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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-K(Mark One)
[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended
December 31, 2010[ ] TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period
from [ ] to [ ] Commission file number 000-31909ALTERNET SYSTEMS, INC.(Exact name of registrant as specified in its charter)

|Nevada                                           | 88-0473897                          
|------------------------------------------------ | ------------------------------------
|(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.)
|organization)                                    |                                     
|                                                 |                                     
|2665 S Bayshore Drive Miami FL                   | 33133                               
|(Address of principal executive offices)         | (Zip Code)                          

Registrant's telephone number, including area code:
786-265-1840Securities registered pursuant to Section
12(b) of the Act:

|Title of Each Class | Name of Each Exchange On Which Registered
|------------------- | -----------------------------------------
|N/A                 | N/A                                      

Securities registered pursuant to Section 12(g) of the Act:
N/A(Title of class)

Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 the Securities Act. Yes  
[ ]     No   [X] Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act Yes   [ ]     No  
[X]

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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was  required to file such reports) and (2) has been subject to
such filing requirements for the last 90 days. Yes  
[X]     No   [ ] Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405
of this chapter) is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or  information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting  company in Rule 12b-2 of the
Exchange Act.

Large accelerated filer
    [ ]
    Accelerated filer
    [ ]Non-accelerated filer
    [ ]
    Smaller reporting company
    [X]


Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The aggregate market value of Common Stock held by
non-affiliates of the Registrant on March 28, 2011 was $4,080,582 based on a
$0.11 closing price for the Common Stock on March 28, 2011. For purposes of this
computation, all executive officers and directors have been deemed to be
affiliates. Such determination should not be deemed to be an admission that such
executive officers and directors are, in fact, affiliates of the Registrant.

Indicate the number of shares outstanding of each of the
registrants classes of common stock as of the latest practicable date.
49,940,011 as of March 28, 2011DOCUMENTS INCORPORATED BY
REFERENCE None.

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TABLE OF CONTENTS

|Item 1.  | Business                                                                                                                 | 4 
|-------- | ------------------------------------------------------------------------------------------------------------------------ | --
|Item 1A. | Risk Factors                                                                                                             | 14
|Item 1B. | Unresolved Staff Comments                                                                                                | 19
|Item 2.  | Properties                                                                                                               | 19
|Item 3.  | Legal Proceedings                                                                                                        | 19
|Item 4.  | Submission of Matters to a Vote of Security
      Holders                                                                | 20
|Item 5.  | Market for Registrants Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity
      Securities | 20
|Item 6.  | Selected Financial Data                                                                                                  | 21
|Item 7.  | Managements Discussion and Analysis of Financial Condition
      and Results of Operations                              | 22
|Item 7A. | Quantitative and Qualitative Disclosures About Market
      Risk                                                         | 32
|Item 8.  | Financial Statements and Supplementary Data                                                                              | 32
|Item 9.  | Changes in and Disagreements With Accountants on Accounting
      and Financial Disclosure                               | 33
|Item 9A. | Controls and Procedures                                                                                                  | 33
|Item 9B. | Other Information                                                                                                        | 34
|Item 10. | Directors, Executive Officers and Corporate
      Governance                                                             | 34
|Item 11. | Executive Compensation                                                                                                   | 39
|Item 12. | Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters                     | 43
|Item 13. | Certain Relationships and Related Transactions, and Director
      Independence                                          | 44
|Item 14. | Principal Accounting Fees and Services                                                                                   | 45
|Item 15. | Exhibits, Financial Statement Schedules                                                                                  | 46

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PART I

Item 1. Description of Business

Forward Looking Statements

This annual report contains forward-looking statements. These
statements relate to future events or our future financial performance. In some
cases, you can identify forward-looking statements by terminology such as may,
should, expects, plans, anticipates, believes, estimates,
predicts, potential or continue or the negative of these terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks in the
section entitled Risk Factors, that may cause our or our industrys actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by these forward-looking statements.

Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Except as required by
applicable law, including the securities laws of the United States, we do not
intend to update any of the forward-looking statements to conform these
statements to actual results.

Our financial statements are stated in United States Dollars
(US$) and are prepared in accordance with United States Generally Accepted
Accounting Principles.

In this annual report, unless otherwise specified, all dollar
amounts are expressed in United States dollars and all references to common
shares refer to the common shares in our capital stock.

Company History and Business

Alternet Systems, Inc. (the "Company"), was organized under the
laws of the State of Nevada on June 26, 2000, under the name North Pacific
Capital Corp. On June 26, 2000, the Company increased its authorized share
capital from 20,000 shares with no par value to 100,000,000 shares with a par
value of $0.00001. On December 20, 2001, the Company received shareholder
approval to change its name from North Pacific Capital Corp. to SchoolWeb
Systems Inc..

On April 26, 2002, the Company received shareholder approval to
change its name from SchoolWeb Systems Inc. to Alternet Systems, Inc. and in May
of 2002 this change of name was completed.

Alternet Systems, Inc. developed, markets and sells Internet
application software and systems, marketed under the names "SchoolWeb" and
HealthWeb.

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Each SchoolWeb system or software / hardware package is
comprised of the SchoolWeb virtual library software, Linux Operating System, a
network server, redundant file system, software configuration, SchoolWeb user
license, 24 hour technical support , on-site installation, training , system
maintenance and 5X9 on-site warranty.

A SchoolWeb system and software were sold to Burnaby School
District, near Vancouver, Canada. Burnaby School District placed an order for
SchoolWeb for installation in 52 schools. This installation was completed in
February of 2003.

SchoolWeb has been granted trademark rights in the Canada for
the trademark "SchoolWeb". The initial application was filed in Canada on March
30, 2001 and it was granted in March of 2003. The trademark is also registered
on the supplemental register in the United States, as the United States
trademark was applied for based on the Canadian trademark application. Once a
company has used a supplemental register mark in the United States for five
years, the company's mark is placed on the full register. In the meantime, its
rights in the United States are protected.

TekVoice Inc. Merger

Alternet Systems Inc.executed a
merger with TekVoice Communications, Inc. of Miami, Florida, on December 31, 2007. TekVoice is a telecommunications
services company with operations in North America and Latin America. The
combined entity is called Alternet Systems Inc. and its primary business is
delivering telecom services; education / healthcare application software and
content; and mobile transaction services to customers primarily located in Latin
America, North America and the Caribbean.

Alternet offers a portfolio of next-generation solutions for
government, business, schools, hospitals and residents in this region.

About TekVoice Communications Inc.

TekVoice Communications, Inc.is a Voice over IP
telecommunications company that since 2002, offers convergent voice and data
services over IP networks. With sales of over $3 million in both 2006 and 2007,
it has capitalized on its in-depth knowledge of the Hispanic and Latin American
market, the quality of its telecommunications network and the dramatic cost
savings that the network delivers to its customers. As a pioneer in the VOIP
industry, TekVoice has been at the leading edge in the design and deployment of
new products and services for the corporate and residential markets. TekVoice
Communications, Inc. is a U.S. corporation with offices in Miami, Florida.

On December 31, 2007, Alternet Systems, Inc. (the Company),
Fabio Alvino, Eduardo & Monica Bello, Henryk Dabrowski, Manfred Koroschetz,
New Market Technology, Inc., John Puente, Red Hawke, Inc. and Hector Rodriguez
(each, a Transferor and collectively, the Transferors) and TekVoice
Communications, Inc. (TekVoice) entered into and closed a Stock Acquisition
Agreement (the Agreement) pursuant to which the Company acquired all of the
issued and outstanding shares of capital stock of TekVoice from the Transferors
in consideration for an aggregate amount of four million (4,000,000) shares of
common stock of the Company (the Acquisition Shares).

---

2010 Focus on Mobile Financial Transactions and
Security

In late 2009 the Company incorporated two new subsidiaries to
offer services in the mobile value added services markets of mobile financial
transactions and security. These subsidiaries, Alternet Transaction Systems (dba
Utiba Americas, which is 49% owned by Utiba Pte, Ltd) and International Mobile
Security (IMS, which is 49% owned by General Services Holding LLC) were launched
within the fiscal year 2010. The creation of new lines of business was intended
to provide new revenue and profitability as a transition from international long
distance services and the educational content market.

Competition

The Company competes in two distinct technology sectors,
telecommunications and network systems. Although the Company has unique features
in its product offerings, it competes with companies that are better financed to
survive any adverse economic conditions.

Research and Development

The Company has spent an insignificant amount in research and
development expenditures over the last fiscal year.

Employees

Currently our only employees are our directors, officers, and
an office manager. We will continue to outsource contract employment as needed.

Item 1A. Risk Factors

The Company is exposed to a number of risks, including the
following:

- The Company may be unable to market and sell its software and
  telecommunications products;
- The Companys sales are minimal and its future prospects are dependent on
  the ability to market its products and services;
- The Company has a history of operating its software business at a
  significant loss;
- The Company requires additional equity financing to continue operations
  and may be unable to obtain this financing;
- If further equity financing is obtained, it will dilute the value of
  existing shareholders stock;
- The Company has limited working capital with which to continue operations;
  The telecom and software industries are extremely competitive and the Company
  faces competition from more established distributors and producers with
  greater financial resources and established sales and distribution
  capabilities;
- The Company has a significant number of shares outstanding which may be
  eligible for resale under Rule 144 and which, if sold, could depress the
  market price of the Companys shares;
- The profit margins in the telecom industry have been steadily eroding such
  that, even if it is able to make sales for its products, the Company may be
  unable to do so at a profitable margin.

---

Our business operations are also subject to a number of risks
and uncertainties, including, but not limited to those set forth below:

We have had negative cash flows from operations. If we are
unable to obtain financing in the amounts and on terms deemed acceptable to us,
we may be unable to continue our business and as a result may be required to
scale back or cease operations, the result of which would be that our
stockholders would lose some or all of their investment.

To date we have had negative cash flows from operations and we
have been dependent on sales of our equity securities and debt financing to meet
our cash. We do not expect positive cash flow from operations in the near term
and there is no assurance that actual cash requirements will not exceed our
estimates, or that our sales projections will be realized as estimated. The
occurrence of any of the aforementioned events could adversely affect our
ability to meet our business plans.

We will depend almost exclusively on outside capital to pay for
the continued development of our business. Such outside capital may include the
sale of additional stock and/or commercial borrowing. Capital may not continue
to be available to meet these continuing development costs or, if the capital is
available, that it will be on terms acceptable to us. The issuance of additional
equity securities by us would result in a significant dilution in the equity
interests of our current stockholders. Obtaining commercial loans, assuming
those loans would be available, will increase our liabilities and future cash
commitments.

A decline in the price of our common stock could affect our
ability to raise further working capital and adversely impact our operations.

A prolonged decline in the price of our common stock could
result in a reduction in the liquidity of our common stock and a reduction in
our ability to raise capital. Because our operations have been primarily
financed through the sale of equity securities, a decline in the price of our
common stock could be especially detrimental to our liquidity and our continued
operations. Any reduction in our ability to raise equity capital in the future
would force us to reallocate funds from other planned uses and would have a
significant negative effect on our business plans and operations, including our
ability to develop new products and continue our current operations. If our
stock price declines, we may not be able to raise additional capital or generate
funds from operations sufficient to meet our obligations.

---

We have a history of losses and fluctuating operating
results.

There is no assurance that we will operate profitably or will
generate positive cash flow in the future. In addition, our operating results in
the future may be subject to significant fluctuations due to many factors not
within our control, such as the unpredictability of when customers will purchase
our products and/or services, the size of customers purchases, the demand for
our production and/or services, and the level of competition and general
economic conditions. If we cannot generate positive cash flows in the future, or
raise sufficient financing to continue our normal operations, then we may be
forced to scale down or even close our operations.

We have a limited operating history and if we are not
successful in continuing to grow our business, we may have to scale back or even
cease our ongoing business operations.

We have limited history of revenues from operations and have
limited significant tangible assets. We have yet to generate positive earnings
and there can be no assurance that we will ever operate profitably. Our company
has a limited operating history and must be considered in the development stage.
Our companys operations will be subject to all the risks inherent in the
establishment of a developing enterprise and the uncertainties arising from the
absence of a significant operating history. We are in the development stage and
potential investors should be aware of the difficulties normally encountered by
enterprises in the development stage. If our business plan is not successful,
and we are not able to operate profitably, investors may lose some or all of
their investment in our company.

Trading of our stock may be restricted by the SEC's "Penny
Stock" regulations, which may limit a stockholder's ability to buy and sell our
stock.

The U.S. Securities and Exchange Commission has adopted
regulations which generally define "penny stock" to be any equity security that
has a market price (as defined) less than $5.00 per share or an exercise price
of less than $5.00 per share, subject to certain exceptions. Our securities are
covered by the penny stock rules, which impose additional sales practice
requirements on broker-dealers who sell to persons other than established
customers and "accredited investors." The term "accredited investor" refers
generally to institutions with assets in excess of $5,000,000 or individuals
with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or
$300,000 jointly with their spouse. The penny stock rules require a
broker-dealer, prior to a transaction in a penny stock not otherwise exempt from
the rules, to deliver a standardized risk disclosure document in a form prepared
by the SEC, which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. The bid and offer quotations, and the broker-dealer and
salesperson compensation information, must be given to the customer orally or in
writing prior to effecting the transaction and must be given to the customer in
writing before or with the customer's confirmation. In addition, the penny stock
rules require that prior to a transaction in a penny stock not otherwise exempt
from these rules, the broker-dealer must make a special written determination
that the penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our
securities and to find purchases for our securities. We believe that the penny
stock rules discourage investor interest in and limit the marketability of, our
common stock.

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The Financial Industry Regulatory Authority, or FINRA, has
adopted sales practice requirements which may also limit a stockholder's ability
to buy and sell our stock.

In addition to the "penny stock" rules described above, FINRA
has adopted rules that require that in recommending an investment to a customer,
a broker-dealer must have reasonable grounds for believing that the investment
is suitable for that customer. Prior to recommending speculative low priced
securities to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer's financial status,
tax status, investment objectives and other information. Under interpretations
of these rules, FINRA believes that there is a high probability that speculative
low priced securities will not be suitable for at least some customers. FINRA
requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy and sell our
stock and have an adverse effect on the market for our shares.

Trading in our common shares on the OTC Bulletin Board is
limited and sporadic making it difficult for our shareholders to sell their
shares or liquidate their investments.

Our common shares are currently listed for public trading on
the OTC Bulletin Board. The trading price of our common shares has been subject
to wide fluctuations. Trading prices of our common shares may fluctuate in
response to a number of factors, many of which will be beyond our control. The
stock market has generally experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance
of companies with no current business operation. There can be no assurance that
trading prices and price earnings ratios previously experienced by our common
shares will be matched or maintained. These broad market and industry factors
may adversely affect the market price of our common shares, regardless of our
operating performance.

In the past, following periods of volatility in the market
price of a company's securities, securities class-action litigation has often
been instituted. Such litigation, if instituted, could result in substantial
costs for us and a diversion of management's attention and resources.

Because of the early stage of development and the nature of
our business, our securities are considered highly speculative.

Our securities must be considered highly speculative, generally
because of the nature of our business and the early stage of its development.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Executive Offices

Our corporate headquarters are leased and are located at 2665
S. Bayshore Dr. Miami Florida, 33133. At the present time, we do not have any
real estate holdings and there are no plans to acquire any real property
interests.

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Item 3. Legal Proceedings

Other than as described below, management is not aware of any
legal proceedings (either presently engaged in or contemplated) by any
government authority or other party involving the Company, its properties or its
products.

On June 30, 2008, the Company filed an action in the Circuit
Court in and for Miami-Dade County, Florida against a customer seeking to
recover a total of $142,121 for services and loans provided. The Company is also
seeking to recover interest and attorneys' fees and costs. The likelihood of any
results from the above lawsuit is not determinable at this time, consequently
the company has made bad debt provisions for the entire amounts.

On October 16 2009 the Company received notice that they had
been named as Defendants in a lawsuit whereby the Plaintiffs are seeking a
judgement of $39,000 plus interest thereon from March 11 2009 for breach of
contract. The company had 30 days to respond to the notice before a default
judgment is awarded. As at December 31, 2010, no amounts have been accrued as
the likelihood of an unfavorable judgment is considered low.

On May 10, 2010, the Company received noticed that they had
been named as Defendants in a lawsuit whereby the Plaintiffs are seeking a
judgment of $6,889 including interest of $1,444 for unpaid invoices. The Company
had 30 days to respond to the notice before a default judgment is awarded. As at
December 31, 2010, the full amount has been accrued and is included in accounts
payable.

No directors, officers, or affiliate of the Company is (i) a
party adverse to the Company in any legal proceedings, or (ii) has an adverse
interest to the Company in any legal proceedings.

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

There were no matters submitted to a vote of our security
holders either through solicitation of proxies or otherwise in the fourth
quarter of the fiscal year ended December 31, 2010.

PART II

Item 5. Market for Common Equity and Related Stockholder
Matters

Market for Common Stock

The Companys securities trade on the NASDs OTCQB under the
symbol ALYI .

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The following table summarizes the high and low bid prices for
our common stock for the periods indicated as reported by the OTC Bulletin
Board:

|2010           |   | HIGH |  |   | LOW  | 
|-------------- | - | ---- |  | - | ---- | 
|               |   |      |  |   |      | 
|First Quarter  | $ | 0.15 |  | $ | 0.05 | 
|Second Quarter | $ | 0.14 |  | $ | 0.02 | 
|Third Quarter  | $ | 0.06 |  | $ | 0.03 | 
|Fourth Quarter | $ | 0.19 |  | $ | 0.06 | 

Holders of Common Stock

On December 31, 2010, there were 106 holders of record of our
common stock and there were 48,219,648 shares outstanding. There are 205
indirect holders of common shares in outside institutions or stock brokerage
firms, and we estimate that there are no additional beneficial shareholders
beyond the 106 registered shareholders and 205 non-registered shareholders at
December 31, 2010.

Dividend Policy

We have not paid any cash dividends on our common stock and
have no present intention of paying any dividends on the shares of our common
stock. Our current policy is to retain earnings, if any, for use in our
operations and in the development of our business. Our future dividend policy
will be determined from time to time by our board of directors.

Recent Sales of Unregistered Securities

Sales in 2010

During the year ended December 31, 2010, the Company issued
250,000 shares valued at $16,250 for services rendered during the year ended
December 31, 2009; 3,650,000 shares valued at $332,750 for services rendered
during the year ended December 31, 2010; 23,433,187 shares valued at $1,276,865
for debt settlement and convertible debenture agreements, and 633,691 shares
valued at $95,053 for share subscriptions previously received. As at December
31, 2010, the Company has $145,362 (December 31, 2009 - $225,415) in private
placement subscriptions which are reported as private placement subscriptions
within stockholders deficit.

Sales in 2009

During the year, a total of 512,500 shares valued at $45,000
were issued with respect to cash received and services rendered

---

Where the offerings described in Sales in 2010 and Sales in
2009 above were made to Canadian residents they were undertaken under
Regulation S and they were made under Rule 903 (Category 3, equity securities)
and:

- the sale was made in an offshore transaction;
- no directed selling efforts were made in the United States by the Company;
- the purchaser certified that it is not a US person and is not acquiring
  the securities for the account or benefit of any US person;
- the purchaser agreed to resell such securities only in accordance with the
  provisions of the Securities Act of 1933 or regulations applicable to their
  securities;
- the securities contained a legend to the effect that transfer was
  prohibited unless the securities were first registered under the Securities
  Act of 1933 or resale was made pursuant to an exemption therefrom.

No commission or professional fees were paid in connection with
the Company's sales of unregistered securities under Regulation S.

Where the sales were made to residents of the United States
under Regulation D each person to whom the sale was made was asked by the
Company to confirm in writing that they were accredited investors, as that term
is defined in the rules and regulations of the Securities Exchange Commission.

Neither we nor any person acting on our behalf offered or sold
the foregoing securities by means of any form of general solicitation or general
advertising. All purchasers represented in writing that they acquired the
securities for their own accounts. A resale legend has been provided for the
stock certificates stating that the securities have not been registered under
the Securities Act of 1933 and cannot be resold or otherwise transferred without
registration or an exemption (such as that provided by Regulation S or Rule
144).

Convertible Debenture Notes

On February 4, 2008, the Company issued a note payable in the
amount of $50,000. The note carries interest at a rate of 8% per quarter and is
due on May 4, 2008. If the note is not repaid on maturity or in any other event
of default, the holder is entitled to convert all or any portion of the original
principal face value of the note into shares of common stock of the Company at a
conversion value equal to 50% of the average market price of the Companys stock
for the 30 days prior to the date of conversion. As at December 31, 2010,
$122,360 of principal and accrued interest on this note was included in Due to
related parties.

On January 8, 2009, the Company issued a note payable in the
amount of $48,464. The note carries interest at the rate of 10% per annum and is
due on January 8, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the average market price of the
Companys stock for the 30 days prior to the date of conversion. As the loan had
not been repaid by the maturity date, the loan was extended and interest
continued to accrue. On April 22, 2010 the Company signed a Debt Settlement
Agreement with the creditor whereby the creditor agreed to receive shares in
lieu of payment of the outstanding balance. Under the terms of the Debt
Settlement Agreement, the creditor is entitled to receive common stock of the
Company at a conversion value equal to 50% of the average daily low price of the
Companys stock for the 20 days prior to the date of conversion. The holder may
not hold more than 4.99% of the outstanding common stock of the Company at any
point in time. During the year ended December 31, 2010, the creditor converted
$55,141 of debt into 2,542,782 common shares of the company resulting in a full
repayment of the loan.

---

On January 8, 2009, the Company issued a note payable in the
amount of $48,517. The note carries interest at the rate of 10% per annum and is
due on January 8, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the average market price of the
Companys stock for the 30 days prior to the date of conversion. As the loan had
not been repaid by the maturity date, the loan was extended and interest
continued to accrue. On April 22, 2010 the Company signed a Debt Settlement
Agreement with the creditor whereby the creditor agreed to receive shares in
lieu of payment of the outstanding balance. Under the terms of the Debt
Settlement Agreement, the creditor is entitled to receive common stock of the
Company at a conversion value equal to 50% of the average daily low price of the
Companys stock for the 20 days prior to the date of conversion. The holder may
not hold more than 4.99% of the outstanding common stock of the Company at any
point in time. During the year ended December 31, 2010, the creditor converted
$55,066 of debt into 1,180,846 common shares of the company resulting in a full
repayment of the loan.

On January 8, 2009, the Company issued a note payable in the
amount of $42,085. The note carries interest at the rate of 10% per annum and is
due on January 8, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the average market price of the
Companys stock for the 30 days prior to the date of conversion. On September
15, 2009, the balance outstanding on the note payable was agreed to be settled
prior to the conversion date and as such the corresponding derivative liability
was written off.

On December 18, 2009, the Company issued a note payable in the
amount of $100,000. The note carries interest at the rate of 12% per annum and
is due on March 18, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 80% of the average market price of the
Companys stock for the 30 days prior to the date of conversion. During the year
ended December 31, 2010, the creditor converted $50,640 of debt into 3,331,604
common shares of the company. As at December 31, 2010, $59,597 of principal and
accrued interest on this note was included in Other loans payable.

On December 18, 2009, the Company entered into a Debt
Settlement agreement whereby a creditor agreed to receive shares in lieu of
payment of a $152,916 promissory note. The holder is entitled to receive common
stock of the Company at a conversion value equal to 50% of the lowest closing
price of the Companys stock for the 10 days prior to the date of conversion.
The holder may not hold more than 4.99% of the outstanding common stock of the
Company at any point in time. During the year ended December 31, 2010, the
creditor converted $113,750 of debt into 4,457,699 common shares of the company.
As at December 31, 2010, $72,833 of principal and accrued interest on this note
was included in Other loans payable.

---

On March 8, 2010, the Company issued a note payable in the
amount of $25,000. The note carries interest at the rate of 12% per annum and is
due on April 8, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the lowest closing price of the
Companys stock for the 10 trading days immediately preceding and including the
date of conversion. As at December 31, 2010, $27,292 of principal and accrued
interest on this note was included in Other loans payable.

On April 14, 2010, the Company issued a note payable in the
amount of $15,000. The note carries interest at the rate of 10% per annum and is
due on May 18, 2010. If the note is not repaid on maturity or in any other event
of default, the holder is entitled to convert all or any portion of the original
principal face value of the note into shares of common stock of the Company at a
conversion value equal to 50% of the lowest closing price of the Companys stock
for the 10 trading days immediately preceding and including the date of
conversion. As at December 31, 2010, $16,310 of principal and accrued interest
on this note was included in Other loans payable.

On April 22, 2010, the Company entered into a Debt Settlement
agreement whereby a creditor agreed to receive shares in lieu of payment of a
$50,000 promissory note plus accrued interest calculated at 10% per annum. The
creditor is entitled to receive common stock of the Company at a conversion
value equal to 50% of the average daily low price of the Companys stock for the
20 days prior to the date of conversion. The holder may not hold more than 4.99%
of the outstanding common stock of the Company at any point in time. During the
year ended December 31, 2010, the creditor converted $51,874 of debt into
1,703,169 common shares of the company resulting in a full repayment of the
loan.

On April 30, 2010, the Company issued a note payable in the
amount of $100,000. The note carries interest at the rate of 10% per annum and
is due on July 30, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the lowest daily low price of the
Companys stock for the 10 trading days immediately preceding and including the
date of conversion. As at December 31, 2010, $106,833 of principal and accrued
interest on this note was included in Other loans payable.

On June 1, 2010, the Company entered into a Debt Settlement
agreement whereby a creditor agreed to receive shares in lieu of payment of a
$32,000 debt. The creditor is entitled to receive common stock of the Company at
a conversion value equal to 50% of the lowest daily low price of the Companys
stock for the 20 days prior to the date of conversion. The holder may not hold
more than 4.99% of the outstanding common stock of the Company at any point in
time. During the year ended December 31, 2010, the creditor converted $32,000 of
debt into 1,258,604 common shares of the company resulting in a full repayment
of the loan.

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The Company accounts for debt with embedded conversion features
and warrant issues in accordance with EITF 98-5: Accounting for convertible
securities with beneficial conversion features or contingency adjustable
conversion and EITF No. 00-27: Application of issue No 98-5 to certain
convertible instruments. Conversion features determined to be beneficial to the
holder are valued at fair value and recorded to additional paid in capital. The
Company determines the fair value to be ascribed to the detachable warrants
issued with the convertible debentures utilizing the Black-Scholesmethod. Any discount derived from determining the fair value to the
debenture conversion features and warrants is amortized to financing cost over
the life of the debenture. The unamortized costs if any, upon the conversion of
the warrants is expensed to financing cost on a pro rata basis over the life of
the warrant.

Debt issued with the variable conversion features are
considered to be embedded derivatives and are accountable in accordance with
FASB 133; Accounting for Derivative Instruments and Hedging Activities. The fair
value of the embedded derivative is recorded to derivative liability. This
liability is required to be marked each reporting period. The resulting discount
on the debt is amortized to interest expense over the life of the related
debt.

Other Loans

On October 22, 2007, the Company signed a Promissory Note
whereby the Company will repay a creditor $20,000 plus interest at 8% per annum
on November 22, 2007. As at December 31, 2010, $28,000 of principal and accrued
interest on this note was included in Other loans payable.

On September 15, 2010, the Company signed a Promissory Note
whereby the Company will repay a creditor $20,000 plus interest at 10% per annum
on October 15, 2010. The loan was repaid in full on November 5, 2010.

On September 17, 2010, the Company signed a Promissory Note
whereby the Company will repay a creditor $3,000 plus interest at 10% per annum
on October 31, 2010. If the Promissory Note is not repaid by the maturity date,
a $50 penalty will be assessed for each month the loan is outstanding after the
maturity date. The loan was repaid in full on November 5, 2010.

Recent Issuance of Non- Restricted Securities

Employee and Consultant Retainer Stock Plan  2008

The Company adopted a retainer stock plan on January 29 2008.
The 2008 Retainer Stock Plan authorizes the issuance of a maximum of 6,000,000
shares of our common stock granted to our or our subsidiarys employees or
directors and to consultants performing work for us or our subsidiary. All of
the shares issuable under the 2008 Retainer Stock Plan were registered under a
Registration Statement on Form S-8. To date, 5,998,542 common shares valued at
$431,631 relating to services provided have been awarded, leaving a balance of
1,458 shares which may be awarded under this plan.

During 2010, the Company issued restricted shares as
compensation to key management. Juan Cubides, CEO of International Mobile
Security Inc. received 1,000,000 shares, Luz Villanueva, CFO, received 1,000,000
shares and Erin Clancy received 250,000 shares, as part of 2010 compensation and
sign up bonuses.

---

Purchase of Equity Securities by the Issuer and
Affiliated Purchasers

We did not purchase any of our shares of common stock or other
securities during our fourth quarter of our fiscal year ended December 31, 2010.

Item 6. Selected Financial Data

As a smaller reporting company, we are not required to
provide the information required by this Item.

Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations

The following discussion should be read in conjunction with our
consolidated audited financial statements and the related notes that appear
elsewhere in this annual report. The following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the forward
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and elsewhere in this
annual report, particularly in the section entitled "Risk Factors.

Our consolidated audited financial statements are stated in
United States Dollars and are prepared in accordance with United States
Generally Accepted Accounting Principles.

Overview

Alternet Systems Inc. offers long-distance telecommunications
services, mobile transaction services and internet content management solutions
for the North and South American markets. In 2010, the company launched two
subsidiaries in the mobile value added services markets of mobile commerce and
mobile security.

Results of Operations:

Results of Operations are for the year ended December 31, 2010
compared to the year ended December 31, 2009.

The Companys results, on a consolidated basis, reflected its
own results consolidated with its subsidiary TekVoice Communications, Inc., and
newly incorporated subsidiaries, described below.For the remainder of this part,
the term Company refers to both the Company and its wholly owned and majority
owned subsidiaries.

On July 29, 2009 the Company incorporated Alternet Transactions
Systems, Inc. (ATS) in the State of Florida in partnership with Utiba PTE Ltd.
The Company owns 5,100 shares (51%) of the outstanding shares of ATS with Utiba
PTE Ltd. owning the remaining 4,900 (49%). ATS is doing business as Utiba
Americas.

---

On September 17, 2009 the Company incorporated International
Mobile Security, Inc. (IMS) in the State of Florida in partnership with
General Services Holdings, LLC. The Company owns 6,000 shares (60%) of the
outstanding shares of IMS with General Services Holdings, LLC. owning the
remaining 4,000 (40%).

Net Sales

For the year ending December 31, 2010, the Company had net
sales of $1,301,558. During the corresponding year ended December 31, 2009, the
Company had net sales of $277,551. The increase in sales is attributable to the
fact that the Company began to implement its mobile commerce strategy initially
selling licenses in Latin America, deemphasizing its Telecommunication Services
division.

The objective of the Companys marketing plan is to have two
distinct product divisions over the next twelve months: Mobile Financial
Transaction Services and Mobile Security.

Net Loss

For the year ending December 31, 2010, the Company had a net
loss of $2,847,011 or ($0.08) per share, which was an increase of 315% when
compared to the net loss for the corresponding year December 31, 2009 of
$685,896 or $(0.03) per share. The increased loss was due primarily to the
significant increase in financing costs and the costs associated with
implementing the companys strategy, as reflected by the increase in management
and consulting fees, professional fees, and salaries for the year ended December
31 2010 compared to the year ended December 31, 2009. Investor relations
expenses also contributed significantly to the higher net loss, due to the
expensing of $630,000 of deferred compensation originally recorded in 2008.

Selling, General and Administrative Expenses

For the year ended December 31 2010 the Company incurred office
and general expenses of $61,446, compared to the $32,550 incurred in the
previous year ending December 31 2009. Marketing expenses for the year ending
December 31 2010 increased to $89,092 from negative $2,230 for the year ending
December 31 2009. Investor relations costs were $734,478 for the year ending
December 31 2010, compared to $80,888 for the year ending 2009.

Management and consulting fees of $605,988 for the year ending
December 31 2010 compared to the management and consulting fees of $534,266
incurred in the year ending December 31 2009. Professional fees of $262,058 were
incurred in the period ending December 31 2010, an increase from the $61,657
incurred in the previous year ending December 31 2009. The increase in
management consulting expense for the year ended December 31 20109 is a result
of increased staffing levels compared to the corresponding year ending December
31, 2009.

---

Accounts payable were $1,003,828 at December 31 2010 compared to accounts payable of $171,638 at December 31 2009. Accounts receivable were $856,339 for the year ended December 31 2010 compared to $36,585 for the previous year ended
December 31 2009. Both items reflect the significant increase in business and sale activity in the year.

Interest and other expenses

The Companys bank charges and interest expense increased to $118,920 for year ended December 31, 2010 compared to $51,247 the previous year ended December 31, 2009. Financing costs of $1,096,670 for the year ending December 31,
2010 increased from $127,625 incurred in the year ended December 31, 2009 due to the increased number of convertible debentures issued by the Company during the year.

Liquidity and Capital Resources

As at December 31, 2010, the Company had $13,718 cash in the bank, shares subscriptions receivable of $4,000 and accounts receivable of $856,339. At December 31 2010, the Company had a working capital deficiency of $1,264,225. The
Company is currently pursuing financing to fund ongoing operations and to pay current debts. The Companys ability to continue as a going concern will be negatively affected if it is unsuccessful.

Plan of Operation

Over the next 12 months, the Company will be concentrating on supporting the sale of mobile financial transaction services and mobile and digital security software, and services through its subsidiaries Utiba Americas and International Mobile
Security (IMS). Targeted industries include telecommunications, public utilities, government and financial services,

Mobile Financial Transaction Services

In the year 2010 the Company launched its mobile financial and mobile commerce suite of services, which it offers in equity partnership with the leading mobile financial services software developer, Utiba. Utiba Americas enjoys exclusive rights to
the Utiba software platform for the Americas region, sold as a software license, or as a hosted service, also known as Software as a Service (SaaS).

Demand for our mobile financial transaction services is driven by the widespread adoption of mobile phone service and the existence of large segments of the global population which possess a mobile phone, but do not possess a bank account. The
global mobile commerce industry is in its early growth and adoption stages and several successful initiatives have been launched worldwide by our competitors. We believe that as wireless usage expands the demand for our services will grow.

Sales will come from organic growth of its existing operations; however, the Company may identify strategic acquisition targets in the course of business. Sales and marketing is accomplished through the Companys existing sales staff, who
contact potential clients directly, and through agent sales, trade shows and industry associations.

---

The Company continuously updates its marketing material,
including web presence and technical information. Particular focus will be
placed on its offerings within the mobile financial and mobile commerce
transaction products, targeting specific vertical industries, specifically the
telecom, financial, utilities and transportation sectors.

A structured plan has been defined to close and pursue
opportunities. The sales funnel includes projects in Colombia, Ecuador, Bolivia,
Guatemala, Panama, Mexico, Brasil, Costa Rica, El Salvador, Honduras, Venezuela,
Guyana, Haiti, Dominican Republic and the United States.

Digital and Mobile Security Software and Services

Newly launched subsidiary International Mobile Security (IMS)
has finalized the acquisition of proprietary technology in early 2011 and
intends to grow sales of software and security products in the global market
segments of law enforcement, corporate and consumer sales. Sales efforts will be
conducted in house and through value added resellers. Drivers of demand include
smart phones and the newly arrived mobile tablet computers.

Although the Company believes that demand exists for its
products and services, there can be no assurance that sales will increase in the
future. The Company is expected to remain dependent upon debt or equity
financing unless revenues from operations grow significantly.

Funds Required For the Next 12 Months of Operations

Based on the staffing required to properly address market
demand and service customers the Company anticipates the following for monthly
cash expenses in the next 12 months (excluding the cost of any share issuances
which may be made pursuant to management agreements between the Company and
senior management):

Wages/Salaries/Management Fees:
    $
    300,000Product Development/Intellectual Property:
    $
    50,000Travel
    $
    35,000Advertising & Marketing
    $
    25,000Professional Fees
    $
    30,000General & Administrative
    $
    70,000Total Monthly Expenses:
    $
    510,000


Critical Accounting Policies

The discussion and analysis of our financial condition and
results of operations are based upon our financial statements, which have been
prepared in accordance with the accounting principles generally accepted in the
United States of America. Preparing financial statements requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. These estimates and assumptions are affected
by managements application of accounting policies. We believe that
understanding the basis and nature of the estimates and assumptions involved
with the following aspects of our financial statements is critical to an
understanding of our financial statements.

---

Basis of Presentation and Consolidation

These consolidated financial statements and related notes are
presented in accordance with accounting principles generally accepted in the
United States, and are expressed in United States dollars. Our company has
produced significant revenue from its principal business and in fiscal years
prior to December 31, 2008 was considered an Exploration Stage Company, as
defined by Statement of Financial Accounting Standard (SFAS) No. 7 Accounting
and Reporting for Development Stage Enterprises. These financial statements
include the accounts of the Company and its wholly owned and majority owned
subsidiaries. Our fiscal year-end is December 31.

Use of Estimates

The preparation of financial statements in conformity with U.S.
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. Our company regularly evaluates estimates and assumptions. Our
company bases its estimates and assumptions on current facts, historical
experience and various other factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and the accrual of costs and
expenses that are not readily apparent from other sources. The actual results
experienced by our company may differ materially and adversely from our
companys estimates. To the extent there are material differences between the
estimates and the actual results, future results of operations will be affected.

Foreign Currency Translation

Our companys and its United States subsidiaries functional
and reporting currency is the United States dollar. The functional currency of
our companys Canadian subsidiary is the Canadian dollar. The financial
statements of the subsidiary are translated to United States dollars in
accordance with SFAS No. 52  Foreign Currency Translation using
period-end rates of exchange for assets and liabilities, and average rates of
exchange for the period for revenues and expenses. Translation gains (losses)
are recorded in accumulated other comprehensive income as a component of
stockholders equity. Foreign currency transaction gains and losses are included
in current operations. Gains and losses arising on translation or settlement of
foreign currency denominated transactions or balances are included in the
determination of income. Foreign currency transactions are primarily undertaken
in Canadian dollars. Our company has not, to the date of these financials
statements, entered into derivative instruments to offset the impact of foreign
currency fluctuations.

Long-Lived Assets

In accordance with SFAS No. 144,  Accounting for the
Impairment or Disposal of Long-Lived Assets", the carrying value of
intangible assets and other long-lived assets is reviewed on a regular basis for
the existence of facts or circumstances that may suggest impairment. Our company
recognizes impairment when the sum of the expected undiscounted future cash
flows is less than the carrying amount of the asset. Impairment losses, if any,
are measured as the excess of the carrying amount of the asset over its
estimated fair value.

---

Loss Per Share

Our company computes net loss per share in accordance with SFAS
No. 128 " Earnings per Share" which requires presentation of both basic
and diluted earnings per share (EPS) on the face of the statement of operations.
Basic EPS is computed by dividing net loss available to common shareholders by
the weighted average number of shares outstanding during the period. Diluted EPS
gives effect to all dilutive potential common shares outstanding during the
period including convertible debt, stock options, and warrants, using the
treasury stock method. Diluted EPS excludes all dilutive potential shares if
their effect is anti dilutive. Diluted loss per share figures are equal to those
of basic loss per share for each period since the effects of convertible debt,
stock options and warrants have been excluded as they are anti-dilutive.

Other Comprehensive Income (Loss)

SFAS No. 130,  Reporting Comprehensive Income,
establishes standards for the reporting and display of comprehensive loss and
its components in the financial statements.

Financial Instruments

The carrying value of our companys financial instruments,
consisting of cash and cash equivalents, restricted cash, receivables, and
accounts payable and accrued liabilities, approximate fair value due to the
relatively short maturity of these instruments.

Income Taxes

Our company follows the liability method of accounting for
income taxes as set forth in SFAS No. 109,  Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
balances. Deferred tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply to the taxable income in the
years in which those differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or
substantive enactment.

Debt Issue Costs

In accordance with the Accounting Principles Board Opinion 21 
Interest on Receivables and Payables, our company recognizes debt issue
costs on the balance sheet as deferred charges, and amortizes the balance over
the term of the related debt. Our company follows the guidance in the EITF 95-13
 Classification of Debt Issue Costs in the Statement of Cash Flows and
classifies cash payments for debt issue costs as a financing activity.

---

Recent Accounting Pronouncements

In May 2009, the FASB issued SFAS No.165, Subsequent Events,which is effective for interim or annual financial statements issued after
June 15, 2009. This statement requires the Company to disclose the period for
which subsequent events have been reported and clarifies when subsequent events
should be disclosed. This standard did not effect the Companys reported
financial position or results of operations.

In June 2009, the FASB issued SFAS No.166, Accounting for
Transfers of Financial Assets,which is effective for financial statements
issued for fiscal years beginning after November 15, 2009. This statement amends
SFAS No.140, Accounting for Transfers and Servicing of Financial Assets and
extinguishments of Liabilities,by removing the concept of special purpose
entity from SFAS No.140. This statement also clarifies the objective of
paragraph 9 of SFAS No.140 which is to determine whether a transferor and all of
the entities included in the transferors financial statements being presented
have surrendered control of transferred financial assets. This standard is not
expected to have a significant effect on the Companys reported financial
position or results of operations

In June 2009, the FASB issued SFAS No.167, Amendments to
FASB Interpretation No.46(R),which is effective for financial statements
issued for fiscal years beginning after November 15, 2009. This statement amends
FASB Interpretation No.46(R), Consolidation of Variable Interest Entities,by requiring an entity to perform an analysis to determine whether the
entitys variable interest or interest give it a controlling financial interest
in a variable interest entity. This standard is not expected to have a
significant effect on the Companys reported financial position or results of
operations

In June 2009, the FASB issued SFAS No.168, The FASB
Accounting Standards Codification andthe Hierarchy of Generally Accepted
Accounting Principles,which replaces SFAS 162 and is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. This statement identifies the sources of accounting
principles and framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United States,
the GAAP hierarchy. This standard did not affect the Companys reported
financial position or results of operations..

In January 2010, the FASB issued ASU 2010-01, Accounting for
Distributions to Shareholders with Components of Stock and Cash,which is
effective for financial statements issued for interim and annual periods ending
after December 15, 2009. This update identifies how companies should be
reporting distributions to shareholders that offers them the ability to elect to
receive the distribution in cash or an equivalent number of shares. It was
determined that all distributions of shares relating to these payments should be
recorded as new share issuances. This standard did not affect the Companys
reported financial position or results of operations.

In January 2010, the FASB issued ASU 2010-02, Consolidation,which replaces SFAS No. 160 and is effective for financial statements issued
for interim and annual periods ending after December 15, 2009. This update
establishes the accounting and reporting guidance for non-controlling interest
and changes in ownership interests of a subsidiary. This standard is not
expected to have a significant effect on the Companys reported financial
position or results of operations. This standard did not affect the Companys
reported financial position or results of operations.

---

In January 2010, the FASB issued ASU 2010-06, Fair Value
Measurements and Disclosures,which replaces SFAS No. 157 and is effective
for financial statements issued for interim and annual periods ending after
December 15, 2009 except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward activity in Level 3 fair value measurements
which are effective for financial statements issued for fiscal years ending
after December 15, 2010 and interim periods commencing December 16, 2009. This
update identifies new disclosure requirements relating to fair value
measurements. This standard did not affect the Companys reported financial
position or results of operations.

In February 2010, the FASB issued ASU 2010-09, Subsequent
Events,which is effective for financial statements issued for interim and
annual periods ending after June 15, 2010. This update addresses both the
interaction of the requirements of Topic 855 with the SECs reporting
requirements and the intended breadth of the reissuance disclosure provision
related to subsequent events. This standard is not expected to have a
significant effect on the Companys reported financial position or results of
operations.

In March 2010, the FASB issued ASU 2010-11, Derivatives and
Hedging (Topic 815),which is effective for financial statements issued at
the beginning of the entitys first fiscal quarter beginning after June 15,
2010. This update provides amendments to Subtopic 815-15, Derivatives and
Hedging  Embedded Derivatives, such as clarification of the scope exception for
embedded credit derivative features related to the transfer of credit risk in
the form of subordination of one financial instrument to another and whether
those derivatives are subject to potential bifurcation. This standard is not
expected to have a significant effect on the Companys reported financial
position or results of operations.

In April 2010, the FASB issued ASU 2010-13, Compensation 
Stock Compensation (Topic 718),which is effective for financial statements
issued for interim and annual periods beginning on or after December 15, 2010.
This update addresses the classification of an employee share-based payment
award with an exercise price denominated in a currency that differs from the
functional currency of the employer entity or payroll currency of the employee.
This standard is not expected to have an effect on the Companys reported
financial position or results of operations.

In April 2010, the FASB issued ASU 2010-17, Revenue
Recognition  Milestone Method (Topic 605),which is effective on a
prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010. This update provides
guidance on defining a milestone and determining when it may be appropriate to
apply the milestone method of revenue recognition for research and development
transactions. This standard did not have an effect on the Companys reported
financial position or results of operations.

---

In April 2010, the FASB issued ASU 2010-18, Receivables (Topic 310),which is effective on a prospective basis for modifications of loans accounted for within pools occurring in the first interim or annual period ending on or after July 15,
2010. This update provides guidance on accounting for acquired loans that have evidence of credit deterioration upon acquisition. This standard did not have an effect on the Companys reported financial position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Receivables (Topic 310),which for public entities, the disclosures as of the end of a reporting period are effective in financial statements issued for interim and annual periods ending on or after
December 15, 2010 and for disclosures about activities that occur during a period are effective for interim and annual periods beginning on or after December 15, 2010. This update provides guidance on increasing transparency about an entitys
allowance for credit losses and the credit quality of its financing receivables.  This standard did not have an effect on the Companys reported financial position or results of operations.

In December 2010, the FASB issued ASU 2010-28, Intangibles  Goodwill and Other (Topic 350),which is effective for financial statements issued for interim and annual periods beginning on or after December 15, 2010. This update modifies
Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. This standard is not expected to have an effect on the Companys reported financial position or results of operations.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 850),which is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2010. This update provides guidance on the pro forma revenue and earnings disclosure requirements for business combinations.  This standard is not expected to have an effect on the Companys reported financial
position or results of operations.

In January 2011, the FASB issued ASU 2011-01, Receivables (Topic 310),which is effective upon issuance.  This update defers the effective date of the disclosures required under ASU 2010-20 to be concurrent with the effective date of the
guidance for determining what constitutes a troubled debt restricting as presented in proposed ASU update: Receivables (Topic 310) Clarifications to Accounting for Troubled Debt Restructurings by Creditors. This standard did not have an
effect on the Companys reported financial position or results of operations.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide the information required by this Item.

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Item 8. Financial Statements and Supplementary Data



ALTERNET SYSTEMS INC.(A Development Stage
      Company)CONSOLIDATED FINANCIAL STATEMENTSDECEMBER
  31, 2010

****

****



|CONSOLIDATED BALANCE SHEETS               
|------------------------------------------
|                                          
|CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                          
|CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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|Hamilton PC                  
|-----------------------------
|                             
|2121 S. Oneida St., Suite 312
|Denver, CO 80224             
|P: (303) 548-8072            
|F: (888) 466-4216            
|ed@hamiltonpccpa.com         

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

The Board of Directors and StockholdersAlternet Systems
Inc.Miami, Florida

We have audited the accompanying consolidated balance sheets of
Alternet Systems Inc. as of December 31, 2010 and 2009, and the related
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 audit.

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

In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Alternet
Systems Inc. as of December 31, 2010 and 2009, and the result of its operations
and its cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.

The accompanying financial statements have been prepared
assuming that Alternet Systems Inc. will continue as a going concern. As
discussed in Note 1 to the financial statements, Alternet Systems Inc suffered
recurring losses from operations which raises substantial doubt about its
ability to continue as a going concern. Management's plans regarding those
matters also are described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

Hamilton, PC

/s/ Hamilton, PC

Denver, Colorado March 30, 2011

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|CONSOLIDATED BALANCE SHEETS                  
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

|                                               |   | 2010       |   |   | 2009       |  
|---------------------------------------------- | - | ---------- | - | - | ---------- | -
|ASSETS                                         |   |            |   |   |            |  
|                                               |   |            |   |   |            |  
|Current Assets                                 |   |            |   |   |            |  
|                                               |   |            |   |   |            |  
|Cash                                           | $ | 13,718     |   | $ | 17,854     |  
|Accounts receivable                            |   | 856,339    |   |   | 36,585     |  
|Share
      subscriptions receivable           |   | 4,000      |   |   | 8,900      |  
|Prepaids and deposits                          |   | 218,832    |   |   | -          |  
|Deferred
      financing costs                 |   | -          |   |   | 30,920     |  
|Total Current Assets                           |   | 1,092,889  |   |   | 94,259     |  
|                                               |   |            |   |   |            |  
|Fixed Assets (Note 3)                          |   | 2,544      |   |   | 4,592      |  
|                                               |   |            |   |   |            |  
|TOTAL ASSETS                                   | $ | 1,095,433  |   | $ | 98,851     |  
|                                               |   |            |   |   |            |  
|                                               |   |            |   |   |            |  
|LIABILITIES                                    |   |            |   |   |            |  
|                                               |   |            |   |   |            |  
|Current Liabilities                            |   |            |   |   |            |  
|Accounts payable and
      accrued charges     |   | 1,003,828  |   |   | 171,638    |  
|Wages
      payable                            |   | 396,156    |   |   | 735,715    |  
|Accrued taxes                                  |   | 224,324    |   |   | 81,739     |  
|Customer
      deposits (Note 2)               |   | 144,000    |   |   | -          |  
|Deferred income (Note 2)                       |   | 142,312    |   |   | -          |  
|Other
      loans payable (Note 4)             |   | 313,313    |   |   | 359,397    |  
|Due to related parties
      (Note 4 and 6)    |   | 133,181    |   |   | 82,916     |  
|Derivative liability                           |   | -          |   |   | 71,879     |  
|TOTAL LIABILITIES                              |   | 2,357,114  |   |   | 1,503,284  |  
|                                               |   |            |   |   |            |  
|                                               |   |            |   |   |            |  
|STOCKHOLDERS' DEFICIENCY                       |   |            |   |   |            |  
|Capital Stock (Note 5)                         |   | 483        |   |   | 202        |  
|Additional paid-in capital                     |   | 7,860,223  |   |   | 5,257,695  |  
|Private placement
      subscriptions          |   | 145,362    |   |   | 225,415    |  
|Obligation to issue shares                     |   | 108,000    |   |   | 83,196     |  
|Deferred compensation
      (Note 7)           |   | (79,832    | ) |   | (645,181   | )
|Deficit                                        |   | (9,181,753 | ) |   | (6,334,660 | )
|                                               |   | (1,147,517 | ) |   | (1,413,333 | )
|Non-controlling interest                       |   | (114,164   | ) |   | 8,900      |  
|TOTAL STOCKHOLDERS' DEFICIENCY                 |   | (1,261,681 | ) |   | (1,404,433 | )
|                                               |   |            |   |   |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY | $ | 1,095,433  |   | $ | 98,851     |  

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

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|CONSOLIDATED STATEMENTS OF OPERATIONS        
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

|                                                                  |   | 2010       |   |   | 2009       |  
|----------------------------------------------------------------- | - | ---------- | - | - | ---------- | -
|REVENUE                                                           |   |            |   |   |            |  
|Sales                                                             | $ | 1,711,163  |   | $ | 277,551    |  
|Sales
      discounts                                             |   | (409,605   | ) |   | -          |  
|TOTAL REVENUE                                                     |   | 1,301,558  |   |   | 277,551    |  
|COST OF SALES                                                     |   |            |   |   |            |  
|Direct Cost of Sales                                              |   | 838,794    |   |   | 81,527     |  
|GROSS PROFIT                                                      |   | 462,764    |   |   | 196,024    |  
|                                                                  |   |            |   |   |            |  
|OPERATING EXPENSES                                                |   |            |   |   |            |  
|Bad Debt                                                          |   | 21,055     |   |   | 13,894     |  
|Bank
      Charges and Interest                                   |   | 118,920    |   |   | 51,247     |  
|Depreciation and
      Amortization                               |   | 1,008      |   |   | 2,148      |  
|Investor
      Relations                                          |   | 734,478    |   |   | 80,888     |  
|License Fees                                                      |   | 1,163      |   |   | 299        |  
|Management and Consulting                                         |   | 605,988    |   |   | 534,266    |  
|Marketing                                                         |   | 89,092     |   |   | (2,230     | )
|Office
      and General                                          |   | 61,446     |   |   | 32,550     |  
|Professional fees                                                 |   | 262,058    |   |   | 61,657     |  
|Rent                                                              |   | 49,318     |   |   | 26,574     |  
|Salaries                                                          |   | 411,033    |   |   | 254,032    |  
|Telephone
      and Utilities                                     |   | 14,553     |   |   | 6,110      |  
|Travel                                                            |   | 88,686     |   |   | 16,154     |  
|TOTAL OPERATING EXPENSES                                          |   | 2,458,798  |   |   | 1,077,589  |  
|                                                                  |   |            |   |   |            |  
|NET LOSS BEFORE OTHER ITEMS                                       |   | (1,996,034 | ) |   | (881,565   | )
|                                                                  |   |            |   |   |            |  
|OTHER ITEMS                                                       |   |            |   |   |            |  
|Customer fees                                                     |   | 403        |   |   | 4,827      |  
|Other
      income/(expense)                                      |   | -          |   |   | (6,922     | )
|Loss on disposal of
      assets                                  |   | (1,411     | ) |   | -          |  
|Gain on
      sale of investment                                  |   | -          |   |   | 196,628    |  
|Gain on debt settlement                                           |   | 440,468    |   |   | 35,237     |  
|Financing
      Costs                                             |   | (1,096,670 | ) |   | (127,625   | )
|Forgiveness and
      adjustment of old accounts payable          |   | 83,833     |   |   | -          |  
|Increase
      (decrease) in derivative liability                 |   | (400,664   | ) |   | 93,524     |  
|                                                                  |   | (974,041   | ) |   | 195,669    |  
|                                                                  |   |            |   |   |            |  
|NET LOSS BEFORE NON-CONTROLLING INTEREST                          | $ | (2,970,075 | ) | $ | (685,896   | )
|                                                                  |   |            |   |   |            |  
|NON-CONTROLLING INTEREST                                          |   | (123,064   | ) |   | -          |  
|                                                                  |   |            |   |   |            |  
|NET LOSS ATTRIBUTABLE TO ALTERNET SYSTEMS INC.
      FOR THE YEAR | $ | (2,847,011 | ) | $ | (685,896   | )
|                                                                  |   |            |   |   |            |  
|BASIC NET LOSS PER SHARE                                          | $ | (0.08      | ) | $ | (0.03      | )
|                                                                  |   |            |   |   |            |  
|WEIGHTED COMMON SHARES OUTSTANDING                                |   | 35,046,924 |   |   | 20,100,921 |  

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

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|CONSOLIDATED STATEMENT OF CASH FLOWS         
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

|                                                                     |   | 2010       |   |   | 2009     |  
|-------------------------------------------------------------------- | - | ---------- | - | - | -------- | -
|                                                                     |   |            |   |   |          |  
|OPERATING ACTIVITIES                                                 |   |            |   |   |          |  
|Net Loss From Operations
      Attributable to Alternet Systems Inc. | $ | (2,847,011 | ) | $ | (685,896 | )
|Non-controlling interest                                             |   | (123,064   | ) |   | -        |  
|Add: Items Not Affecting
      Cash                                  |   |            |   |   |          |  
|Depreciation                                                         |   | 1,008      |   |   | 2,148    |  
|Shares for services                                                  |   | 440,750    |   |   | 36,250   |  
|Reversal of shares for services                                      |   | (40,000    | ) |   | (50,000  | )
|Shares for debt                                                      |   | 1,249,919  |   |   | 26,946   |  
|Loss on disposal of assets                                           |   | 1,411      |   |   | -        |  
|Deferred compensation                                                |   | 565,349    |   |   | 226,962  |  
|Gain on sale of investment                                           |   | -          |   |   | 196,628  |  
|Gain on debt settlement                                              |   | (440,468   | ) |   | -        |  
|Value of debt for share conversion
      features                    |   | 881,891    |   |   | -        |  
|Changes In Non-Cash
      Working Capital:                           |   |            |   |   |          |  
|Accounts receivable                                                  |   | (819,754   | ) |   | (14,070  | )
|Share subscriptions receivable                                       |   | 4,900      |   |   | (8,900   | )
|Prepaids and deposit                                                 |   | (218,832   | ) |   | 10,169   |  
|Accounts payable and accrued charges                                 |   | 832,190    |   |   | 618,896  |  
|Wages payable                                                        |   | (339,559   | ) |   | -        |  
|Accrued taxes                                                        |   | 142,585    |   |   | 19,760   |  
|Customer deposits                                                    |   | 144,000    |   |   | -        |  
|Deferred income                                                      |   | 142,312    |   |   | -        |  
|Due to related parties                                               |   | 50,265     |   |   | (615,414 | )
|                                                                     |   | (372,108   | ) |   | (236,521 | )
|                                                                     |   |            |   |   |          |  
|INVESTING ACTIVITIES                                                 |   |            |   |   |          |  
|Acquisition of fixed assets                                          |   | (371       | ) |   | (283     | )
|                                                                     |   |            |   |   |          |  
|FINANCING ACTIVITIES                                                 |   |            |   |   |          |  
|Change in loans payable                                              |   | 394,384    |   |   | 180,159  |  
|Derivative liability                                                 |   | (71,879    | ) |   | 71,879   |  
|Deferred financing costs                                             |   | 30,920     |   |   | (30,920  | )
|Net
      proceeds on sale of common stock and subscriptions         |   | 15,000     |   |   | 25,000   |  
|Minority shares issued                                               |   | -          |   |   | 8,900    |  
|                                                                     |   | 368,425    |   |   | 255,018  |  
|                                                                     |   |            |   |   |          |  
|OTHER COMPREHENSIVE INCOME                                           |   | (82        | ) |   | (4,686   | )
|                                                                     |   |            |   |   |          |  
|NET CHANGE IN CASH DURING THE YEAR                                   |   | (4,136     | ) |   | 13,528   |  
|                                                                     |   |            |   |   |          |  
|CASH, BEGINNING OF YEAR                                              |   | 17,854     |   |   | 4,326    |  
|                                                                     |   |            |   |   |          |  
|CASH, END OF YEAR                                                    | $ | 13,718     |   | $ | 17,854   |  

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

---

|ALTERNET SYSTEMS INC.                                                  
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                         
|                                                                       
|For the Period
      from May 16, 2002 (Inception) to December 31, 2010
|                                                                       

|                                                                                    |  |           |  |        |  | Additional |  |           |   |          |   | Private       |  |             |   |              |  | Obligation |  | Other         |  | Non-        |  |          |  
|----------------------------------------------------------------------------------- |  | --------- |  | ------ |  | ---------- |  | --------- | - | -------- | - | ------------- |  | ----------- | - | ------------ |  | ---------- |  | ------------- |  | ----------- |  | -------- | -
|                                                                                    |  |           |  | Common |  | Paid in    |  | Treasury  |   | Treasury |   | Placement     |  | Accumulated |   | Deferred     |  | To Issue   |  | Comprehensive |  | controlling |  |          |  
|                                                                                    |  | Shares    |  | Stock  |  | Capital    |  | Shares    |   | Stock    |   | Subscriptions |  | Deficit     |   | Compensation |  | Shares     |  | Income        |  | Interest    |  | Total    |  
|Balance May 16, 2002                                                                |  | -         |  | -      |  | -          |  | -         |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | -        |  
|Issuance of common stock for cash at $0.223 per
      share - May 17, 2002          |  | 448,400   |  | 448    |  | 99,552     |  | -         |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 100,000  |  
|Issuance of common stock for
      services at $0.223 per share - December 31, 2002 |  | 2,394,854 |  | 2,396  |  | 531,684    |  | -         |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 534,080  |  
|Issuance of common stock for cash at $0.223 per
      share - December 31, 2002     |  | 156,776   |  | 157    |  | 34,805     |  | -         |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 34,962   |  
|Net Loss for the year                                                               |  | -         |  | -      |  | -          |  | -         |   | -        |   | -             |  | (88,038     | ) | -            |  | -          |  | -             |  | -           |  | (88,038  | )
|Balance December 31, 2002                                                           |  | 3,000,030 |  | 3,001  |  | 666,041    |  | -         |   | -        |   | -             |  | (88,038     | ) | -            |  | -          |  | -             |  | -           |  | 581,004  |  
|Net Loss for the year                                                               |  | -         |  | -      |  | -          |  | -         |   | -        |   | -             |  | (387,426    | ) | -            |  | -          |  | -             |  | -           |  | (387,426 | )
|Balance December 31, 2003                                                           |  | 3,000,030 |  | 3,001  |  | 666,041    |  | -         |   | -        |   | -             |  | (475,464    | ) | -            |  | -          |  | -             |  | -           |  | 193,578  |  
|Issuance of common stock for cash at
      $0.31 per share - April 30, 2004         |  | 363,669   |  | 364    |  | 112,256    |  | -         |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 112,620  |  
|Issuance of common stock for services at $0.31 per
      share - April 30, 2004     |  | 475,914   |  | 475    |  | 146,905    |  | -         |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 147,380  |  
|Redemption of shares                                                                |  | -         |  | -      |  | -          |  | 1,615,445 |   | 360,260  |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | (360,260 | )
|Issuance of common stock at $0.42 per share                                         |  | -         |  | -      |  | 148,698    |  | (762,122  | ) | (167,668 | ) | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 316,366  |  
|Issuance of common stock for
      acquisition at $0.50 per share - June 30, 2004   |  | -         |  | -      |  | 115,321    |  | (411,268  | ) | (90,479  | ) | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 205,800  |  
|Issuance of common stock for services at $0.50 per
      share - June 30, 2004      |  | -         |  | -      |  | 28,018     |  | (99,919   | ) | (21,982  | ) | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 50,000   |  

The accompanying notes are an integral part of these financial
statements

---

|ALTERNET SYSTEMS INC.                                                  
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                         
|                                                                       
|For the Period
      from May 16, 2002 (Inception) to December 31, 2010
|                                                                       

|                                                                                    |  |           |  |        |  | Additional |  |          |   |          |   | Private       |  |             |   |              |  | Obligation |  | Other         |  | Non-        |  |            |  
|----------------------------------------------------------------------------------- |  | --------- |  | ------ |  | ---------- |  | -------- | - | -------- | - | ------------- |  | ----------- | - | ------------ |  | ---------- |  | ------------- |  | ----------- |  | ---------- | -
|                                                                                    |  |           |  | Common |  | Paid in    |  | Treasury |   | Treasury |   | Placement     |  | Accumulated |   | Deferred     |  | To Issue   |  | Comprehensive |  | controlling |  |            |  
|                                                                                    |  | Shares    |  | Stock  |  | Capital    |  | Shares   |   | Stock    |   | Subscriptions |  | Deficit     |   | Compensation |  | Shares     |  | Income        |  | Interest    |  | Total      |  
|Issuance of common stock for cash at
      $0.60 per share - September 30, 2004     |  | 33,516    |  | 34     |  | 76,917     |  | (154,988 | ) | (36,299  | ) | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 113,250    |  
|Issuance of common stock for Services at $0.60 per share -
      September 30, 2004 |  | 40,471    |  | 40     |  | 92,878     |  | (187,148 | ) | (43,832  | ) | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 136,750    |  
|Issuance of common stock for cash at
      $0.50 per share - September 30, 2004     |  | 204,834   |  | 205    |  | 102,295    |  | -        |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 102,500    |  
|Issuance of common stock for services at $0.50 per
      share - September 30, 2004 |  | 644,600   |  | 644    |  | 321,856    |  | -        |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 322,500    |  
|Issuance of common stock for cash at
      $0.48 per share - October 1, 2004        |  | 413,956   |  | 414    |  | 199,586    |  | -        |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 200,000    |  
|Issuance of common stock for services at $0.48 per
      share - October 1, 2004    |  | 150,000   |  | 150    |  | 71,850     |  | -        |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 72,000     |  
|Net Loss for the year                                                               |  | -         |  | -      |  | -          |  | -        |   | -        |   | -             |  | (1,619,425  | ) | -            |  | -          |  | -             |  | -           |  | (1,619,425 | )
|Balance December 31, 2004                                                           |  | 5,326,990 |  | 5,327  |  | 2,082,621  |  | -        |   | -        |   | -             |  | (2,094,889  | ) | -            |  | -          |  | -             |  | -           |  | (6,941     | )
|Issuance of common stock for cash at $0.48 per
      share - June 30, 2005          |  | 357,477   |  | 357    |  | 172,304    |  | -        |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 172,661    |  
|Issuance of common stock for services at $0.48 per share - June
      30, 2005      |  | 1,137,880 |  | 1,138  |  | 548,201    |  | -        |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 549,339    |  
|Issuance of common stock for
      acquisition at $0.48 per share - June 30, 2005   |  | 425,961   |  | 426    |  | 205,374    |  | -        |   | -        |   | -             |  | -           |   | -            |  | -          |  | -             |  | -           |  | 205,800    |  
|Net Loss for the year                                                               |  | -         |  | -      |  | -          |  | -        |   | -        |   | -             |  | (837,842    | ) | -            |  | -          |  | -             |  | -           |  | (837,842   | )
|Balance December 31, 2005                                                           |  | 7,248,308 |  | 7,248  |  | 3,008,500  |  | -        |   | -        |   | -             |  | (2,932,731  | ) | -            |  | -          |  | -             |  | -           |  | 83,017     |  

The accompanying notes are an integral part of these financial
statements

---

|ALTERNET SYSTEMS INC.                                                  
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                         
|                                                                       
|For the Period
      from May 16, 2002 (Inception) to December 31, 2010
|                                                                       

|                                                                               |  |            |   |        |   | Additional |   |          |  |          |  | Private       |  |             |   |              |   | Obligation |  | Other         |   | Non-        |  |          |  
|------------------------------------------------------------------------------ |  | ---------- | - | ------ | - | ---------- | - | -------- |  | -------- |  | ------------- |  | ----------- | - | ------------ | - | ---------- |  | ------------- | - | ----------- |  | -------- | -
|                                                                               |  |            |   | Common |   | Paid in    |   | Treasury |  | Treasury |  | Placement     |  | Accumulated |   | Deferred     |   | To Issue   |  | Comprehensive |   | controlling |  |          |  
|                                                                               |  | Shares     |   | Stock  |   | Capital    |   | Shares   |  | Stock    |  | Subscriptions |  | Deficit     |   | Compensation |   | Shares     |  | Income        |   | Interest    |  | Total    |  
|Issuance of common stock for cash at $0.48 per
      share - June 30, 2006     |  | 594,585    |   | 595    |   | 286,676    |   | -        |  | -        |  | -             |  | -           |   | -            |   | -          |  | -             |   | -           |  | 287,271  |  
|Issuance of common stock for services at $0.48 per
      share - June 30, 2006 |  | 781,818    |   | 782    |   | 376,947    |   | -        |  | -        |  | -             |  | -           |   | -            |   | -          |  | -             |   | -           |  | 377,729  |  
|Issuance of common stock for
      services at $0.35 per share - June 30, 2006 |  | 425,961    |   | 426    |   | 146,574    |   | -        |  | -        |  | -             |  | -           |   | -            |   | -          |  | -             |   | -           |  | 147,000  |  
|Net Loss for the year                                                          |  | -          |   | -      |   | -          |   | -        |  | -        |  | -             |  | (553,314    | ) | -            |   | -          |  | -             |   | -           |  | (553,314 | )
|Balance December 31, 2006                                                      |  | 9,050,672  |   | 9,051  |   | 3,818,697  |   | -        |  | -        |  | -             |  | (3,486,045  | ) | -            |   | -          |  | -             |   | -           |  | 341,703  |  
|Net Loss for the year                                                          |  | -          |   | -      |   | -          |   | -        |  | -        |  | -             |  | (320,322    | ) | -            |   | -          |  | -             |   | -           |  | (320,322 | )
|Balance December 31, 2007                                                      |  | 9,050,672  |   | 9,051  |   | 3,818,697  |   | -        |  | -        |  | -             |  | (3,806,367  | ) | -            |   | -          |  | -             |   | -           |  | 21,381   |  
|Alternet Systems Inc. balance before reverse acquisition                       |  | 6,278,146  |   | 63     |   | 5,136,702  |   | -        |  | -        |  | 231,487       |  | (5,540,778  | ) | (29,677      | ) | -          |  | 256           |   | -           |  | (201,947 | )
|Issued to effect reverse acquisition                                           |  | 4,000,000  |   | 40     |   | 21,791     |   | -        |  | -        |  | -             |  | -           |   | -            |   | -          |  | -             |   | -           |  | 21,831   |  
|Reverse acquisition recapitalization adjustment                                |  | (9,050,672 | ) | (9,051 | ) | (5,552,854 | ) | -        |  | -        |  | -             |  | 5,540,778   |   | -            |   | -          |  | (256          | ) | -           |  | (21,383  | )
|Balance December 31, 2007                                                      |  | 10,278,146 |   | 103    |   | 3,424,336  |   | -        |  | -        |  | 231,487       |  | (3,806,367  | ) | (29,677      | ) | -          |  | -             |   | -           |  | (180,118 | )
|Stock-based compensation at $0.025 per share - January 2, 2008                 |  | 4,500,000  |   | 45     |   | 112,455    |   | -        |  | -        |  | -             |  | -           |   | -            |   | -          |  | -             |   | -           |  | 112,500  |  
|Stock-based compensation at $0.025
      per share - January 15, 2008          |  | 750,000    |   | 7      |   | 18,743     |   | -        |  | -        |  | -             |  | -           |   | -            |   | -          |  | -             |   | -           |  | 18,750   |  
|Stock-based compensation at $0.025 per share -
      January 23, 2008          |  | 75,000     |   | 1      |   | 1,874      |   | -        |  | -        |  | -             |  | -           |   | -            |   | -          |  | -             |   | -           |  | 1,875    |  

The accompanying notes are an integral part of these financial
statements

---

|ALTERNET SYSTEMS INC.                                                  
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                         
|                                                                       
|For the Period
      from May 16, 2002 (Inception) to December 31, 2010
|                                                                       

|                                                                                     |  |           |  |        |  | Additional |  |          |  |          |  | Private       |   |             |  |              |  | Obligation |  | Other         |  | Non-        |  |         | 
|------------------------------------------------------------------------------------ |  | --------- |  | ------ |  | ---------- |  | -------- |  | -------- |  | ------------- | - | ----------- |  | ------------ |  | ---------- |  | ------------- |  | ----------- |  | ------- | 
|                                                                                     |  |           |  | Common |  | Paid in    |  | Treasury |  | Treasury |  | Placement     |   | Accumulated |  | Deferred     |  | To Issue   |  | Comprehensive |  | controlling |  |         | 
|                                                                                     |  | Shares    |  | Stock  |  | Capital    |  | Shares   |  | Stock    |  | Subscriptions |   | Deficit     |  | Compensation |  | Shares     |  | Income        |  | Interest    |  | Total   | 
|Issuance of common stock for services at $0.30
      per share - May 23, 2008        |  | 23,542    |  | -      |  | 7,063      |  | -        |  | -        |  | -             |   | -           |  | -            |  | -          |  | -             |  | -           |  | 7,063   | 
|Issuance of common stock for services at $0.51 per
      share - May 23, 2008        |  | 150,000   |  | 2      |  | 76,498     |  | -        |  | -        |  | -             |   | -           |  | -            |  | -          |  | -             |  | -           |  | 76,500  | 
|Issuance of common stock for
      services at $0.50 per share - June 6, 2008        |  | 100,000   |  | 1      |  | 49,999     |  | -        |  | -        |  | -             |   | -           |  | -            |  | -          |  | -             |  | -           |  | 50,000  | 
|Issuance of common stock for services at $0.42 per share - June
      26, 2008       |  | 1,500,000 |  | 15     |  | 629,985    |  | -        |  | -        |  | -             |   | -           |  | -            |  | -          |  | -             |  | -           |  | 630,000 | 
|Issuance of common stock for
      debenture note at $0.36 per share - July 16, 2008 |  | 277,778   |  | 3      |  | 99,997     |  | -        |  | -        |  | -             |   | -           |  | -            |  | -          |  | -             |  | -           |  | 100,000 | 
|Issuance of common stock for debenture note at $0.21 per share
      - July 16, 2008 |  | 48,443    |  | -      |  | 10,000     |  | -        |  | -        |  | -             |   | -           |  | -            |  | -          |  | -             |  | -           |  | 10,000  | 
|Issuance of common stock for
      debenture note at $0.35 per share - July 16, 2008 |  | 57,143    |  | 1      |  | 19,999     |  | -        |  | -        |  | -             |   | -           |  | -            |  | -          |  | -             |  | -           |  | 20,000  | 
|Issuance of common stock for cash at $0.35 per share
      - July 16, 2008           |  | 670,000   |  | 7      |  | 234,493    |  | -        |  | -        |  | (234,500      | ) | -           |  | -            |  | -          |  | -             |  | -           |  | -       | 
|Issuance of common stock for services at $0.42
      per share - July 16, 2008       |  | 500,000   |  | 5      |  | 209,995    |  | -        |  | -        |  | -             |   | -           |  | -            |  | -          |  | -             |  | -           |  | 210,000 | 
|Issuance of common stock for services at $0.42 per share -
      August 6, 2008      |  | 310,000   |  | 3      |  | 130,197    |  | -        |  | -        |  | -             |   | -           |  | -            |  | -          |  | -             |  | -           |  | 130,200 | 

The accompanying notes are an integral part of these financial
statements

---

|ALTERNET SYSTEMS INC.                                                  
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                         
|                                                                       
|For the Period
      from May 16, 2002 (Inception) to December 31, 2010
|                                                                       

|                                                                                    |  |            |  |        |  | Additional |  |          |  |          |  | Private       |   |             |  |              |   | Obligation |  | Other         |  | Non-        |  |            |  
|----------------------------------------------------------------------------------- |  | ---------- |  | ------ |  | ---------- |  | -------- |  | -------- |  | ------------- | - | ----------- |  | ------------ | - | ---------- |  | ------------- |  | ----------- |  | ---------- | -
|                                                                                    |  |            |  | Common |  | Paid in    |  | Treasury |  | Treasury |  | Placement     |   | Accumulated |  | Deferred     |   | To Issue   |  | Comprehensive |  | controlling |  |            |  
|                                                                                    |  | Shares     |  | Stock  |  | Capital    |  | Shares   |  | Stock    |  | Subscriptions |   | Deficit     |  | Compensation |   | Shares     |  | Income        |  | Interest    |  | Total      |  
|Issuance of common stock for cash at $0.35 per
      share - August 7, 2008         |  | 14,100     |  | -      |  | 4,930      |  | -        |  | -        |  | (4,930        | ) | -           |  | -            |   | -          |  | -             |  | -           |  | -          |  
|Issuance of common stock for cash at $0.35 per share
      - August 11, 2008        |  | 241,158    |  | 2      |  | 84,403     |  | -        |  | -        |  | (84,405       |   | -           |  | -            |   | -          |  | -             |  | -           |  | -          |  
|Issuance of common stock for cash at
      $0.35 per share - August 13, 2008        |  | 44,960     |  | -      |  | 15,735     |  | -        |  | -        |  | (15,735       | ) | -           |  | -            |   | -          |  | -             |  | -           |  | -          |  
|Issuance of common stock for services at $0.41 per
      share - September 16, 2008 |  | 200,000    |  | 2      |  | 81,998     |  | -        |  | -        |  | -             |   | -           |  | -            |   | -          |  | -             |  | -           |  | 82,000     |  
|Private placement subscriptions
      received                                      |  | -          |  | -      |  | -          |  | -        |  | -        |  | 333,498       |   | -           |  | -            |   | -          |  | -             |  | -           |  | 333,498    |  
|Foreign exchange translation adjustment                                             |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |  | -            |   | -          |  | 2,766         |  | -           |  | 2,766      |  
|Increase in derivative liability                                                    |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |  | -            |   | -          |  | 143,480       |  | -           |  | 143,480    |  
|Obligation to issue shares per consulting agreement                                 |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |  | -            |   | 90,000     |  | -             |  | -           |  | 90,000     |  
|Services provided per term of
      contracts                                       |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |  | (842,466     | ) | -          |  | -             |  | -           |  | (842,466   | )
|Net loss for the year                                                               |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | (1,983,957  |  | -            |   | -          |  | -             |  | -           |  | (1,983,957 | )
|Balance December 31, 2008                                                           |  | 19,740,270 |  | 197    |  | 5,212,700  |  | -        |  | -        |  | 225,415       |   | (5,790,324  |  | (872,143     | ) | 90,000     |  | 146,246       |  | -           |  | (987,909   | )
|Issuance of common stock for cash at $0.08 per share
      - April 9, 2009          |  | 312,500    |  | 3      |  | 24,997     |  | -        |  | -        |  | (25,000       | ) | -           |  | -            |   | -          |  | -             |  | -           |  | -          |  
|Issuance of common stock for
      services at $0.10 per share - May 5, 2009        |  | 200,000    |  | 2      |  | 19,998     |  | -        |  | -        |  | -             |   | -           |  | -            |   | -          |  | -             |  | -           |  | 20,000     |  
|Private placement subscriptions
      received                                      |  | -          |  | -      |  | -          |  | -        |  | -        |  | 25,000        |   | -           |  | -            |   | -          |  | -             |  | -           |  | 25,000     |  

The accompanying notes are an integral part of these financial
statements

---

|ALTERNET SYSTEMS INC.                                                  
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                         
|                                                                       
|For the Period
      from May 16, 2002 (Inception) to December 31, 2010
|                                                                       

|                                                                              |  |            |  |        |  | Additional |  |          |  |          |  | Private       |  |             |   |              |   | Obligation |   | Other         |   | Non-        |  |            |  
|----------------------------------------------------------------------------- |  | ---------- |  | ------ |  | ---------- |  | -------- |  | -------- |  | ------------- |  | ----------- | - | ------------ | - | ---------- | - | ------------- | - | ----------- |  | ---------- | -
|                                                                              |  |            |  | Common |  | Paid in    |  | Treasury |  | Treasury |  | Placement     |  | Accumulated |   | Deferred     |   | To Issue   |   | Comprehensive |   | controlling |  |            |  
|                                                                              |  | Shares     |  | Stock  |  | Capital    |  | Shares   |  | Stock    |  | Subscriptions |  | Deficit     |   | Compensation |   | Shares     |   | Income        |   | Interest    |  | Total      |  
|Foreign exchange translation adjustment                                       |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |  | -           |   | -            |   | -          |   | (4,686        | ) | -           |  | (4,686     | )
|Increase (decrease) in derivative liability                                   |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |  | -           |   | -            |   | -          |   | 93,524        |   | -           |  | 93,524     |  
|Services provided per term of
      contracts                                 |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |  | -           |   | 226,962      |   | -          |   | -             |   | -           |  | 226,962    |  
|Reversal of obligation to issue shares                                        |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |  | -           |   | -            |   | (50,000    | ) | -             |   | -           |  | (50,000    | )
|Obligation to issue shares per
      consulting agreement                     |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |  | -           |   | -            |   | 16,250     |   | -             |   | -           |  | 16,250     |  
|Obligation to issue shares per debt settlement
      agreement                |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |  | -           |   | -            |   | 26,946     |   | -             |   | -           |  | 26,946     |  
|Subsidiary shares issued to
      noncontrolling interest                     |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |  | -           |   | -            |   | -          |   | -             |   | 8,900       |  | 8,900      |  
|Net loss for the year                                                         |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |  | (779,420    | ) | -            |   | -          |   | -             |   | -           |  | (779,420   | )
|Balance December 31, 2009                                                     |  | 20,252,770 |  | 202    |  | 5,257,695  |  | -        |  | -        |  | 225,415       |  | (6,569,744  | ) | (645,181     | ) | 83,196     |   | 235,084       |   | 8,900       |  | (1,404,433 | )
|Issuance of common stock for services at $0.065 per share - Jan
      5, 2010 |  | 250,000    |  | 2      |  | 16,248     |  | -        |  | -        |  | -             |  | -           |   | -            |   | (16,250    | ) | -             |   | -           |  | -          |  
|Issuance of common stock for debt at $0.065 per
      share - Jan 5, 2010     |  | 414,554    |  | 4      |  | 26,942     |  | -        |  | -        |  | -             |  | -           |   | -            |   | (26,946    | ) | -             |   | -           |  | -          |  
|Issuance of common stock for debt at $0.10 per share
      - Feb 18, 2010     |  | 1,000,000  |  | 10     |  | 99,990     |  | -        |  | -        |  | -             |  | -           |   | -            |   | -          |   | -             |   | -           |  | 100,000    |  
|Issuance of common stock for debt at
      $0.13 per share - April 19, 2010   |  | 500,000    |  | 5      |  | 64,995     |  | -        |  | -        |  | -             |  | -           |   | -            |   | -          |   | -             |   | -           |  | 65,000     |  

The accompanying notes are an integral part of these financial
statements

---

|ALTERNET SYSTEMS INC.                                                  
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                         
|                                                                       
|For the Period
      from May 16, 2002 (Inception) to December 31, 2010
|                                                                       

|                                                                                       |  |           |  |        |  | Additional |  |          |  |          |  | Private       |  |             |  |              |  | Obligation |   | Other         |  | Non-        |  |         | 
|-------------------------------------------------------------------------------------- |  | --------- |  | ------ |  | ---------- |  | -------- |  | -------- |  | ------------- |  | ----------- |  | ------------ |  | ---------- | - | ------------- |  | ----------- |  | ------- | 
|                                                                                       |  |           |  | Common |  | Paid in    |  | Treasury |  | Treasury |  | Placement     |  | Accumulated |  | Deferred     |  | To Issue   |   | Comprehensive |  | controlling |  |         | 
|                                                                                       |  | Shares    |  | Stock  |  | Capital    |  | Shares   |  | Stock    |  | Subscriptions |  | Deficit     |  | Compensation |  | Shares     |   | Income        |  | Interest    |  | Total   | 
|Issuance of common stock for debt at $0.06 per
      share - May 5, 2010               |  | 800,000   |  | 8      |  | 49,592     |  | -        |  | -        |  | -             |  | -           |  | -            |  | -          |   | -             |  | -           |  | 49,600  | 
|Issuance of common stock for debt at $0.06 per share
      - May 11, 2010              |  | 769,231   |  | 8      |  | 46,146     |  | -        |  | -        |  | -             |  | -           |  | -            |  | -          |   | -             |  | -           |  | 46,154  | 
|Issuance of common stock for debt at $0.045
      per share - May 12, 2010             |  | 800,000   |  | 8      |  | 35,992     |  | -        |  | -        |  | -             |  | -           |  | -            |  | -          |   | -             |  | -           |  | 36,000  | 
|Issuance of common stock for debt at $0.05 per share - May
      19, 2010              |  | 611,077   |  | 6      |  | 30,548     |  | -        |  | -        |  | -             |  | -           |  | -            |  | -          |   | -             |  | -           |  | 30,554  | 
|Issuance of common stock for debt at $0.04
      per share - May 20, 2010              |  | 1,600,000 |  | 16     |  | 63,984     |  | -        |  | -        |  | -             |  | -           |  | -            |  | -          |   | -             |  | -           |  | 64,000  | 
|Issuance of common stock for debt at $0.05 per share - May
      21, 2010              |  | 3,266,667 |  | 33     |  | 163,300    |  | -        |  | -        |  | -             |  | -           |  | -            |  | -          |   | -             |  | -           |  | 163,333 | 
|Issuance of common stock for debt at $0.03
      per share - June 1, 2010              |  | 923,680   |  | 9      |  | 27,701     |  | -        |  | -        |  | -             |  | -           |  | -            |  | -          |   | -             |  | -           |  | 27,710  | 
|Issuance of common stock for debt at $0.03 per share - June
      17, 2010             |  | 7,076,297 |  | 71     |  | 212,218    |  | -        |  | -        |  | -             |  | -           |  | -            |  | -          |   | -             |  | -           |  | 212,289 | 
|Issuance of common stock for debt at $0.04
      per share - July 22, 2010             |  | 3,331,604 |  | 34     |  | 133,231    |  | -        |  | -        |  | -             |  | -           |  | -            |  | -          |   | -             |  | -           |  | 133,265 | 
|Issuance of common stock for services at $0.085 per share -
      July October 5, 2010 |  | 3,150,000 |  | 32     |  | 267,718    |  | -        |  | -        |  | -             |  | -           |  | -            |  | (76,500    | ) | -             |  | -           |  | 191,250 | 

The accompanying notes are an integral part of these financial
statements

---

|ALTERNET SYSTEMS INC.                                                  
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                         
|                                                                       
|For the Period
      from May 16, 2002 (Inception) to December 31, 2010
|                                                                       

|                                                                                   |  |            |  |        |  | Additional |  |          |  |          |  | Private       |   |             |   |              |   | Obligation |   | Other         |   | Non-        |   |            |  
|---------------------------------------------------------------------------------- |  | ---------- |  | ------ |  | ---------- |  | -------- |  | -------- |  | ------------- | - | ----------- | - | ------------ | - | ---------- | - | ------------- | - | ----------- | - | ---------- | -
|                                                                                   |  |            |  | Common |  | Paid in    |  | Treasury |  | Treasury |  | Placement     |   | Accumulated |   | Deferred     |   | To Issue   |   | Comprehensive |   | controlling |   |            |  
|                                                                                   |  | Shares     |  | Stock  |  | Capital    |  | Shares   |  | Stock    |  | Subscriptions |   | Deficit     |   | Compensation |   | Shares     |   | Income        |   | Interest    |   | Total      |  
|Issuance of common stock for debt at $0.14 per
      share - November 23, 2010     |  | 1,258,604  |  | 13     |  | 176,192    |  | -        |  | -        |  | -             |   | -           |   | -            |   | -          |   | -             |   | -           |   | 176,205    |  
|Issuance of common stock for debt at $0.14 per share
      - November 30, 2010     |  | 521,801    |  | 5      |  | 73,047     |  | -        |  | -        |  | -             |   | -           |   | -            |   | -          |   | -             |   | -           |   | 73,052     |  
|Issuance of common stock for debt at
      $0.13 per share - December 22, 2010     |  | 559,672    |  | 6      |  | 72,751     |  | -        |  | -        |  | -             |   | -           |   | -            |   | -          |   | -             |   | -           |   | 72,757     |  
|Issuance of common stock for services at $0.13 per
      share - December 22, 2010 |  | 500,000    |  | 5      |  | 64,995     |  | -        |  | -        |  | -             |   | -           |   | -            |   | -          |   | -             |   | -           |   | 65,000     |  
|Share subscriptions issued                                                         |  | 633,691    |  | 6      |  | 95,047     |  | -        |  | -        |  | (95,053       | ) | -           |   | -            |   | -          |   | -             |   | -           |   | -          |  
|Private placement subscriptions received                                           |  | -          |  | -      |  | -          |  | -        |  | -        |  | 15,000        |   | -           |   | -            |   | -          |   | -             |   | -           |   | 15,000     |  
|Value of debt for share conversion
      features                                  |  | -          |  | -      |  | 881,891    |  | -        |  | -        |  | -             |   | -           |   | -            |   | -          |   | -             |   | -           |   | 881,891    |  
|Services provided per term of contracts                                            |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |   | 749,849      |   | -          |   | -             |   | -           |   | 749,849    |  
|Obligation to issue shares per
      consulting agreement                          |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |   | (184,500     | ) | 184,500    |   | -             |   | -           |   | -          |  
|Reversal of obligation to issue shares                                             |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |   | -            |   | (40,000    | ) | -             |   | -           |   | (40,000    | )
|Foreign exchange translation
      adjustment                                      |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |   | -            |   | -          |   | (82           | ) | -           |   | (82        | )
|Increase (decrease) in derivative liability                                        |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |   | -            |   | -          |   | (400,664      | ) | -           |   | (400,664   | )
|Non-controlling interest                                                           |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | -           |   | -            |   | -          |   | -             |   | (123,064    | ) | (123,064   | )
|Net loss for the year                                                              |  | -          |  | -      |  | -          |  | -        |  | -        |  | -             |   | (2,446,347  | ) | -            |   | -          |   | -             |   | -           |   | (2,446,347 | )
|Balance December 31, 2010                                                          |  | 48,219,648 |  | 483    |  | 7,860,223  |  | -        |  | -        |  | 145,362       |   | (9,016,091  | ) | (79,832      | ) | 108,000    |   | (165,662      | ) | (114,164    | ) | (1,261,681 | )

The accompanying notes are an integral part of these financial
statements

---

|ALTERNET SYSTEMS INC.                                                  
|-----------------------------------------------------------------------
|CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY                         
|                                                                       
|For the Period
      from May 16, 2002 (Inception) to December 31, 2010
|                                                                       

NOTE 1  NATURE OF OPERATIONS AND BASIS OF
PRESENTATION

Alternet Systems Inc. (Alternet or the Company) is focused
on the mobile phone value added services marketplace which encompasses Mobile
Commerce and Mobile Security in North and South America. Previously, the Company
focused on designing, marketing, and selling proprietary software and hardware
systems known as SchoolWeb and CommunityWeb which provided high speed
internet access to schools and rural communities, in North America and
internationally. The Company also provides Voice over IP services, primarily in
Latin America.

The Company was incorporated on June 26, 2000 in the State of
Nevada as North Pacific Capital Corp. and was organized for the purpose of
creating a corporate vehicle to locate and acquire an operating business. On
December 19, 2001, the Company changed its name to Schoolweb Systems Inc. and on
May 14, 2002 the Company changed its name to Alternet Systems Inc. (Alternet
or the Company). On November 6, 2000, the Company filed a Form 10SB
registration statement with the United States Securities and Exchange Commission
(SEC) and as a result is subject to the regulations governing reporting
issuers in the United States. On March 14, 2003, the Company was listed for
quotation on the Over-the-Counter Bulletin Board.

By agreement entered into December 31, 2007, Alternet issued
4,000,000 shares of restricted common stock to the shareholders of TekVoice
Communications, Inc., a Company incorporated on May 17, 2002 in the State of
Florida, in exchange for all of the issued and outstanding shares of TekVoice
Communications, Inc.

The acquisition resulted in the former shareholders of TekVoice
Communications, Inc. acquiring 38.92% of the then outstanding shares of the
Company and has been accounted for as a reverse merger with TekVoice
Communications, Inc., the legal subsidiary, being treated as the accounting
parent and Alternet, the legal parent, being treated as the accounting
subsidiary. Accordingly, the consolidated results of operations of the Company
include those of TekVoice Communications, Inc. for all periods shown and those
of Alternet since the date of the reverse acquisition.

On July 29, 2009, the Company purchased 51% of the outstanding
shares of Alternet Transactions Systems, Inc. (ATS), a company incorporated in
the State of Florida on July 29, 2009, for $5,100. ATS is doing business as
Utiba Americas.

On September 17, 2009, the Company purchased 60% of the
outstanding shares of International Mobile Security, Inc. (IMS), a company
incorporated in the State of Florida on September 17, 2009, for $6,000.

On January 11, 2010, AI Systems Group (Canada) Inc. was
dissolved. All transactions incurred from January 1, 2010 to January 11, 2010
have been included in these financial statements.

The consolidated interim financial statements have been
prepared on the basis of a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. At
December 31, 2010 the Company had a working capital deficiency of $1,264,225.
The Companys continued operations are dependent on the successful
implementation of its business plan, its ability to obtain additional financing
as needed, continued support from creditors, settling its outstanding debts and
ultimately attaining profitable operations.

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America.

Principles of Consolidation

The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, AI Systems Group, Inc., AI
Systems Group (Canada) Ltd., and TekVoice Communications, Inc. These
consolidated financial statements also include the accounts of Alternet
Transactions Systems, Inc. and International Mobile Security, Inc. with the
minority interest of each deduced from earnings and equity. All significant
intercompany transactions and account balances have been eliminated.

Use of Estimates and Assumptions

Preparation of the Companys financial statements in conformity
with generally accepted accounting principles in the United States of America
requires management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could differ from
those estimates.

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)

Cash and Cash Equivalents

The Company considers all liquid investments, with an original
maturity of three months or less when purchased, to be cash equivalents.

Equipment

Fixed assets are recorded at cost and depreciated at the
following rates:

Computer equipment and software
    -
    30% declining balance basisEquipment
    -
    20% declining balance basis


Impairment of Long Lived Assets

Management monitors the recoverability of long-lived assets
based on estimates using factors such as current market value, future asset
utilization, and future undiscounted cash flows expected to result from its
investment or use of the related assets. The Companys policy is to record any
impairment loss in the period when it is determined that the carrying amount of
the asset may not be recoverable. Any impairment loss is calculated as the
excess of the carrying value over estimated realizable value.

Revenue Recognition

The Company derives its revenues from the sale of licenses of
software, implementation services, support services, and telecommunication
services. Revenues are recognized when title transfers or services are
rendered.

| | a) | Revenue from the sale of licenses is recognized when the
      title of the license transfers to the customer, which occurs once a
      contract has been signed.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | Revenue from implementation services performed is
      recognized upon completion of the service.                                                                
| | c) | Revenue from support services is recognized as
    earned.                                                                                                        
| | d) | Revenue from telecommunications services are recognized
      when billed, which occurs at the end of the month the services are
      provided.                  

The Company invoices 100% of the implementation services and
requires customers to pay a non-refundable deposit prior to any services being
performed. The Company recognizes the customer deposit as unearned revenue until
either completion of the implementation or upon the contract being cancelled at
which time the revenue is recognized. The uncollected portion of the
implementation invoice is recorded as customer deposits until collection has
occurred, completion of the implementation services, or upon the contract being
cancelled.

The Company invoices support services at the beginning of the
term and recognizes the revenue over the term of the agreement.

Foreign Currency Translation

The financial statements are presented in United States
dollars. In accordance with Statement of Financial Accounting Standards No. 52,
Foreign Currency Translation, foreign denominated monetary assets and
liabilities are translated to their United States dollar equivalents using
foreign exchange rates which prevailed at the balance sheet date. Revenue and
expenses are translated at average rates of exchange during the year. Related
translation adjustments are reported as a separate component of stockholders
deficit, whereas gains or losses resulting from foreign currency transactions
are included in the results of operations.

Fair Value of Financial Instruments

In accordance with the requirements of SFAS No. 107, the
Company has determined the estimated fair value of financial instruments using
available market information and appropriate valuation methodologies. The fair
value of financial instruments classified as current assets or liabilities
approximate carrying value due to the short-term maturity of the instruments.

Income Taxes

The Company accounts for income taxes under a method which
requires the Company to recognize deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Companys financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statements carrying amounts and tax basis of assets and liabilities
using enacted tax rates. The Company presently prepares its tax returns on the
cash basis and financial statement on the accrual basis. No deferred tax assets
or liabilities have been recognized at this time, since the Company has shown
losses for both tax and financial reporting.

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for stock-based
awards under the recognition and measurement provisions of Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employeesusing the intrinsic value method of accounting, under which compensation
expense was only recognized if the exercise price of the Companys employee
stock options was less than the market price of the underlying common stock on
the date of grant. Effective January 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123R Share Based Payments, using the
modified prospective transition method. Under that transition method,
compensation cost is recognized for all share-based payments granted prior to,
but not yet vested as of January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, and
compensation cost for all share-based payments granted subsequent to January 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. Results for prior periods have not been restated.

Stock-Based Compensation (continued)

All transactions in which goods or services are the
consideration received for the issuance of equity instruments are accounted for
based on the fair value of the consideration received or the fair value of the
equity instrument issued, whichever is more reliably measurable. Equity
instruments issued to employees and the cost of the services received as
consideration are measured and recognized based on the fair value of the equity
instruments issued.

Loss per Share

The Company computes net earnings (loss) per share in
accordance with SFAS No. 128, Earnings per Share. SFAS No. 128 requires
presentation of both basic and diluted earnings per share (EPS) on the face of
the statement of operations. Basic EPS is computed by dividing net loss
available to common shareholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the period
including warrants using the treasury stock method. Diluted EPS excludes all
dilutive potential common shares if their effect is anti-dilutive. As the
Company has net losses, no common equivalent shares have been included in the
computation of diluted net loss per share as the effect would be
anti-dilutive.

Risk Management

The Company is exposed to credit risk through accounts
receivable and therefore, the Company maintains adequate provisions for
potential credit losses.

The Companys functional currency is the United States dollar.
The Company operates in foreign jurisdictions, giving rise to exposure to market
risks from changes in foreign currency rates. The financial risk is the risk to
the Company's operations that arises from fluctuations in foreign exchange rates
and the degree of volatility of these rates. Currently, the Company does not use
derivative instruments to reduce its exposure to foreign currency risk.

Recent Accounting Pronouncements

In May 2009, the FASB issued SFAS No.165, Subsequent Events,which is effective for interim or annual financial statements issued after
June 15, 2009. This statement requires the Company to disclose the period for
which subsequent events have been reported and clarifies when subsequent events
should be disclosed. This standard did not effect the Companys reported
financial position or results of operations.

In June 2009, the FASB issued SFAS No.166, Accounting for
Transfers of Financial Assets,which is effective for financial statements
issued for fiscal years beginning after November 15, 2009. This statement amends
SFAS No.140, Accounting for Transfers and Servicing of Financial Assets and
extinguishments of Liabilities,by removing the concept of special purpose
entity from SFAS No.140. This statement also clarifies the objective of
paragraph 9 of SFAS No.140 which is to determine whether a transferor and all of
the entities included in the transferors financial statements being presented
have surrendered control of transferred financial assets. This standard did not
effect the Companys reported financial position or results of operations.

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

In June 2009, the FASB issued SFAS No.167, Amendments to
FASB Interpretation No.46(R),which is effective for financial statements
issued for fiscal years beginning after November 15, 2009. This statement amends
FASB Interpretation No.46(R), Consolidation of Variable Interest Entities,by requiring an entity to perform an analysis to determine whether the
entitys variable interest or interest give it a controlling financial interest
in a variable interest entity. This standard did not effect the Companys
reported financial position or results of operations.

In June 2009, the FASB issued SFAS No.168, The FASB
Accounting Standards Codification andthe Hierarchy of Generally Accepted
Accounting Principles,which replaces SFAS 162 and is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. This statement identifies the sources of accounting
principles and framework for selecting the principles used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles in the United States,
the GAAP hierarchy. This standard did not effect the Companys reported
financial position or results of operations.

In January 2010, the FASB issued ASU 2010-01, Accounting for
Distributions to Shareholders with Components of Stock and Cash (Topic 505),which is effective for financial statements issued for interim and annual
periods ending after December 15, 2009. This update identifies how companies
should be reporting distributions to shareholders that offers them the ability
to elect to receive the distribution in cash or an equivalent number of shares.
It was determined that all distributions of shares relating to these payments
should be recorded as new share issuances. This standard did not effect the
Companys reported financial position or results of operations.

In January 2010, the FASB issued ASU 2010-02, Consolidation
(Topic 810),which replaces SFAS No. 160 and is effective for financial
statements issued for interim and annual periods ending after December 15, 2009.
This update establishes the accounting and reporting guidance for
non-controlling interest and changes in ownership interests of a subsidiary.
This standard did not affect the Companys reported financial position or
results of operations.

In January 2010, the FASB issued ASU 2010-06, Fair Value
Measurements and Disclosures (Topic 820),which replaces SFAS No. 157 and is
effective for financial statements issued for interim and annual periods ending
after December 15, 2009 except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward activity in Level 3 fair value
measurements which are effective for financial statements issued for fiscal
years ending after December 15, 2010 and interim periods commencing December 16,
2009. This update identifies new disclosure requirements relating to fair value
measurements. This standard did not affect the Companys reported financial
position or results of operations.

In February 2010, the FASB issued ASU 2010-09, Subsequent
Event (Topic 855),which is effective for financial statements issued for
interim and annual periods ending after June 15, 2010. This update addresses
both the interaction of the requirements of Topic 855 with the SECs reporting
requirements and the intended breadth of the reissuance disclosure provision
related to subsequent events. This standard is not expected to have a
significant effect on the Companys reported financial position or results of
operations.

In March 2010, the FASB issued ASU 2010-11, Derivatives and
Hedging (Topic 815),which is effective for financial statements issued at
the beginning of the entitys first fiscal quarter beginning after June 15,
2010. This update provides amendments to Subtopic 815-15, Derivatives and
Hedging  Embedded Derivatives, such as clarification of the scope exception for
embedded credit derivative features related to the transfer of credit risk in
the form of subordination of one financial instrument to another and whether
those derivatives are subject to potential bifurcation. This standard is not
expected to have a significant effect on the Companys reported financial
position or results of operations.

In April 2010, the FASB issued ASU 2010-13, Compensation 
Stock Compensation (Topic 718),which is effective for financial statements
issued for interim and annual periods beginning on or after December 15, 2010.
This update addresses the classification of an employee share-based payment
award with an exercise price denominated in a currency that differs from the
functional currency of the employer entity or payroll currency of the employee.
This standard is not expected to have an effect on the Companys reported
financial position or results of operations.

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

NOTE 2  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

In April 2010, the FASB issued ASU 2010-17, Revenue
Recognition  Milestone Method (Topic 605),which is effective on a
prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010. This update provides
guidance on defining a milestone and determining when it may be appropriate to
apply the milestone method of revenue recognition for research and development
transactions. This standard did not have an effect on the Companys reported
financial position or results of operations.

In April 2010, the FASB issued ASU 2010-18, Receivables
(Topic 310),which is effective on a prospective basis for modifications of
loans accounted for within pools occurring in the first interim or annual period
ending on or after July 15, 2010. This update provides guidance on accounting
for acquired loans that have evidence of credit deterioration upon acquisition.
This standard did not have an effect on the Companys reported financial
position or results of operations.

In July 2010, the FASB issued ASU 2010-20, Receivables
(Topic 310),which for public entities, the disclosures as of the end of a
reporting period are effective in financial statements issued for interim and
annual periods ending on or after December 15, 2010 and for disclosures about
activities that occur during a period are effective for interim and annual
periods beginning on or after December 15, 2010. This update provides guidance
on increasing transparency about an entitys allowance for credit losses and the
credit quality of its financing receivables. This standard did not have an
effect on the Companys reported financial position or results of
operations.

In December 2010, the FASB issued ASU 2010-28, Intangibles 
Goodwill and Other (Topic 350),which is effective for financial statements
issued for interim and annual periods beginning on or after December 15, 2011
This update modifies Step 1 of the goodwill impairment test for reporting units
with zero or negative carrying amounts. This standard is not expected to have an
effect on the Companys reported financial position or results of
operations.

In December 2010, the FASB issued ASU 2010-29, Business
Combinations (Topic 850),which is effective prospectively for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2010. This
update provides guidance on the pro forma revenue and earnings disclosure
requirements for business combinations. This standard is not expected to have an
effect on the Companys reported financial position or results of
operations.

In January 2011, the FASB issued ASU 2011-01, Receivables
(Topic 310),which is effective upon issuance. This update defers the
effective date of the disclosures required under ASU 2010-20 to be concurrent
with the effective date of the guidance for determining what constitutes a
troubled debt restricting as presented in proposed ASU update: Receivables
(Topic 310) Clarifications to Accounting for Troubled Debt Restructurings by
Creditors. This standard did not have an effect on the Companys reported
financial position or results of operations.

NOTE 3  FIXED ASSETS

| |                    | December 30, 2010
| | ------------------ | -----------------
| |                    |                  
| |                    |                  
| |                    |                  
| | Computer equipment | $                
| | Computer software  |                  
| | Equipment          |                  
| |                    | $                

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

NOTE 3  FIXED ASSETS (continued)

| |                    | December 31, 2009
| | ------------------ | -----------------
| |                    |                  
| |                    |                  
| |                    |                  
| | Computer equipment | $                
| | Computer software  |                  
| | Equipment          |                  
| |                    | $                

NOTE 4  CONVERTIBLE DEBENTURE NOTES AND OTHER
LOANS

Convertible Debentures

On February 4, 2008, the Company issued a note payable in the
amount of $50,000. The note carries interest at the rate of 8% per quarter and
is due on May 4, 2008. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the average market price of the
Companys stock for the 30 days prior to the date of conversion. As at December
31, 2010, $122,360 of principal and accrued interest on this note was included
in Due to related parties.

On January 8, 2009, the Company issued a note payable in the
amount of $48,464. The note carries interest at the rate of 10% per annum and is
due on January 8, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the average market price of the
Companys stock for the 30 days prior to the date of conversion. As the loan had
not been repaid by the maturity date, the loan was extended and interest
continued to accrue. On April 22, 2010 the Company signed a Debt Settlement
Agreement with the creditor whereby the creditor agreed to receive shares in
lieu of payment of the outstanding balance. Under the terms of the Debt
Settlement Agreement, the creditor is entitled to receive common stock of the
Company at a conversion value equal to 50% of the average daily low price of the
Companys stock for the 20 days prior to the date of conversion. The holder may
not hold more than 4.99% of the outstanding common stock of the Company at any
point in time. During the year ended December 31, 2010, the creditor converted
$55,141 of debt into 2,542,782 common shares of the company resulting in a full
repayment of the loan.

On January 8, 2009, the Company issued a note payable in the
amount of $48,517. The note carries interest at the rate of 10% per annum and is
due on January 8, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the average market price of the
Companys stock for the 30 days prior to the date of conversion. As the loan had
not been repaid by the maturity date, the loan was extended and interest
continued to accrue. On April 22, 2010 the Company signed a Debt Settlement
Agreement with the creditor whereby the creditor agreed to receive shares in
lieu of payment of the outstanding balance. Under the terms of the Debt
Settlement Agreement, the creditor is entitled to receive common stock of the
Company at a conversion value equal to 50% of the average daily low price of the
Companys stock for the 20 days prior to the date of conversion. The holder may
not hold more than 4.99% of the outstanding common stock of the Company at any
point in time. During the year ended December 31, 2010, the creditor converted
$55,066 of debt into 1,180,846 common shares of the company resulting in a full
repayment of the loan.

On January 8, 2009, the Company issued a note payable in the
amount of $42,085. The note carries interest at the rate of 10% per annum and is
due on January 8, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the average market price of the
Companys stock for the 30 days prior to the date of conversion. On September
15, 2009, the balance outstanding on the note payable was agreed to be settled
prior to the conversion date and as such the corresponding derivative liability
was written off.

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

NOTE 4  CONVERTIBLE
DEBENTURE NOTES AND OTHER LOANS (continued)

Convertible Debentures (continued)

On December 18, 2009, the Company issued a note payable in the
amount of $100,000. The note carries interest at the rate of 12% per annum and
is due on March 18, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 80% of the lowest daily low price of the
Companys stock for the 30 trading days immediately preceding and including the
date of conversion. During the year ended December 31, 2010, the creditor
converted $50,640 of debt into 3,331,604 common shares of the company. As at
December 31, 2010, $59,597 of principal and accrued interest on this note was
included in Other loans payable.

On December 18, 2009, the Company entered into a Debt
Settlement agreement whereby a creditor agreed to receive shares in lieu of
payment of a $152,916 promissory note. The holder is entitled to receive common
stock of the Company at a conversion value equal to 50% of the lowest closing
price of the Companys stock for the 10 days prior to the date of conversion.
The holder may not hold more than 4.99% of the outstanding common stock of the
Company at any point in time. During the year ended December 31, 2010, the
creditor converted $113,750 of debt into 4,457,699 common shares of the company.
As at December 31, 2010, $72,833 of principal and accrued interest on this note
was included in Other loans payable.

On March 8, 2010, the Company issued a note payable in the
amount of $25,000. The note carries interest at the rate of 12% per annum and is
due on April 8, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the lowest closing price of the
Companys stock for the 10 trading days immediately preceding and including the
date of conversion. As at December 31, 2010, $27,292 of principal and accrued
interest on this note was included in Other loans payable.

On April 14, 2010, the Company issued a note payable in the
amount of $15,000. The note carries interest at the rate of 10% per annum and is
due on May 18, 2010. If the note is not repaid on maturity or in any other event
of default, the holder is entitled to convert all or any portion of the original
principal face value of the note into shares of common stock of the Company at a
conversion value equal to 50% of the lowest closing price of the Companys stock
for the 10 trading days immediately preceding and including the date of
conversion. As at December 31, 2010, $16,310 of principal and accrued interest
on this note was included in Other loans payable.

On April 22, 2010, the Company entered into a Debt Settlement
agreement whereby a creditor agreed to receive shares in lieu of payment of a
$50,000 promissory note plus accrued interest calculated at 10% per annum. The
creditor is entitled to receive common stock of the Company at a conversion
value equal to 50% of the average daily low price of the Companys stock for the
20 days prior to the date of conversion. The holder may not hold more than 4.99%
of the outstanding common stock of the Company at any point in time. During the
year ended December 31, 2010, the creditor converted $51,874 of debt into
1,703,169 common shares of the company resulting in a full repayment of the
loan.

On April 30, 2010, the Company issued a note payable in the
amount of $100,000. The note carries interest at the rate of 10% per annum and
is due on July 30, 2010. If the note is not repaid on maturity or in any other
event of default, the holder is entitled to convert all or any portion of the
original principal face value of the note into shares of common stock of the
Company at a conversion value equal to 50% of the lowest daily low price of the
Companys stock for the 10 trading days immediately preceding and including the
date of conversion. As at December 31, 2010, $106,833 of principal and accrued
interest on this note was included in Other loans payable.

On June 1, 2010, the Company entered into a Debt Settlement
agreement whereby a creditor agreed to receive shares in lieu of payment of a
$32,000 debt. The creditor is entitled to receive common stock of the Company at
a conversion value equal to 50% of the lowest daily low price of the Companys
stock for the 20 days prior to the date of conversion. The holder may not hold
more than 4.99% of the outstanding common stock of the Company at any point in
time. During the year ended December 31, 2010, the creditor converted $32,000 of
debt into 1,258,604 common shares of the company resulting in a full repayment
of the loan.

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

NOTE 4  CONVERTIBLE
DEBENTURE NOTES AND OTHER LOANS (continued)

Convertible Debentures (continued)

The Company accounts for debt with embedded conversion features
and warrant issues in accordance with EITF 98-5: Accounting for convertible
securities with beneficial conversion features or contingency adjustable
conversion and EITF No. 00-27: Application of issue No 98-5 to certain
convertible instruments. Conversion features determined to be beneficial to the
holder are valued at fair value and recorded to additional paid in capital. The
Company determines the fair value to be ascribed to the detachable warrants
issued with the convertible debentures utilizing the Black-Scholesmethod. Any discount derived from determining the fair value to the
debenture conversion features and warrants is amortized to financing cost over
the life of the debenture. The unamortized costs if any, upon the conversion of
the warrants is expensed to financing cost on a pro rata basis over the life of
the warrant.

Debt issued with the variable conversion features are
considered to be embedded derivatives and are accountable in accordance with
FASB 161; Accounting for Derivative Instruments and Hedging Activities. The fair
value of the embedded derivative is recorded to derivative liability. This
liability is required to be marked each reporting period. The resulting discount
on the debt is amortized to interest expense over the life of the related
debt.

Other Loans

On October 22, 2007, the Company signed a Promissory Note
whereby the Company will repay a creditor $20,000 plus interest at 8% per annum
on November 22, 2007. As at December 31, 2010, $28,000 of principal and accrued
interest on this note was included in Other loans payable.

On September 15, 2010, the Company signed a Promissory Note
whereby the Company will repay a creditor $20,000 plus interest at 10% per annum
on October 15, 2010. The loan was repaid in full on November 5, 2010.

On September 17, 2010, the Company signed a Promissory Note
whereby the Company will repay a creditor $3,000 plus interest at 10% per annum
on October 31, 2010. If the Promissory Note is not repaid by the maturity date,
a $50 penalty will be assessed for each month the loan is outstanding after the
maturity date. The loan was repaid in full on November 5, 2010.

NOTE 5  CAPITAL STOCK

The Company is authorized to issue up to 100,000,000 shares of
the Companys common stock with a par value of $0.00001. As at December 31,
2010, 47,159,976 shares of common stock were issued and outstanding.

Effective January 29, 2008, the Company adopted a Retainer
Stock Plan for Professional and Consultants (the 2008 Professional/Consultant
Stock Compensation Plan) for the purpose of providing the Company with the
means to compensate, in the form of common stock of the Company, eligible
consultants that have previously rendered services or that will render services
during the term of this 2008 Professional/Consultant Stock Compensation Plan. A
total of 6,000,000 common shares may be awarded under this plan. The Company
filed a Registration Statement on Form S-8 to register the underlying shares
included in the 2008 Plan. To date, 5,998,542 common shares valued at $431,631
relating to services provided have been awarded, leaving a balance of 1,458
shares which maybe awarded under this plan.

The Company is obligated to issue 600,000 (December 31, 2009 
864,554) common shares valued at $108,500 (December 31, 2009 - $83,196) as at
December 31, 2010 of which zero (December 31, 2009  450,000) shares valued at
$Nil (December 31, 2009 - $56,250) are for services rendered by consultants
during the year ended December 31, 2009, 600,000 shares are for services
rendered by consultants during the current year, and zero (December 31, 2009 -
414,554) shares valued at $Nil (December 31, 2009 - $26,946) are for a debt
settlement agreed on October 1, 2009. During the year ended December 31, 2010, a
liability to issued 200,000 (December 31, 2009 - 100,000) shares valued at
$40,000 (December 31, 2009 - $50,000) owed to one consultant was reversed to
consulting fees as the consultant had not performed the services in accordance
with the contract.

During the year ended December 31, 2009, the Company issued
312,500 shares valued at $25,000 for cash received during the three months ended
March 31, 2009 and 200,000 shares valued at $20,000 for services to be rendered
over a one year period.

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

NOTE 5  CAPITAL STOCK
(continued)

During the year ended December 31, 2010, the Company issued
250,000 shares valued at $16,250 for services rendered during the year ended
December 31, 2009, 3,650,000 shares valued at $332,750 for services rendered
during the year ended December 31, 2010, 23,433,187 shares valued at $1,276,865
for debt settlement and convertible debenture agreements, and 633,691 shares
valued at $95,053 for share subscriptions previously received. As at December
31, 2010, the Company has $145,362 (December 31, 2009 - $225,415) in private
placement subscriptions which are reported as private placement subscriptions
within stockholders deficit.

The shares which were not issued as at December 31, 2010 or
December 31, 2009 were not used to compute the total weighted average shares
outstanding as at December 31, 2010 or December 31, 2009 respectively and were
thus not used in the basic net loss per share calculation.

NOTE 6 - RELATED PARTY TRANSACTIONS

As at December 31, 2010, a total of $450,647 (2009 - $566,714)
was payable to directors and officers of which $388,869 (2009 -$528,597) was
non-interest bearing and had no specific terms of repayment and $122,360 (2009 -
$38,117) relates to a convertible debenture detailed in Note 4. Of the amount
payable, $40,388 (2009 - $Nil) was included in accounts payable for expense
reimbursements and $340,660 (2009 - $484,684) was included in wages payable for
accrued fees.

During the year ended December 31, 2010, the company expensed a
total of $847,610 (2009 - $424,668) in consulting fees, investor relations, and
salaries paid to directors and officers of the Company. Of the amounts incurred,
$373,394 (2009 -$424,668) was accrued and $474,216 (2009 - $Nil) was paid in
cash. In addition, $630,000 of deferred compensation relating to shares issued
in June 2008 to a director of the Company was expensed to investor
relations.

During the year ended December 31, 2010, the company issued
3,010,087 shares of the Companys common stock valued at $90,303 to two
directors of the Company and 1,836,890 shares of the Companys common stock
valued at $55,107 to a previous director of the Company for accrued consulting
fees and investor relations.

NOTE 7  DEFERRED COMPENSATION

On June 26, 2008, 1,500,000 common shares valued at $630,000
were issued to a consultant pursuant to a contract with certain terms and
benchmarks. As at December 31, 2010, the contract with the consultant expired.
The total $630,000 has been expensed to investor relations.

On October 15, 2008, the Company entered into agreement with a
consultant for a one-year term whereby the consultant will provide consulting
services to the Company in exchange for 200,000 shares of the Companys common
stock. As of December 31, 2008, 200,000 common shares valued at $40,000 were
recorded as obligation to issue shares during the year. This amount was expensed
over the life of the contract. During the year, the Company reversed the
obligation to issue shares against the consulting fees previously expensed as
the shares will not be issued and the services were never received.

On January 5, 2009, the Company entered into an agreement with
a consultant for a one-year term whereby the consultant will provide business
consulting services to the Company in exchange for 200,000 shares of the
Companys common stock valued at $20,000. This amount was expensed over the life
of the contract.

On December 8, 2009, the Company entered into an agreement with
a consultant for a one-year term whereby the consultant will provide business
consulting services to the Company in exchange for 250,000 shares of the
Companys common stock valued at $16,250 based on the date of issuance. This
amount was expensed over the life of the contract.

On January 5, 2010, the Company entered into an agreement with
a consultant for a one-year term whereby the consultant will provide business
consulting services to the Company in exchange for 300,000 shares of the
Companys common stock originally valued at $19,500. This amount is being
expensed over the life of the contract. The shares were issued on October 5,
2010 resulting in an increase in the value in $6,000 to $25,500.

---

|ALTERNET SYSTEMS INC.                        
|---------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   
|                                             
|December 31,
      2010 and December 31, 2009
|                                             

NOTE 7  DEFERRED
COMPENSATION (continued)

On July 1, 2010, the Company entered into an agreement with a
consultant for a one-year term whereby the consultant will provide business
consulting services to the Company in exchange for 1,200,000 shares of the
Companys common stock valued at $159,000 of which 900,000 shares are to be
issued by September 30, 2010 and 300,000 shares are to be issued by December 31,
2010. As at December 31, 2010, 600,000 shares had been issued. As 600,000 shares
were not issued by December 31, 2010, the stated value is subject to change.

The Company recorded the aggregate fair value of the shares
issued pursuant to the above agreements as deferred compensation and amortizes
the costs of all these services on a straight-line basis over the respective
terms of the contracts. During the year ended December 31, 2010, the Company
expensed $749,849 (2009 - $263,212) relating to the above contracts. At December
31, 2010, the unamortized portion of the deferred compensation totalled $108,000
(2009 - $645,181). The shares issued were all valued at their market price on
the date of issuance.

NOTE 8  LAWSUITS

On October 16, 2009, the Company received noticed that they had
been named as Defendants in a lawsuit whereby the Plaintiffs are seeking a
judgment of $39,000 plus interest thereon from March 11, 2009 for breach of
contract. The Company had 30 days to respond to the notice before a default
judgment is awarded. As at December 31, 2010, no amounts have been accrued as
the likelihood of an unfavorable judgment is considered low.

On May 10, 2010, the Company received noticed that they had
been named as Defendants in a lawsuit whereby the Plaintiffs are seeking a
judgment of $6,889 including interest of $1,444 for unpaid invoices. The Company
had 30 days to respond to the notice before a default judgment is awarded. As at
December 31, 2010, the full amount has been accrued and is included in accounts
payable.

NOTE 9  COMPARATIVE FIGURES

Certain of the comparative figures have been reclassified in
order to conform with the current years presentation.

NOTE 10  SUBSEQUENT EVENTS

|a) | On January 3, 2011, the Company entered into a consulting
      agreement with a consultant to provide business development and investor
      relation services to the Company for a term of three months for 1,500,000
      shares. On January 17, 2011, the Company terminated the contract with
      consultant.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                       
|b) | On January 28, 2011, the Company issued 500,000 common
      shares of the Company for $15,000 of subscriptions previously
    received.                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                       
|c) | On February 25, 2011, the Company issued 1,220,363 common
      shares of the Company to a creditor for the conversion of debt valued at
      $72,833.                                                                                                                                                               

---

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure

There were no disagreements related to accounting principles or
practices, financial statement disclosure, internal controls or auditing scope
or procedure during the two fiscal years and interim periods, including the
interim period up through the date the relationship ended.

Change in Accountant

On March 15, 2010, the members of the Board of Directors of
Alternet Systems, Inc., a Nevada corporation (the  Registrant),
unanimously approved the dismissal of Pollard  Kelley Audit Services Inc. (PK),
as the Registrants independent registered public accounting firm.

No reports of PK on the
Registrants financial statements for the past two fiscal years, specifically
the fiscal years ended December 31, 2007 and 2008 and through March 24, 2010,
contained any adverse opinion or disclaimer of opinion or was qualified or
modified as to uncertainty, audit scope, or accounting principles.

During the fiscal years ended
December 31, 2007 and 2008 and through March 24, 2010, there were no
disagreements with PK on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of PK, would have caused it
to make reference thereto in any report.

During the fiscal years ended
December 31, 2007 and 2008 and through March 24, 2010, there were no reportable
events (as defined in Item 304(a)(1)(v) of Regulation S-K).

On March 24, 2010, the Registrant engaged the firm of Hamilton
PC as the Registrants principal independent accountant to audit the
Registrants financial statements. The members of the Registrants Audit
Committee unanimously approved the engagement of Hamilton PC.

Prior to the engagement of
Hamilton PC, neither the Registrant nor any person on the Registrants behalf
consulted Hamilton PC regarding either (i) the application of accounting
principles to a specified completed or proposed transaction or the type of audit
opinion that might be rendered on the Registrants financial statements, or (ii)
any matter that was the subject of a disagreement (as defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions to such Item) or a
reportable event (as defined in Item 304(a)(1)(v) of Regulation S-K).

Item 9A. Controls and Procedures

Managements Report on Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are
designed to ensure that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our management, including our
president (also our principal executive officer) and our secretary, treasurer
and chief financial officer (also our principal financial and accounting
officer) to allow for timely decisions regarding required disclosure.

---

In designing and evaluating our disclosure controls and
procedures, our management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and our management is required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Therefore,
even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
Projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.

As of December 31, 2010, the end of our fiscal year covered by
this report, we carried out an evaluation, under the supervision and with the
participation of our president (also our principal executive officer) and our
secretary, treasurer and chief financial officer (also our principal financial
and accounting officer), of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, our president (also
our principal executive officer) and our secretary, treasurer and chief
financial officer (also our principal financial and accounting officer)
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this annual report in providing reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordances with US generally
accepted accounting principles.

Managements Report on Internal Control over Financial
Reporting

Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Responsibility, estimates
and judgments by management are required to assess the expected benefits and
related costs of control procedures. The objectives of internal control include
providing management with reasonable, but not absolute, assurance that assets
are safeguarded against loss from unauthorized use or disposition, and that
transactions are executed in accordance with managements authorization and
recorded properly to permit the preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United
States. Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2010. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Our management has concluded that, as of
December 31, 2010, our internal control over financial reporting is effective in
providing reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with US generally accepted accounting principles. Our management reviewed the
results of their assessment with our Board of Directors.

This annual report does not include an attestation report of
our companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by our
companys registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit our company to provide only
managements report in this annual report.

---

Inherent limitations on effectiveness of controls

Internal control over financial reporting has inherent
limitations which include but is not limited to the use of independent
professionals for advice and guidance, interpretation of existing and/or
changing rules and principles, segregation of management duties, scale of
organization, and personnel factors. Internal control over financial reporting
is a process which involves human diligence and compliance and is subject to
lapses in judgment and breakdowns resulting from human failures. Internal
control over financial reporting also can be circumvented by collusion or
improper management override. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements on a
timely basis, however these inherent limitations are known features of the
financial reporting process and it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation. Projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal controls
over financial reporting that occurred during the year ended December 31, 2010
that have materially or are reasonably likely to materially affect, our internal
controls over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate
Governance

The following discussion contains disclosure concerning the
directors, officers and control persons of the Company. There are no persons
which have acted as a promoter, controlling person, or significant employee of
the Company other than as disclosed below.

Name
    Position
    Term
      of Office*1*2Henryk Dabrowski
    President, Chairman and Director
    Expires at next AGMFabio Alvino
    Director
    Expires at next AGMRobin Bjorklund
    Director
    Expires at next AGM


---

|1. | Directors, whether appointed at a meeting of stockholders
      or by the remaining directors, are appointed until the next annual meeting
      of stockholders.                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                       
|2. | The President, Secretary, CEO and Treasurer do not have a
      set term of office. They serve at the pleasure of the Directors and can be
      removed at any time by the Directors.

Henryk Dabrowski, President and Chairman

Mr Dabrowski has over 21 years of experience in the information
technology, data network and telecommunications industries.

After co-founding and growing multi-million dollar integrations
firm, RKM IT of Venezuela, Mr Dabrowski served as COO/President of Vox2Vox
Communications in Miami, a multi-million dollar IP telecommunications and value
added services company, with presence in three continents and eight countries.
Vox2Vox was part of Ella Cisneros Communications Holdings (ECC Holdings).

After Vox2Vox he served as President of TekVoice Communications
Inc., a Miami FL  based Voice over IP telecommunications company, which merged
with Alternet Systems Inc. in 2008.

Mr. Dabrowski has extensive experience in Northern, Central and
Southern American markets and Europe; he is fluent in 4 languages and holds a
MBA from Universidad Metropolitana.

Fabio Alvino, DirectorMr. Alvino has over 30 years of
international entrepreneurship and management experience in the information
technology, multimedia and business and information consulting industries. He
has been involved in large project management and deployment experience in multi
country and disciplinary teams. He has also been involved in successful founding
and selling of multiple companies in the multimedia and internet consulting
industries.

Robin Bjorklund, Director,

Mr. Bjorklund has an extensive background in building
successful multi-million dollar companies from start-up to profitability. Over
the past 5 years he has worked as a venture capitalist and as a consultant with
Alternet Systems Inc.

Item 11. Executive Compensation

The particulars of the compensation paid to the following
persons:

| | (a) | our principal executive officer;                                                                                                                                                                                                                 
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                  
| | (b) | each of our two most highly compensated executive
      officers who were serving as executive officers at the end of the years
      ended December 31, 2010 and 2009; and                                                                      
| |     |                                                                                                                                                                                                                                                  
| | (c) | up to two additional individuals for whom disclosure
      would have been provided under (b) but for the fact that the individual
      was not serving as our executive officer at the end of the years ended
      December 31, 2010 and 2009,

who we will collectively refer to as the named executive
officers of our company, are set out in the following summary compensation
table, except that no disclosure is provided for any named executive officer,
other than our principal executive officers, whose total compensation did not
exceed $100,000 for the respective fiscal year:

---

Summary Compensation Table

|Name and 
      principal 
      position          | Year                                                                | Annual Compensation                                | Long-term compensation                         
|-------------------------------------------------- | ------------------------------------------------------------------- | -------------------------------------------------- | -----------------------------------------------
|Salary 
      ($)                                  | Bonus 
      ($)                                                    | Other 
      Annual 
      Compensation 
      ($) | Awards                                         
|Restricted 
      Stock 
      Award(s) 
      ($) | Securities 
      Underlying 
      options/ 
      SARs 
      (#) | LTIP 
      payouts
      ($)                      | All 
      other 
      Compensation 
      ($)
|(a)                                                | (b)                                                                 | (c)                                                | (d)                                            
|Henryk Dabrowski 
      President and Chairman     | 2010 
      2009                                                    | 140,000 
      140,000                             | 70,000 
      0                                
|Fabio Alvino 
      Director                       | 2010 
      2009                                                    | 130,000 
      120,000                             | 65,000 
      0                                
|Robin Bjorklund 
      Director                    | 2010 
      2009                                                    | 102,000 
      102,000                             | 0 
      0                                     

Involvement in Certain Legal Proceedings

None of our directors, executive officers, promoters or control
persons has been involved in any of the following events during the past five
years:

|1. | any bankruptcy petition filed by or against any business
      of which such person was a general partner or executive officer either at
      the time of the bankruptcy or within two years prior to that
  time;                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                               
|2. | any conviction in a criminal proceeding or being subject
      to a pending criminal proceeding, excluding traffic violations and other
      minor offences;                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                               
|3. | being subject to any order, judgment or decree, not
      subsequently reversed, suspended or vacated, of any court of competent
      jurisdiction, permanently or temporarily enjoining, barring, suspending or
      otherwise limiting his involvement in any type of business, securities or
      banking activities; or
|   |                                                                                                                                                                                                                                                                                                                               
|4. | being found by a court of competent jurisdiction in a
      civil action, the Securities and Exchange Commission or the Commodity
      Futures Trading Commission to have violated a federal or state securities
      or commodities law and the judgment has not been reversed, suspended, or
      vacated.               

---

Compliance with Section 16(a) of the Securities Exchange Act
of 1934

Section 16(a) of the Securities Exchange Act of 1934 requires
our executive officers and directors and persons who own more than 10% of our
common stock to file with the Securities and Exchange Commission initial
statements of beneficial ownership, reports of changes in ownership and annual
reports concerning their ownership of our common stock and other equity
securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and
greater than 10% shareholders are required by the SEC regulations to furnish us
with copies of all Section 16(a) reports that they file.

Based solely on our review of the copies of such forms received
by us, or written representations from certain reporting persons, we believe
that during fiscal year ended December 31, 2008, all filing requirements
applicable to our officers, directors and greater than 10% percent beneficial
owners were complied with.

Code of Ethics

Effective March 24, 2004, our company's board of directors
adopted a Code of Business Conduct and Ethics that applies to, among other
persons, our company's president and secretary (being our principal executive
officer, principal financial officer and principal accounting officer), as well
as persons performing similar functions. As adopted, our Code of Business
Conduct and Ethics sets forth written standards that are designed to deter
wrongdoing and to promote:

| | 1. | honest and ethical conduct, including the ethical
      handling of actual or apparent conflicts of interest between personal and
      professional relationships;                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                              
| | 2. | full, fair, accurate, timely, and understandable
      disclosure in reports and documents that we file with, or submit to, the
      Securities and Exchange Commission and in other public communications made
      by us;
| |    |                                                                                                                                                                                                                              
| | 3. | compliance with applicable governmental laws, rules and
      regulations;                                                                                                                                                   
| |    |                                                                                                                                                                                                                              
| | 4. | the prompt internal reporting of violations of the Code
      of Business Conduct and Ethics to an appropriate person or persons
      identified in the Code of Business Conduct and Ethics; and                            
| |    |                                                                                                                                                                                                                              
| | 5. | accountability for adherence to the Code of Business
      Conduct and Ethics.                                                                                                                                               

Our Code of Business Conduct and Ethics requires, among other
things, that all of our company's senior officers commit to timely, accurate and
consistent disclosure of information; that they maintain confidential
information; and that they act with honesty and integrity.

---

In addition, our Code of Business Conduct and Ethics emphasizes
that all employees, and particularly senior officers, have a responsibility for
maintaining financial integrity within our company, consistent with generally
accepted accounting principles, and federal and state securities laws. Any
senior officer who becomes aware of any incidents involving financial or
accounting manipulation or other irregularities, whether by witnessing the
incident or being told of it, must report it to our company. Any failure to
report such inappropriate or irregular conduct of others is to be treated as a
severe disciplinary matter. It is against our company policy to retaliate
against any individual who reports in good faith the violation or potential
violation of our company's Code of Business Conduct and Ethics by another.

Our Code of Business Conduct and Ethics is filed with the
Securities and Exchange Commission as an Exhibit to our annual report.

Board and Committee Meetings

Our board of directors held no formal meetings during the year
ended December 31, 2009. All proceedings of the board of directors were
conducted by resolutions consented to in writing by all the directors and filed
with the minutes of the proceedings of the directors. Such resolutions consented
to in writing by the directors entitled to vote on that resolution at a meeting
of the directors are, according to the Nevada General Corporate Law and our
Bylaws, as valid and effective as if they had been passed at a meeting of the
directors duly called and held.

Nomination Process

As of December 31, 2010, we did not affect any material changes
to the procedures by which our shareholders may recommend nominees to our board
of directors. Our board of directors does not have a policy with regards to the
consideration of any director candidates recommended by our shareholders. Our
board of directors has determined that it is in the best position to evaluate
our companys requirements as well as the qualifications of each candidate when
the board considers a nominee for a position on our board of directors. If
shareholders wish to recommend candidates directly to our board, they may do so
by sending communications to the president of our company at the address on the
cover of this annual report.

Audit Committee

Currently our company does not have an audit committee.

Option Exercises and Stock Vested

During our Fiscal year ended December 31, 2010 there were no
options exercised by our named officers.

---

Compensation of Directors

We do not have any agreements for compensating our directors
for their services in their capacity as directors, although such directors are
expected in the future to receive stock options to purchase shares of our common
stock as awarded by our board of directors.

Pension, Retirement or Similar Benefit Plans

There are no arrangements or plans in which we provide pension,
retirement or similar benefits for directors or executive officers. We have no
material bonus or profit sharing plans pursuant to which cash or non-cash
compensation is or may be paid to our directors or executive officers, except
that stock options may be granted at the discretion of the board of directors or
a committee thereof.

Indebtedness of Directors, Senior Officers, Executive
Officers and Other Management

None of our directors or executive officers or any associate or
affiliate of our company during the last two fiscal years, is or has been
indebted to our company by way of guarantee, support agreement, letter of credit
or other similar agreement or understanding currently outstanding.

Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters

The following table sets forth information regarding the
beneficial ownership of shares of the Companys common stock as of March 28,
2011 (49,940,011) shares issued and outstanding) by (i) all stockholders known
to the Company to be beneficial owners of more than 5% of the outstanding common
stock; and (ii) all directors and executive officers of the Company, and as a
group (each person has sole voting power and sole dispositive power as to all of
the shares shown as beneficially owned by them):

Name and Address
    Position
    Amount of Stock
      Beneficially Owned
    Percentage of ClassHenryk Dabrowski 5500-SW 86 thStreet
      Miami, FL 33143
    President, Director
    4,458,817
    8.92%Fabio Alvino 2627 S. Bayshore Drive, Apt. 1501
      Miami, FL 33133
    Vice President of Business
      Development
    2,735,898
    5.48%Robin Bjorklund 473-1027 Davie Street Vancouver BC
      V6E 4L2
    Director
    4,155,670
    8.32%Directors, Officers and 5%
      stockholders in total
    
    11,350,385


---

Changes in Control

We are unaware of any contract or other arrangement the
operation of which may at a subsequent date result in a change in control of our
company.

Item 13. Certain Relationships and Related Transactions, and
Director Independence

Except as disclosed herein, no director, executive officer,
shareholder holding at least 5% of shares of our common stock, or any family
member thereof, had any material interest, direct or indirect, in any
transaction, or proposed transaction since the year ended December 31, 2010, in
which the amount involved in the transaction exceeded or exceeds the lesser of
$120,000 or one percent of the average of our total assets at the year-end for
the last three completed fiscal years.

At December 31, 2010, a total of $450,647 (December 2009 -
$566,714) was payable to directors. Amounts due to related parties are
non-interest bearing and have no specific terms of repayment.

During the year, the company has expensed for a total $847,610
(2009 - $424,668) in consulting fees, investors relations and salaries to
related parties.

Of the amounts incurred to directors and officers, $373,394
(2009 - $424,668) was accrued and $474,216 (2009 - $Nil) paid in cash.

During the year ended December 31, 2010, the Company issued
3,010,087 common shares valued at $90,303 to two directors of the Company and
1,836,890 common shares valued at $55,107 to a previous director of the Company
for accrued consulting fees and investor relations.

Director Independence

We currently act with three (3) directors, consisting of Henryk
Dabrowski, Fabio Alvino and Robin Bjorklund. From inception to present date, we
believe that the members of our board of directors have been and are
collectively capable of analyzing and evaluating our financial statements and
understanding internal controls and procedures for financial reporting.

Item 14. Principal Accounting Fees and Services

The aggregate fees billed for the most recently completed
fiscal year ended December 31, 2010 and for fiscal year ended December 31, 2009
for professional services rendered by the principal accountant for the audit of
our annual financial statements and review of the financial statements included
in our quarterly reports on Form 10-Q and services that are normally provided by
the accountant in connection with statutory and regulatory filings or
engagements for these fiscal periods were as follows:



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**Year Ended****December 31,** 2010
    **December 31,** 2009Audit Fees
    $ 46,670
    $40,000Audit Related Fees
    $660
    $24,500


Year EndedDecember 31,
      2010
    December 31,
      2009Tax Fees
    $ 3,500
    $6,500All Other Fees
    Nil
    NilTotal
    $ 50,830
    $70,000


Our board of directors pre-approves all services provided by
our independent auditors. All of the above services and fees were reviewed and
approved by the board of directors either before or after the respective
services were rendered.

Our board of directors has considered the nature and amount of
fees billed by our independent auditors and believes that the provision of
services for activities unrelated to the audit is compatible with maintaining
our independent auditors independence.

PART IV

Item 15. Exhibits, Financial Statement Schedules

EXHIBIT INDEX

|Number | Exhibit Description                                                                                                                                           
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    | Articles of Incorporation
      (incorporated by reference to Exhibit 3.1 of the Registration Statement on
      Form 10SB filed on EDGAR on November 6, 2000)
|3.2    | Certificate of amendment to Articles of
      Incorporation (incorporated by reference to Exhibit 3.2 on the report on
      Form 8-K filed on May 23, 2002)  
|14.1   | Code
      of Business Conduct                                                                                                                                
|31.1   | Section 302
      Certification of Chief Executive Officer                                                                                                    
|31.2   | Section 302 Certification of Chief Financial
      Officer                                                                                                    
|32.1   | Section 906
      Certification of Chief Executive Officer                                                                                                    
|32.2   | Section 906 Certification of Chief Financial
      Officer                                                                                                    

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SIGNATURES

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

ALTERNET SYSTEMS INC.

By: /s/Henryk DabrowskiHenryk Dabrowski,
President (Principal Executive Officer) March 29, 2011



By: /s/ Luz VillanuevaLuz Villanueva,
Secretary, Treasurer(Principal Financial Officer and Principal Accounting
Officer) March 29, 2011

Pursuant to the requirements of 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.



|By: /s/ Henryk Dabrowski      | By: /s/ Luz Villanueva                                     
|----------------------------- | -----------------------------------------------------------
|Henryk Dabrowski, President   | Luz Villanueva, Secretary,Treasurer                        
|(Principal Executive Officer) | (Principal Financial Officer and Principal
      Accounting
|March 29, 2011                | Officer)                                                   
|                              | March 29, 2011                                             

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