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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2001

COMMISSION FILE NO. 1-13830

TELESOFT CORP.
(Name of Registrant as specified in its charter)

ARIZONA 86-0431009
(State of Incorporation) (IRS Employer Identification No.)

3443 NORTH CENTRAL AVENUE #1800
PHOENIX, ARIZONA 85012
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (602) 308-2100

SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:

Title of Class Name of each exchange on which registered
-------------- -----------------------------------------
COMMON STOCK, NO PAR VALUE PACIFIC STOCK EXCHANGE, INC.

SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT : NONE

Indicate by check mark whether the Registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
---

Indicate by check mark if there is no disclosure of delinquent filer in response
to Item 405 of Regulation S-K contained in this form and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K X
---

Registrant's revenues from continuing operations for its most recent fiscal
year were $20,167,847.

As of February 22 2002, the number of shares of Common Stock outstanding was
1,415,833 and the aggregate market value of the Common Stock (based on the
closing price on that date) held by non-affiliates of the Registrant was
$1,403,992.

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PART I

ITEM 1. BUSINESS.

GENERAL

Telesoft Corp. (the "Company" or "Telesoft") provides billing and customer
care solutions to educational institutions, corporations and government
agencies. The Company offers the following integrated hardware and proprietary
software systems and services: the STS Outsourcing Program, Customized Billing
Outsourcing Services, TelMaster Telemanagement System, Telesoft Recovery
Services (TRS) and Distribution Control System.

HISTORICAL HIGHLIGHTS

The Company was incorporated in Arizona in May 1982. From 1982 to 1986,
the Company focused primarily on its Distribution Control System product line.
In 1986, the Company began to shift its focus to developing and marketing
proprietary software and integrated systems to serve the long distance
telecommunications and data management and call processing needs of the
university and college market. In April 1996, the Company acquired Telesoft
Acquisition Corp II, d.b.a. GoodNet ("GoodNet"), an Arizona-based internet
service provider, to deploy a nationwide ATM network to sell high-speed
connectivity to high-bandwidth users. In January 1998, the Company sold GoodNet
to Winstar Communications, Inc. ("Winstar"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Discontinued
Operations". During fiscal 1999, the Company began redirecting its focus to the
TelMaster Telemanagement System product. Also during fiscal 1999, the Company
established a new division, Telesoft Recovery Services. This division assists
large organizations in analyzing, recovering and optimizing their
telecommunications expenditures. The Company's executive offices are located at
3443 North Central Avenue, Suite 1800, Phoenix, Arizona 85012, and its telephone
number is (602) 308-2100. The Company's website is located at www.telesoft.com.

PRODUCTS AND SERVICES

The Company's products and services are broken down as follows:

(1) System Sales and Maintenance
(a) TelMaster Telemanagement System
(b) Distribution Control System
(c) Software and Hardware Recurring Maintenance
(2) Telesoft Recovery Services
(3) STS Outsourcing Program
(4) Customized Billing Outsourcing Services

-2-

SYSTEM SALES AND MAINTENANCE

The Company offers the following integrated hardware and proprietary
software systems and services: the Telecommunications Management System,
TelMaster and the Distribution Control System.

Telecommunications Management System and TelMaster. The Telecommunications
Management System ("TMS") is a proprietary text-based software solution used by
universities, Fortune 1000 companies and the health care and governmental agency
markets to manage telephony data for billing and ad-hoc reporting purposes. TMS
is comprised of a series of software modules and is typically sold in a package
including hardware, software, installation, training and on-going hardware and
software maintenance.

TelMaster is Telesoft's third generation telemanagement system. Based on
client server technology, this product was released in the fourth quarter of
1996. During fiscal 1999, the Company began developing a custom convergence
billing, reporting and support system for Pacific Bell and MCI customer care
services in connection with the long-term contract between Pacific Bell and MCI
and the State of California to supply telecommunications services to state
government agencies ("CALNET contract"). Since the CALNET contract between
Pacific Bell, MCI and the State of California was terminated in April 2001 the
Company is no longer developing this system.

TelMaster Web is Telesoft's fourth generation telemanagement system, which
was first released and implemented in March 2000. TelMaster Web is an
integrated suite of products, including secured web based budget center
reporting, enterprise directory and administration, trouble ticketing, change
management, and a powerful ad-hoc reporting tool and scheduler. The products
billed encompass all forms of telecommunication expenditures, including long
distance, cellular, pagers and local calls.

Invoice Processing System (IPS) is a TelMaster product that enables
customers who utilize the program to quickly detect billing errors and realize
immediate cost savings. This module-based system streamlines tracking,
validating and processing large volumes of telecommunications invoices. IPS
empowers businesses to manage their invoices effectively across locations with a
customizable, adaptable and user-friendly tool.

During 2001, TelMaster product implementations were initiated for 35 new
customers including Delta Airlines, Compaq Computer Corporation, GE Financial
Assurance, Johns Hopkins University, Wellpoint Health Networks, State of
Wyoming, and White Sands Missile Range in conjunction with Harris Network
Support.

Distribution Control System. The Company has offered the DCS product since
1982. DCS is an automated control solution for the wholesale distribution
industry. The Company includes extensive on-site training and maintenance
services as part of its DCS package. The fully integrated software package has
a modular design, which includes applications for sales order processing,
inventory control, accounts receivable and sales analysis. DCS runs on the IBM
RS6000 server family. DCSWEB is a newly introduced Java-based
business-to-business software module. This fully integrated web offering
provides electronic catalog publishing with real time inventory control and a
flexible pricing shopping-cart system.

TELESOFT RECOVERY SERVICES

During the second quarter of fiscal 1999, the Company hired two executives
to run its Telesoft Recovery Services ("TRS") division headquartered in New
Jersey. These individuals have 21 years of combined industry experience in two
leading companies. The TRS division assists large organizations in analyzing,
recovering and optimizing their telecommunications expenditures. TRS revenues
are generated on a contingency basis, whereby fees are earned only when TRS
customers obtain refunds or realize cost savings. The customers that generated
the most TRS revenues during fiscal 2001 were Bank of New York, Ixnet,
Telecheck, First Union, and North Shore LIJ Health System.

-3-

STUDENT TELEPHONE SERVICES (STS) OUTSOURCING PROGRAM

The Company provides an outsourcing program to universities and colleges to
establish long distance resale programs to residence hall students, off-campus
students, administrative staff and faculty. Through its Student Telephone
Services Outsourcing Program ("STS Program"), the Company offers a complete
billing solution which includes the following services: (1) production and
distribution of marketing literature for the program, (2) on-site solicitation
and registration of program participants, (3) installation of hardware and
billing software, (4) collection, costing and processing of long-distance
billing data, (5) production and distribution of individual bills, (6) on-site
or remote customer service center, (7) management of accounts receivable and
collections, (8) clearing-house services for the various suppliers involved with
the program, and (9) financial reporting services to the university or college
on the performance of the program.

Telesoft administers and operates its STS Program on a turnkey basis on 52
university and college campuses of various sizes, including Rutgers College, the
University of Southern California, Fordham University and Long Island
University.

Telesoft also has sold the system, software and services required to
administer the STS Program to approximately 75 campuses of various sizes
nationwide, including Yale University, State University of New York at Oswego,
Case Western Reserve University, the University of Oklahoma, Auburn University
and Fairfield University. Once a sale is consummated, the Company maintains
and services the hardware and software under renewable one-year maintenance
contracts.

CUSTOMIZED BILLING OUTSOURCING SERVICES

The Company provides customized billing outsourcing applications to Fortune
1000 companies and governmental agencies in conjunction with large interexchange
carriers and RBOCs. The Company also provides customized billing services for
Verizon Data Solutions, Adelphia, and McGraw Hill.

-4-

COMPETITION

The telecommunications industry is highly competitive and subject to rapid
technological change. Failure to keep pace with technological advances could
adversely affect the Company's competitive position and future prospects. In
order to maintain or improve its position, the Company must continue to enhance
its current products and develop new products and services in a timely fashion.

In connection with its telemanagement system division, the Company competes
with Peregrine Systems, Telco Research, Stonehouse Technologies, Inc., ISI
Infortext and Pinnacle products, all of which provide telemanagement systems and
services to the university, health care, government and general business
markets.

In connection with its recovery services division, the Company competes
with Profit Recovery Group and Teldata Control Inc., both of which provide
recovery services to the Fortune 1000 market.

In connection with its STS Program, the Company competes with AT&T, which
provides long distance telephone service on a resale basis and offers long
distance billing services to universities. The Company also competes with MCI
WorldCom, Sprint and other long distance providers which market long distance
services to the public and directly to college campuses. The STS product also
competes with calling cards, prepaid cards and cellular/wireless service.

The Company believes that the factors for its success include quality,
technical capability, reliability, price and promptness of performance. While
the Company has competed successfully against the foregoing companies, most, if
not all, of the Company's existing and potential competitors have longer
operating histories and significantly greater financial, technical, sales,
marketing and human and other resources than the Company. Most, if not all, of
these companies have greater name recognition and a larger installed base than
the Company. The Company's competitors could, in the future, introduce products
and services with more features and lower prices than the Company's product and
service offerings. These companies also could fund existing or new products and
services with other products or services to compete with the Company. While the
Company has operated successfully against such competition in the past, there
can be no assurance that it will be able to do so in the future.

MAJOR CUSTOMERS AND SUPPLIERS

During the fiscal years ended November 30, 2001, 2000 and 1999, the Company
did not have any customers that accounted for greater than 10% of its revenues.

SALES AND MARKETING

The Company's sales staff consists of nine people who are responsible for
all of the Company's marketing and sales efforts. Sales personnel are paid on
both a salary and commission basis. The Company's executive officers also
devote a substantial amount of their time to developing and maintaining personal
relationships with the Company's customers and with prospective new customers.

-5-

RESEARCH AND DEVELOPMENT

The Company conducts an active and ongoing research and development program
that focuses on developing new and improved software products, and particularly
those that are compatible with or enhance existing programs. Research and
development costs for the fiscal years ended November 30, 2001, 2000, and 1999
were $528,000, $1,168,000, and $1,424,000, respectively. These costs have been
expensed during their respective fiscal years. Research and development costs
have a current annual run-rate of approximately $609,000.

REGULATION

The Company's business is subject to various federal and state regulations.
Commencement of new services frequently requires licenses from public utilities
commissions. There is no assurance that the Company or its customers, if
required, will be successful in their efforts to obtain necessary licenses or
regulatory approvals. The Company's inability to secure any necessary licenses
or approvals could have a material adverse effect on its business. In addition
to specific regulations, the Company is subject to all federal, state and local
rules and regulations imposed upon businesses generally. The cost of regulatory
compliance is an additional cost of doing business for the Company. The Company
cannot predict the impact, if any, that future regulation or regulatory changes
may have on its business.

WARRANTIES

The Company offers a 90-day warranty on hardware and software and an
extended warranty program in connection with the Company's service and
maintenance programs. The Company has not had any material claims made under
its warranty program.

PATENTS, TRADEMARKS, LICENSES AND COPYRIGHTS

The Company regards its software as proprietary and attempts to protect it
with copyrights, trademarks, and though the use of trade secret laws and
restrictions on disclosure, copying and transferring title. The Company also
attempts to preserve its proprietary rights by contractual non-disclosure
safeguards and restrictions on transferability in its software license
agreements. Additionally, the Company does not provide the source codes for its
products to its customers. The Company's products are not patented and are not
the subject of any current patent application, nor is it anticipated that any of
its products will be patented. Existing copyright laws afford only limited
practical protection for its software. Accordingly, despite precautions taken
by the Company, it may be possible for unauthorized third parties to copy
certain portions of the Company's products and to obtain and use information
that the Company regards as proprietary.

Key officers and employees have assigned to the Company certain technical
and other information and patent rights, if any, acquired by them during their
employment by the Company and after termination of their employment with the
Company, if such information or rights arose out of information obtained by them
during their employment. They also have agreed not to use or disclose any such
information for a period of two years following termination of their employment.

In spite of these precautions, it may be possible for competitors or users
to copy aspects of the Company's products or to obtain information that the
Company regards as trade secrets. However, the Company believes that due to the
rapid pace of innovation within its industry, factors such as technological and
creative skills of its personnel are more important to establishing and
maintaining a technology leadership position within the industry than are the
various legal protections of its technology. The Company believes that its
products and technology do not infringe on any proprietary rights of others,
although there can be no assurance that third parties will not assert
infringement claims in the future.

The Company has not obtained trademark or trade name registration on the
use of the names "TelMaster," "TRS," "Student Telephone Services," "STS Service
Bureau," "SunDial Program," "DCS" or "Sunbelt Business Computers." The Company
is in the process of investigating the feasibility and protection that might be
afforded by registration of these names, or as trademarks or trade names on a
national, regional or local basis.

-6-

SEASONALITY

The Company generally completes the sale of the majority of STS Program
system installations in the university market during the spring and early summer
months. The implementation and installation of these systems and services
typically occurs during the summer months. Revenues derived from STS Programs
begin in the fall and weaken during winter holiday and the summer months when
students are on vacation. As a result, the Company's revenues have consistently
been highest during the second and fourth quarters.

BACKLOG

For the TelMaster and related products, backlog arises due to software
customization and implementation, which may not be completed for several months
after a sales contract is signed. As of November 30, 2001, systems sold, but
not yet recognized as revenue, totaled approximately $1,230,000.

Backlog is not material to any other segments of the Company's business
since the Company ships and installs its software and systems promptly upon
receipt of customers' orders. While the Company tends to experience higher
installation activity on university campuses during the summer months for its
STS division, it has not historically had problems installing its products and
performing its services in a timely fashion.

EMPLOYEES

As of February 22, 2002, the Company had 124 full-time employees, five of
which are in executive positions, 16 are engaged in sales and marketing, 30 are
in software development and support, 29 are in customer service and the balance
are in various administrative and support positions. The Company's employees
are not covered by a collective bargaining agreement. The Company considers its
employee relations to be satisfactory.

ITEM 2. PROPERTIES.

In January 1998, the Company signed a ten-year lease for approximately
30,000 square feet of office space in Phoenix, Arizona. The Company's
obligations under the terms of this lease were approximately $452,000, $421,000,
and $392,000 for the fiscal years ended November 30, 2001, 2000, and 1999,
respectively.

In July 1999, the Company entered into a lease for approximately 2,100
square feet of office space in Cranford, New Jersey, which housed its Telesoft
Recovery Services operations. This lease expired in July 2001. The Company's
obligations under the terms of this lease were approximately $25,000, $44,000
and $15,000 for fiscal 2001, 2000 and 1999, respectively.

In June 2001, the Company entered into a lease for approximately 5,500
square feet of office space in Cranford, New Jersey, which houses its Telesoft
Recovery Services operations. This lease expires in November 2002. The
Company's obligation under the terms of this lease was approximately $68,000 for
fiscal 2001. There were no obligations under this lease during fiscal 2000 and
1999.

-7-

ITEM 3. LEGAL PROCEEDINGS.

The Company is not involved as a party to any legal proceedings other than
various claims and lawsuits arising in the normal course of its business, none
of which, in the opinion of the Company's management, are individually or
collectively material to the Company's business.

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

No matter was submitted to security holders through the solicitation of
proxies or otherwise during the fourth quarter of the fiscal year covered by
this report.

-8-

PART II

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

The following table sets forth, for the fiscal periods shown,
representative high and low bid prices of the Company's common stock as reported
by the Nasdaq SmallCap Market. The prices represent inter-dealer quotations,
which do not include retail mark-ups, mark-downs or commissions and may not
necessarily represent actual transactions.

YEAR ENDED NOVEMBER 30, 2001 HIGH LOW
- ---------------------------- ------- -------

First Quarter $2.2500 $0.9375
Second Quarter 6.0000 1.5800
Third Quarter 2.4700 1.8600
Fourth Quarter 2.4500 1.3100

YEAR ENDED NOVEMBER 30, 2000 HIGH LOW
- ---------------------------- ------- -------

First Quarter $7.0000 $3.7500
Second Quarter 6.7500 2.0000
Third Quarter 2.6250 1.3125
Fourth Quarter 1.7188 0.7500

As of February 22, 2002, there were 379 holders of record of the Company's
common stock. Although the Company has no limitations or restrictions on
declaring dividends, the Company has not declared or paid dividends on its
Common Stock and does not expect to declare or pay dividends in fiscal 2002.

RECENT SALES OF UNREGISTERED SHARES

During the quarter ended November 30, 2001, the Company did not make any
sales of unregistered securities.

-9-

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data are derived from the financial
statements of the Company which have been audited by Semple & Cooper, LLP,
independent certified public accountants, for the years ended November 30, 2001
and 2000 and by BDO Seidman, LLP, independent certified public accountants, for
the years ended November 30, 1999, 1998 and 1997. Such selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's financial
statements and related notes set forth in Item 8 herein.

For the years ended November 30,
------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA (1): 2001 2000 1999 1998 1997
------------ ------------- ------------- ------------- -------------

Net sales $20,167,847 $ 24,613,309 $ 29,377,592 $ 28,250,373 $ 22,593,450
Cost of sales (8,799,831) (12,826,565) (16,780,838) (18,033,402) (14,330,388)
------------ ------------- ------------- ------------- -------------
Gross profit 11,368,016 11,786,744 12,596,754 10,216,971 8,263,062
Income (loss) from operations 322,698 (629,250) 1,261,686 1,544,157 561,191
Other income (expense) (6,327) 538,529 567,157 332,012 163,094
Income (loss) from continuing
operations 174,001 (50,121) 1,249,043 1,089,578 402,985
Diluted earnings (loss) per share-
continuing operations $ 0.12 $ (0.02) $ 0.33 $ 0.28 $ 0.11
Weighted average number of
shares outstanding-diluted 1,406,278 2,123,879 3,832,067 3,888,033 3,802,874

As of November 30,
------------------------------------------------------------------------

BALANCE SHEET DATA: 2001 2000 1999 1998 1997
------------ ------------- ------------- ------------- -------------
Cash and investments $ 540,726 $ 41,434 $ 14,425,071 $ 17,677,008 $ 3,821,784
Working capital 1,353,643 710,284 18,452,329 16,970,488 4,080,013
Total assets 6,725,241 10,222,057 26,862,937 27,620,329 17,640,850
Short-term debt - 1,375,000 - - 90,523
Long-term debt - - - - 371,551
Total stockholders' equity 2,364,152 2,191,695 19,990,765 18,395,164 8,906,507

- ------------------------
(1) Figures reflect results from continuing operations.

-10-

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.

FORWARD LOOKING INFORMATION

This report contains forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements involve certain risks and uncertainties
that could cause actual results to differ materially from those in the
forward-looking statements including uncertainties regarding the effectiveness
of initiatives to sell, introduce and implement the TelMaster product and to
maintain our Student Telephone Services customer base. Certain factors which
may cause such a difference include, but are not limited to, the following: the
impact of increased competition from competitors with significant financial
resources and market share; and the amount and rate of growth in general and
administrative expenses associated with building a strengthened corporate
infrastructure to support operations.

BACKGROUND

The Company began as a value-added reseller in the wholesale distribution
of accounting software (Distribution Control System) in 1982. During the fiscal
year ended November 30, 2001, the Company derived approximately 54% of its
revenues from its STS Outsourcing Program. The balance of revenues were derived
from hardware, software, maintenance and other services in the university,
Fortune 1000, governmental and wholesale distribution markets.

The Company has adapted to fast-paced market changes by shifting its
resources from providing generic or general system hardware and software to
providing a full range of services in its specialty niches. The Company is
continuously developing new products and services to maintain and expand its
market share.

The core focus of the Company is its TelMaster software suite of modules
and its recovery services division. Both segments are geared primarily to large
entities including Fortune 1000 corporations, governmental agencies and
educational institutions.

-11-

Results of Operations by Product Line for the Fiscal Years ended November 30, 2001 and 2000
(in thousands except per share items)

Year ended November 30, 2001 Year ended November 30, 2000
------------------------------------------- --------------------------------------------
System System
Sales TRS STS CBS Total Sales TRS STS CBS Total
------- ------ -------- ------ -------- -------- ------ ------- ------- --------

Sales, net $6,007 $2,395 $10,884 $ 882 $20,168 $ 6,302 $1,360 $15,991 $ 960 $24,613
Cost of sales 1,398 - 7,397 5 8,800 1,332 - 11,440 54 12,826
------- ------ -------- ------ -------- -------- ------ ------- ------- --------
Gross profit 4,609 2,395 3,487 877 11,368 4,970 1,360 4,551 906 11,787
------- ------ -------- ------ -------- -------- ------ ------- ------- --------
General & administrative
expenses:
General 4,757 1,760 2,822 476 9,815 6,048 1,027 3,486 722 11,283
Depreciation 35 4 113 11 163 132 3 161 19 315
Bad debt 1 1 442 - 444 12 - 230 - 242
Corporate allocations:
General 159 5 149 7 320 87 6 151 27 271
Depreciation 181 8 90 24 303 136 - 136 33 305
------- ------ -------- ------ -------- -------- ------ ------- ------- --------
5,133 1,778 3,616 518 11,045 6,415 1,036 4,164 801 12,416
------- ------ -------- ------ -------- -------- ------ ------- ------- --------

Operating income (loss) (524) 617 (129) 359 323 (1,445) 324 387 105 (629)

Other income (expense) (7) 538
-------- -------

Pretax income 316 (91)

Income tax provision (142) 41
-------- -------
Income (loss) from continuing
operations $ 174 $ (50)
======== =======
Diluted earnings (loss) per share-
continuing operations
$0.12 $(0.02)
======== =======

RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2001 COMPARED TO
THE FISCAL YEAR ENDED NOVEMBER 30, 2000

Revenues decreased to $20,167,847 for the fiscal year ended November 30,
2001, compared to $24,613,309 for the fiscal year ended November 30, 2000. The
Company's revenue is derived from four principal product lines and services:
System Sales and Maintenance, TRS, STS Outsourcing Programs (STS) and Customized
Billing Outsourcing Services.

Revenues from System Sales and Maintenance were $6,006,768 for the fiscal
year ended November 30, 2001 compared to $6,302,107 for the fiscal year ended
November 30, 2000, a decrease of 4.7%. TelMaster sales and maintenance related
revenues increased by $1,072,036, or 27.5%, to $4,966,652 for the fiscal year
ended November 30, 2001 compared to $3,894,616 for the fiscal year ended
November 30, 2000. The increase in TelMaster revenues from fiscal 2000 to
fiscal 2001 was related to a $1,524,000 increase in revenues from general
TelMaster system sales, offset by a $329,500 decrease in revenues related to the
CALNET contract, which was terminated in April 2001. Additionally, maintenance
revenue decreased by $122,000 due to many customers transitioning from the
Company's prior telemanagement software product to TelMaster. The Company
anticipates that maintenance revenues for the TelMaster product may replace
maintenance revenues lost from the prior contracts and revenues will return to
prior levels. However, there can be no assurance that this will happen.

-12-

The DCS product revenues declined 10.1%, or $112,762, to $1,003,744, due to
a decrease in demand for its text-based software. The Company expects this trend
to continue in fiscal 2002. In December 2000, the Company completed the sale of
the RATEX division, and as a result, RATEX revenues declined 97.2%, or
$1,254,613, to $36,372 for the fiscal year ended November 30, 2001 compared to
$1,290,985 for the fiscal year ended November 30, 2000.

Revenues from TRS, which are generated through the Company's wholly-owned
subsidiary, Telesoft Recovery Corp., increased 76%, or $1,034,532, to $2,394,996
for the year ended November 30, 2001 from $1,360,464 for the fiscal year ended
November 30, 2000. We expect TRS revenues to continue to increase at a more
moderate level.

STS Program revenues were $10,884,348 for the fiscal year ended November
30, 2001 compared to $15,990,614 for the fiscal year ended November 30, 2000, a
31.9% decrease. This decrease was primarily due to market pressure from
competing long-distance communications products, including calling cards,
wireless services and the Internet. During fiscal 2000, the Company adjusted to
these market pressures by lowering its retail rates and renegotiating its
wholesale rates with its suppliers. Based on declining revenue, the Company has
reduced selling, general and administrative expenses, including a reduction in
staff to adjust to the reduction in subscribers, traffic and revenues. The
Company expects STS Program revenues to decrease in the 2001-2002 and 2002-2003
academic year, based on decreases in long distance usage and its customer base.

For the fiscal years ended November 30, 2001 and 2000, revenues from
Customized Billing Outsourcing Services were $881,735 and $960,124,
respectively. This decrease is primarily a result of lower billing volume for
one of the Company's primary customers.

Fiscal Year Ended November 30,
REVENUE 2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------

Telemanagement $ 4,966,652 $ 3,894,616 $ 3,652,921 $ 1,526,959 $ 1,368,985
DCS 1,003,744 1,116,506 1,393,617 1,606,088 1,684,631
RATEX 36,372 1,290,985 2,809,994 2,436,686 1,143,864
System Sales 6,006,768 6,302,107 7,856,532 5,569,733 4,197,480
---------------------------------------------------------------

STS 10,884,348 15,990,614 19,815,617 21,460,885 17,430,383
Custom Billing 881,735 960,124 1,404,230 1,219,755 965,587
TRS 2,394,996 1,360,464 135,778 - -
Network Services - - 165,435 - -
---------------------------------------------------------------
$20,167,847 $24,613,309 $29,377,592 $28,250,373 $22,593,450
===============================================================

Total gross profit decreased 3.6% to $11,368,016 for the fiscal year ended
November 30, 2001 from $11,786,744 for the fiscal year ended November 30, 2000.
Cost of goods sold was approximately 68.0% and 71.5% of STS revenues for the
fiscal years ended November 30, 2001 and 2000, respectively. The increased
emphasis on fixed fee structures resulted in a more moderate decrease in gross
profits of 23.4% compared to the 31.9% decrease in revenues from this division.
Cost of goods sold as a percentage of system sales and maintenance revenues were
23.3% and 21.1% for the fiscal years ended November 30, 2001 and 2000,
respectively. This increase was due to a higher proportion of professional
services-related revenue, which have a lower gross profit margin.

General and administrative expenses decreased by 11.0%, or $1,370,676, in
fiscal 2001 to $11,045,318 from $12,415,994 in fiscal 2000. This decrease was
primarily due to a reduction in human resources and other cost-cutting efforts
implemented by the Company during the last two fiscal quarters of 2000 and the
first and fourth fiscal quarters of 2001. Also contributing to the decrease was
the decrease in human resource costs resulting from the sale of the RATEX

-13-

division. The $286,000 gain from the sale of RATEX was largely offset by a
$290,000 charge taken for the issuance of common stock to the TRS executives in
lieu of cash compensation under their employment agreements. RATEX related
expenses for fiscal 2001 and 2000 were approximately $50,000 and $1,010,000,
respectively. TRS had operating expenses of $1,778,183 and $1,036,676 during
fiscal 2001 and 2000, respectively. The Company's general and administrative
expenses as a percentage of gross profit were 97.2% and 105.3% for fiscal 2001
and 2000, respectively. The Company expects general and administrative expenses
as a percentage of gross profit to decrease over time as revenues for TelMaster
systems and TRS increase.

Other income decreased to $1,214 for fiscal 2001 from $319,406 for fiscal
2000. This decrease was attributable to the sale of 7,434 shares of common
stock of Amdocs Ltd. for $296,439, through which the Company realized a $145,189
gain on the sale in fiscal 2000. Additionally during fiscal 2000, the Company
realized a $168,782 return of premium on a key-person insurance policy.

There was a $142,370 provision for income taxes for fiscal 2001 compared to
a $40,600 benefit from income taxes for fiscal 2000.

Fiscal 2001 resulted in net income of $174,001 compared to a net loss of
$50,121 in fiscal 2000.

-14-

RESULTS OF OPERATIONS BY PRODUCT LINE FOR THE FISCAL YEARS ENDED NOVEMBER 30, 2000 AND 1999
(in thousands except per share items)

Year ended November 30, 2000 Year ended November 30, 1999
----------------------------------------- -----------------------------------------------------
System System Network
Sales TRS STS CBS Total Sales TRS STS CBS Services Total
----------------------------------------- -----------------------------------------------------

Sales, net $ 6,302 $1,360 $15,991 $960 $24,613 $7,857 $ 136 $19,816 $1,404 $ 165 $29,378
Cost of sales 1,332 - 11,440 54 12,826 1,980 - 14,766 35 - 16,781
-------- ------ ------- ---- -------- ------ ------ ------- ------ ---------- --------
Gross profit 4,970 1,360 4,551 906 11,787 5,877 136 5,050 1,369 165 12,597
-------- ------ ------- ---- -------- ------ ------ ------- ------ ---------- --------
General &
administrative
expenses:
General 6,048 1,027 3,486 722 11,283 4,901 453 3,563 1,046 285 10,248
Depreciation 132 3 161 19 315 137 - 160 21 - 318
Bad debt 12 - 230 - 242 7 - 215 53 - 275
Corporate
allocations:
General 87 6 151 27 271 52 1 195 17 1 266
Depreciation 136 - 136 33 305 99 - 101 23 5 228
-------- ------ ------- ---- -------- ------ ------ ------- ------ ---------- --------
6,415 1,036 4,164 801 12,416 5,196 454 4,234 1,160 291 11,335
-------- ------ ------- ---- -------- ------ ------ ------- ------ ---------- --------

Operating income (loss) (1,445) 324 387 105 (629) 681 (318) 816 209 (126) 1,262
Other income 538 567
-------- --------

Pretax income (91) 1,829
Income tax
Provision 41 (580)
-------- --------

Income (loss)
from continuing
operations $ (50) $ 1,249
======== ========

Diluted earnings
(loss) per share-
continuing
operations
$ (0.02) $ 0.33
======== ========

RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED NOVEMBER 30, 2000 COMPARED TO
THE FISCAL YEAR ENDED NOVEMBER 30, 1999

Revenues decreased to $24,613,309 for the fiscal year ended November 30,
2000, compared to $29,377,592 for the fiscal year ended November 30, 1999. The
Company's revenue is derived from four principal product lines and services:
System Sales and Maintenance, TRS, STS Outsourcing Programs (STS) and Customized
Billing Outsourcing Services. The Company's Network Services division, which
began operations in December 1998, was discontinued in August 1999 due to
unsatisfactory performance.

Revenues from System Sales and Maintenance were $6,302,107 for the fiscal
year ended November 30, 2000 compared to $7,856,532 for the fiscal year ended
November 30, 1999, a decrease of 19.8%. TelMaster sales and maintenance related
revenues increased by $241,695, or 6.7%, to $3,894,616 for the year ended

-15-

November 30, 2000 compared to $3,652,921 for the year ended November 30, 1999.
The increase in TelMaster revenues from fiscal 1999 to fiscal 2000 was related
to a $430,000 increase in revenues from the ongoing development of a custom
convergence billing, reporting and support system for Pacific Bell and MCI
customer care services for the State of California's CALNET contract, and offset
by a $190,000 decrease in other TelMaster system sales.

The DCS product revenues declined 19.9%, or $277,111, to $1,116,506 and
RATEX product revenues declined 54.1% or $1,519,009 to $1,290,985 for the year
ended November 30, 2000 compared to the year ended November 30, 1999. The
decline in revenues in these segments was the result of a decrease in demand for
these text-based software products. In December 2000, the Company completed the
sale of the RATEX division.

TRS, which began operations in March 1999, had revenues of $1,360,464 and
$135,778 during fiscal 2000 and 1999, respectively.

STS Program revenues were $15,990,614 for the fiscal year ended November
30, 2000 compared to $19,815,617 for the fiscal year ended November 30, 1999, a
19.3% decrease. This decrease was primarily a result of market pressure from
competing means of communication including pre-paid cards, other calling cards,
wireless services and the Internet. During fiscal 2000, the Company adjusted to
these market pressures by lowering its retail rates and renegotiating its
wholesale rates with its suppliers. The impact of these new rates began during
the fourth fiscal quarter (September-November), which represents the first three
months of the 2000-2001 academic year. Revenues for the fourth quarter of fiscal
2000 were 23.2% lower than the fourth quarter of fiscal 1999. Historically, the
calling patterns during September through November are indicative of calling
patterns for the balance of the academic year. Based on this decline in revenue,
the Company has attempted to reduce selling, general and administrative
expenses, including a reduction in staff to adjust to the reduction in
subscribers, traffic, and revenues.

For the fiscal years ended November 30, 2000 and 1999, revenues from
Customized Billing Outsourcing Services were $960,124 and $1,404,230,
respectively.

In December 1998, the Company formed a Network Services division to sell
telecommunication services, including dial tone and data transport services, via
strategic agent relationships with Regional Bell Operating Companies. This
division was discontinued in August 1999 due to unsatisfactory performance.
Network Services had revenues of $165,435 during fiscal 1999.

Total gross profit decreased 6.4% to $11,786,744 for the fiscal year ended
November 30, 2000 from $12,596,754 for the fiscal year ended November 30, 1999.
Cost of goods sold was approximately 71.5% and 74.5% of STS revenues for the
fiscal years ended November 30, 2000 and 1999, respectively. This decrease was
primarily due to continued pressure on the price of long distance services from
the Company's suppliers. Cost of goods sold as a percentage of system sales and
maintenance revenues were 21.1% and 25.2% for the fiscal years ended November
30, 2000 and 1999, respectively. This improvement was due to a higher
percentage of TelMaster sales, which have a higher gross profit rate than the
RATEX and DCS products.

General and administrative expenses increased by 9.5%, or $1,080,926, in
fiscal 2000 to $12,415,994 from $11,335,068 in fiscal 1999. This increase was
primarily due to an increase in human resources in the areas of TelMaster
research and development, implementation, sales, and support services, as well
as the addition TRS division. Research and development costs incurred and
expensed during the fiscal years ended November 30, 2000 and 1999 were
$1,168,000 and $1,424,000, respectively. Sales and support related expenses
increased $1,090,000 from fiscal 1999 to fiscal 2000. TRS had operating expenses
of $1,036,000 and $454,000 during the fiscal years ended November 30, 2000 and
1999, respectively. The Network Services division contributed $291,000 to
operating expenses in fiscal 1999. General and administrative expenses as a
percentage of revenues were 50.4% and 38.6% for fiscal 2000 and 1999,
respectively. The Company expects general and administrative expenses as a
percentage of revenues to decrease over time, as revenues for TelMaster systems
increase. During the fourth quarter of fiscal 2000 and into the first quarter of
fiscal 2001, the Company has attempted to reduce selling, general and

-16-

administrative expenses, including a reduction in staff. These adjustments
resulted in a decrease in general and administrative expenses of $303,000 to
$3,031,000 for the fourth quarter fiscal 2000 compared to $3,334,000 in the
fourth quarter of fiscal 1999.

Other income increased to $319,406 for fiscal 2000 from $2,623 in fiscal
1999. This increase was attributable to the sale of 7,434 shares of common
stock of Amdocs Ltd. for $296,439, through which the Company realized a $145,189
gain on the sale. Additionally, the Company realized a $168,782 return of
premium on a key-person insurance policy.

There was a $40,600 benefit from income taxes for fiscal 2000 compared to a
provision for income taxes of $579,800 for fiscal 1999.

Fiscal 2000 resulted in a loss from continuing operations of $50,121
compared to income from continuing operations of $1,249,043 in fiscal 1999.
This was primarily attributable to increased investments made during fiscal 2000
in human resources supporting the TelMaster product line, coupled with decreased
revenues for the DCS, RATEX and STS product lines. These declines were offset
by growth in the TRS division, resulting in $324,000 of operating income from
this division in fiscal 2000 compared to a $318,000 operating loss in fiscal
1999.

DISCONTINUED OPERATIONS

Effective January 12, 1998, the Company, together with the minority
shareholders of GoodNet, entered into an agreement with Winstar to sell the
Company's Internet services subsidiary for approximately $22.0 million,
consisting of $3.5 million cash and shares of common stock of Winstar having an
aggregate market value of approximately $18.5 million.

Under the terms of the agreement, the Company received approximately
$3,500,000 in cash plus 479,387 shares of Winstar restricted common stock, which
had an aggregate fair market value of approximately $13.9 million as of the
close of business on January 12, 1998. After commissions and related legal
expenses, the Company realized an approximate $13.2 million pretax gain on the
sale in the first quarter of fiscal 1998. Additionally, the Company received
$235,000 in cash to offset GoodNet's net cash disbursements from December 12,
1997 through the date of the sale.

-17-

MATERIAL CHANGES IN FINANCIAL POSITION

Cash and cash equivalents increased to $540,726 at November 30, 2001 from
$41,434 at November 30, 2000. During fiscal 2001, the Company used
approximately $81,800 in cash to purchase property and equipment for its
continuing operations compared to $598,000 during fiscal 2000. Additionally,
the Company used $146,575 in cash to purchase treasury stock during fiscal 2001
compared to $298,061 during fiscal 2000.

Accounts receivable decreased to $4,952,652 as of November 30, 2001 from
$8,160,650 as of November 30, 2000 ($4,567,380 and $7,737,213, net of allowance
for uncollectibles as of November 30, 2001 and 2000, respectively). This
$3,207,998 decrease was primarily due to an approximate $3,208,000 decrease in
overall revenues for the fourth quarter of fiscal 2001 compared to the fourth
quarter of fiscal 2000.

Accounts payable and accrued liabilities decreased $2,414,066 to $2,696,839
as of November 30, 2001 from $5,110,905 as of November 30, 2000. This decrease
was primarily due to an approximate $2,229,000 decrease in STS cost of sales
from the fourth quarter of fiscal 2000 to the fourth quarter of fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

At November 30, 2001, the Company's balance sheet reflected cash of
$540,726. The Company believes that anticipated cash flows from its business
will be adequate to supply currently anticipated operating requirements for the
Company for the next 12 months. However, there can be no assurance that the
Company will not require additional funding within this time frame. The Company
may be required to raise additional funds through public or private financing,
strategic relationships, or other arrangements. There can be no assurance that
such additional funding, if needed, will be available on terms attractive to the
Company, or at all. Furthermore, any additional equity financing may be
dilutive to existing stockholders.

ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No.
144 addresses financial accounting and reporting for the impairment or disposal
of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of", and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations for the disposal of a segment of a businessSFAS No. 144
is effective for fiscal years beginning after December 15, 2001. The Company
expects to adopt SFAS No. 144 December 1, 2002. The Company does not believe
the adoption of SFAS No. 144 will have a material impact on its results of
operations.

-18-

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

As of November 30, 2001, the Company has no derivative financial
instruments, other financial instruments, or long-term debt obligations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The financial statements and supplementary financial information are
included herewith commencing on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.

-19-

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth certain information with respect to the Company's
directors and executive officers.

NAME AGE POSITION
- ---- --- --------

Michael F. Zerbib (2) . . . . . . . . . . 35 President, Chief Executive Officer, Chief Financial
Officer, Treasurer and Director

Joseph W. Zerbib. . . . . . . . . . . . . 66 Chairman of the Board of Directors

Thierry E. Zerbib . . . . . . . . . . . . 40 Vice President-Technologies, Secretary and Director
Vice President and Director

Brian H. Loeb . . . . . . . . . . . . . 40

Cecile Silverman(1)(2). . . . . . . . . . 77 Director

Kalvan Swanky(1)(2) . . . . . . . . . . . 38 Director

Todd P. Belfer (1). . . . . . . . . . . . 34 Director

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

(1) Member of Audit Committee.
(2) Member of Compensation Committee.

Michael F. Zerbib has been President and Chief Executive Officer of the
Company since February 2000 and Chief Financial Officer, Treasurer and a
director of the Company since 1990. He holds a Bachelor of Science degree in
finance and a Master's degree in taxation and financial accounting from Arizona
State University. Mr. Zerbib also holds a certification from the Arizona State
Board of Accountancy.

Joseph W. Zerbib has been Chairman of the Board of Directors since 1982.
From 1982 to February 2000, he served as President and Chief Executive Officer
of the Company.

Thierry E. Zerbib has been Vice President-Technologies, Secretary and a
director of the Company since 1982. He holds dual degrees in computer science
and math from Tel Aviv University, Israel.

Brian H. Loeb has been Vice President since 1982 and a director of the
Company since 1992.

Cecile Silverman has been a director of the Company since June 1995. Ms.
Silverman is a certified public accountant and has been self-employed since
1989. From 1975 to 1989, she was a partner at the firm of Schwartz, Cohen & Co.
Ms. Silverman specializes in tax planning for corporations and individuals, as
well as representing clients before various governmental agencies. She
graduated from Syracuse University with a degree in accounting.

-20-

Kalvan Swanky has been a director of the Company since June 1995. Since
1986, he has been employed by Storage Technology Corporation ("STC"), which
develops, manufactures and distributes computer memory devices. Mr. Swanky has
held a number of positions with STC, most recently as Direct Sales Manager for
Arizona and Nevada. He received a Bachelor of Science degree from the
University of Colorado.

Todd P. Belfer has been a director of the Company since April 2001. Mr.
Belfer has served as a director of Vitrix Inc. (OTCBB: VTTX) since April 1999,
as chairman of the board of directors of Vitrix Inc. since November 1999, and as
a director of its wholly-owned subsidiary since April 1996. Since February
1994, Mr. Belfer also has served as a director of M.D. Labs, Incorporated, a
private Arizona-based company. Mr. Belfer also co-founded Employee Solutions,
Inc. in May 1990, and served as its executive vice president and a director from
1991 to 1996. Mr. Belfer received a Bachelor of Science degree in Finance and
Economics from the University of Arizona.

Joseph W. Zerbib is the father of Thierry E. Zerbib and Michael F. Zerbib
and the father-in-law of Brian H. Loeb. Accordingly, Thierry E. Zerbib and
Michael F. Zerbib are brothers and Brian H. Loeb is the brother-in-law of
Thierry E. Zerbib and Michael F. Zerbib.

BOARD MEETINGS AND COMMITTEES

During the fiscal year ended November 30, 2001, the Board of Directors held
four meetings. All directors attended these meetings.

Audit Committee. The Board of Directors maintains an Audit Committee,
which currently is composed of Cecile Silverman, Kalvan Swanky and Todd Belfer.
The responsibilities of the Audit Committee include, in addition to such other
duties as the Board of Directors may specify, (i) receiving reports with respect
to loss contingencies, the public disclosure or financial statement notation of
which may be legally required, (ii) annually reviewing and examining those
matters that relate to a financial and performance audit of the Company's stock
option plans, (iii) recommending to the Board of Directors the selection,
retention and termination of the Company's independent accountants, (iv)
reviewing the professional services, proposed fees and independence of such
accountants, and (v) providing for the periodic review and examination of
management performance in selected aspects of corporate responsibility. The
Audit Committee held three meetings during the fiscal year ended November 30,
2001.

Compensation Committee. The Board of Directors maintains a Compensation
Committee, which currently is composed of Cecile Silverman, Kalvan Swanky and
Michael Zerbib. The responsibilities of the Compensation Committee include, in
addition to such other duties as the Board of Directors may specify, (i)
reviewing and recommending to the Board of Directors the salaries, compensation
and benefits of the Company's executive officers and key employees, (ii)
reviewing any related party transactions on an ongoing basis for potential
conflicts of interest, and (iii) administering the Company's stock plans. The
Compensation Committee held one meeting during the fiscal year ended November
30, 2001.

-21-

COMPENSATION OF DIRECTORS

The members of the Board of Directors do not receive any cash compensation
for serving as directors. However, the Company reimburses the independent
directors for their reasonable out-of-pocket expenses in connection with their
attendance at meetings. In April 1996, the Company granted immediately
exercisable options to purchase 1,000 shares of Common Stock to each of Ms.
Silverman and Mr. Swanky. The options were exercisable at a price of $4.75 per
share through April 2001. In October 1996, the Company granted each of Ms.
Silverman and Mr. Swanky immediately exercisable options to purchase 1,000
shares of Common Stock at a price of $3.00 per share through October 2001. In
October 1997, the Company granted each of Ms. Silverman and Mr. Swanky
immediately exercisable options to purchase 1,000 shares of Common Stock at a
price of $2.9375 per share through October 2002. None of the options granted
were pursuant to any stock option plan. During the year ended November 30,
2000, both Ms. Silverman and Mr. Swanky exercised 1,792 options, including 1,000
and 792 options with an exercise price $2.9375 and $3.00, respectively, in
connection with the Company's self-tender offer. They each received $7,679 of
net proceeds.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers, directors and persons who beneficially own more than ten
percent of the Company's Common Stock to file reports of ownership and changes
in ownership with the Commission. These reporting persons also are required to
furnish the Company with copies of all Section 16(a) forms they file. To the
Company's knowledge, based solely on its review of the copies of such forms
furnished to it and representations that no other reports were required, the
Company believes that all Section 16(a) reporting requirements were complied
with during the fiscal year ended November 30, 2001.

-22-

ITEM 11. EXECUTIVE COMPENSATION.

SUMMARY COMPENSATION TABLE

The following table sets forth the total compensation received by the chief
executive officer and each additional executive officer whose compensation
exceeded $100,000, paid to the named individuals for services rendered in all
capacities to the Company and its subsidiaries for the fiscal years ended
November 30, 2001, 2000 and 1999.

Long Term Compensation
---------------------------------------
Annual Compensation Awards Payouts
--------------------------- ---------------------- ---------------
Other Securities All
Annual Restricted Underlying Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary Bonus sation Awards SARs Payouts sation
- ------------------------ ---- -------- -------- ------- ---------- ---------- ------- -------

Michael F. Zerbib (1) 2001 $ 44,000 $ 20,000 -0- -0- -0- -0- -0-
President, Chief 2000 $123,000 -0- -0- -0- -0- -0- -0-
Executive Officer, 1999 $144,000 -0- -0- -0- -0- -0- -0-
Chief Financial Officer
and Treasurer
- ------------------------ ---- -------- -------- ------- ---------- ---------- ------- -------
Thierry E. Zerbib 2001 $144,000 $ 20,000 -0- -0- -0- -0- -0-
Vice President - 2000 $182,000 -0- -0- -0- -0- -0- -0-
Technologies and 1999 $154,000 -0- -0- -0- -0- -0- -0-
Secretary
- ------------------------ ---- -------- -------- ------- ---------- ---------- ------- -------
Brian H. Loeb 2001 $ 99,000 $ 20,000 -0- -0- -0- -0- -0-
Vice President - 2000 $129,000 -0- -0- -0- -0- -0- -0-
Marketing, Sales and 1999 $144,000 $150,000 -0- -0- -0- -0- -0-
Operations
- ------------------------ ---- -------- -------- ------- ---------- ---------- ------- -------
Joseph W. Zerbib (2) 2001 $ 93,000 $ 20,000 -0- -0- -0- -0- -0-
Chairman of the Board 2000 $129,000 -0- -0- -0- -0- -0- -0-
1999 $144,000 $150,000 -0- -0- -0- -0- -0-
- ------------------------ ---- -------- -------- ------- ---------- ---------- ------- -------

(1) Michael Zerbib acted as Chief Financial Officer and Treasurer until
February 1, 2000. Since February 1, 2000, he has served as President, Chief
Executive Officer, Chief Financial Officer and Treasurer.

(2) Joseph Zerbib acted as President and Chairman of the Board until February
1, 2000. Since February 1, 2000, he has served as Chairman of the Board.

The executive officers of the Company named above routinely receive other
benefits from the Company, the amounts of which are customary in the industry.
The Company has concluded, after reasonable inquiry, that the aggregate amounts
of such benefits during the years ended November 30, 2001, 2000 and 1999 did not
exceed the lesser of $50,000 or 10% of the compensation set forth above as to
any named individual.

-23-

OPTION GRANTS AND EXERCISES IN FISCAL 2001

No options were granted to or exercised by the Company's executive officers
during fiscal 2001.

STOCK OPTION PLANS

1995 and 1996 Incentive Stock Option Plans. The Board of Directors adopted
the 1995 Incentive Stock Option Plan ("1995 ISO Plan") on February 1, 1995 and
the 1996 Incentive Stock Option Plan ("1996 ISO Plan") on April 15, 1996. The
shareholders subsequently approved these plans. The terms and conditions of
these plans are substantively similar. Each of the plans authorizes the Company
to grant to key employees both nonqualified options and options intended to
qualify as incentive options under Section 422 of the Internal Revenue Code.
The plans are administered by the compensation committee, which has the
authority to interpret their provisions, to establish and amend rules for their
administration, to determine the types and amounts of awards to be made pursuant
to the plans, subject to the plans' limitations, and to approve recommendations
made by management of the Company as to who should receive awards. There are
264,000 shares authorized for grant under the 1995 ISO Plan. As of November 30,
2001, there were no common stock options outstanding under the 1995 ISO Plan.
There are 260,000 shares authorized for grant under the 1996 ISO Plan. As of
November 30, 2001, options to purchase 4,000 shares of common stock were
outstanding under the 1996 ISO Plan. These options are held by certain
employees of the Company at an exercise price of $5.875 per share.

1997 Performance Equity Plan ("1997 Plan"). On October 2, 1997, the board
of directors adopted the 1997 Plan. On May 15, 1998, the board of directors
amended the 1997 Plan. The shareholders subsequently approved the 1997 Plan.
The board of directors has authorized 1,000,000 shares for grant under the 1997
Plan. Awards consist of stock options (both nonqualified options and options
intended to qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended), restricted stock awards, deferred stock
awards, stock appreciation rights and other stock-based awards, as described in
the 1997 Plan. The 1997 Plan is administered by the compensation committee,
which determines the persons to whom awards will be granted, the number of
awards to be granted and the specific terms of each grant, including the vesting
thereof, subject to the provisions of the 1997 Plan. As of November 30, 2001,
options to purchase 136,719 shares of common stock were outstanding under the
1997 Plan. These options are held by certain employees of the Company at
exercise prices ranging from $1.3125 to $4.875 per share.

-24-

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information as of February 22, 2002,
with respect to (i) those persons or groups known to the Company to beneficially
own more than 5% of the Company's Common Stock, (ii) each director, (iii) each
executive officer whose compensation exceeded $100,000 in the fiscal year ended
November 30, 2001, and (iv) all directors and executive officers as a group.
The information is determined in accordance with Rule 13d-3 promulgated under
the Securities Exchange Act of 1934 ("Exchange Act") based upon information
furnished by the persons listed or contained in filings made by them with the
Securities and Exchange Commission ("Commission"). Except as indicated below,
the shareholders listed possess sole voting and investment power with respect to
their shares.

Name and Address of Beneficial Owner(1)
- --------------------------------------------------------- Amount and Nature of Percent
Beneficial Ownership(2) of Class
----------------------- ---------

Michael F. Zerbib . . . . . . . . . . . . . . . . . . . . 230,603 16.3%

Thierry E. Zerbib . . . . . . . . . . . . . . . . . . . . 232,617 16.4%

Brian H. Loeb . . . . . . . . . . . . . . . . . . . . . . 232,617 16.4%

Joseph W. Zerbib . . . . . . . . . . . . . . . . . . . . 0 *

Cecile Silverman . . . . . . . . . . . . . . . . . . . . 0 *
66 West State Avenue
Phoenix, Arizona 85021

Kalvan Swanky . . . . . . . . . . . . . . . . . . . . . . 0 *
6634 East Calle Redondo
Scottsdale, Arizona 85251

Todd P. Belfer . . . . . . . . . . . . . . . . . . . . . 6,975(3) *
5450 East Arcadia Lane
Phoenix, Arizona 85018

Nicolas Zerbib . . . . . . . . . . . . . . . . . . . . . 118,322 8.4%
20 Horseneck Lane
Greenwich, Connecticut 06830

Mark Gordon . . . . . . . . . . . . . . . . . . . . . . . 150,660(4) 10.9%

All executive officers and directors
as a group (seven persons) . . . . . . . . . . . . . . . 702,812(5) 49.6%

- ----------------------------------
* Less than 1%.

(1) Unless otherwise indicated, the address of each of the persons listed is
c/o Telesoft Corp., 3443 North Central Avenue, Suite 1800, Phoenix, Arizona
85012.

(2) A person is deemed to be the beneficial owner of voting securities that can
be acquired by such person within 60 days from February 22, 2002 upon the
exercise of options, warrants or convertible securities. Each beneficial
owner's percentage ownership is determined by assuming that options,

-25-

warrants or convertible securities that are held by such person (but not
those held by any other person) and which are exercisable within 60 days of
February 22, 2002, have been exercised.

(3) Represents shares of common stock owned by T.P.B. Investment Limited
Partnership, an Arizona limited partnership of which Mr. Belfer is the
general partner.

(4) Includes 57,270 shares of common stock issuable upon exercise of currently
exercisable options.

(5) Includes those shares of common stock deemed to be included in the
respective beneficial ownership of Michael F. Zerbib, Thierry E. Zerbib,
Brian H. Loeb, Joseph W. Zerbib, Kalvan Swanky, Ms. Cecile Silverman and
Todd Belfer.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In March 2000, in connection with his retirement as the Company's President
and Chief Executive Officer, Joseph Zerbib, who currently serves as the
Company's Chairman of the Board, sold all of his 293,750 shares of the Company's
common stock back to the Company at a price of $7.25 per share, for an aggregate
of $2,129,688.

In April 2000, the Company entered into an agreement with each of Michael
Zerbib, Thierry Zerbib and Brian Loeb, pursuant to which each of them agreed to
make available to the Company up to $1,000,000 at the Company's request. In May
2000, their agreements were amended to increase the amount to $1,350,000. Draw
downs were payable on May 31, 2001 and had an annual interest rate of 10%. Each
loan was secured by the Company's assets. Pursuant to a second amendment to
their agreements in April 2001, each of the officers agreed to extend $350,000
of their loans until August 31, 2001. A third amendment to their agreements in
July 2001 extended their loans until November 30, 2001. During the years ended
November 30, 2001 and 2000, interest expense in connection with these notes was
$41,089 and $115,754, respectively. As of November 30, 2001, there were no
amounts outstanding under the notes and no interest was due thereon.

The Board of Directors has adopted a policy that all future material
transactions and loans between the Company and its executive officers,
directors, employees and affiliates will be subject to the approval of the
majority of independent and disinterested directors and that such transactions
and loans, and any forgiveness of loans, will be on terms that are no less
favorable to the Company than those that are generally available from
unaffiliated third parties.

-26-

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) Exhibits

NO. DESCRIPTION REFERENCE
- ----- ----------- ---------

3.1 Amended and Restated Articles of Incorporation of the Company dated April 13, 1995 (1)

4.1 Form of Common Stock Certificate (1)

10.1 1995 Incentive Stock Option Plan (1)

10.2 1995 Restricted Stock Plan (1)

10.3 Asset Purchase Agreement between Telesoft Acquisition Corp., Uniquest (1)
Incorporated and CSI Acquisition Corp. dated March 13, 1995

10.8 Contract between the Company and the University of Delaware (1)

10.9 1996 Incentive Stock Option Plan (2)

10.10 1996 Restricted Stock Plan (2)

10.11 1997 Performance Equity Plan (3)

10.12 Form of Promissory Note between the Company and each of Michael Zerbib, Thierry (4)
Zerbib and Brian Loeb, dated April 3, 2000

10.13 Form of Amendment to the Promissory Note dated April 3, 2000 between the Company (4)
and each of Michael Zerbib, Thierry Zerbib and Brian Loeb, dated May 24, 2000

10.14 Form of Second Amendment to the Promissory Note dated April 3, 2000, as amended on (4)
May 24, 2000, between the Company and each Michael Zerbib, Thierry Zerbib and
Brian Loeb, dated April 9, 2001

10.15 Form of Third Amendment to the Promissory Note dated April 3, 2000, as amended on (5)
May 24, 2000 and April 9, 2001, between the Company and each Michael Zerbib,
Thierry Zerbib and Brian Loeb, dated July 23, 2001

21 Subsidiaries of Registrant *

* Filed herewith
(1) Filed with Registration Statement No. 33-91234-LA, dated
June 30, 1995.
(2) Filed with Form 10-KSB/A for the fiscal year ended
November 30, 1996
(3) Filed with Definitive Proxy Statement dated June 16, 1998
(4) Filed with Form 10-Q for the quarter ended May 31, 2001
(5) Filed with Form 10-Q for the quarter ended August 31, 2001

-27-

(b) Financial Statement Schedules

SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS.

Years ended November 30, 2001, 2000 and 1999

BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND NET OF END OF THE
THE YEAR EXPENSES RECOVERIES YEAR
------------- ---------- ----------- -----------
Allowance for doubtful accounts:

2001 $ 423,437 443,547 (481,712) $ 385,272
2000 $ 452,601 242,359 (271,523) $ 423,437
1999 $ 502,095 275,194 (324,688) $ 452,601

There were no Current Reports on Form 8-K filed during the quarter ended
November 30, 2001.

-28-

SIGNATURES

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

TELESOFT CORP.

Dated: February 25, 2002 By /s/ Michael F. Zerbib
-------------------------------------
Michael F. Zerbib,
President and Chief Executive Officer

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

Signature and Title Date
- --------------------- ----

/s/ Michael F. Zerbib February 25, 2002
- -------------------------------------------------------
Michael F. Zerbib, President, Chief Executive Officer,
Chief Financial Officer, Treasurer and Director (and
principal accounting officer)

/s/ Joseph W. Zerbib February 25, 2002
- -------------------------------------------------------
Joseph W. Zerbib, Chairman of the Board of Directors

/s/ Thierry E. Zerbib February 25, 2002
- -------------------------------------------------------
Thierry E. Zerbib, Vice President - Technologies,
Secretary and Director

/s/ Brian H. Loeb February 25, 2002
- -------------------------------------------------------
Brian H. Loeb, Vice President and Director

/s/ Cecile Silverman February 25, 2002
- -------------------------------------------------------
Cecile Silverman, Director

/s/ Kalvan Swanky February 25, 2002
- -------------------------------------------------------
Kalvan Swanky, Director

/s/ Todd P. Belfer February 25, 2002
- -------------------------------------------------------
Todd P. Belfer, Director

-29-

TELESOFT CORP. AND SUBSIDIARIES

INDEX TO THE FINANCIAL STATEMENTS

PAGE

Report of Independent Certified Public Accountants F-2 - F-3

Consolidated Balance Sheets as of November 30, 2001 and
2000 F-4

Consolidated Statements of Operations for the years ended
November 30, 2001, 2000 and 1999 F-5 - F-6

Consolidated Statements of Changes in Stockholders'
Equity for the years ended November 30, 2001,
2000 and 1999 F-7

Consolidated Statements of Cash Flows for the years ended F-8 - F-9
November 30, 2001, 2000 and 1999

Notes to the Consolidated Financial Statements F-10 - F-27

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
Telesoft Corp. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Telesoft Corp.
and Subsidiaries as of November 30, 2001 and 2000 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telesoft Corp. and
Subsidiaries at November 30, 2001 and 2000 and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.

/s/ Semple & Cooper, L.L.P.

Phoenix, Arizona
January 18, 2002

F-2

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
Telesoft Corp. and Subsidiaries

We have audited the consolidated statements of operations, stockholders' equity,
and cash flows of Telesoft Corp. and Subsidiaries for the year ended November
30, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Telesoft Corp. and Subsidiaries for the year ended November 30, 1999 in
conformity with accounting principles generally accepted in the United States of
America.

/s/ BDO Seidman, LLP

Los Angeles, California
January 14, 2000

F-3

TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, 2001 AND 2000

ASSETS 2001 2000 (1)
----------- ------------

Cash and cash equivalents (Note 2) $ 540,726 $ 41,434
Restricted cash (Note 4) 19,390 -
Accounts receivable, net of allowance for uncollectibles of $385,272 and
$423,437, respectively (Note 5) 4,567,380 7,737,213
Inventory (Note 6) 83,542 208,325
Income taxes receivable 112,305 349,364
Deferred taxes (Note 10) 173,400 188,400
Other 101,589 94,010
----------- ------------

Total current assets 5,598,332 8,618,746

Property and equipment, net (Note 7) 1,032,860 1,407,118
Computer software costs, net (Note 8) - 54,484
Other 94,049 141,709
----------- ------------

Total assets $6,725,241 $10,222,057
=========== ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Related party debt (Note 13) $ - $ 1,375,000
Accounts payable and accrued liabilities 2,696,839 5,110,905
Accrued compensation 307,291 19,012
Customer deposits 473,255 69,270
Income taxes payable 127,519 203,900
Deferred revenue 639,785 1,130,375
----------- ------------
Total current liabilities 4,244,689 7,908,462

Deferred taxes (Note 10) 116,400 121,900

Total liabilities 4,361,089 8,030,362
----------- ------------
Commitments and contingencies (Notes 12, 14, 15 and 16)
Stockholders' equity: (Note 11)
Preferred stock, no par value, 10,000,000 shares authorized; none
issued and outstanding - -
Common stock, no par value, 50,000,000 shares authorized;
1,684,934 issued and 1,415,833 and 1,376,828 outstanding,
respectively 956,731 665,125
Retained earnings 2,219,121 2,191,695
----------- ------------
3,175,852 2,856,820
Less: Treasury stock, 269,101 and 178,106 shares, at cost (811,700) (665,125)
----------- ------------
Total stockholders' equity 2,364,152 2,191,695
----------- ------------

Total liabilities and stockholders' equity $6,725,241 $10,222,057
=========== ============

(1) As restated for comparative purposes only.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-4

TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999

2001 2000 1999
------------ ------------ ------------

Sales, net $20,167,847 $24,613,309 $29,377,592
Cost of sales (Note 2) 8,799,831 12,826,565 16,780,838
------------ ------------ ------------
Gross profit 11,368,016 11,786,744 12,596,754
General and administrative expenses (Note 17) 11,045,318 12,415,994 11,335,068
------------ ------------ ------------
Operating income (loss) 322,698 (629,250) 1,261,686
------------ ------------ ------------
Other income (expense):
Interest income 38,345 347,361 564,804
Interest expense (45,886) (128,238) (270)
Other income 1,214 319,406 2,623
------------ ------------ ------------

(6,327) 538,529 567,157
------------ ------------ ------------
Income (loss) from continuing operations before 316,371 (90,721) 1,828,843
(provision for) benefit from income taxes
(Provision for) benefit from income taxes (Note 10) (142,370) 40,600 (579,800)
------------ ------------ ------------
Income (loss) from continuing operations 174,001 (50,121) 1,249,043

Discontinued operations (Note 18):
Gain on disposal of GoodNet subsidiary (net of
income taxes of $357,700 in 1999) - - 549,309
------------ ------------ ------------

Net income (loss) 174,001 (50,121) 1,798,352

Other comprehensive (loss) income, net of tax
Unrealized holding losses arising during period - (66,120) (18,446)
------------ ------------ ------------

Comprehensive income (loss) $ 174,001 $ (116,241) $ 1,779,906
============ ============ ============

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-5

TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000, AND 1999

2001 2000 1999
---------- ----------- ----------

Basic earnings (loss) per share
Continuing operations $ 0.12 $ (0.02) $ 0.33
Sale of discontinued operations - - 0.15
-----------------------------------
Net income (loss) $ 0.12 $ (0.02) $ 0.48
===================================

Diluted earnings (loss) per share
Continuing operations $ 0.12 $ (0.02) $ 0.33
Sale of discontinued operations - - 0.14
-----------------------------------
Net income (loss) $ 0.12 $ (0.02) $ 0.47
===================================

Weighted average number
of shares outstanding
- basic 1,398,510 2,123,879 3,713,601
===================================
- diluted 1,406,278 2,123,879 3,832,067
===================================

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-6

TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999

Common Stock
-------------------------- Accumulated
Number of Additional other Total
shares Treasury paid-in comprehensive Retained stockholders'
outstanding Amount stock capital income earnings equity
------------ ------------ ---------- ------------ ------------- ------------- -------------

Balance, November 30, 1998 3,748,500 $ 7,286,159 $(182,759) $ 80,069 $ 84,566 $ 11,127,129 $ 18,395,164
Treasury stock acquired
(Note 11) (37,000) - (184,305) - - - (184,305)
Change in unrealized gain on
investment securities - - - - (18,446) - (18,446)

Net income - - - - - 1,798,352 1,798,352

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

Balance, November 30, 1999 3,711,500 7,286,159 (367,064) 80,069 66,120 12,925,481 19,990,765
Treasury stock acquired
(Note 11) (102,106) - (298,061) - - - (298,061)
Common stock acquired (2,232,566) (6,621,034) - (80,069) - (10,683,665) (17,384,768)
from stock redeemed
(Note 11)
Change in unrealized gain
on investment securities - - - - (66,120) - (66,120)

Net loss - - (665,125) - - (50,121) (50,121)
------------ ------------ ---------- ------------ ------------- ------------- -------------

Balance, November 30, 2000 1,376,828 665,125 - - 2,191,695 2,191,695
Treasury stock acquired
(Note 11) (90,995) 146,575 (146,575) - - (146,575) (146,575)

Stock compensation 130,000 145,031 - - - - 145,031

Net income - - - - - 174,001 174,001

------------ ------------ ---------- ------------ ------------- ------------- -------------
Balance, November 30, 2001 1,415,833 $ 956,731 $(811,700) $ - $ - $ 2,219,121 $ 2,364,152
============ ============ ========== ============ ============= ============= =============

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-7

TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999

2001 2000 1999
------------- ------------- -------------

Increase (decrease) in cash and cash equivalents:

Cash flows from operating activities:
Cash received from customers $ 22,807,528 $ 26,489,044 $ 26,737,413
Cash paid to suppliers and employees (20,770,715) (24,938,451) (28,989,264)
Interest paid (45,886) (128,238) (270)
Interest received 38,345 508,731 506,597
Income tax refund 214,480 598,947 -
Income taxes paid (186,672) (148,785) (817,965)
-------------------------------------------
Net cash provided (used) by operating activities
of continuing operations 2,057,080 2,381,248 (2,563,489)
-------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (81,776) (597,558) (578,912)
Cash received from sale of equipment 45,563 11,433 7,653
Disbursements for notes receivable from related
parties - (450,000) (50,000)
Collection of notes receivable - 500,000 373,153
Purchase of investment securities - (1,500,000) (6,616,250)
Sale of investment securities - 13,846,439 4,874,232
-------------------------------------------

Net cash (used) provided by investing activities
of continuing operations (36,213) 11,810,314 (1,990,124)
-------------------------------------------

Cash flows from financing activities:
Purchases of treasury stock (146,575) (298,061) (184,305)
Proceeds from debt - related parties 300,000 2,825,000 -
Repayment of debt - related parties (1,675,000) (1,450,000) -
Stock redemption - (17,384,768) -
-------------------------------------------

Net cash used in financing activities of
continuing operations (1,521,575) (16,307,829) (184,305)
-------------------------------------------

Cash provided (used) by continuing operations 499,292 (2,116,267) (4,737,918)

Cash used in discontinued operations, including income
taxes paid in the amount of $844,600 in 1999 - - (844,600)
-------------------------------------------

Net increase (decrease) in cash and cash equivalents 499,292 (2,116,267) (5,582,518)

Cash and cash equivalents at beginning of fiscal year 41,434 2,157,701 7,740,219
-------------------------------------------

Cash and cash equivalents at end of fiscal year $ 540,726 $ 41,434 $ 2,157,701
===========================================

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-8

TELESOFT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED NOVEMBER 30, 2001, 2000 AND 1999

2001 2000(1) 1999(1)
------------ ----------- ------------

Reconciliation of net income (loss) to net cash
provided (used) by operating activities from
continuing operations:

Net income (loss) $ 174,001 $ (50,121) $ 1,798,352
---------------------------------------
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities
from continuing operations:

Gain on sale of discontinued operations - - (549,309)
Income taxes payable and deferred taxes
related to sale of discontinued operations - - 486,900
Depreciation and amortization 466,169 619,660 545,590
Gain on sale of fixed assets (1,214) (5,224) (2,516)
Gain on sale of investment securities - (145,189) -
Interest income included with note receivable - - (2,294)
Stock compensation 145,031 - -

Changes in assets and liabilities:
Restricted cash (19,390) - -
Accounts receivable 3,169,833 1,747,723 (2,551,847)
Inventory 124,783 158,469 259,376
Other current assets (7,579) 157,764 38,853
Deferred taxes 9,500 92,400 (115,200)
Other assets 47,660 (30,986) (20,675)
Accounts payable and accrued liabilities (2,414,066) (475,326) (2,174,351)
Accrued compensation 288,279 (199,745) 75,811
Customer deposits 403,985 (6,717) 70,931
Deferred revenue (490,590) 201,378 186,755
Income taxes payable (76,381) 203,900 (147,239)
Income taxes receivable 237,059 113,262 (462,626)
---------------------------------------

1,883,079 2,431,369 (4,361,841)
---------------------------------------

Net cash provided (used) by operating activities
from continuing operations $ 2,057,080 $2,381,248 $(2,563,489)
=======================================

(1) As restated for comparative purposes only.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-9

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Telesoft Corp. (the "Company" or "Telesoft"), an Arizona corporation, was
incorporated on May 4, 1982. The Company provides four principal continuing
product lines and services: long distance and telecommunications division,
d.b.a. Student Telephone Services (STS); Customized Billing Outsourcing
Services; computer software and hardware sales, d.b.a. Sunbelt Business
Computers (SBC); and its telecommunications audit subsidiary, Telesoft
Recovery Corp (TRC). The long distance and telecommunications division is
primarily involved in long distance and telecommunication services to
higher education institutions. The software and hardware division is
primarily involved in the design, distribution, installation, and
maintenance of computer hardware and software systems. The Company markets
its products throughout the United States.

The Company originally operated as B.P. & J Investors, Ltd., d.b.a. Sunbelt
Business Computers. Effective April 12, 1995, the Company changed its name
to Telesoft Corp.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Telesoft
Corp., together with its wholly owned subsidiaries, Telesoft Acquisition
Corp and Telesoft Recovery Corp., and its former 71% owned subsidiary,
Telesoft Acquisition Corp II, d.b.a. GoodNet ("GoodNet"). (See Note 18)

All significant intercompany accounts and transactions have been
eliminated.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash and cash equivalents
for the purposes of reporting cash flows.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has cash and cash equivalents, receivables, accounts payable
and accrued liabilities for which the carrying value approximates the fair
value due to the short-term nature of these instruments.

LONG-LIVED ASSETS

Statement of Financial Accounting Standards No.121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS 121") issued by the Financial Accounting Standards Board
("FASB") is effective for financial statements for fiscal years beginning
after December 15, 1995. The standard establishes guidelines regarding when
impairment losses on long-lived assets, which include plant and equipment,
and certain identifiable intangible assets, should be recognized and how
impairment losses should be measured. The Company adopted SFAS 121 during
the year ended November 30, 1997. The Company does not believe any assets
are impaired as of November 30, 2001.

INVENTORY

Inventory is stated at the lower of cost, first-in, first-out (FIFO)
method, or market. Inventory quantities are reviewed periodically for
obsolescence.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-10

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is provided for
on the straight-line method over the estimated useful lives of the assets.
The average lives range from three to seven years. The gain or loss on
disposal of assets is reflected in earnings, and the cost and related
accumulated depreciation are removed from the accounts. Maintenance and
repairs that neither materially add to the value of the property nor
appreciably prolong its life are charged to expense as incurred.
Betterments or renewals are capitalized when incurred. Leasehold
improvements are recorded at cost and amortized over the shorter of the
lives of the leases or estimated useful lives.

COMPUTER SOFTWARE COSTS

The Company capitalizes software development costs in accordance with
Financial Accounting Standards Board Statement No. 86 ("FASB 86"). FASB 86
requires software development costs to be capitalized when technological
feasibility is reached and discontinued when the product is ready for sale.
Software development costs not qualifying for capitalization are expensed
as research and development costs. Capitalized costs are amortized on
product-by-product basis using the greater of the straight line method over
the product's remaining estimated economic life or the ratio of the current
year's gross revenues to the total of a product's current year and
anticipated revenues. The Company evaluates the estimated net realizable
value of each software product at each balance sheet date and records
write-downs for any products for which net book value is in excess of net
realizable value.

REVENUE RECOGNITION

The Company recognizes revenues as follows: Revenue from computer software
sales is recognized upon delivery if no customization is necessary, and on
the percentage-of-completion method if customization is needed, in
accordance with Statement of Position (SOP) 97-2, Software Revenue
Recognition. The Company uses the contract phases completed to measure
progress towards completion, each contract is divided into four distinct
phases, each valued at 25% of the total contract. Revisions in cost
estimates and recognition of losses on these contracts are reflected in the
accounting period in which the facts become known. Maintenance contract
revenue is recognized ratably over the life of the contract. Revenue from
telecommunication recovery services is recognized when the service has been
performed and the customer has received their refund. Revenue from
collection of long-distance charges is recognized as the charges are
incurred. The Company accrues revenues from customers based upon actual
usage as reported on billings received from long-distance carriers and
estimates the amount of unbilled revenues based upon number of days in the
billing cycle and past usage by customers. Revenue from customized billing
outsourcing is recognized when services are completed.

DEFERRED REVENUE

Deferred revenue represents deferred income from maintenance contracts. The
income is recognized ratably over the applicable lives of the respective
contracts.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-11

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

INCOME TAXES

The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred
income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future
years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.

STOCK COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation ("SFAS
No. 123"), which became effective during the year ended November 30, 1997.
The Company has adopted the disclosure-only provisions of SFAS No. 123.

WARRANTIES

The Company offers a warranty of 90 days on hardware and software and an
extended warranty program in connection with the Company's service and
maintenance programs. The Company has not had any material claims made
under its warranty program to date.

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share of common stock were computed by dividing
net earnings (loss) by the weighted average number of common shares.

Diluted earnings (loss) per share are computed based on the weighted
average number of shares of common stock and dilutive securities
outstanding during the period. Dilutive securities are options that are
freely exercisable into common stock at less than market exercise prices.
Dilutive securities are not included in the weighted average number of
shares when inclusion would increase the earnings per share or decrease the
loss per share.

ACCOUNTING PRONOUNCEMENTS:

In August 2001, the Financial Accounting Standards Board issued SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 addresses financial accounting and reporting for the impairment or
disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of", and the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations for the disposal of a segment
of a businessSFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company expects to adopt SFAS No. 144 December 1,
2002. The Company does not believe the adoption of SFAS No. 144 will have a
material impact on its results of operations.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-12

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. CONCENTRATION OF CREDIT RISK:

The Company maintains cash balances at various financial institutions. The
Federal Deposit Insurance Corporation insures deposits not in excess of
$100,000 on deposit at each institution. At November 30, 2001, the Company
had uninsured cash and cash equivalent bank balances of approximately
$766,000.

Suppliers

Prior to December 1, 2000, one telecommunications company provided the
Company with a significant portion of its long distance telecommunications
services. For fiscal 2001 and 2000, multiple telecommunications companies
provided long distance services to the Company and, accordingly, no
supplier accounted for greater than 10% of the Company's expenses. For the
fiscal year ended November 30, 1999, fees paid to this company totaled
approximately $2,323,000. As of November 30, 2001, the outstanding amount
due to this service provider was approximately $44,700.

Customers

During the years ended November 30, 2001, 2000 and 1999, the Company did
not have any customers that accounted for greater than 10% of its revenues.

3. Investment Securities:

As of November 30, 2001 and 2000, the Company had no investment securities.

Investment income for the years ended November 30, 2001, 2000 and 1999:

2001 2000 1999
-----------------------------

Interest income $38,345 $347,361 $ 564,804

Gross realized gains, included with continuing
operations - 145,189 107

Gross realized gains, included with
discontinued operations - - 607,009
-----------------------------
$38,345 $492,550 $1,171,920
=============================

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-13

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. RESTRICTED CASH:

At November 30, 2001, restricted cash represents cash held in a savings
account in lieu of a security deposit for a TRS office lease. This lease
expires in November 2002.

5. ACCOUNTS RECEIVABLE:

At November 30, 2001 and 2000, accounts receivable include billed and
unbilled amounts, as follows:

2001 2000
----------- -----------

Billed $4,208,967 $6,183,294
Unbilled 743,685 1,977,356
------------------------

4,952,652 8,160,650
Less: allowance for uncollectibles (385,272) (423,437)
------------------------
$4,567,380 $7,737,213
========================

Unbilled accounts receivable represent amounts earned but not billed for
long distance telephone service.

At November 30, 2001, accounts receivable by product line is as follows:

System Sales/ Recovery STS Custom Network
Maintenance Services Outsourcing Billing Services Total
------------- --------- ------------- --------- ---------- -----------

Billed $ 1,874,288 $ 307,503 $ 1,936,377 $ 88,967 $ 1,832 $4,208,967
Unbilled (39,744) - 769,129 14,300 - 743,685
Allowance (19,387) - (336,559) (27,494) (1,832) (385,272)
---------------------------------------------------------------------------

Total, Net $ 1,815,157 $ 307,503 $ 2,368,947 $ 75,773 $ - $4,567,380
===========================================================================

At November 30, 2000, accounts receivable by product line is as follows:

System Sales/ Recovery STS Custom Network
Maintenance Services Outsourcing Billing Services Total
------------- --------- ------------- --------- --------- -----------

Billed $ 2,433,330 $ 206,848 $ 3,380,226 $161,058 $ 1,832 $6,183,294
Unbilled - - 1,967,706 9,650 - 1,977,356
Allowance (49,604) - (333,262) (40,571) - (423,437)
--------------------------------------------------------------------------

Total, Net $ 2,383,726 $ 206,848 $ 5,014,670 $130,137 $ 1,832 $7,737,213
==========================================================================

6. INVENTORY:

At November 30, 2001 and 2000, inventory consists primarily of finished
products.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-14

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. PROPERTY AND EQUIPMENT:

At November 30, 2001 and 2000, property and equipment consists of:

2001 2000
------------ ------------

Equipment $ 2,460,151 $ 2,620,034
Vehicles 28,458 28,458
Furniture and fixtures 543,685 560,834
Leasehold improvements 88,479 84,028
Property leased to others 220,000 351,518
--------------------------
3,340,773 3,644,872
Accumulated depreciation and amortization (2,307,913) (2,237,754)
--------------------------
$ 1,032,860 $ 1,407,118
==========================

Depreciation and amortization expense was $415,844, $504,477, and $400,295
for the fiscal years ended November 30, 2001, 2000, and 1999, respectively.

8. COMPUTER SOFTWARE COSTS:

At November 30, 2001and 2000, computer software costs capitalized are:

2001 2000
---------- ----------

Computer software $ 716,260 $ 987,885
Accumulated amortization (716,260) (933,401)
----------------------
$ - $ 54,484
======================

Amortization expense from continuing operations related to computer
software cost during the years ended November 30, 2001, 2000, and 1999 was
$50,325, $115,183, and $145,295, respectively.

9. INTANGIBLES:

At November 30, 2001, there were no intangibles included in the Company's
balance sheet. At November 30, 2000, intangibles consisted of:

Covenant not-to-compete-RATEX $ 25,000

Accumulated amortization (25,000)
---------
$ -
=========

There was no amortization expense during the years ended November 30, 2001,
2000 and 1999.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-15

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES:

The components of the provision for (benefit from) income taxes for the
years ended November 30, 2001, 2000, and 1999 consist of:

2001 2000 1999
--------- ---------- ---------

Current $146,000 $(133,000) $764,718
Deferred (3,630) 92,400 172,782
--------------------------------
Provision for (benefit from)
income taxes $142,370 $ (40,600) $937,500
================================

Provision for (benefit from)
income taxes attributable
to continuing operations $142,370 $ (40,600) $579,800

Provision for income taxes
attributable to Gain on
disposal of GoodNet
subsidiary - - 357,700
--------------------------------
Provision for (benefit from)
income taxes $142,370 $ (40,600) $937,500
================================

The Company's tax expense differs from the expense calculated using the
statutory federal income tax rate for the following reasons:

2001 2000 1999
-------- --------- ----------

Expected $107,600 $(30,800) $ 621,800
Tax exempt interest income - (31,100) (148,400)

Non deductible portion of
meals and entertainment 8,000 9,300 10,200

State taxes, net of federal
benefit 26,770 12,000 96,200
-------------------------------
Provision for (benefit from)
income taxes attributable to
continuing operations $142,370 $(40,600) $ 579,800
===============================

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-16

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES: (CONTINUED)

The income tax effect of temporary differences between financial and tax
reporting gives rise to the deferred income tax assets and liabilities as
follows:

Current asset 2001 2000
---------- ----------

Allowance for uncollectibles $ 173,400 $ 177,800
Inventory allowance - 10,400
Timing differences from IRS audit - 200
----------------------

173,400 188,400
----------------------
Non-current liability
Accumulated depreciation (116,400) (129,500)
Accumulated amortization - 5,400
Timing differences from IRS audit - 2,200
----------------------

(116,400) (121,900)
----------------------

Net deferred tax asset $ 57,000 $ 66,500
======================

The Company believes that it is likely to realize the net deferred tax
asset subject to the Company's ability to generate profits in the future.
Accordingly, no valuation allowance has been provided.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-17

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. STOCKHOLDERS' EQUITY:

SERIAL PREFERRED STOCK

The Company is authorized to issue 10,000,000 shares of serial preferred
stock, no par value. As of November 30, 2001 and 2000, there were no shares
issued or outstanding.

COMMON STOCK WARRANTS

During the year ended November 30, 1995, the Company issued 125,000 common
stock warrants to the underwriters of the Company's initial public offering
in exchange for $100. The warrants were exercisable at $7.20 per warrant
for a period of four years beginning July 1, 1996. As of November 30, 1999,
125,000 common stock warrants were outstanding. As of November 30, 2000,
these common stock warrants expired.

DIVIDEND POLICY

The Company has no limitations or restrictions for declaring dividends. As
of November 30, 2001, no dividends have been declared.

TREASURY STOCK

The Board of Directors has authorized the repurchase of up to 10% of the
Company's outstanding stock. During the years ended November 30, 2001,
2000, and 1999, the Company repurchased 90,995, 102,106, and 37,000 shares
of its common stock on the open market for $146,575, $298,061, and
$184,305, respectively.

SELF-TENDER OFFER

On February 3, 2000, the Company commenced an offer to repurchase up to 2.3
million shares of its common stock pursuant to a "Dutch auction"
self-tender offer. On March 24, 2000, the tender offer expired. Pursuant to
the tender offer, the Company repurchased a total of 2.3 million shares of
its common stock. The purchase price for the shares of common stock was
$7.25 per share and the proration factor was 60.22 percent. The Company
redeemed 1,938,816 common shares for $14,056,416 and 351,352 common stock
options for $1,112,674. Included in the common shares redeemed were
1,031,663 shares of the Company's common stock redeemed from affiliates of
the Company for an aggregate of approximately $7,480,000.

Additionally, the Company repurchased all 293,750 shares of common stock
owned by Joseph Zerbib for $2,129,688. As of November 30, 2001, affiliates
of the Company owned 695,837 shares or 49.1% of the outstanding common
stock of the Company.

Expenses incurred related to the tender offer were $85,991.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-18

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. STOCK PLANS:

INCENTIVE STOCK OPTION PLANS

Effective February 1, 1995, the Board of Directors adopted the 1995
Incentive Stock Option Plan (ISOP). Under the 1995 ISOP, a total of 264,000
shares are reserved for issuance at the discretion of the compensation
committee. As of November 30, 2001, there were no common stock options
outstanding under the 1995 ISOP. Effective April 15, 1996, the Board of
Directors adopted an additional stock plan, the 1996 ISOP. The shareholders
approved this plan on August 7, 1996. Under the 1996 ISOP, a total of
260,000 shares are reserved for issuance at the discretion of the
compensation committee. As of November 30, 2001, options to purchase 4,000
shares of common stock were outstanding under the 1996 ISOP. These options
are held by certain employees of the Company at an exercise price of $5.875
per share. The 1995 ISOP and 1996 ISOP authorize the Company to grant to
key employees both nonqualified options and options intended to qualify as
incentive options under Section 422 of the Internal Revenue Code. The plans
are administered by the compensation committee, which has authority to
interpret their provisions, to establish and amend rules for their
administration, to determine the types and amounts of awards to be made
pursuant to the plans, subject to the plans' limitations, and to approve
recommendations made by management of the Company as to who should receive
awards.

On October 2, 1997, the board of directors adopted the 1997 Performance
Equity Plan. On May 15, 1998, the board of directors amended the 1997 Plan.
The shareholders subsequently approved the 1997 Plan. The board of
directors has authorized 1,000,000 shares for grant under the 1997 Plan.
Awards consist of stock options (both nonqualified options and options
intended to qualify as incentive stock options under Section 422 of the
Internal Revenue Code, restricted stock awards, deferred stock awards,
stock appreciation rights and other stock-based awards, as described in the
1997 Plan. The 1997 Plan is administered by the compensation committee,
which determines the persons to whom awards will be granted, the number of
awards to be granted and the specific terms of each grant, including the
vesting thereof, subject to the provisions of the 1997 Plan. As of November
30, 2001, options to purchase 136,719 shares of common stock were
outstanding under the 1997 Plan. These options are held by certain
employees of the Company at exercise prices ranging from $1.3125 to $4.875
per share.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-19

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. STOCK PLANS: (CONTINUED)

The following table summarizes stock option activity:

Number of Weighted average
shares exercise price
--------- ---------------

Outstanding at November 30, 1999 748,900 $ 4.62

Granted 59,157 3.40
Exercised (338,810) 4.1974
Forfeited (319,018) 5.2639
---------

Outstanding at November 30, 2000 150,229 3.7301

Granted 27,200 1.3125
Exercised - -
Forfeited (36,710) 3.9416
---------

Outstanding at November 30, 2001 140,719 3.2076
=========
Options exercisable at November 30, 2001 96,351 $ 3.119
=========

Available for grant at: (a)
November 30, 2000 1,373,771
November 30, 2001 1,383,281

(a) Available for grant includes shares that may be granted as either
stock options or restricted stock, as determined by the Committee.

Following is a summary of the status of options outstanding at November 30,
2001:

Outstanding Options Exercisable Options
------------------------------- -----------------------
Weighted
average Weighted Weighted
Exercise price remaining average average
range Number contractual life exercise price Number exercise price
--------------- ------- ---------------- --------------- ------ ---------------

$ 5.88 4,000 5 years $ 5.88 4,000 $ 5.88
$ 2.94 27,084 6 years 2.94 27,084 2.94
$ 4.25 3,208 7 years 4.25 3,208 4.25
$ 4.88 20,070 8 years 4.88 20,070 4.88
$ 3.40 59,157 9 years 3.40 14,789 3.40
$ 1.31 27,200 10 years 1.31 27,200 1.31
------------------------------------------------------------------------------------

1.31 - $5.88 140,719 8 years $ 3.21 96,351 $ 3.12
====================================================================================

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-20

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. STOCK PLANS: (CONTINUED)

OTHER OPTIONS

No other options were granted during the years ended November 30, 2001,
2000 and 1999.

STOCK BASED COMPENSATION

All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant.
In accordance with accounting for such options utilizing the intrinsic
value method, there is no related compensation expense recorded in the
Company's financial statements for the fiscal years ended November 30,
2001, 2000 and 1999. Had compensation cost for stock-based compensation
been determined based on the fair value of the options at the grant dates
consistent with the method of SFAS 123, the Company's net income (loss) and
diluted earnings (loss) per share for the fiscal years ended November 30,
2001, 2000 and 1999 would have been reduced to the pro-forma amounts
presented below:

2001 2000 1999
-------- --------- ----------

Net income (loss) as reported $174,001 $(50,121) $1,798,353
Pro-forma $158,481 $(67,453) $1,636,018

Net income (loss) per share as reported $ 0.12 $ (0.02) $ 0.47
Pro-forma $ 0.11 $ (0.03) $ 0.43

The fair value of the option grants is estimated as of the date of grant
utilizing the Black-Scholes option-pricing model with the following
weighted average assumptions for grants in 2001, 2000 and 1999; expected
life of options of one to three years, expected volatility of 51% in 2001,
64% in 2000, and 24% in 1999, risk-free interest rates of 8%, and a 0%
dividend yield. The weighted average fair value at date of grant for
options granted during 2001, 2000, and 1999 approximated $0.44, $1.08, and
$1.03, respectively.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-21

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. Related Party Transactions:

Related party debt

In April 2000, the Company entered into an agreement with three executive
officers, pursuant to which each of them agreed to make available to the
Company up to $1,000,000 at the Company's request. In May 2000, their
agreements were amended to increase the amount to $1,350,000. Draw downs
were payable on May 31, 2001 and had an annual interest rate of 10%. Each
loan was secured by the Company's assets. Pursuant to a second amendment to
their agreements in April 2001, each of the officers agreed to extend
$350,000 of their loans until August 31, 2001. A third amendment to their
agreements in July 2001 extended their loans until November 30, 2001.

During the years ended November 30, 2001 and 2000, interest expense in
connection with these notes was $41,089 and $115,754, respectively. As of
November 30, 2000, an aggregate of $1,375,000 principal was outstanding
under the notes and no interest was due thereon. As of November 30, 2001,
there were no amounts outstanding under the notes and no interest was due
thereon.

14. Employee Benefit Plans:

The Company maintains a 401(k) profit sharing plan covering substantially
all full-time employees. Under the terms of the plan, the employees may
elect to contribute a portion of their salary to the plan.

The Company has agreed to make matching contributions equal to fifty
percent of the first 6% in deferred compensation. In addition, the Company
may make discretionary contributions to the plan. For the fiscal year ended
November 30, 2001, contributions were $81,850.

During the fiscal years 2000 and 1999, the Company made matching
contributions equal to fifty percent of the first $500 in deferred
compensation plus twenty-five percent of deferrals in excess of $1,000. For
the fiscal years ended November 30, 2000, and 1999, contributions were
$62,982 and $46,878, respectively.

15. Commitments:

Office Lease Commitments

The Company is obligated under long-term operating leases for office
facilities through the year 2007.

As of November 30, 2001, future minimum lease payments due under the
non-cancelable operating lease agreements are as follows:

FISCAL YEAR ENDING
NOVEMBER 30, AMOUNT
------------------ ----------

2002 $ 602,349
2003 478,809
2004 492,009
2005 505,209
2006 518,409
Thereafter 544,809
----------
Total $3,141,594
==========

Rent expense under all operating leases amounted to approximately $547,674,
$386,224, and $335,000 for the years ended November 30, 2001, 2000, and
1999, respectively.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-22

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. Operating Leases:

The Company was the lessor of equipment under operating lease agreements
that expired in June 2000. The equipment had an original cost basis of
$220,000. Accumulated depreciation was $220,000 as of November 30, 2001 and
2000. During the fiscal years ended November 30, 2000 and 1999, the Company
received rental income of $47,587.

The Company was also the sublessor of office space in Tempe, Arizona. The
lease agreement expired in March 2000. During the fiscal years ended
November 30, 2000 and 1999, the Company received $37,065 and $33,288,
respectively under this agreement.

17. Research and Development:

Research and development costs included in general and administrative
expenses for the fiscal years ended November 30, 2001, 2000, and 1999 were
$528,000, $1,168,000, and $1,424,000, respectively. These costs have been
expensed during their respective fiscal years.

18. Discontinued Operations/Sale of GoodNet

Effective January 12, 1998, the Company together with the minority
shareholders of GoodNet, entered into an agreement with Winstar
Communications, Inc. ("Winstar") to sell the Company's Internet services
subsidiary, GoodNet, for approximately $22.0 million, consisting of $3.5
million cash and shares of common stock of Winstar having an aggregate
market value of approximately $18.5 million.

Under the terms of the agreement, the Company received approximately
$3,500,000 in cash plus 479,387 shares of Winstar restricted common stock,
which had an aggregate fair market value of approximately $13.9 million as
of the close of business on January 12, 1998. After commissions and related
legal expenses, the Company realized an approximate $13.2 million pretax
gain on the sale in the first quarter of fiscal 1998. Additionally, the
Company received $235,000 in cash to offset GoodNet's net cash
disbursements from December 12, 1997 through the date of the sale.

The results of operations of GoodNet have been shown as discontinued
operations in the accompanying financial statements.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-23

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. Earnings per Share

The following table reconciles the numerators and denominators of the basic and diluted
earnings (loss) per share:

FOR THE YEAR ENDED NOVEMBER 30,
-------------------------------
2001 2000 1999
----------- ----------- ------------

BASIC EARNINGS (LOSS) PER COMMON SHARE:
---------------------------------------
NUMERATOR
Income (loss) from continuing operations $ 174,001 $ (50,121) $1,249,043
Gain on disposal of GoodNet - - 549,309
-------------------------------------
Net earnings (loss) available to common shareholders $ 174,001 $ (50,121) $1,798,352
=====================================
DENOMINATOR

Weighted average number of shares outstanding 1,398,510 2,123,879 3,713,601
====================================

PER SHARE AMOUNTS

Income (loss) from continuing operations $ 0.12 $ (0.02) $ 0.33
Gain on disposal of GoodNet - - 0.15
-------------------------------------
Net earnings (loss) available to common shareholders $ 0.12 $ (0.02) $ 0.48
=====================================
DILUTED EARNINGS (LOSS) PER SHARE
---------------------------------

NUMERATOR
Income (loss) from continuing operations $ 174,001 $ (50,121) $1,249,043
Gain on disposal of GoodNet - - 549,309
-------------------------------------

Net earnings (loss) available to common shareholders $ 174,001 $ (50,121) $1,798,352
=====================================
DENOMINATOR

Weighted average number of shares outstanding 1,398,510 2,123,879 3,713,601
Effect of dilutive securities:
Options and warrants 27,200 - 339,700
Stock acquired with proceeds (19,432) - (221,234)
-------------------------------------
Weighted average common shares and assumed
conversions outstanding 1,406,278 2,123,879 3,832,067
=====================================
PER SHARE AMOUNTS

Income (loss) from continuing operations $ 0.12 $ (0.02) $ 0.33
Gain on disposal of GoodNet - - 0.14
-------------------------------------
Net earnings (loss) available to common shareholders $ 0.12 $ (0.02) $ 0.47
=====================================

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-24

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

19. Earnings per Share: (Continued)

At November 30, 2001, options to acquire 113,519 shares of common stock, at
various prices per share, were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares.

At November 30, 2000, warrants and options to acquire 150,229 shares of
common stock, at various prices per share, were not included in the
computation of diluted EPS because the options had an anti-dilutive effect.

At November 30, 1999, warrants and options to acquire 535,200 shares of
common stock, at various prices per share, were not included in the
computation of diluted EPS because the options' exercise price was greater
than the average market price of the common shares.

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-25

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

20. SEGMENT INFORMATION

The Company's products and services are broken down as follows:

(1) System Sales and Maintenance
(a) TelMaster Telemanagement System ("TMS")
(b) Distribution Control System ("DCS")
(c) Software and Hardware Recurring Maintenance Revenue
(2) Telesoft Recovery Services ("TRS")
(3) STS Outsourcing Program ("STS")
(4) Customized Billing Outsourcing Services ("CBS")

Following is selected segment information (in thousands except per share items):

Year ended November 30, 2001 Year ended November 30, 2000
------------------------------------------- -------------------------------------------
System System
Sales TRS STS CBS Total Sales TRS STS CBS Total
------- ------ -------- ------ -------- -------- ------ ------- ------- --------

Operating income (loss) (524) 617 (129) 359 323 (1,445) 324 387 105 (629)

Other income (expense) (7) 538
-------- --------

Pretax income 316 (91)

Income tax provision (142) 41
-------- --------
Income (loss) from continuing
operations $ 174 $ (50)
======== ========
Diluted earnings (loss) per share-
continuing operations $ 0.12 $ (0.02)
======== ========

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-26

TELESOFT CORP. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21. QUARTERLY FINANCIAL DATA

(unaudited)/(in thousands except per share amounts)

QUARTER ENDED
---------------------------------------------------------
FEBRUARY 28 (29) MAY 31 AUGUST 31 NOVEMBER 30
---------------------------------------------------------

2001
Net revenues $ 6,119 $ 6,400 $ 2,867 $ 4,782

Gross profit 3,281 3,071 2,101 2,915
Income (loss) from continuing operations 310 179 (314) 0
Income (loss) per share - continuing
operations, diluted $ 0.23 $ 0.13 ($0.22) $ 0.00
Income (loss) per share - continuing
operations, basic $ 0.23 $ 0.13 ($0.22) $ 0.00
Shares used in per share calculation - diluted 1,349,307 1,425,512 1,415,833 1,423,282
Shares used in per share calculation - basic 1,345,584 1,415,833 1,415,833 1,415,833

2000
Net revenues $ 7,022 $ 6,485 $ 3,116 $ 7,990

Gross profit 3,396 2,677 2,061 3,653
Income (loss) from continuing operations 378 (223) (553) 348
Income (loss) per share - continuing
operations, diluted $ 0.10 ($0.11) ($0.40) $ 0.25
Income (loss) per share - continuing
operations, basic $ 0.10 ($0.11) ($0.40) $ 0.25
Shares used in per share calculation - diluted 3,829,204 2,030,721 1,377,728 1,377,085
Shares used in per share calculation - basic 3,711,500 2,030,721 1,377,728 1,377,085

The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements

F-27