SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


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

                      for the year ended December 31, 2001

                                       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: 416-663-9700

  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  $863,907 of gross  revenues for the fiscal year ended December 31,
2001.  As of  March  31,  2002,  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
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

                                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 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  approximately
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 to  eighteen  countries  around  the world.  In August of 2000,  we
expanded service to over 200
countries  around the world.  In 2001 we did not deploy any  additional  network
servers  and in  some  cases  have  redeployed  as a  cost  cutting  measure  to
territories that were unprofitable.  These areas included Miami,  Greece,  Italy
and Hong Kong. In these areas of  redeployment  we have entered into  agreements
with other  carriers to deliver our traffic.  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  analog  phone  lines,   routers  and  other  equipment  in  a  rack-mounted
configuration.

<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  inquiries 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.

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
 marketing materials 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 an
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.



<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. We have produced television and
radio  commercials  that aired  regularly in 2000 and Q1 of 2001. We did not air
these  commercials  during  the  remainder  of  2001  due  to our  cost  cutting
initiatives. 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.  We anticipate that this sales team will grow
to  approximately  20  representatives  by the first quarter of 2002. The team's
primary  focus is to  prospect  small to  medium  sized  businesses  and  create
tailor-made  long  distance  packages.  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

Yapalot produces  pre-paid long distance cards for several  companies in Canada.
These  cards are  privately  labeled for our clients and do not show the Yapalot
brand anywhere.  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 in 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.
In 2001 we did not wholesale minutes, but we anticipate that sales will commence
by Q3 of 2002.

<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 has been completed. The software allows 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;

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; and

o Global fax.

During 2001, we were focused on customer  retention and service quality.  In the
midst  of a  shrinking  advertising  budget,  we had to  focus  on  keeping  our
customers  and making  sure they were happy,  while at the same time  increasing
revenues.  We have  the  potential  to sell  flat  rate  long  distance  service
subscriptions  in  all of  the  countries  available  on  the  Yapalot  network.
Subscriptions  worldwide  areset up and managed by our customer  service  center
located in  Toronto,  Canada,  through  our  inbound  call center or through our
website.

<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 were  installed in 2000
and no additional gateways were purchased in 2001.

YAPALOT'S PRODUCTS

In North  America our services  spread  across two major  markets:  consumer and
corporate.  Both markets are enticed by promotional marketing initiatives and an
outbound sales team.

We 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 of these companies ultimately rely on Bell who owns the network.


<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 on 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  analog  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 no 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.


<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 9 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.

ITEM 2. PROPERTIES

We lease offices at 4884 Dufferin Street, Unit 1, Toronto,  Ontario,  Canada M3H
5S8.  The 5,000 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  engaged in legal proceedings with one of the founding members,
Marilyn  Benlolo.  Ms. Benlolo is seeking  $925,000 in relief,  compensation and
punitive damages for alleged misrepresentation and breach of contract pertaining
to her initial investment in Yapalot. We have filed a counterclaim in the amount
of $12 million  against  Marilyn  Benlolo for damages  pertaining to her role as
Director and Chief Operating  Officer.  The Company's causes of action relate to
Ms. Benlolo's  allowance and/or  authorization of the involvement of her sons to
the detriment of the Company.  The Company believes that Ms.  Benlolo's  actions
and  conduct  amount to gross  negligence  in her  duties,  failure to  properly
exercise  control and the failure to restrain from delegating or restricting her
sons  involvement  with the Company.  Although,  management  believes  that this
litigation will not have a material or adverse effect on our business operations
as it is vigorously  defending this action,  because of the uncertainty involved
in such litigation, management is unable to predict the outcome.


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

None.

<PAGE>


                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

As of March 31,  2002,  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 March 31,  2002 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, 2001,  we  completed  the launch of ten
initial gateways at a cost of $1,000,000. 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.  This belief is founded on our current revenue streams. 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 9 full time
employees comprised of customer service,  administration,  marketing and network
operations employees.

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.


<PAGE>


RESULTS OF OPERATIONS


Period April 6, 2000  (Inception)  to December  31, 2000  compared to Year Ended
December 31, 2001

For the year ended  December 31, 2001, we increased our revenue to $863,907 from
$168,273  for the period from April 6, 2000  (Inception)  through  December  31,
2000. The increase is attributed to growing sales and customer retention.

Selling,  general and  administrative  expenses  increased from $806,334 for the
period from April 6, 2000  (Inception)  through December 31, 2000 to $$1,024,540
for the year ended  December  31,  2001.  The  increase in selling,  general and
administrative expenses was due to the increased operations and a full year. The
amortization  cost of capital  assets for the year ended  December  31, 2001 was
$276,181  compared  to $120,192  for the period  from April 6, 2000  (Inception)
through December 31, 2000. The increase  represents a significant charge against
revenues, due to the cumulative  installation cost of our gateways.  Most of our
other  expenses  have  developed  rather  normally,  considering  our  increased
infrastructure  requirements  as we  continue  to develop  our  client  base and
resulting  operating  costs.Net  loss for the year ended  December  31, 2001 was
$467,286  compared  with a loss of  $799,215  for the period  from April 6, 2000
(Inception) through December 31, 2000. The decrease is largely attributed to the
increase in revenue.

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.

At December 31, 2001,  we had cash of $$5,607 and a working  capital  deficit of
$690,672 as  compared  to cash of  $151,835  at December  31, 2000 and a working
capital deficit of $429,017. Current assets totaled $21,497 at December 31, 2001
compared to $9 %205,065 at December 31, 2000.  The decrease is  attributable  to
the utilization of cash maintaining our infrastructure as the business develops,
our  acquiring  customer  service  contracts  to be  collected  over the current
operating cycle and increased accounts payable and accrued liabilities.
At December 31, 2001, 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,  2001,  we had 1710
customers  on our  network.  Most of our  customers  are on  twelve  month  term
contracts  and we bill  their  major  credit  card on a  monthly  basis  for the
contract commitment.

As of December  31,  2001,  current  liabilities  totaled  $712,169  compared to
$634,082 at December 31, 2000.  The increase is largely  attributable  toamounts
due to new suppliers.

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.

ITEM 7. FINANCIAL STATEMENTS

Our financial statements,  including the notes thereto, together with the report
of  Bromberg  &  Associate,   independent  Chartered  Accountants  thereon,  are
presented following the signature page.

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

Changes in Registrant's Certifying Accountant.

      On November 14, 2001,  the  client-auditor  relationship  between  Yapalot
Communications  Holdings  Inc.  (the  "Company")  and Weisbrod  Goldmacher,  LLP
("Weisbrod")  ceased as the Company's Board of Directors  dismissed  Weisbrod as
its auditor.

<PAGE>

      The Company's receipt of Weisbrod's report of the financial  statements of
the Registrant for the period from inception on April 6, 2000 through the fiscal
year ended December 31, 2000, and any related interim period did not contain any
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope or accounting principles.

            During  the  audit of the  Company's  financial  statements  for the
period from  inception on April 6, 2000  through the fiscal year ended  December
31, 2000,  and the  subsequent  interim  period  through the date of  dismissal,
Weisbrod did not have any disagreements with the Company.  Weisbrod did not have
any disagreements  with the Company,  whether or not resolved,  on any matter of
accounting principles or practices,  financial statement disclosure, or auditing
scope or procedure,  which,  if not resolved to Weisbrod's  satisfaction,  would
have caused them to make reference to the subject matter of the  disagreement in
connection with their report.

            On November 14, 2001, the Registrant  engaged Howard Bromberg as its
independent  accountant to review the  Company's  financial  statements  for the
quarter ended  September  30, 2001, as well as to audit the Company's  financial
statements for the year ended  December 31, 2001.  During the most recent fiscal
year and any subsequent  interim period prior to engaging Howard  Bromberg,  the
Company  did  not  consult  with  Howard  Bromberg   regarding  either  (i)  the
application  of  accounting  principals  to  a  specified  transaction,   either
completed  or proposed;  or the type of audit  opinion that might be rendered on
the  Company's  financial  statements;  or (ii) any  matter  that was either the
subject matter of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation
S-K and the  related  instructions)  or a  reportable  event (as defined in Item
304(a)(1)(v)  of Regulation  S-K).  Howard  Bromberg has reviewed the disclosure
required by Item  304(a)  before it was filed with the  Commission  and has been
provided an opportunity  to furnish the Company with a letter  addresssed to the
Commission  containing  any  new  information,  clarification  of the  Company's
expression  of its views,  or the  respects  in which it does not agree with the
statements  made by the Company in response to Item 304(a).  Howard Bromberg did
not furnish a letter to the Commission.


<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


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.

     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.

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

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  $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 had waived
his rights to  compensation  under the employment  contract  through January 31,
2001. For the period ending  December 31, 2001 the Company had accrued  $183,333
in unpaid salary to Mr.  Barzakay.  Mr. Barzakay has used $38,226 of the accrual
to repay the Bank Loan interest and principal for year ended December 31, 2001.

ITEM 11.  SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The  following  table  sets  forth  information  as of March 31,  2002 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.

<PAGE>

Name and Address of
Beneficial Owner                      Number of Shares            Percent
--------------------                  ----------------           ---------
Yuval Barzakay                           9,450,000                 47.3%
     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


Directors and executive officers
 as a group (1 persons)                  9,450,000                 47.3%

* Less than one percent

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Yapalot  Communications  Inc.  currently has an outstanding loan to Marilyn
Benlolo, our former chief operating officer, 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 on an annual
basis which  includes  interest at 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, 2001, Mr. Barzakay has reimbursed the Company for any principal and
interest payments made by the Company in connection with this loan in the amount
of $38,226.

<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

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(4) 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.

(4)  Incorporated  by reference to the  respective  exhibits  filed with the 2nd
     Amendment to Form 10-KSB filed on September 12, 2001.


<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: April 1, 2002

                              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,      April 1, 2002
--------------------  President, Principal Financial Officer,
Yuval Barzakay        and Principal Accounting Officer
                      (Principal Executive Officer)

<PAGE>


                      YAPALOT COMMUNICATIONS HOLDINGS INC.

                        CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31,2001

                            (Stated in U.S. Dollars)


                      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>



                                AUDITOR'S REPORT

TO THE SHAREHOLDERS OF:
YAPALOT COMMUNICATIONS HOLDINGS INC.

We have  audited  the  consolidated  balance  sheet  of  Yapalot  Communications
Holdings  Inc.  as of  December  31,2001  and  the  consolidated  statements  of
operations and deficit and cash flows for the year ended December 31,2001. 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 the 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.  We  believe  that  our  audit
provides a reasonable basis for our opinion.

In our opinion,  these consolidated  financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2001
and the results of its operations and the changes in its cash flows for the year
ended  December  31,  2001 in  accordance  with  generally  accepted  accounting
principles in the United States.




TORONTO, Canada                                         Bromberg & Associate
March 25, 2002                                   CHARTERED ACCOUNTANTS


<PAGE>


                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                           CONSOLIDATED BALANCE SHEET


                            (Stated in U.S. Dollars)

<TABLE>

                                                             December 31       December 31
                                                                 2001             2000
                                                               --------         --------
<S>                                                         <C>                <C>

                                   A S S E T S

 CURRENT
    Cash                                                   $       5,607      $   151,835
    Accounts receivable                                            6,157            1,248
    Sales taxes receivable                                             -           27,574
    Due from shareholder                                               -           24,408
    Prepaid and sundry                                             9,733                -
                                                             ------------       ---------

                                                           $      21,497      $   205,065

 CAPITAL ASSETS (Note 3)                                         820,100        1,060,173
                                                             ------------      ----------


                                                           $    841,597       $ 1,265,238
                                                             ============      ==========

                              L I A B I L I T I E S

 CURRENT
    Accounts payable and accrued liabilities               $    677,690       $   599,603
    Current portion of bank term loan (Note 4)                   34,479            34,479
                                                             ------------      -----------

                                                           $    712,169       $   634,082

 BANK TERM LOAN, Less current portion (Note 4)                   71,214           133,739

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

                                                           $  1,084,494      $  1,068,932
                                                             ------------      -----------

                              SHAREHOLDERS' DEFICIT

 SHARE CAPITAL ISSUED AND PAID UP (Note 6)                 $     20,000      $     20,000
 CAPITAL IN EXCESS OF PAR VALUE                               1,039,076         1,016,983
 CUMULATIVE TRANSLATION ADJUSTMENT                              (35,472)          (41,462)
 DEFICIT                                                     (1,266,501)         (799,215)
                                                           ----------------    -----------

                                                           $   (242,897)     $    196,306
                                                           ----------------    -----------

                                                           $    841,597      $  1,265,238
                                                           ================    ===========
</TABLE>


<PAGE>


                      YAPALOT COMMUNICATIONS HOLDINGS INC.
            CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

                            (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>

FROM INCEPTION TO DECEMBER 31,2000

  ISSUE OF COMMON SHARES
    Founder shares issued at inception     16,000,000     $  16,000            -      $      -           $     -        $    16,000
    Shares issued in August, 2000           4,000,000         4,000      996,000             -                 -          1,000,000

  Net loss                                          -             -            -      (799,215)                -           (799,215)

  Foreign currency translation adjustments          -             -            -             -           (41,462)           (41,462)
  Imputed interest on shareholder loans                                   20,983                                             20,983
                                           -----------    ----------   ---------     ----------          --------        -----------

BALANCE - December 31, 2000                20,000,000    $   20,000    1,016,983    $ (799,215)         $(41,462)       $   196,306


FROM JANUARY 1, 2001 TO December 31, 2001

  Net loss                                          -             -            -     (467,286)                 -           (467,286)

  Foreign currency translation adjustments          -             -            -            -              5,990              5,990
  Imputed interest on shareholder loans                                   22,093                                             22,093
                                           -----------    ----------   ---------     ----------          --------        -----------
BALANCE - December 31, 2001                20,000,000    $   20,000    1,039,076  $(1,266,501)          $(35,472)       $  (242,897)
                                           ===========    ==========   =========   ============          ========        ===========
</TABLE>



                             See accompanying notes.

<PAGE>

                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                CONSOLIDATED STATEMENT OF OPERATIONS AND DEFICIT


                            (Stated in U.S. Dollars)


<TABLE>

                                                For the year ended       For the period
                                                December 31,             April 6, 2000 to December 31,
                                                2000                     2000
                                                -------------------      -----------------------------
<S>                                             <C>                      <C>


 REVENUE                                             $   863,907                $168,273
                                                       -----------             -----------
 EXPENSES
    Selling, general and administrative expenses     $ 1,024,540               $   806,334
    Bank charges and interest                             30,472                    40,962
    Amortization                                         276,181                   120,192
                                                      ------------               -----------
                                                     $1,331,193                $   967,488
                                                      ------------               -----------
 NET LOSS                                            $ (467,286)               $  (799,215)
                                                      ------------               -----------
 OTHER COMPREHENSIVE INCOME
    Foreign currency translation adjustment          $    5,990                $   (41,462)
                                                      ------------               -----------
 DEFICIT - Beginning year                            $ (799,215)               $         -
 NET LOSS FOR THE YEAR                                 (467,286)                  (799,215)

 DEFICIT - End of year                               $(1,266,501)              $  (799,215)
                                                      ===========                ===========
 LOSS PER COMMON SHARE (Note 7)                      $     (0.02)              $     (0.05)
                                                      ===========                ===========
 WEIGHTED AVERAGE NUMBER OF COMMON
 SHARES OUTSTANDING                                  $20,000,000               $17,592,412
                                                      ===========               ============

</TABLE>


<PAGE>

                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS


                            (Stated in U.S. Dollars)

<TABLE>


                                                              For the Year Ended        For the period April 6th
                                                              December 31, 2001         2000 to  December 31, 2000
                                                              -------------------       --------------------------
<S>                                                           <C>                        <C>

CASH (USED IN) OPERATIONS

    Net loss                                                    $   (467,286)              $      (799,215)
    Adjustments to reconcile net loss
     to net cash provided by operating activities:
        Amortization                                                 276,181                       120,192
        Non-cash imputed interest                                     22,093                        20,983
    Changes in assets and liabilities relating to operations
    Accounts receivable                                               22,665                        (1,248)
    Accounts payable and accrued liabilities Prepaid and              78,087                       572,029
    sundry assets                                                     (9,733)                           --
                                                                  -----------                --------------
    NET CASH (USED IN) OPERATIONS                               $    (77,993)               $      (87,259)
                                                                  -----------                --------------
 CASH USED IN INVESTING ACTIVITIES
    Purchase of capital assets                                  $    (36,108)               $   (1,180,365)
    Incorporation costs paid                                              --                            --
                                                                  -----------                --------------
    NET CASH USED IN INVESTING ACTIVITIES                       $    (36,108)               $   (1,180,365)
                                                                  -----------                --------------
 CASH FROM FINANCING ACTIVITIES
    Advances from shareholders                                  $         --                $      301,111
    Loan                                                             (62,525)                      168,218
    Amounts due from shareholder                                      24,408                       (24,400)
    Capital shares issued                                                 --                     1,016,000
                                                                  -----------                --------------
    NET CASH FROM (USED IN) FINANCING ACTIVITIES                     (38,117)                    1,460,929
                                                                  -----------                --------------
 EFFECT OF EXCHANGE RATE CHANGES ON CASH                        $      5,990                $      (41,462)
                                                                  -----------                --------------
 NET INCREASE (DECREASE) IN CASH DURING THE YEAR                $   (146,228)               $      151,835
                                                                  -----------                --------------
 CASH - Beginning of year                                            151,835                            --
                                                                  -----------                --------------
 CASH - End of year                                             $      5,607                $      151,835
                                                                  ===========                ==============
</TABLE>


<PAGE>
                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2001

                            (Stated in U.S. Dollars)


The financial information for the year ended December 31, 2001 presented in this
Form 10-QSB has been prepared from accounting records of Yapalot  Communications
Holdings  Inc.  (the  "Company").   The  information   furnished   reflects  all
adjustments  which are,  in the  opinion  of  management,  necessary  for a fair
statement of the results of this year.


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 interim  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 balance 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
provided.

<PAGE>

                      YAPALOT COMMUNICATIONS HOLDINGS INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2001

                            (Stated in U.S. Dollars)


    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.

    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 Unites
        States generally accepted  accounting  principles (GAAP), as they relate
        to these financial statements.


3.  CAPITAL ASSETS

                                     Accumulated          Net           Net
                          Cost       Amortization         2001          2000
                         ------     --------------       ------        -------

Computer equipment    $  152,561      $  54,677        $ 97,884     $  139,835
Computer software         72,867         72,867              --         52,355
Furniture and fixtures    67,152         16,418          50,734         63,417
Leasehold improvements    71,000         18,112          52,888         66,434
Network communication
equipment                852,893        234,299         618,594        738,132
                      -----------      ---------       ---------     ----------
                      $1,216,473      $ 396,373        $820,100     $1,060,173
                      ===========      =========       =========     ==========

4.  BANK TERM LOAN

    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,  one of the founding shareholders.
    Mr. Barzakay has agreed to reimburse the company  annually for all principal
    and interest payments.

<PAGE>


5.  SHAREHOLDERS' ADVANCES

    The  balance  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
                                                                    ===========


6.  SHARE CAPITAL

    Authorized
          50,000,000   Common shares at $.001 par value
    Issued
          20,000,000   Common shares at $.001 par value            $    20,000
                                                                   ===========
7.       LOSS PER COMMON SHARE

    Loss per common share is  calculated as the loss for the year 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.