SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                  FORM 10-KSB/A
                                Amendment No. 2

[X]  Annual Report  pursuant to Section 13 or l5 (d) of the Securities  Exchange
     Act of 1934

                      for the year ended December 31, 2000

                                       OR

[ ]  Transition  Report  pursuant  to Section 13 or 15 (d) of the  Securities
     Exchange  Act of  1934

          for the transition period from ___________ to ___________ .

                         Commission File Number: 0-28514

                      YAPALOT COMMUNICATIONS HOLDINGS INC.
         ---------------------------------------------------------------
        (Exact Name of Small Business Issuer as Specified in Its Charter)

             DELAWARE                                         98-0160284
             --------                                         ----------
   (State or Other Jurisdiction                            (I.R.S. Employer
  Incorporation or Organization)                        Identification Number)

             4884 Dufferin Street, Unit 1, Toronto, Ontario M3H 5S8
             ------------------------------------------------------
                    (Address of Principal Executive Offices)

  Registrant's telephone number, including area code:        416-736-8882

  Securities Registered Pursuant to Section 12(b) of the Act:        None

  Securities Registered Pursuant to Section 12(g) of the Act:        None

                                                        Name of Each Exchange
            Title of Each Class                          on which Registered
            -------------------                         ---------------------
 Common Stock, par value $0.0001 per share                      None

We generated  $168,273 of gross  revenues for the fiscal year ended December 31,
2000.  As of  September  12,  2001,  20,000,000  shares of our Common Stock were
outstanding, at a par value of $0.001 per share.

<PAGE>
                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                         ANNUAL REPORT ON FORM 10-KSB/A
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

                                TABLE OF CONTENTS
PART I                                                                     PAGE

Item 1     Description of Business                                            3
Item 2     Properties                                                         9
Item 3     Legal Proceedings                                                  9
Item 4     Submission of Matters to a Vote of Security Holders                9

PART II

Item 5     Market For Common Equity and Related Stockholder Matters          10
Item 6     Management's Discussion and Analysis or Plan of Operation         10
Item 7     Financial Statements and Supplementary Data                       12
Item 8     Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure                                              12

PART III

Item 9     Directors, Executive Officers, Promoters and Control Persons      13
Item 10    Executive Compensation                                            13
Item 11    Security Ownership of Certain beneficial Owners and Management    13
Item 12    Certain Relationships and Related Transactions                    14
Item 13    Exhibits and Reports on Form 8-K                                  15
           Signatures
           Financial Statements                                             F-1

<PAGE>

PART I

ITEM 1. DESCRIPTION OF BUSINESS

Yapalot Communications Holdings Inc. was incorporated on April 6, 2000 under the
laws of  Delaware  to  deploy  and  market a  global  Internet  Protocol  ("IP")
telecommunications  network. Yapalot is the holding company for its wholly-owned
subsidiary, Yapalot Communications Inc. which was incorporated under the laws of
Canada on March 8,  2000.  Yapalot  Communications  Holdings  Inc.  and  Yapalot
Communications  Inc. are referred to as a single entity throughout this document
as "Yapalot",  "we" or "us". We specialize in voice communication solutions over
an Internet  Protocol  (IP)  network our network of  computers  around the world
allows  for voice  telecommunications  over the  Internet.  We do this by moving
packets of  information  from one place to another  over our IP network  that we
have deployed and now manage.  Voice  traffic  travels into our network from our
customer's  telephones,  we  "packetize"  (digitize  the sound  into  small data
packets)  them,  send  them  over our IP  network  to the  destination  that the
customer dialed, and then we "unpackatize" them when they reach the destination.
The final result is a telephone call over an IP network or Voice over IP (VoIP).

Our  Network  Operations  Center  (NOC) at our head  office in  Toronto,  Canada
manages the network.  The NOC  continually  monitors  network  performance,  and
trouble-shoots  incidences.  Two  personnel  control  the  NOC at all  times  to
facilitate a rapid response to network issues.  Our NOC staff,  led by Mr. James
Tetaka has been instrumental in the smooth operation of our network.

The long distance  market is highly  competitive,  with numerous  competitors of
varying  sizes.  The principal  methods of competition  are price,  advertising,
promotion and quality.  In all of our products and services Yapalot competes not
only  with  other  widely  advertised  services,  but also  with  private  label
resellers  that  generally  sell  at  lower  prices.  We  presently  have  1,852
customers.

GROWTH STRATEGY

Principal Business Activities

Our growth strategy is based on:

1.   Rapid network growth by deploying  network  servers and increasing the size
     of our network around the world.
2.   Distribution   rights  to  qualified  persons  interested  in  selling  and
     marketing  Yapalot  services.  Distributors or "Approved  Agents" will have
     access to our network enabling them to market and offer Flat Rate Unlimited
     long distance to customers in their territory.
3.   Flat Rate  Unlimited  long  distance  voice  solutions for the consumer and
     business market.
4.   The development of an outbound Corporate Sales team.
5.   Pre-paid  long  distance  card  solution  that is time  sensitive  and thus
     enables unlimited long distance for a specified period of time.
6.   Wholesale  of minutes on our network to other  carriers  and  brokers,  and
     pre-paid card companies.

Network Growth

In order to expand our reach,  we must deploy  network  servers around the world
and manage them.  Initially,  we began providing flat rate long distance service
in July 2000 in several major cities: Toronto,  Montreal,  Vancouver, Hong Kong,
Moscow,  Chicago,  Los  Angeles,  Miami and New York,  and in the  countries  of
France,  the United Kingdom,  Italy and Israel.  In August 2000, we expanded our
long  distance  services to include the entire  continental  United  States.  In
September 2000, we launched additional long distance services in German,  Norway
and the  Netherlands.  We anticipate  expanding our services in November 2000 to
include Japan and Argentina at a cost of approximately $200,000, and in December
2000 to include Greece at a cost of approximately $100,000.

We collocate  (house) each of our network servers in a suitable housing facility
in a country or city.  These  facilities  are accessible to our staff 24 hours a
day, 7 days a week. Our choice of  collocation  vendors is a key solution to our
present  and  future  growth  potential.   These  vendors  hold  more  than  200
collocation  facilities  around the world.  They were selected  because of their
global reach,  which means that we can deploy additional  network servers around
the world relatively quickly and unencumbered by the difficult task of having to
find suitable real estate. We have executed three-year  renewable contracts with
each  vendor.  These  temperature-controlled  facilities  house  our  computers,
network servers,  digital and analogue phone lines,  routers and other equipment
in a rack-mounted configuration.

                                       3
<PAGE>

Approved Agents and Master Dealers

We have  already  taken  steps to expand to other  countries,  and have  aligned
ourselves  with vendors such as UUNET  because  they have a  substantial  global
real-estate presence to house our network equipment.

The other way we plan to grow  internationally is via distribution using Yapalot
Approved  Agents.  The  response  from  interested   Approved  Agents  has  been
overwhelming  with over 200  enquiries to date  received  from Agents around the
world through our web site.  Approved Agents will sell Yapalot services in their
countries and promote the Yapalot name.  The cost to the Agent is $80,000 and is
non-exclusive.  We also have a Master Dealer  program,  which costs $500,000 and
gives  exclusive  distribution  rights to the person or  company  for a specific
territory,  i.e. State,  Province, or small country to sell Yapalot services and
set up new Approved Agents.

To date, no Approved  Agents or Master Dealers have been  established,  although
numerous  negotiations  are  underway.  We have an  executed  agreement  labeled
"Approved Agent Agreement" with Chris Kwon  Enterprises,  they have not paid the
requisite  $80,000 fee as stipulated in the  agreement.  Therefore,  we consider
Chris Kwon Enterprises to be a Sales Agent.  Under the terms of their agreement,
they  receive a commission  for their  Yapalot  sales.  We will  re-label  these
agreements as "Sales Agent  Agreements" in the future.  As a Sales Agent,  Chris
Kwon Enterprises is expected to sell and solicit  subscriptions for our services
for which they are paid a one-time  commission  per sale.  A Sales  Agent is not
required to pay a fee to us. At this time, we have not determined the commission
to be paid to Chris  Kwon  Enterprises.  At such time that their  commission  is
determined,  we will  incorporate  that  information  into  Schedule  A of their
agreement.  Sales  Agents,  including  Chris Kwon  Enterprises,  must  adhere to
quarterly  sales quotas.  However,  we have not yet determined what those quotas
will be. Therefore,  at such time that we have determined Chris Kwon Enterprises
quota, we will incorporate such information into Schedule B of their Agreement.

APPROVED AGENTS- This  relationship will require the Approved Agent to pay us an
initial fee of $80,000.  The Agent is  responsible to hire and train sales staff
to   successfully   sell  and  promote  our  services.   This   relationship  is
non-exclusive  and we have the right to sell more agencies in any location.  The
Approved Agent is responsible  for any and all costs  associated  with operating
his business  and  promoting  our  services.  We furnish to the  Approved  Agent
collateral,  and POP marketing  material  such as brochures,  as may be required
from time to time to help  promote  our  services.  The purpose of the fee is to
allow the Approved Agent access to sell  subscriptions  to the Yapalot  network.
For each subscription,  the Approved Agent receives residual commissions from us
equal to 50% of the Monthly Service Fee (MSF) that we bill to the customer.

MASTER  DEALER-  This  relationship  will assign the Master  Dealer an exclusive
territory,  such as a  country,  state  or  province,  to  promote  and sell our
Approved Agencies.  The cost is $500,000 and this arrangement assures the Master
Dealer that we will not set up  distribution  or  Approved  Agents in a specific
territory.  For  each  Approved  Agency  that  the  Master  Dealer  sells in his
territory the master dealer earns 60% of the initial  Approved  Agent fee and on
ongoing 5% of all MSF  generated by the Approved  Agent in that  territory.  The
Master Dealer may also operate his own Approved Agent  locations  under the same
terms as the Approved Agent.  Essentially,  the Master Dealer is a Yapalot sales
representative  with an  exclusive  territory  to develop and sell our  Approved
Agencies for $80,000 each.


                                       4
<PAGE>

UNLIMITED LONG DISTANCE

We promote our  unlimited  long  distance  package using a variety of media that
include print, television and radio advertising in the Toronto market. Customers
simply choose the destination they call the most and for $50 per month. They can
talk as long as they want from their home phone or cell phone.  If a customer in
Toronto wished to call Los Angeles,  he can select that  destination and for $50
per month he can talk as long as he wants to the State of  California.  The U.S.
destinations are broken down by state and in Canada by Province, but for most of
Europe it is by  individual  country.  Therefore,  the cost is $50 per month for
Italy, Israel,  France, Norway and each of the individual states. More countries
are being added as our network  grows.  We have elected to promote our unlimited
package because our competitors are constantly  promoting per minute rates.  Our
customers never have to count minutes and they talk as long as they want for one
low rate to the destination of their choice.  (Provided that we offer service to
the destination they choose).

OUR CUSTOMERS

Consumers

Initially we are marketing our Long Distance  services to consumers  that have a
strong ethnic diversity.  We began by offering Unlimited Long Distance to Israel
from Toronto by appealing to this ethnic group, which has a strong attachment to
their  homeland  and family.  Each global  destination  is targeted to an ethnic
group or corporate  need for a  particular  destination.  The primary  marketing
vehicle for this  segment is radio,  print and TV. At the  present  time we have
produced  television and radio  commercials that are presently airing throughout
Ontario,  Canada.  It is our intention to have our Approved  Agents both locally
and  internationally  when launched  target and market as we have in Canada.  We
also intend to reach new customers by growing our  distribution by way of retail
channels  authorized to sell Yapalot services.  These distribution  channels may
include electronic stores, variety stores, cellular stores and others.

Corporate

By  capitalizing  on our consumer  offering,  we have now  assembled a corporate
sales team of seven  personnel  including a corporate  sales manager.  They have
begun  prospecting  and  promoting  our  corporate  product  offering  that also
includes  unlimited  long  distance  as well as  enhanced  services  like Global
Conference,  and Global  Fax.  We  anticipate  that this sales team will grow to
approximately 20  representatives  by the first quarter 2001. The team's primary
focus is to prospect small to medium sized  businesses and creating  tailor-made
long  distance  packages  and  enhanced  services.  The  team  will  be  able to
capitalize on marketing  efforts already in the  marketplace,  which has created
awareness and brand recognition of the Yapalot name.

Pre-Paid

Our pre-paid  offer is different  from  traditional  pre-paid  cards marketed by
competitors.  Rather than offer our  customers  the same or  slightly  lower per
minute rates,  our prepaid cards are  time-sensitive  and offer  unlimited  long
distance for a specific period of time to a selected  destination.  For example:
(1)A  customer may walk into a variety  store,  (2) purchases a thirty day card,
(3) he then  calls  the  activation  number  on the  back of the  card,  (4) the
computer  generated  voice  response  system (IVR) prompts him to enter his card
number (5) Then prompts him to select the  destination.  Once the destination is
selected  by the  customer,  the card is  activated  by the IVR and is valid for
unlimited  calling for thirty days to the selected  destination.  At the present
time,  we have secured  distribution  of our prepaid  cards through 3,000 retail
outlets on Ontario  formalized by a card distribution  agreement with Chris Kwon
Enterprises for a period of five years.

Wholesale

We are able to wholesale  minutes to other long distance  companies and carriers
around the  world.  We have  competitive  rates and are  therefore  able to sell
minutes to many long distance  companies and pre-paid  telephone card companies.
To date,  we have sold  approximately  250,000  minutes  a month on a  wholesale
basis.

                                       5
<PAGE>

INDUSTRY BACKGROUND

As  the  telecommunication  industry  has  been  deregulated,   competition  has
corrected  the high  prices  of long  distance  service  with  competitive  cost
effective pricing.  Our Voice over Internet Protocol ("VoIP")  technology allows
for  substantial  cost  savings over  traditional  telephone  company  switching
systems by eliminating all long distance tolls and replacing them with efficient
IP technology.  Yapalot was formed by a team of  experienced  telecommunications
executives.

We have developed  strategic  alliances with  manufacturers such as Ericsson and
Clarent Corporation ("Clarent").  We consulted with Ericsson, on a non-exclusive
basis, in connection with the initial  deployment of our long distance services.
Clarent is currently the  manufacturer of our Yapalot Gateway  Servers.  Clarent
also provides us with  consulting  services,  technical  support and  deployment
support,  all on a non-exclusive basis. We have a written agreement with Clarent
that may be terminated by either party with 30 days written notice. We have also
formed non-exclusive alliances with UUNET, an MCI Worldcom company, and Appwerx.
UUNET  houses our  technical  equipment  in the  countries in which we presently
provide services.  In addition,  they provide the IP bandwith we require for the
operation  of our  network.  We have a one  year  contract  with  UUNET.  We may
renegotiate this contract once the full term of each is completed.

We contracted  with Appwerx in May 2000 to develop the PC to phone  solution.  A
contract has been  executed  that will allow Yapalot to own the software once it
is  completed.  The project is expected to be  completed by February  2001.  The
software  will allow our  customers  to make free calls  using a PC to any phone
through a graphical interface that will be a picture of a phone.

Our purpose is to provide  flexible  long distance  voice and data  solutions to
consumers and businesses by attempting to achieve the following:

o Provide flat rate long distance packages

o Prepaid card service "One Card"

o Post paid billing scenario

o Free long distance calls: PC to phone

o Corporate long distance solutions

o Corporate global voice mail

o International conferencing

o Global fax

During our first year of operations, we are focusing on global deployment of our
gateways and a Canada-wide  advertising  campaign,  which is currently underway.
Beginning  in our  second  year,  we will  place  the same  promotional  efforts
employed  in  Canada  to sell flat  rate  long  distance  service  subscriptions
worldwide.  We have the  potential  to sell  flat  rate  long  distance  service
subscriptions  in  all of  the  countries  available  on  the  Yapalot  network.
Subscriptions  worldwide  will be set up and  managed  by our  customer  service
center  located in Toronto,  Canada,  through our inbound call center or through
our website.

                                       6
<PAGE>

YAPALOT'S VOIP NETWORK

Our VoIP network was developed using hardware (gateways) manufactured by Clarent
Corporation  and software  either  manufactured  by Clarent or  proprietary.  We
co-located  our  gateways  with  UUNET,  a  company  which  specializes  in data
solutions and server location  facilities for global  companies,  by positioning
our gateways,  also known as points of presence, in specific countries in rental
space  provided by UUNET.  We purchased  Internet  bandwidth from UUNET that can
carry all data  between  our  gateways to avoid data being  carried  over public
Internet service.  Once our gateway is in place it is linked via the Internet to
other  gateways owned and operated by Yapalot.  The software is responsible  for
routing all telephone,  fax and video  transmissions from gateway to gateway and
then  terminating  them  through a PRI  (regular  telephone  line).  Our initial
deployment  of 10 gateways in eight  different  countries has a one time cost of
$1,000,000  including  installation,  training and  software.  We  anticipate an
additional  fixed cost of $100,000 per gateway and an ongoing cost of $4,000 per
gateway to add an additional  city to our network.  Our global  expansion from a
hardware  standpoint is $100,000 per site.  Ten gateways had been launched as of
December 31, 2000.

YAPALOT'S PRODUCTS

In North  America our services  spread  across two major  markets:  consumer and
corporate.  The consumer market will be enticed by discounting long distance and
flat rate packages.  While business will also be attracted by discounted  rates,
they will be more anxious to use new services, such as global voice mail, global
fax and global conference.

We will  provide an  inbound  call  center  located  in  Toronto.  International
customers will subscribe to our service via e-commerce on our website or contact
their local Yapalot representative to subscribe via phone.

Our services and products will be diverse and all share a common goal:
cost  reduction in global  communications  via voice,  fax or data.  The network
infrastructure  will  yield  substantial  benefits  over  traditional  telephone
companies as follows:

Infrastructure - Based on the Internet standard of IP, which allows for the flow
of data  across the  globe.  This data can then  carry  voice,  fax and video to
almost anywhere.

Performance  - Voice  over IP or VoIP with a  standard  T1 data  connection  can
support over 120 simultaneous phone calls in every country of presence.

Products - The  ability to market  long  distance  voice  services  via phone to
phone, PC to phone and PC to PC. These services can be post paid,  prepaid cards
or flat rate service.  These  services can also migrate to the  corporate  world
with enhanced network  abilities to link corporate offices around the world with
both voice and data transfer, conference calling and global voice mail.

Flexibility  - Because the  infrastructure  backbone  is Internet IP based,  the
marketing of the services can be done anywhere in the world even without a point
of presence, hence a global reach.

E-Commerce  - The ability to  subscribe  clients  internationally  via  commerce
giving them access to our VoIP network.

COMPETITION FOR TELECOMMUNICATIONS SERVICES

In the world of  deregulated  telecommunication,  competition  has corrected the
high prices of long distance service with  competitive  cost effective  pricing.
Communication  is  expedited  due to the  Internet  and  e-commerce.  Management
believes that they can capture a substantial portion of the international market
largely due to our "Flat Rate"  program.  Our services  address  these issues by
providing  value added  services that combine with flat rate service to create a
reoccurring revenue stream.

An increasing number of competitors must find ways to effectively create revenue
by attracting clients at lower rates and providing new services. The competition
in North  America  and many  parts of Europe  has led to the  decline  in profit
margins.  Bell Canada owns the phone switches and cables,  but with deregulation
must  wholesale  airtime to AT&T,  Sprint,  and now Telus who resell to Canadian
consumers. Other wholesalers also have entered the market and are repackaging in
the form of Prepaid Cards,  and domestic flat rate service like London  Telecom.
All these companies ultimately rely on Bell who owns the network.

                                       7
<PAGE>

According to a March 2000 Probe Research,  Inc. report,  VoIP  telecommunication
traffic  is  expected  to reach 611  billion  minutes  by 2005.  Revenue to VoIP
suppliers is expected to also reach $24.7  billion by 2005. We plan to construct
and deploy a new sophisticated  network from the ground up. This VoIP network is
intended to bypass Bell and any  regulatory  body by accessing  the  unregulated
Internet  IP  network,  hence  Voice  over  IP.  At  present,  the  internet  is
unregulated  as to  content,  volume  and  distribution.  Any  regulation  being
discussed  for future  consideration  by  Congress  concerns  elements  of adult
content,  freedom of speech and  taxation on goods sold.  Individual  states are
addressing  the issue of taxation.  We use the internet as a conduit to transfer
data.  Although we do not  anticipate  that  Congress will pass  legislation  to
regulate  data  transfer of this type,  any taxation that may be imposed on this
use  will be  passed  on to our  customers.  Our  ability  to pass  taxes to our
customers  will depend on the size of any taxes imposed.  Should  regulations be
passed, our business model will not change.

This is a new and emerging  technology.  We are not the first  company to market
voice over the internet.  Companies such as Net2Phone and DialPad.com  have each
launched  discounted  internet  calls  from a  personal  computer  ("PC").  This
requires the customer to use a PC to place a long distance call. Our services do
not require the customer to use a PC.  Instead,  we route  internet  voice calls
from any standard telephone to any standard  telephone.  We have built a private
digital network by networking  computers  internationally in multiple countries.
These  computers  are linked via a dedicated  internet  "pipe" thus creating the
Yapalot Global Private Network ("YGPN") that consists of computer servers around
the world.  We use this  network  to convert  analogue  voice  signals  from our
customers  telephone  to digital  data that we transfer  from one PC to the next
across the globe.  Therefore,  our  customers are able to make a phone call over
the internet without the use of their PC. Their phone becomes a conduit to voice
transfer over the internet.  We anticipate that future internet related services
will soon be available like Internet Fax and Internet  Conference  Calls without
the use of a PC or specially equipped phone.

We compete with  companies  that are much larger and have far greater  financial
resources than us. While there can be no assurances,  we believe our approach to
the  international  telecommunications  market will distinguish our services and
yield cost savings to our  customers.  We route our calls  privately  within our
YGPN, thus keeping costs to the consumer low. Our  competition  still use legacy
networks that require them to hand off each call to local telephone companies in
each country.  These  telephone  companies  charge our  competitors a per-minute
rate.  Furthermore,   our  approach  to  marketing  our  services  differs  from
competitors, such as Bell, AT&T and Sprint in that they must charge a per-minute
rate.  Per-minute  rates  cannot be avoided as long as the  international  phone
companies charge each other to route calls.  International  telephone  companies
are the conduits for delivering the long distance  services of our  competitors,
while we can offer our  customers  an  unlimited  flat rate  international  long
distance service because of our YGPN.

It appears  that our  business is one with low barriers to entry and no patented
technology.  Therefore,  if our business model is a success, we may face so much
competition, that there is not guarantee of long or medium term success.

EQUIPMENT SUPPLIERS

We have a written  agreement  with  Clarent  Corporation  ("Clarent"),  based in
Redwood City,  California to manufacture  our equipment.  Clarent is the world's
leading IP telephony  technology  supplier to mainstream carriers and providers.
In  addition,  Clarent  will  provide  technical  training  for  installing  and
operating  the hardware and software for the VoIP network.  The  agreement  sets
forth a payment schedule according to the deployment,  training and operation of
the VoIP network. We also will be utilizing other routing equipment manufactured
by Cisco  Systems,  Lucent  and IBM.  The  equipment  for the  construction  and
operation of our network is readily available from these  manufacturers.  We are
not dependent  upon any single company for the purchase of hardware and software
necessary to  construct  our VoIP  network.  If any of our  suppliers  ceased to
exist, it would not affect our ability to operate our network.

                                       8
<PAGE>

TRADEMARK CONCERNS

The name  "Yapalot"  is  trademarked  in Canada  and is in the  process of being
trademarked  abroad.  Our network  cannot be  registered  because it is Internet
based and cannot be patented.  Approved agents,  which are  distribution  points
across the world with licenses to operate through our network, will be available
for sale outside of Canada.

GOVERNMENT REGULATIONS

Our VoIP network is Internet based and,  therefore,  does not require government
approval or licensing.

One  component of the network,  called a "PRI",  can be described as a telephone
line.  These  "PRI's"  are  necessary  in any country in which our network has a
point of presence. Some countries require a license to operate a "PRI", although
most do not have such  regulations.  We will obtain the  necessary  licensing in
those countries that require it. To date, we have realized an approximate  legal
cost of $5,000 per country to obtain the required licensing.  We are licensed in
Hong  Kong and  Russia  and we are  seeking  a license  in the  Philippines.  No
licenses  are  required in Europe.  We do not  anticipate  that the time or cost
involved in securing  licensing will be a limiting factor in our development and
growth.

EMPLOYEES

At  present,  we  have a  total  of 32  full-time  employees  and no  part  time
employees.  They are  responsible  for the  construction  of the  VoIP  network,
software design and business operations,  and customer service. Over the next 12
months and once the VoIP network is complete,  we will require  approximately 13
additional full-time employees for various functions throughout the company.

ITEM 2. PROPERTIES

We lease offices at 4884 Dufferin Street, Unit 1, Toronto,  Ontario,  Canada M3H
5S8.  The 6,000 square foot  facility is occupied  pursuant to a five year lease
that  commenced on April 1, 2000 with an option to renew for an additional  five
years.  The monthly rental is $4,083.00 per month including  taxes,  maintenance
and insurance.

The headquarters were designed as an open concept,  forty employee facility with
the capacity to oversee and manage worldwide operations, handle customer service
and support, house sales and marketing staff, conduct billing and offer a retail
sales outlet.  Management believes these facilities are adequate for our current
needs and anticipated future needs.

ITEM 3. LEGAL PROCEEDINGS

We are  currently  not  engaged  in any legal  proceedings  and not aware of any
pending or threatened  litigation  that could have a material  adverse effect on
our business, financial condition or results of operations.

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

None.

                                       9
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of September  12, 2001, we had  20,000,000  shares of common stock issued and
outstanding.

During  August  and  September  2000,  we  conducted  an  offering  pursuant  to
Regulation D, Rule 504 of the  Securities  Act of 1933,  as amended,  whereby we
sold 4  million  shares of  common  stock at $.25 per share to raise $1  million
dollars for working capital.

As of December 31, 2000 there were 76 holders of record of our common stock.  We
have not  declared  or paid any cash  dividends  on our common  stock  since our
inception,  and our Board of Directors  currently intends to retain all earnings
for use in the  business  for the  foreseeable  future.  Any  future  payment of
dividends will depend upon our results of operations,  financial condition, cash
requirements and other factors deemed relevant by our Board of Directors.  There
is no public trading market for our securities.

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

Overview

We are a Voice Over IP  telecommunications  company whose objective is to create
shareholder value by developing  operations and proprietary assets that generate
sustainable revenues and which yield long-term growth potential.  Our operations
are located primarily in North America.

During  the next few  years,  we expect to  continue  to  implement  our  growth
strategy.  Our growth  strategy  includes  a global  deployment  of the  Yapalot
Network  through  the  following:  (i) allow us to gain  strategic  position  by
deploying  Network Gateways in different parts of the world,  (ii) improve asset
productivity,  and (iii) improve growth potential in both emerging  technologies
and key targeted vertical market sectors.  To increase market share, we may also
attempt to acquire key  competitors,  as well as  companies  and assets that may
have important products and synergies with our existing operations and products.

Significant Developments

For the fiscal year ended  December  31, 2000,  we  completed  the launch of ten
initial gateways at a cost of $1,000,000. We have now commenced the launch of an
additional 22 gateways, at a further cost of approximately  $2,500,000.  The ten
initial  gateways  were  financed  using  the  private  funds  of  our  founding
shareholders.  We believe that we will  generate  sufficient  positive cash flow
from  operations  to meet  operating  requirements  and the  purchase  of the 22
gateways over the next 12 months. This belief is founded on our current customer
base growth of  approximately  450 new customers per month,  coupled by stronger
purchasing  power to  purchase  Gateways  from  Clarent  at  reduced  prices and
favorable  installment payment terms on each Gateway.  In addition,  we are also
working on Approved Agent Agreements which we anticipate will be completed early
in the new year.  Management  has also put plans  into  effect to  significantly
build the current monthly  customer  acquisition  base from 450 to approximately
700 new customers per month.  This latter growth is expected to be  accomplished
through  a  planned  increase  in  advertising  expenditures  and the  hiring of
additional  sales staff early in the new year. If we do not generate  sufficient
positive cash flow to meet cash requirements, we may, from time to time, seek to
raise capital from  additional  sources,  including  setting up lines of credit,
project  specific  financings  and public or private debt or equity  financings.
However,  there can be no  assurance  that we will be able to obtain any sort of
financing on commercially acceptable terms, if at all.

To  achieve  our  business  plan to date,  we have hired a total of 32 full time
employees  comprised of a customer service team of 12 employees and 20 employees
in the areas of administration, marketing and sales.

We are a holding  company and have no independent  operating  history other than
through Yapalot  Communications  Inc. Expenses for the period ended December 31,
2000 represent consolidated costs since inception.

                                       10
<PAGE>

COMPARISON OF THE PERIOD ENDED  DECEMBER 31, 2000 TO THE PERIOD ENDED  SEPTEMBER
30, 2000.

During the current  quarter  ended  December  31, 2000,  we  completed  contract
negotiations  with our major  equipment  suppliers.  We also took  delivery  and
installed gateways for Montreal,  Vancouver,  Toronto, Hong Kong and Israel, New
York City, Miami, Italy, and Greece. Under the terms of our supplier agreements,
we have paid initial  deposits of 25% of the equipment  cost,  with  installment
payments for the balance paid over the following three fiscal  quarters.  During
this period,  we also completed  most of the  renovations of our offices and the
acquisition of furniture and equipment workstations for our employees.

RESULTS OF OPERATIONS

For the 3 months ended December 31,2000:

During this quarter  ended  December 31, 2000,  we  significantly  increased our
revenues by $150,750,  signing  customers to  contracted  revenues  amounting to
$530,550,  of which $363,525  remains to be collected as the related  service is
provided and earned.  Our resulting loss for this period of $467,472  reflects a
significant  increase in various corporate  expenses in the period compared with
the prior  periods,  as  operations  continue to roll out. This period's loss is
largely a result of anticipated  costs from a heavy advertising  program,  which
cost us $244,601 in this quarter.  In addition,  we also developed the remaining
proportion of our planned staffing level this quarter,  resulting in $158,871 of
wages and other payroll costs this quarter.

The  net  loss  for  the  current  quarter  was  also  affected  by the  cost of
professional legal,  accounting and other services during the period, which grew
out of our ongoing organizational development to ensure we meet the needs of our
current and projected  operations.  Amortization of capital assets in the amount
of $85,283 this quarter also represents a significant cost, due to the increased
installation  cost of our gateways.  Most other expenses have  developed  rather
normally   during  this  period,   considering   our  increased   infrastructure
requirements  as we continue to develop our client base and resulting  operating
costs.

For the cumulative 9 months ended December 31,2000

For the  cumulative  period from  incorporation,  April 6, 2000, to December 31,
2000,  we began  increasing  our  revenues to $168,273 by signing  customers  to
contracts  valued at $530,550,  of which  $362,277 will be recognized as revenue
when the related  service has been  provided by us. Our  cumulative  net loss of
$802,002  for the nine  months  ended  December  31,2000  is largely a result of
anticipated costs of $389,086 from the initial advertising  program, as well the
development of a significant proportion of our planned staffing level, resulting
in  administration  and sales  wages paid out during this  cumulative  period of
$226,960.  The net loss for the  current  cumulative  period also  reflects  the
accumulated cost of professional  legal,  accounting and other services required
to ensure our ongoing organizational  development meets the needs of our current
and projected operations. The accumulated amortization cost of capital assets of
$120,192  also  represents a significant  charge  against  revenues,  due to the
cumulative installation cost of our gateways. Most other expenses have developed
rather  normally during this period,  considering  our increased  infrastructure
requirements  as we continue to develop our client base and resulting  operating
costs.

LIQUIDITY AND CAPITAL RESOURCES

Our primary  sources of liquidity are funds generated by loans from the founding
shareholders.  Additional information on the loan agreement is described in note
4 to the  Company's  Consolidated  Financial  Statements  set  forth in Part III
hereto.

Current  assets  totaled  $205,065 at December 31, 2000  compared to $640,313 at
September  30,  2000.  The  decrease  in the last  quarter  is  attributable  to
additional hardware equipment purchased for the new gateways, the utilization of
cash  maintaining our  infrastructure  as the business  develops,  our acquiring
customer service  contracts to be collected over the current operating cycle, as
well as additional  prepaid  Canadian Goods and Services Taxes refundable to us.
At December 31, 2000, we had cash but no short-term deposits.  Yapalot customers
pay for the service by automatic credit card payments,  as such, we anticipate a
low  balance  of  accounts  receivable.  As of  December  31,  2000,  we had 941
customers on our network.  Our customers are on twelve month term  contracts and
we bill their major credit card on a monthly basis for the contract commitment.

                                       11
<PAGE>

As of December  31,  2000,  current  liabilities  totaled  $634,084  compared to
$786,101 at September  30, 2000.  The  decrease is largely  attributable  to the
commencement of payments against current supplier balances and network equipment
supplied under a payment schedule.

Our operations are carried out in Canadian dollars. Our reporting currency is in
Unites States dollars. As indicated in the notes to this financial  information,
any  translation  adjustment  to the  reporting  currency  would be  included in
equity.

During the period ended December 31, 2000, we conducted an offering  pursuant to
Regulation D, Rule 504 of the Securities Act of 1933, as amended,  to accredited
investors of 4,000,000  shares of common stock at $0.25 to raise  $1,000,000 for
working capital.

ITEM 7. FINANCIAL STATEMENTS

Our financial statements,  including the notes thereto, together with the report
of Weisbrod Goldmacher,  LLP.,  independent  Chartered  Accountants thereon, are
presented following the signature page.

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

We dismissed Bromberg & Associates, the independent public accountants that were
previously engaged as the principal accountant to audit our financial statements
and as our principal accountant on September 15, 2000. The dismissal of Bromberg
& Associates was approved by our Board of Directors on September 14, 2000.  From
the date of our inception  through  September  15, 2000,  Bromberg & Associates'
report on the financial statements has never (i) contained an adverse opinion or
a disclaimer of opinion;  nor (ii) been qualified or modified as to uncertainty,
audit scope or accounting  principles.  From the date of our  inception  through
September  15,  2000,  there were no  disagreements  between  us and  Bromberg &
Associates on any matter of accounting principles or practices,  resolved to the
satisfaction  of Bromberg & Associates,  would have caused Bromberg & Associates
to make reference to the subject matter of the disagreement or disagreements.

On September 15, 2000, we hired Weisbrod Golmacher,  LLP, Chartered  Accountants
as our new auditors to perform certain accounting services for us and to perform
an audit of our financial statements for the year ended December 31, 2000. Their
responsibility  was  to  review  the  interim  financial  information  from  our
inception on April 6, 2000 to June 30, 2000.  The hiring of Weisbrod  Goldmacher
was approved by the Board of  Directors.  During our most recent fiscal year and
subsequent  interim periods prior to the engagement of Weisbrod  Goldmacher,  we
did not, nor did anyone on our behalf,  consult  Weisbrod  Goldmacher  regarding
either (A) the application of accounting  principles to a specified completed or
proposed transaction, or the type of audit opinion that might be rendered on our
financial statements as to which a written report or oral advice was provided to
us that was an important factor considered by us in reaching a decision as to an
accounting,  auditing or financial  report issue, or (B) any matter that was the
subject of a  disagreement  between us and  Bromberg &  Associates,  or an event
described in paragraph 304(a)(1)(v) of the SEC's Regulation S-B.

                                       12
<PAGE>

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The  following  table sets forth  certain  information  about our  directors and
executive officers.

   Name                         Age      Position
 --------                      -----    -----------
Yuval Barzakay                  29      Chairman, President and CEO
Albert Kshoznicer               54      Director
Alon Barzakay                   27      Director

YUVAL  BARZAKAY,  CHAIRMAN,  PRESIDENT  AND  CEO - Mr.  Barzakay  has  been  our
Chairman,  President and CEO since  inception.  He was CEO of Absolute  Mobility
Inc.  from 1990 to April 2000 and  founder and CEO of  Absolute  Total  Security
since 1992. Mr. Barzakay attended York University in Toronto.

ALBERT  KSHOZNICER,  DIRECTOR - Mr.  Kshoznicer  has been a Director since April
2000.   He  is   President   and   Treasurer   of  ABS   Woodworking   Inc.,   a
multimillion-dollar  company  located in Toronto,  Ontario,  since  1980.  He is
Chairman of Shelby Investments Inc ., a Toronto based property  developer,  from
1985 to present. From 1970 to 1975, he was President and founder of Vital Hotel,
Winnipeg, Manitoba and prior to that he was President of Balik Development Inc.,
a home development company in Toronto.

ALON BARZAKAY,  DIRECTOR - Mr. Barzakay has been a Director since April 2000. He
practices corporate and commercial litigation at Bienstock and Clark,  Attorneys
at Law, since 1998. He received his J.D. from Detroit College of Law at Michigan
State University in 1998.

     Directors  serve  for a term of one  year or  until  their  successors  are
elected and qualified. Executive officers are appointed by and serve at the will
of the Board of Directors.  Yuval Barzakay is a son-in-law of Albert  Kshoznicer
and the brother of Alan Barzakay.

Compliance With Section 16(a) of the Exchange Act

     Under the securities  laws of the United States,  the Company's  directors,
its executive  officers,  and beneficial  owners of more than ten percent of any
class of the Company's securities are required to report their initial ownership
of the Company'  securities and any subsequent  changes in that ownership to the
Securities and Exchange  Commission.  None of the Company's officers,  directors
and  beneficial  owners of more than ten percent of the Company's  stock filed a
Form 3  reporting  their  initial  ownership,  and no Form 4s have been filed as
there has been no change in ownership. In making these disclosures,  the Company
has relied solely on written statements of its directors, executive officers and
shareholders and copies of the reports that they filed with the Commission.

ITEM 10. EXECUTIVE COMPENSATION

No remuneration  currently is being paid to our officers and senior  management.
On October 31, 2000, the Company entered into an employment  contract with Yuval
Barzakay  for a term of ten years.  Pursuant  to the  employment  contract,  Mr.
Barzakay receives a salary of CDN$200,000 per year with a minimum 6% increase of
his salary each  subsequent  year after the first year.  In addition the Company
has agreed to maintain a life insurance  policy on the life of Mr.  Barzakay and
Mr. Barzakay's estate is the beneficiary of the policy.  Mr. Barzakay has waived
his rights under the employment  contract through December 31, 2000 and as such,
no salary has been accrued.

ITEM 11.  SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following  table sets forth  information  as of September 12, 2001 with
respect to persons known to be  beneficial  owners of more than 5% of our voting
common  stock.  The table also states the  beneficial  ownership  of such common
stock by each director and by all directors and executive officers as a group.

                                       13
<PAGE>

Name and Address of
Beneficial Owner                      Number of Shares            Percent
--------------------                  ----------------           ---------
Yuval Barzakay                           9,600,000                 48.0%
     4884 Dufferin Street, Unit 1
     Toronto, Ontario
     Canada M3H 5S8

Marilyn Benlolo                          6,400,000                 32.0%
     4884 Dufferin Street, Unit 1
     Toronto, Ontario
     Canada M3H 5S8

Albert Kshoznicer                                -                     *
     4884 Dufferin Street, Unit 1
     Toronto, Ontario
     Canada M3H 5S8

Alon Barzakay                                    -                     *
     4884 Dufferin Street, Unit 1
     Toronto, Ontario
     Canada M3H 5S8

Directors and executive officers
 as a group (3 persons)                  9,600,000                 48.0%

* Less than one percent

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Yapalot  Communications  Inc.  currently has an outstanding loan to Marilyn
Benlolo in the amount of $301,111.  The loan is interest free and the funds were
used to finance Yapalot  Communications  Inc. since its inception in March 2000.
The loan is for a term of no less than one year and is payable after one year or
when revenues reach a level in which the loan can be repaid.

     Yuval  Barzakay  arranged for a Canadian  Small Business loan for us in the
amount of $168,794 as part of his initial advance.  This liability is a Canadian
government   guarantee  small  business  loan  with  Mr.   Barzakay   personally
guaranteeing  twenty-five  percent of the original loan balance to the financial
institution with the Canadian government guaranteeing the remaining seventy-five
percent of the original loan balance which matures in March 2005. As part of the
initial funding  agreement with us, Mr. Barzakay agreed to reimburse us annually
for all  principal  and  interest  payments.  The loan is  repayable  in monthly
payments  of  CDN$4,165  plus  interest  of the Royal  Bank  prime rate plus 1.5
percent.  The loan  matures in March 2005 and is  personally  guaranteed  by Mr.
Barzakay.  As of December 31, 2000, Mr.  Barzakay had not reimbursed the Company
for any principal and interest  payments made by the Company in connection  with
this  loan  and  the  Company's  balance  sheet  reflects  an  amount  due  from
shareholder of $24,408.

                                       14
<PAGE>

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     INDEX OF EXHIBITS


2.1(1) Articles of Incorporation of Yapalot Communications Holdings Inc.
2.2(1) Bylaws of Yapalot Communications Holdings Inc.
2.3(1) Articles of Incorporation of Yapalot Communications Inc.
2.4(1) Bylaws of Yapalot Communications Inc.
10.1(1)Office Lease Agreement
10.2(2)Clarent Sales and Purchase Order Form
27.1*  Financial Data Schedule
10.3(3)Agreement between Chris Kwon Enterprises and Yapalot Communications, Inc.
10.4(3)Agreement between Appwerx Inc. and Yapalot Communications, Inc.
10.5(3)Agreement between UUNET and Yapalot Communications.
10.6*  Employment Agreement with Yuval Barzakay

*Filed herein

(1)  Incorporated by reference to the respective  exhibits filed with Form 10-SB
     filed on July 27, 2000.

(2)  Incorporated  by reference to the  respective  exhibits  filed with the 1st
     Amendment to Form 10-SB filed on September 27, 2000.

(3)  Incorporated  by reference to the  respective  exhibits  filed with the 3rd
     Amendment to Form 10-SB filed on December 28, 2000.


                                       15
<PAGE>

                                   SIGNATURES

In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.

                           YAPALOT COMMUNICATIONS HOLDINGS INC.
Dated: September 12, 2001

                           By  /s/ Yuval Barzakay
                           ---------------------------------------------------
                           Yuval Barzakay, Chairman and Chief Executive Officer


In  accordance  with the  Exchange  Act,  this  report  has been  signed  by the
following  persons on behalf of the  registrant and in the capacities and or the
duties indicated.

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

/s/ Yuval Barzakay    Chairman, Chief Executive Officer,      September 12, 2001
--------------------  President, Principal Financial Officer,
Yuval Barzakay        and Principal Accounting Officer
                      (Principal Executive Officer)


/s/ Albert Kshoznicer Director                                September 12, 2001
---------------------
Albert Kshoznicer

/s/ Alon Barzakay     Director                                September 12, 2001
---------------------
Alon Barzakay


                                       16
<PAGE>


                      YAPALOT COMMUNICATIONS HOLDINGS INC.

                                      INDEX
                                                                           Page

 Auditors' Report                                                           1
 Consolidated Balance Sheet                                                 2
 Consolidated Statement of Changes in Shareholders' Equity                  3
 Consolidated Statement of Operations and Deficit                           4
 Consolidated Statement of Cash Flows                                       5
 Notes to Consolidated Financial Statements                               6 - 8


<PAGE>

                            WEISBROD GOLDMACHER, LLP

                     C H A R T E R E D A C C O U N T A N T S


ALAN WEISBROD, BBM., C.A.                               TELEPHONE (416) 661-1499
MURRAY GOLDMACHER, B.Sc., C.A.                                FAX (416) 661-1510


                                AUDITOR'S REPORT



TO THE SHAREHOLDERS OF:
YAPALOT COMMUNICATIONS HOLDINGS INC.

We have  audited  the  consolidated  balance  sheet  of  Yapalot  Communications
Holdings  Inc.  as at  December  31,2000  and  the  consolidated  statements  of
operations and deficit and cash flows for the period from date of incorporation,
April 6,2000 to December 31,2000.  These consolidated  financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit.

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

In our opinion,  these consolidated  financial statements present fairly, in all
material respects,  the financial position of the Company as at December 31,2000
and the  results  of its  operations  and the  changes in its cash flows for the
period  from  date  of  incorporation,  April  6,2000  to  December  31,2000  in
accordance with generally accepted accounting principles in the United States.




TORONTO, Canada                                         Weisbrod Goldmacher, LLP
February 16,2001                                           CHARTERED ACCOUNTANTS


Dated June 26,2001 with respect to Note 8


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

             312 DOLOMITE DRIVE SUITE 209 NORTH YORK ONTARIO M3J 2N2

                                      F-1
<PAGE>

                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31,2000
                            (Stated in U.S. Dollars)


                                   A S S E T S

 CURRENT
    Cash                                           $     151,835
    Accounts receivable                                    1,248
    Sales taxes receivable                                27,574
    Prepaid and sundry                                    24,408
                                                      -----------
                                                   $     205,065

 CAPITAL ASSETS (Note 3)                               1,060,173
                                                      -----------


                                                   $   1,265,238
                                                      ==========

                              L I A B I L I T I E S

 CURRENT
    Accounts payable and accrued liabilities       $    599,603
    Current portion of bank loan (Note 4)                34,479
                                                      ----------

                                                   $    634,082

 BANK LOAN, Less current portion (Note 4)               133,739

 SHAREHOLDERS' ADVANCES (Note 5)                        301,111
                                                     -----------

                                                   $  1,068,932
                                                     -----------

                              SHAREHOLDERS' EQUITY

 SHARE CAPITAL ISSUED AND PAID UP (Note 6)         $     20,000
 CAPITAL IN EXCESS OF PAR VALUE                         996,000
 CUMULATIVE FOREIGN TRANSLATION ADJUSTMENT              (41,462)
 INPUTED ON SHAREHOLDER LOANS                            20,983
 DEFICIT                                               (799,215)
                                                     -----------

                                                   $    196,306
                                                     -----------
                                                   $  1,265,238
                                                     ===========

    APPROVED ON BEHALF OF THE BOARD:

    _____________________________ Director

    _____________________________ Director


                            See accompanying notes.

                                      F-2
<PAGE>

                      YAPALOT COMMUNICATIONS HOLDINGS INC.
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                    FROM DATE OF INCORPORATION, APRIL 6,2000,
                               TO DECEMBER 31,2000
                            (Stated in U.S. Dollars)
<TABLE>


                                                                                                            Accumulated
                                                     Common Shares         Capital in                          Other
                                                               Paid up      Excess of      Accumulated     Comprehensive
                                                 Number        Amount       Par Value        Deficit           Loss          Total
                                                --------      ---------    ------------    ------------   ---------------   -------
<S>                                            <C>            <C>          <C>             <C>            <C>               <C>

 ISSUE OF COMMON SHARES
    Founder shares issued at inception         16,000,000     $ 16,000      $      -      $       -       $        -      $  16,000
    Shares issued in current fiscal period      4,000,000        4,000       996,000              -                -      1,000,000

 NET LOSS                                               -            -             -       (799,215)         (20,479)      (819,694)
                                               ----------      -------       --------      ---------       ----------
 BALANCE - End of period                       20,000,000     $ 20,000      $996,000      $(799,215)      $  (20,479)     $ 196,306
                                               ==========      =======       ========      =========       ==========
</TABLE>


                             See accompanying notes.

                                      F-3
<PAGE>

                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT
                    FROM DATE OF INCORPORATION, APRIL 6,2000,
                               TO DECEMBER 31,2000
                            (Stated in U.S. Dollars)



 REVENUE                                                           $   168,273
                                                                    -----------

 EXPENSES
    Advertising and promotion                                      $   389,086
    Bank charges and interest                                           40,962
    General and office                                                  59,924
    Insurance                                                            5,862
    Professional fees                                                  161,182
    Rent                                                                24,892
    Telephone and communication                                        223,359
    Travel                                                              20,411
    Wages, commissions and benefits                                    226,960
    Amortization                                                       120,192
    Less: Gain on foreign exchange                                    (305,342)
                                                                    -----------

                                                                   $   967,488
                                                                    -----------

 NET LOSS                                                          $  (799,215)
                                                                    -----------

 OTHER COMPREHENSIVE LOSS
    Foreign currency translation adjustment                        $   (41,462)
    Imputed interest on shareholder loans                               20,983
                                                                    -----------


                                                                   $   (20,479)
                                                                    -----------

 DEFICIT - Beginning of period                                     $         -

 NET LOSS FOR THE PERIOD                                              (799,215)
                                                                    -----------

 DEFICIT - End of period                                           $  (799,215)
                                                                    ===========

 LOSS PER COMMON SHARE (Note 7)                                    $     (0.05)
                                                                    ===========
 WEIGHTED AVERAGE NUMBER OF COMMON SHARES
    OUTSTANDING                                                     17,529,412
                                                                    ===========

                                      F-4

                            See accompanying notes.
<PAGE>

                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                    FROM DATE OF INCORPORATION, APRIL 6,2000,
                               TO DECEMBER 31,2000
                            (Stated in U.S. Dollars)



CASH FROM (USED IN) OPERATIONS

    Net loss                                                    $     (799,215)
    Adjustments to reconcile net loss to net cash provided by
        operating activities:
           Amortization                                                 120,192
           Non-cash imputed interest on loans                            20,983
    Changes in assets and liabilities relating to operations
        Accounts receivable                                              (1,248)
        Accounts payable and accrued liabilities                        572,029
        Prepaid and sundry assets                                       (24,408)
                                                                      ----------

    NET CASH USED IN OPERATIONS
                                                                $      (111,667)
                                                                      ----------

 CASH USED IN INVESTING ACTIVITIES

    Purchase of capital assets                                  $    (1,180,365)
                                                                      ----------

 CASH FROM FINANCING ACTIVITIES

    Advances from shareholders                                  $       301,111
    Bank loan proceeds                                                  168,218
    Proceeds from capital shares issued                               1,016,000
                                                                      ----------

    NET CASH FROM FINANCING ACTIVITIES                          $     1,485,329
                                                                      ----------

 EFFECT OF EXCHANGE RATE CHANGES ON CASH                        $       (41,462)
                                                                      ----------

 NET INCREASE IN CASH DURING THE PERIOD                         $       151,835

 CASH - Beginning of period                                                   -
                                                                      ----------
 CASH - End of period                                           $       151,835
                                                                      ==========

                                      F-5
<PAGE>

                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31,2000
                            (Stated in U.S. Dollars)

1.  NATURE OF OPERATIONS

    Yapalot Communications  Holdings Inc. was incorporated under the laws of the
    State of  Delaware  on April  6,2000  and has  adopted a fiscal  year end of
    December  31.  The  company's  activities  consist  of the  development  and
    deployment of Voice Over Internet  Protocol  (VoIP) network  services around
    the world as well as developing different communications solutions utilizing
    VoIP technology.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    a)  Basis of Consolidation
        These consolidated  financial  statements present the combination of the
        financial statements of Yapalot  Communications  Holdings Inc., a United
        States company, and its wholly-owned subsidiary,  Yapalot Communications
        Inc., a company  incorporated under the laws of the Province of Ontario,
        Canada on March 8,2000.

    b)  Basis of Financial Statements
        These  consolidated  financial  statements  are stated in United  States
        dollars,  the "reporting  currency".  The  consolidated  transactions of
        Yapalot  Communications  Holdings  Inc.  have been  recorded in Canadian
        dollars, the "functional  currency",  and have been restated into United
        States  dollars at the period end exchange rates for balance sheet items
        and the average  exchange  rate for the period for  revenues,  expenses,
        gains and losses.  Translation adjustments to the reporting currency are
        included in equity.

    c)  Capital Assets and Amortization
        Capital  assets  are  carried  at  acquisition   cost  less  accumulated
        amortization.  Amortization is provided annually by the company at rates
        intended to amortize  the assets over their  estimated  useful  lives as
        follows:

            Computer equipment                 -   30% Declining balance basis
            Computer software                  -  100% Declining balance basis
            Furniture and fixtures             -   20% Declining balance basis
            Leasehold improvements             -   20% of cost
            Network communications equipment   -   20% Declining balances basis

        Where  the  company  determines  that  circumstances  indicate  that the
        carrying  value of certain  capital assets may not be  recoverable,  the
        company's policy is to write the asset down to an estimate of the future
        cash flows expected to result from the use of the asset and its eventual
        disposition.  Such an  impairment  loss will be charged to operations in
        the current year.

    d)  Revenue Recognition
        The Company records its revenue from customer  contracts as services are
        performed.

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

    f)  Start-up and Other Pre-operating Expenses
        Start-up and pre-operating expenses incurred by the Company are expensed
        as incurred.

                                      F-6
<PAGE>
                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31,2000
                            (Stated in U.S. Dollars)


    g)  Comprehensive Income
        In June 1997, the Financial  Accounting  Standards Board ("FASB") issued
        SFAS No. 130, "Reporting Comprehensive Income", which was adopted by the
        Company. SFAS No. 130 establishes standards for reporting and display of
        comprehensive  income  and  its  components  in  an  entity's  financial
        statements.  Comprehensive  income as defined  includes  all  changes in
        equity (net assets) during a period from non-owner sources.

    h)  Earnings (Loss) Per Share
        Earnings (loss) per common share is based on the weighted average number
        of common shares outstanding during the period.

    i)  General
        These financial  statements have been prepared in accordance with United
        States generally accepted  accounting  principles (GAAP), as they relate
        to these financial statements.

3.  CAPITAL ASSETS
                                                    Accumulated        Net
                                          Cost     Amortization        2000
                                         ------   --------------      ------

    Computer equipment                $  152,562   $    12,727     $  139,835
    Computer software                     72,522        20,167         52,355
    Furniture and fixtures                67,152         3,735         63,417
    Leasehold improvements                70,346         3,912         66,434
    Network communication equipment      817,783        79,651        738,132
                                       ---------     ---------      ---------
                                      $1,180,365   $   120,192     $1,060,173
                                       =========     =========      =========
4.  BANK TERM LOAN

    One of the  founding  shareholders,  Mr.  Barzakay,  arranged for a Canadian
    Small Business Loan for the company,  as part of his initial  advance to the
    company. As the company is liable for the debt and interest repayments,  the
    loan facility has been reflected as long term debt of the company.  However,
    as part of the intial funding  agreement with the company,  Mr. Barzakay has
    agreed to  reimburse  the company  annually for all  principal  and interest
    payments.  The loan is  repayable  in monthly  payments  of  CDN$4,165  plus
    interest at the Royal Bank prime rate plus 1.5 percent.  The loan matures in
    March,2005 and is personally guaranteed by Mr. Barzakay. The moneys that are
    to be reimbursed to the company are included in prepaid and other assets.

5.  SHAREHOLDERS' ADVANCES

    The  balances  due to  shareholders  are  non-interest  bearing,  however in
    accordance with generally accepted accounting policies,  an interest rate of
    7% was imputed in this non arms length arrangement.  The imputed interest is
    charged to operations and credited to stockholders'  equity.  The individual
    shareholder advance amounts are as follows:

           Marilyn Benlolo                               $  301,111
                                                           =========

                                      F-7
<PAGE>


                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31,2000
                            (Stated in U.S. Dollars)


6.  SHARE CAPITAL

    Authorized
          50,000,000   Common shares at $.001 par value
    Issued and paid up
          20,000,000   Common shares at $.001 par value             $   20,000
                                                                     ==========

    During the period the Company raised  $1,000,000 by issuing 4,000,000 common
    shares  at $.25  per  share.  All  other  shares  are  held by the  founding
    shareholders.


7.  LOSS PER COMMON SHARE

    Loss per common share is  calculated  as the loss for the period  divided by
    the weighted  average  number of the  Company's  common  stock  outstanding.
    Diluted loss per share does not differ from basic loss per share.


8.  SUBSEQUENT EVENTS

    Subsequent to February  16,2001 it was determined that as part of one of the
    founding  shareholders'  contributions,  a  small  business  term  loan  was
    arranged on behalf of the company, as explained in Note 4. For this purpose,
    the  financial  statement  balances  have  been  restated  to  reflect  such
    contribution as a bank term loan rather than as a shareholder advance.

                                      F-8