Canadian customers to purchase up to 38 minutes of long distance time for $1 (CDN) per call to anywhere in Canada the United States, China and Hong Kong. The charges for the calls appear on the customer’s current phone bill. A customer is not required to switch their carrier, and there are no access and connection fees.

1+ Program

We also offer a 1+ Billing program for high-volume dial-around customers. The customer can sign up with our 1+ program, essentially giving us the authorization to move the customer from their current long distance provider to our switch. The customer would then receive our lower rates each time he makes a call and would receive a bill directly from Yak. This service requires that the customer dial just 1 or 011 when making long distance calls, without having to dial the normal access code.

In the fall of 2004, we plan to launch a 1+ product within the United States.

Yak Cell

Our competitive cellular long distance services are currently being rolled out to residential and business customers across Canada. Cell phone users simply need to register their cellular phone online and provide a method of payment in order to start saving on long distance. The Yakcell service is currently available in many regional centers across Canada including major urban centers such as Toronto, Montreal, Vancouver, Halifax, Calgary, Edmonton, Winnipeg and Ottawa. The customer is not required to switch their cellular provider in order to use this service.

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Yak Travel

The Yak Travel card allows a customer to enjoy low long distance rates while they travel. Yak Travel enables a customer to call from anywhere in Canada, or the U.S., to anywhere in the world by dialing a local access number and following several voice prompts. This service is billed on either a prepaid or postpaid basis.

Yak for Business (formerly Argos Telecom)

We offer a powerful business solution to forward-thinking small and medium businesses and offer a range of innovative services in the Information Technology and Telecommunications sectors. Our customized business solutions are geared towards companies working in different industries. These companies place great emphasis on perfection and success, which Yak for Business delivers.

We offer a wide array of voice services to help businesses meet the needs of their customers, suppliers and employees. Our extensive, scalable voice network enables us to bring precisely the reach needed for a business - regional, national or international. We offer a full range of voice services including extended area service (EAS), local line services, toll free service, teleconferencing, long distance, local number portability, telecom system service and support, cabling for both voice and data, and data services.

Contour Telecom

Contour Telecom Inc., is a telecommunications management company specializing in voice, data, network, and cost management, helping organizations implement and administer their diverse communication environments. Contour provides customer-focused telecommunications management to medium and large business. The result is active and objective management that saves our clients money, and provides significant improvement in service. We accomplish this via an ongoing focus on cost reduction, containment and consolidated billing, while continually striving to improve service levels. We introduce advanced telecom practices and discipline to our clients while they focus their internal resources on their core business activity.

New Product Introductions:

WorldCity^™ VoIP

We have developed a range of broadband Internet-enabled local, long distance and value-add services that are designed to help our customers keep in touch more efficiently and effectively and for considerably less than ever before. For our customers who currently have a broadband connection, WorldCity^™ VoIP combines bundled local and long distance (within North America) calling packages with ultra-competitive international rates, plus great phone features like Caller ID, Three Way Calling and Voicemail for one flat price. In addition to the basic services to be introduced at launch, we anticipate future releases of the product will make available cutting edge applications to truly differentiate Yak from the competition e.g. unified messaging, virtual international phone numbers, and free member-to-member international calling.

Yak Conference

Yak conferencing service will enable a business customer to schedule unlimited conference calls for themselves anytime, online. There is no internet access needed for the other participants in the call. The only charges that apply are the applicable long distance telephone charges from the phone company of the originator.

SALES & MARKETING ACTIVITIES

The drive for customer satisfaction in the telecommunications industry means that companies such as ours have to serve more “niches” or collections of customer profiles. Becoming the trusted communications provider of

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choice entails marketing and supporting a number of products priced, packaged and serviced in a unique way that creates and reinforces a customer relationship. We have been extremely successful entering niche ethnic markets across Canada by establishing a strong brand presence offering competitively priced services, custom tailored to the international markets it serves. We currently use print media, television, radio, billboards, and continuous direct mail marketing materials to develop brand recognition and generate new customers. Informative, attractive and distinctive direct mail coupled with print media advertising in community newspapers and on selected television and radio programs has allowed us to reach customers that make international calls where we earn our greatest profit margins.

We are in the process of expanding our current marketing strategy to include marketing our dial-around service in the United States. We believe that success in the U.S. marketplace will be borne out of our ability to efficiently attack similar market segments coupled with the feature functionality, reliability and technological and pricing simplicity that American’s have come to expect in their telecommunications vendors. To a large extent, we will follow a strategy of targeting ethnic communities, a strategy that has proven successful in the Canadian market.

As a complement to the aforementioned proven methods of direct marketing (e.g. print media, television and radio advertisement, and direct mail), we will engage in both outbound telemarketing and an Internet marketing program that will make use of online media planning and buying to reach ten’s of millions of people and receive millions of site visits to our eCommerce optimized corporate web site, www.yak.com. We will develop an ad impression campaign to generate qualified leads and subscriptions and persist in search engine advertising, the process of selecting targeted keyword phrases related to the company and its various products and services to generate Web traffic/brand awareness.

In addition to direct and Internet marketing channels, we will use retail distributors to help distribute our WorldCity^™ VoIP broadband voice product, a product that will allow subscribers to make telephone calls using their broadband Internet connections anywhere in the world instead of a regular (or analog) phone line. We understand that an effective and efficient manner to supplement current marketing efforts and procure additional subscribers is via the development and ongoing support of an Independent Distributor Program. Recent technology deployment facilitates the development of a fully automated Distributor/Agent program that will offer a variety of retail rate plans and corresponding commission percentages for products including; dial-around, pre-subscribed long distance, toll free, travel card, wireless and broadband voice products. The company’s programs and products and services will focus on three primary components that attract Agents: price, ease of use and speed to market. Pricing (and commissions) must be competitive. The programs must be easy to understand and easy to explain to the customer. Order processing, price quotes and the provisioning of orders must be efficient and expedient.

We have also engaged the services of a number of celebrities to serve as spokespeople for the company.

TELECOMMUNICATION SWITCHES

Until recently, our business was supported by four Harris LX and Harris IXP switches that we owned and operated. These switches had allowed us to continually “scale up” as we added to the monthly volume of traffic that we processed. In November 2003, we purchased a “state of the art” SanteraOne next generation switch. This switch has allowed us to accommodate increased telephony volume while creating certain cost efficiencies. These efficiencies include savings on the fixed cost of leasing lines, reducing the amount of lines necessary and other savings relating to the physical deployment of the switch.

With the convergence of voice and data, and the development of “next generation” technologies such as VoIP, our Harris switches became obsolete. As a result, in April of 2004 we started to transition from our older Harris environment, into our new SanteraOne switching platform. We began to decommission each of the older switches in a systematic manner. The last of the Harris switches was fully decommissioned in August of 2004. For a discussion of the costs associated with the transition to the SanteraOne switch, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below.

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NETWORK

We have recently completed the consolidation of our four switching platforms into one SanteraOne softswitch, now positioning Yak to more efficiently accommodate the expansion of our customer base. The SanteraOne switch will act as a gateway to both traditional circuit-switched networks (PSTN) and Internet Protocol (IP) networks. This switch is connected through leased lines to all the Incumbent Local Exchange Carriers tandem and central offices in Canada by long haul diverse fiber providing customers access to a true “coast to coast” network. Dedicated fiber transport is contracted from different carriers to provide us with most competitive pricing.

This leased line network allows Yak to originate and terminate the majority of our traffic on our own network, thereby reducing Yak’s overall switching costs. For calls that terminate outside of Canada, Yak has agreements with other “off net” International and cross border carriers, which are selected by running real time Least Cost Routing algorithms.

In addition, Yak’s network has expanded further into the U.S. by loading CIC access codes in all mainland 48 states. U.S. customers can reach this network by dialing the appropriate 1010YAK CIC code or signing up to Yak’s “1+” program. U.S. originated calls are hauled to our switch in Toronto and terminated on our Canadian network or routed “off net’ if the calls terminate outside of Canada. Further, redundancy has been built in this U.S. network by connecting two separate routes through major switching centers in New York City. Finally, we have augmented our network infrastructure to facilitate the launch of our WorldCity^™ VOIP product, a next generation voice communication service.

EMPLOYEES

As of June 30, 2004, we have 151 full-time employees including eight part-time employees, with the following breakdown:

All of the part-time employees are being paid for their services on an hourly basis. We consider our relations with our employees to be excellent, and none of our employees are covered by a collective bargaining agreement.

TECHNICAL TEAM

During the past two years we have created a technical support team of persons who provide technical solutions regarding our switching, network engineering, billing, toll fraud control and data warehousing and management reporting. The technical team currently has seven members, one of whom is an independent contractor. We believe that this technical support team is equipped to design, install and maintain our switching systems and meet all of our foreseeable technology requirements.

For the build out of the Yak WorldCity^™ VOIP service, and to compliment our “time division multiplexing” (TDM) discipline, we have employed an additional seven dedicated technical personnel to architect, deploy and maintain the full data VOIP network. The business is also supported on an end-to-end basis by a further fourteen resources in our Information Technology group.

BILLING & COLLECTION AGREEMENTS

We have written agreements with the incumbent LECs, Bell Canada and Telus Corporation, for the billing and collection of long distance calling charges made by our customers on the Bell Canada local line network in Ontario and Quebec, and by our customers on the Telus local line network in British Columbia and Alberta. We also

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have a billing and collection agreement with MTS covering our services in Manitoba, with Sasktel covering our services in Saskatchewan, and with Aliant Telecom covering our services in provinces on the East coast. The billing and collection agreement covers all long distance calls made through our dial-around switching long distance service and routing system. We track all such calls made, record information about the source, destination, and duration of the call, rate the call, and provide the LECs with this data electronically. The LEC billing cycles are several times a month and include these charges to customers on their respective invoices termed as “other carrier” charges. The LECs then collect these amounts on our behalf. Under the terms of the “Billing & Collection Agreement,” the LECs and Telus are obligated to pay us within 45 days following the month in which the LECs receive our billing records (subject to offsets for non-collectible accounts). Canadian telecommunications authorities require that all incumbent LECs provide these billing and collection agreements in perpetuity subject only to our continued compliance with their terms and any changes in applicable regulations.

In addition, we have an agreement with Telus Corporation Clearinghouse Operations (“Telus clearinghouse”) which allows for the handling, transporting and delivery of our billing records generated by our switching and billing system to Bell Canada and Telus for invoicing and collection. In conjunction with this agreement, we have developed software and implemented hardware that allows for electronic encrypted signaling and online transmission of the billable records between our system and that of Telus clearinghouse which will allow them to process the billable records. This online transmission process significantly minimizes delays and errors in the billing. With respect to MTS and Sasktel we handle, transport and deliver our records to them directly and have developed the necessary software to process these records. The advantage of using Telus’ clearinghouse service for the Bell Canada and Telus records is efficiency due to the large volume of records we deliver, since Telus’ clearinghouse has larger systems in place to process such volume in a timelier manner. The amount of records we deliver to MTS and Sasktel is much smaller in number, and the cost of delivering these records to them directly is lower than through Telus’ clearinghouse.

In the United States we have entered into an agreement with Billing Concepts, Inc. which specializes in inter-carrier clearinghouse operations, for handling, transporting and delivery of our billing records to the LEC for invoicing and collection purposes. Under this U.S. arrangement all amounts invoiced by the LECs on our behalf are paid, less the LEC’s collection fees, to Billing Concepts, and in turn Billing Concepts pays our company the amounts received, less their processing fees. This billing and collection arrangement in the U.S., is technically similar to those arrangements we have established in Canada. This agreement, however, does not apply to nearly all of the competitive local exchange carriers (“CLECs”), and as a result we cannot currently process calls which originate from an alternative local line carrier. Unlike Canada, CLECs represent a larger market share of calls originating in the U.S. We have developed software on our switching systems to block customers with local phone companies that we do not have billing and collection agreements in place.

GOVERNMENTAL REGULATION

As an international communications company, we are subject to varying degrees of regulation in each of the jurisdictions in which we provide services. Laws and regulations applicable to the provision of telecommunications services, and the interpretation of such laws and regulations, differ significantly among the jurisdictions in which we operate. The summary below describes the primary regulatory developments in the U.S. and Canada that may have a material effect on our business.

In general, the regulation of the telecommunications industry continues to change rapidly both domestically and globally. In both the U.S. and Canada, telecommunications regulations are from time to time subject to judicial and administrative proceedings, as well as legislative and administrative hearings, in which proposals are made that, if adopted, could change the manner in which our industry operates. We cannot predict the outcome of these proceedings or their impact on us. There can be no assurance that future regulatory, judicial and legislative changes will not have a material adverse effect on us, or that domestic or international regulations or third parties will not raise material issues with adverse effect on us.

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Canada

Registration and Licensing Requirements. We are registered with the Canadian Radio-television and Telecommunication Commission (“CRTC”) as a reseller of telecommunications services in Canada. This is a requirement that has been imposed by the CRTC on all persons that resell telecommunications services in Canada. Registration with the CRTC is the only requirement necessary to have the authorization to resell telecommunications services in Canada. The provision of certain services, however, requires additional licensing by the Commission, regardless of whether the services are provided on a resale or a facilities basis.

As of January 1, 1999, new requirements oblige all persons who provide basic international telecommunications services (voice or data) to obtain a license from the CRTC for the provision of such services. Resellers who provide basic international telecommunications services must therefore obtain an international services license, in addition to registering with the CRTC as a reseller.

The international services licensing regime was established in part because of concerns relating to the potential for anti-competitive behavior involving foreign monopolists acting in conjunction with a resale affiliate based in Canada. The CRTC also wished to be able to exercise some supervision over Canadian service providers, especially resale affiliates in Canada.

We currently hold a Class B license from the CRTC. The CRTC issues international telecommunications service provider licenses for a period of five years and has indicated that, once it gains more experience with the licensing regime it will consider extending the terms to the maximum permitted length of 10 years. Licensees who maintain their licenses in good standing may expect to have them renewed by the CRTC. Currently, there is no fee payable in order to obtain a basic international telecommunications services license.

The licensing regime for Class B licensees is very light handed. Once a license is obtained, the licensee must keep it current, by advising the CRTC of any changes to the information about the licensee that has been filed with the Commission. The licensee must also file an annual affidavit stating that no changes to the information on file have taken place or alternatively describing any such changes. Licensees are also obliged to comply with the requirements of the Canadian contribution regime (see below) as a condition of their license and to file an annual affidavit attesting to the licensee’s compliance with this requirement. We are currently in full compliance with all filing requirements of our Class B license.

Because we do not provide any services on a monopoly basis and are not a resale affiliate, it is highly unlikely that the CRTC will have any concerns regarding anti-competitive behavior on our part. In addition, because we do not own or operate the underlying transmission facilities used to provide telecommunications services to the public, we are not classified as a Canadian carrier, but rather as a reseller. As such, we are not subject to the Canadian ownership and control requirements that apply to the facilities-based Canadian carriers.

Contribution Requirements. The CRTC established the “contribution” regime (a universal access-type regime) in 1992 when it first opened the long distance market to facilities-based competition. The contribution regime was re-designed in 2000, when the CRTC introduced a revenue-based funding mechanism for subsidizing universal access. The new contribution regime is broadly-based and requires that contribution be paid on the revenue from the widest possible range of services and service providers. Thus, ILECs, long distance operators, CLECs, cellular operators, resellers such as our company and others must all make contribution payments based on their Canadian telecommunications service revenues.

Contribution-eligible revenues are defined as total revenues from Canadian telecommunications services less certain allowable deductions. The most important deduction for us is the inter-carrier payments deduction. To prevent “double taxation”, inter-carrier payments to other telecommunications service providers are deducted from the total of Canadian telecommunications service revenues (except where the services are used to provide a contribution-ineligible service, such as the provision of non-Canadian telecommunications services or where the services are used internally by the acquiring service provider).

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For fiscal year 2003, the contribution charge was 1.1% “contribution-eligible” revenues. The rate is expected to decline in future years. Although we cannot predict whether the CRTC will change its method of contribution assessment and collection in the future, if the current approach remains unchanged and the overall contribution requirement declines as expected, we do not anticipate that our total contribution payments will become material in future years.

Voice over Internet Protocol (“VoIP”) Regulation. The CRTC initiated a policy proceeding to consider the regulatory framework for VoIP services on April 7, 2004 (Public Notice 2004-2), which is expected to conclude in October, 2004.

The CRTC’s preliminary position is that VoIP services that provide subscribers with access to and/or from the PSTN and the ability to make and/or receive local telephone calls should be treated as local exchange services. Therefore, existing regulatory requirements would apply depending on the class of service provider. This approach would allow Yak to offer VoIP services as a local reseller and it would not be subject to Canadian ownership and control requirements that apply to facilities-based Canadian carriers. Nor would we be required to build-out a local exchange network as a CLEC. Further, although the CRTC expects VoIP service providers to eventually provide all mandated end-user local service requirements, particularly 9-1-1, it is of the view that VoIP providers may begin service rollout without these features provided they clearly advise subscribers of these service limitations

Despite the CRTC’s preliminary views, the CRTC may issue a final decision that is much more restrictive. For instance, it may rule that VoIP providers can only offer service as a facilities-based carrier or it may require that VoIP service providers not operate until they can provide all mandated end-user requirements. Alternatively, the CRTC may decide that VoIP services are fundamentally different from current local voice services and may choose to regulate it as a data or Internet service. As such, ILECs would not be required to offer VoIP services pursuant to tariff and would be able to price below aggressively and/or have greater latitude to discriminate against independent providers, such as Yak.

United States

In the U.S. we operate as an interexchange carrier (“IXC”). Because we offer basic communications services (e.g., traditional old telephone service) between points in two different states (“interstate service”), and between the U.S. and a foreign country (“international services”), these services are subject to the provisions of the Communications Act of 1934, as amended (the “Act”) and the regulations of the Federal Communications Commission (the “FCC”). In addition, we offer basic communications services within a specific state (“intrastate service”). Intrastate IXC services are subject to the telecommunications laws of the state in which the service is provided, as well as regulations made by the state’s public utility commission (“PUC”) pursuant to the relevant telecommunications laws.

Interstate and International Services Regulation. The FCC regulates the provision of interstate and international basic communications services where such services are provided by a “common carrier.” A “common carrier” is an entity that offers basic communications services to the public or to all prospective users on standard rates, terms and conditions. We are considered to be a common carrier. The FCC has substantially deregulated interstate and international common carrier services. Nonetheless, we are required to (1) provide our regulated telecommunications services on a non-discriminatory basis upon any reasonable request; (2) charge rates and adopt practices, classifications and regulations that are just and reasonable; (3) avoid unreasonable discrimination in charges, practices, regulations, facilities and services; and (4) file tariffs setting forth the rates, terms and conditions for our services, or establish an Internet web site that lists such rates, terms and conditions. Also, we must comply with a variety of license, rate making, reporting and other requirements in our provision of interstate and international telecommunications services, including but not limited to the payment of annual regulatory fees and other contributions to funds established by the FCC.

In providing international service, we are subject to certain additional rules and requirements. In particular, we must have a license granted by the FCC to provide international service (sometimes called a “Section 214 authorization”). We have obtained a Section 214 authorization from the FCC to provide international switched and

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private line services to foreign locations using our own facilities or using services we lease from other carriers. Other international service rules also may affect our international business, including rules limiting routes over which U.S. international carriers may be permitted to provide international switched services over private lines interconnected with the public switched network (referred to as International Simple Resale, or “ISR”).

Our costs of providing long distance services will be affected by changes in the rates imposed by incumbent local exchange carriers (“ILECs”) as well as competitive local exchange carriers (“CLECs”) for origination and termination of calls over local facilities (“access charges”). Access charges generally comprise a significant portion of the cost of providing interexchange services in the U.S. The FCC has adopted several orders in recent years having the effect of reducing switched access charges imposed by local telephone companies. The FCC is currently considering further changes in its access charge regime; we cannot predict the outcome of these proceedings or how such outcome will affect us.

Other carrier compensation issues similarly may affect our operating expenses as well as our ability to compete with other IXCs and providers of other competitive services, such as voice over Internet protocol. The FCC has initiated a broad-ranging rulemaking proceeding in which it has proposed the replacement of various forms of intercarrier compensation; we cannot predict the outcome of this proceeding or its possible effect on our company.

As a provider of interstate and international telecommunications services, we must contribute to the federal universal service fund (“FUSF”) established by the FCC. The FUSF ensures that high quality, affordable telecommunications service is available to all Americans. Pursuant to the FCC’s universal service rules, all telecommunications providers must contribute a percentage of their interstate and international end-user telecommunications revenues to the FUSF. Contributions to federal universal service support mechanisms are determined using a quarterly contribution factor calculated by the FCC. The contribution factor is subject to change quarterly and may be increased or decreased depending upon the needs of the FUSF. The current contribution factor for the third quarter of 2004 is 8.9%. Accordingly, at present, we contribute slightly less than nine percent of our interstate and international end user telecommunications revenues to the FUSF.

The FCC currently is conducting a comprehensive review of the rules governing the methodology by which entities contribute to the FUSF. While the outcome of this proceeding and its effect on our business cannot be predicted, if any of these proposals are implemented, the amount of our contributions to the FUSF may increase, and could negatively impact our business, prospects, operating margins, cash flows and financial condition. Changes to federal universal service funding obligations could adversely affect us by increasing the payments owed to support the fund.

As of April 1, 2003, carriers may continue to assess a federal universal service surcharge on their customers, either as a flat amount or a percentage of a customer’s revenue, however, this surcharge may not exceed the total amount of the universal service contribution factor currently in effect. As a result, we are precluded from assessing a federal universal service-related charge on our end user customers in excess of the relevant interstate and international telecommunications portion of customer’s bill times the relevant contribution factor. We remain able to recover legitimate administrative costs relating to our contribution to the FUSF, provided that such cost recovery is made through areas other than our universal service line item surcharge.

In addition to cost of service issues affecting IXCs in general, regulatory developments affecting the Regional Bell Operating Companies (“RBOCs”) may have an impact on our ability to compete. The Telecommunications Act of 1996, which amended the Act, establishes standards for RBOCs and their affiliates to obtain from the FCC authority to provide long distance telecommunications services originating in their in-region local access and transport areas, or LATAs, to points outside that area. LATAs are geographical regions in the United States within which a Bell Operating Company may offer local telephone service. The FCC has approved the RBOCs’ applications to provide in-region interLATA long distance service in most states. Because of their existing base of local telephone service customers and their extensive telecommunications network, the RBOCS have the potential to be significant long distance competitors in each of the states in which they have obtained in-region, interLATA authority from the FCC.

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We anticipate that we will begin offering broadband VoIP services to our customers in the coming months. Broadband technologies, which encompass all evolving high-speed digital technologies that provide consumers integrated access to voice, high-speed data, video-on-demand, and interactive delivery services, are a fundamental component of the communications revolution. The FCC’s strategic goal for broadband is to establish regulatory policies that promote competition, innovation, and investment in broadband services and facilities while monitoring progress toward the deployment of broadband services in the U.S. and abroad. In various proceedings, the FCC is considering the appropriate regulatory treatment for different types of broadband services and technologies and for different broadband service providers. We cannot predict the outcome of these proceedings or their impact on our business.

Intrastate Services Regulation. Our intrastate long distance operations are subject to various state laws and regulations, including, in most jurisdictions, certification and tariff filing requirements. Some state PUCs also require the filing of periodic reports, the payment of various fees and surcharges and compliance with service standards and consumer protection rules. State PUCs often require pricing approval or notification for certain stock or asset transfers or, in several states, for the issuance of securities or debt or for name changes. We have received formal commission approvals of applications to provide IXC resale services in Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Missouri, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Vermont, Washington, West Virginia, Wisconsin, and Wyoming. We are also authorized to provide IXC resale services on a registration, or unregulated basis, in Iowa, New Jersey, Utah, Virginia and the District of Columbia. Applications for authority to provide intrastate service are pending in all other jurisdictions except Alaska and Hawaii.

Certificates of authority can generally be conditioned, modified, canceled, terminated, or revoked by state regulatory authorities for failure to comply with state laws and/or the rules, regulations, and policies of the state regulatory authorities. Fines and other penalties also may be imposed for such violations. PUCs also regulate access charges and other pricing for telecommunications services within each state. The regional Bell operating companies and other local exchange carriers have been seeking reduced state regulatory requirements, including greater pricing flexibility which, if granted, could subject our long distance services to increased price competition. We may also be required to contribute to intrastate universal service funds in some states.

REPORTS TO SECURITY HOLDERS

We may furnish our stockholders with a copy of this Form 10-K and with quarterly or semi-annual reports containing unaudited financial information.

For further information about our company, you may read the materials we have filed with the SEC without charge at the Public Reference Section of the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You can also obtain copies of these materials at prescribed rates from the Public Reference Section of the SEC in Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms.

Our SEC filings and the registration statement can also be reviewed by accessing the SEC’s internet site at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding registrants that are filed electronically with the SEC.

ITEM 2. PROPERTIES

As of June 30, 2004 we have a number of leases in place to support the business. In May of 2004, we moved from our offices at 55 Town Centre Court to 300 Consilium Place in order to gain the efficiencies of having all of our operations in one location, and consolidating the recently acquired Argos and Contour business units. As a result of the acquisition of Argos Telecom, we acquired two offices in the Montreal area and we have consolidated those into one office location which supports the data operations. We now use 55 Town Centre Court to support an anticipated outbound Telemarketing Group targeting the growth of our business in the U.S. and we have established a “Broadband Lab” to support the introduction of our VoIP launch in September, 2004.

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We currently lease space at 151 Front Street, Toronto, Ontario and 60 Hudson Street, New York, to house our telecommunication switches and cross-connect platforms. Both locations are in buildings which house switches for many other telecommunications carriers. This provides us with the advantage of ease of access to other carriers. These switches are installed in rooms that are environmentally modified, cooled and designed for switching equipment. These facilities have full battery backup for a full 24 hours in case of a power failure. Our current lease for the facility at 151 Front Street is for five years (which commenced in March 2002) at an annual rent of approximately $75,000 Cdn., with an option for another 5 years at then-current rates. Our current lease for the facility at 60 Hudson Street commenced in April 2000, renewable on a yearly basis, and provides for monthly rent charges of approximately $1,000.

To support the growth of our U.S. operations, on July 20, 2004 we signed a lease for 2,805 square feet of office space at 20803 Biscayne Boulevard, Aventura (Miami), Florida for a three year term at an annual amount of $75,735.

ITEM 3. LEGAL PROCEEDINGS

We are currently not a party to any material litigation which is not incidental to the ordinary course of our business and operations. In the ordinary course of business, the Company is from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the financial condition and/or results of operations of the Company. However, in the opinion of the Company’s management, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the financial position or results of operations of the Company.

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

On December 15, 2003, we held our annual meeting of stockholders. At this annual meeting, the stockholders voted upon and approved the following matters: to elect five directors, to approve an amendment to our articles of incorporation to change our name to Yak Communications Inc. and to approve the appointment of our independent auditors.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock is currently quoted on the Nasdaq SmallCap Market under the symbol “YAKC.” Prior to May 6, 2003, our Common Stock was quoted on the Over-the-Counter Bulletin Board. The following table sets forth the range of the high and low bid quotations for our common stock for the periods indicated. Such market quotations reflect inter-dealer prices, without mark-up, mark-down or commission and may not necessarily represent actual transactions.

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