SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)

|X|   Annual Report Pursuant to Section 13 or 15(D) of the Securities Exchange
      Act of 1934

      For the Fiscal Year ended December 31, 2001

|_|   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 000-25991

                                 DAG Media, Inc.
                                 ---------------
                 (Name of Small Business Issuer in its Charter)

           New York                                              11-3474831
           --------                                              ----------
 (State or other jurisdiction                                 (I.R.S. Employer
of incorporation or organization                             Identification No.)

                    125-10 Queens Blvd. Kew Gardens, NY 11415
                    -----------------------------------------
               (Address of Principal Executive Office) (Zip Code)

                    Issuer's telephone number (718) 535-2717

Securities registered under Section 12(b) of the Exchange Act:

           Title of Each Class                       Name of Each Exchange
           -------------------                        on Which Registered
                                                      -------------------

                                      None

Securities Registered under Section 12(g) of the Exchange Act:

                    Common Stock, par value $.001 per share
                    ---------------------------------------
                                (Title of class)

      Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes |X|
No |_|


                                     - 1 -
<PAGE>

      Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy of
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|

      For the year ended December 31, 2001, the revenues of the registrant were
$5,586,000.

      The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant, based on the closing price on the Nasdaq
SmallCap Market on March 4, 2002 of $ 1.32 , was approximately $ 1,970,582.

      As of March 4, 2002 the registrant has a total of 2,907,460 shares of
Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None


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<PAGE>

                                 DAG MEDIA, INC.

                            Form 10-KSB Annual Report
                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I
   Item 1.  Description of Business ......................................    4
   Item 2.  Description of Property ......................................   10
   Item 3.  Legal Proceedings ............................................   10
   Item 4.  Submission of Matters to a Vote of Security Holders ..........   10

PART II
   Item 5.  Market for Common Equity and Related Stockholder Matters .....   10
   Item 6.  Management's Discussion and Analysis or Plan of Operations ...   11
   Item 7.  Financial Statements .........................................   15
   Item 8.  Changes in and Disagreements With Accountants on Accounting
              and Financial Disclosure ...................................   15

PART III
   Item 9.  Directors, Executive Officers, Promoters and Control
              Persons; Compliance with Section 16(a) of the Exchange Act .   15
   Item 10. Executive Compensation .......................................   17
   Item 11. Security Ownership of Certain Beneficial Owners and
              Management .................................................   18
   Item 12. Certain Relationships and Related Transactions ...............   18
   Item 13. Exhibits, List and Reports on Form 8-K .......................   19

                           FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Forward-looking statements are typically identified by the words "believe",
"expect", "intend", "estimate" and similar expressions. Those statements appear
in a number of places in this report and include statements regarding our
intent, belief or current expectations or those of our directors or officers
with respect to, among other things, trends affecting our financial conditions
and results of operations and our business and growth strategies. These
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Actual results may differ materially from those
projected, expressed or implied in the forward-looking statements as a result of
various factors (such factors are referred to herein as "Cautionary
Statements"), including but not limited to the following: (i) our limited
operating history, (ii) potential fluctuations in our quarterly operating
results, (iii) challenges facing us relating to our growth and (iv) our
dependence on a limited number of suppliers. The accompanying information
contained in this report, including the information set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", identifies important factors that could cause such differences.
These forward-looking statements speak only as of the date of this report, and
we caution potential investors not to place undue reliance on such statements.
We undertake no obligation to update or revise any forward-looking statements.
All subsequent written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by the
Cautionary Statements.


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<PAGE>

                                     PART I

Item 1. Description of Business

      We currently publish and distribute yellow page directories in print and
on the worldwide web, both in the mainstream yellow page industry as well as in
targeted niche markets in the New York metropolitan area. We sell yellow page
advertisements as part of an overall media package that includes print
advertising, on-line advertising and other added value services such as our
referral service and consumer discount club.

      We operate three internet portals, a mainstream general portal
NewYellow.com, targeting the general population, JewishYellow.com targeting
worldwide Jewish communities and JewishMasterguide.com, targeting the
ultra-orthodox Hasidic communities. Our principal source of revenue derives from
the sale of ads in our print and on-line directories.

Industry background

      In 2001, yellow page advertising revenues in the United States were
estimated by the Yellow Pages Publishers Association ("YPPA") to be $13.6
billion up from $13.2 billion in 2000 of which approximately 90% was estimated
to be in publications issued by the major telephone companies. This represents a
growth of approximately 2.8 percent over the previous year. The data is based on
the aggregate results provided to the institute by Yellow Pages publishers in
the United States. It includes local and national spending in the more than
6,000 Yellow Pages directories published domestically.

Products and services

      NewYellow. On May 12, 1999, we launched a general interest yellow page
directory at the request of our ethnic directory advertisers who inquired of us
to provide them with an alternative to the Verizon Yellow Pages. NewYellow
competes directly with the Verizon Yellow Pages in New York City. New Yellow is
published semi-annually and distributed door-to-door in New York City. The first
printed edition of NewYellow was distributed in March 2000, the fourth edition
was printed and distributed in October 2001 and the fifth edition is expected to
be printed and distributed in April 2002. Printing of NewYellow is done
domestically with a professional directory printer.

      NewYellow is the only general interest yellow page directory to provide
full-color advertisements. NewYellow was also the first directory to include
e-mail addresses. Also, as part of our service, we offer to all New Yellow
advertisers free e-mail addresses as well as electronic mail boxes. These mail
boxes are often used to provide our advertisers with electronic referrals.

      NewYellow offers businesses a substantially discounted advertising
package. Rates in New Yellow are approximately 70% less than the Verizon rates
and we provide three added value features that are offered in addition to the
basic NewYellow printed directory: the Referral Service, Online Service and the
Consumer Discount Club. NewYellow is also available online at our web site
NewYellow.com.

      The Jewish Israeli Yellow Pages. The Jewish Israeli Yellow Pages is a
bilingual, yellow page directory that is distributed free through local
commercial and retail establishments in the New York metropolitan area as well
as through travel agencies in Israel. All ads in the Jewish Israeli Yellow Pages
are in English and Hebrew unless the advertiser specifically requests that the
ad be English only. The Jewish Israeli Yellow Pages is organized according to
the Hebrew alphabet, although it is indexed in both Hebrew and English. We
believe that the Jewish Israeli Yellow Pages is used principally by persons
whose native language is Hebrew, although it is also used by members of the
Jewish community whether or not they speak Hebrew. The Jewish Israeli Yellow
Pages was first published in February 1990 and has been


                                     - 4 -
<PAGE>

published in February and August of each year since 1991 . The Jewish Israeli
Yellow Pages is also available online at our web site JewishYellow.com.

      All production, including layout, design, edit and most proofreading
functions, for the Jewish Israeli Yellow Pages is performed locally. The final
version of the Jewish Israeli Yellow Pages is shipped to Israel to be printed by
HaMakor Printing Ltd. The printed directories are shipped to our main office in
New York for distribution. We believe that HaMakor provides us with a
competitive advantage with respect to cost, quality and responsiveness. From
time to time we receive solicitations from printers who would like to publish
our directory. We have consistently found their pricing to be significantly
higher than that of HaMakor, even after taking into account shipping costs. In
addition, we believe the quality of HaMakor's product is superior to anything
that a local printer would produce, particularly because so much of the
directory is in Hebrew. Finally, because of our long standing relationship with
HaMakor we receive timely service.

      The Master Guide. In October 1998 we published the first edition of the
Master Guide, a yellow page directory designed to meet the special needs of the
Hasidic and ultra-Orthodox Jewish communities in the New York metropolitan area.
We produce the Master Guide generally in the same manner as we do the Jewish
Israeli Yellow Pages, including printing it in Israel. The Master Guide differs
from the Jewish Israeli Yellow Pages in that the Master Guide is published in
English only, and that it does not advertise products or services that might
offend the Hasidic and ultra-Orthodox Jewish communities. Generally, advertising
rates for the Master Guide are lower than those for the Jewish Israeli Yellow
Pages because the market that it serves is smaller. Distribution of the Master
Guide is accomplished by placing copies of the directory in synagogues,
community centers and businesses located in Hasidic and ultra-Orthodox
neighborhoods. The development of the Master Guide reflects our strategy to
expand by identifying and pursuing niche markets for yellow page directories.
The MasterGuide is also available online at our web site JewishMasterGuide.com.

      We buy paper for ourdirectories on the local market at prevailing prices.
Accordingly, we do not depend on any single source of supply although we are
subject to market forces that affect the price of paper. Paper costs fluctuate
according to supply and demand in the marketplace. In addition, paper costs can
be affected by events outside of our control, such as fluctuations in currency
rates, political events, global economic conditions, environmental issues and
acts of nature.

      The Referral Service. The Referral Service provides added value to users
of and advertisers in our directories. Potential consumers who are looking to
purchase goods or services call the referral service and an operator directs
them to one or more advertisers in our directories. Tourists also call the
referral service with questions involving travel, lodging, visa issues, driver's
license issues and the like. Finally, advertisers use the referral service as a
tool to generate new business. The telephone number for the Referral Service is
published throughout our various directories as well as various newspapers
serving different communities.

      Discount Club. As part of the referral service, we established a program
under which participating advertisers have agreed to give discounts to customers
who produce the specific directory's Discount Card. This card is distributed
with the directories or can be ordered directly from us. By presenting the card
at participating establishments, consumers can receive discounts of up to 10%.

      Online services. We initially launched our web site in 1995 and have since
expanded it to include functions such as a "portal" with links to a variety of
sites on the web, particularly those that carry information and news that may be
of particular interest to specified users. We also develop web sites for our
advertisers for a fee. We further enhanced our web site by providing links to
NewYellow and community-focused yellow page directories, by including news and
information and by creating strategic alliances with other Internet portals. We
plan to explore ways in which our portal can be used to generate additional
advertising revenue.


                                     - 5 -
<PAGE>

Growth strategy

      In March 2000, we distributed the first printed edition of NewYellow, a
general interest yellow page directory, in the New York metropolitan area. The
third and fourth editions were printed and distributed during 2001. After the
successful establishment of the Manhattan NewYellow directory we plan to offer
additional NewYellow directories covering the other boroughs in New York City,
the other counties in the New York metropolitan area and northern New Jersey.

      To consolidate the initial success of NewYellow in the New York market and
increase our profitability, we are focusing our efforts on the following:

      o     convincing current and potential advertisers that NewYellow is and
            will be used by a sufficient number of their potential customers to
            make it worthwhile and cost effective for them to continue or begin
            advertising in NewYellow;

      o     managing the production, including ad sales, graphic design, layout,
            editing and proofreading, of multiple directories addressing
            different markets in varying stages of development;

      o     attracting, retaining and motivating qualified personnel;

      o     providing high quality, easy to use and reliable directories;

      o     establishing further brand identity for NewYellow;

      o     developing new and maintaining existing relationships with
            advertisers without diverting revenues from our existing
            directories;

      o     developing and upgrading our management, technical, information and
            accounting systems;

      o     responding to competitive developments promptly;

      o     introducing enhancements to our existing products and services to
            address new technologies and standards and evolving customer
            demands;

      o     controlling costs and expenses and managing higher levels of capital
            expenditures and operating expenses; and

      o     maintaining effective quality control over all of our directories.

      o     acquiring a company with high level of synergi.

      Our failure to achieve any of the above in an efficient manner and at a
pace consistent with the growth of our business could adversely affect our
business, financial condition and results of operations.

      In order to prepare for the growth of NewYellow in 2002, during fiscal
year 2001 we hired and trained many new sales representatives to promote and
sell NewYellow. In 2001 we produced a special training video for our sales
representatives that is currently being implemented in our sales force training
program.

      We may also explore opportunities for publishing and introducing Jewish
Israeli Yellow Pages and Master Guide directories in other cities with large
Jewish and Israeli populations, like Miami, Florida and Los Angeles, California.


                                     - 6 -
<PAGE>

Sales

      Advertisements for the directories are sold through our network of trained
sales representatives, all of which are independent contractors who are paid
solely on a commission basis. There are approximately 100 sales representatives
in our network including those employees hired by the respective sales agencies
with which we have agency agreements, E.G.Y. Inc., Tel Aviv New York Media Inc.,
J.Y.I. Inc. and M.I.Y. Inc. The sales representatives operated by us work out of
our offices in Queens, Manhattan and Long Island City in New York and Fairlawn
in New Jersey. E.G.Y. is located in Brooklyn, New York, Tel Aviv New York Media
is located in Long Island, New York, J.Y.I. is located in Long Island City, New
York and M.I.Y. is located in Manhattan, New York. In 2001, we opened a new
office in Manhattan, New York, dedicated to the New Yellow directory.

      Under our agreements with the sales agencies, which are terminable upon 30
days notice, the agencies may not sell advertising for any yellow page
directories other than those we publish. Generally, each sales agency is
responsible for all fixed costs relating to its operations. We pay sales
commissions to the agencies, which, in turn, pay commissions to the individual
sales representatives who sell the ads. The commissions payable to the
individual sales representatives are prescribed in our agreements with the
agencies and are consistent with the commissions we pay to the sales
representatives that we hire directly.

      We are responsible for training each sales representative, whether hired
directly by us or by one of our sales agencies. Generally, training consists of
a one-day orientation, during which one of our sales managers educates the sales
representative about our business and operations, and a two-week period during
which the sales representative receives extensive supervision and support from a
sales manager or another experienced sales representative.

Marketing strategy

      We are now focused on increasing our share of the mainstream yellow page
market in the New York Metropolitan area as well as continuing our dominance of
the Jewish and Israeli niche yellow page markets. New Yellow currently competes
directly with the Verizon Yellow Pages in Manhattan. In the future we plan to
expand into the other boroughs of New York City and its surrounding suburbs.
Initially, we dedicated sales representatives from our existing network, spread
out over the four sales offices, to selling ads for NewYellow. Because New
Yellow is a relatively new publication, it is more difficult to sell, and
because it competes directly with Verizon, the commission structure for
NewYellow sales representatives is higher than it is for our other directories.
Generally, advertising rates for the New Yellow directory are approximately 33%
of the rates for the Verizon Yellow Pages.

      We believe that advertisers are attracted to NewYellow for several
reasons. First, advertising rates for NewYellow are significantly lower than the
comparable rates for advertising in Verizon Yellow Pages. Second, NewYellow is
lighter in weight and less dense than the Verizon Yellow Pages, so that each
advertisement in NewYellow will stand out more prominently than it would in the
Verizon Yellow Pages. Accordingly, we believe that NewYellow will attract
advertisers who do not currently advertise in the Verizon Yellow Pages as well
as existing Verizon Yellow Page advertisers

      The Jewish Israeli Yellow Pages and Master Guide are marketed to the
Jewish and Israeli communities living in the New York metropolitan area.
According to the American Jewish Congress, there are approximately two million
Jews living in this market, representing approximately 10.6% of the total
population. We believe that the Jewish population has higher than average
disposable income, is well educated and possesses a strong sense of community.
In addition, while there is no precise data as to the number of Israeli
immigrants living in the New York metropolitan area, we believe the number is
substantial. Moreover, a significant number of Israeli tourists visit the area
annually. Accordingly, we


                                     - 7 -
<PAGE>

believe that advertisers are attracted to the Jewish Israeli Yellow Pages as a
way to advertise directly to this market.

      We further believe that the Jewish population in the New York metropolitan
area is likely to use the Jewish Israeli Yellow Pages because of the impression
that businesses that advertise in the Jewish Israeli Yellow Pages support or are
affiliated with the Jewish community. In the case of the Master Guide, users can
be comfortable that none of its advertisers will offend their religious beliefs.
We also believe that our advertising rates are attractive, particularly to small
businesses that cannot afford to advertise in the Verizon Yellow Pages.

Government regulation

      We are subject to laws and regulations relating to business corporations
generally, such as the Occupational Safety and Health Act, Fair Employment
Practices and minimum wage standards. We believe that we are in compliance with
all laws and regulations affecting our business and we do not have any material
liabilities under these laws and regulations. In addition, compliance with all
these laws and regulations does not have a material adverse effect on our
capital expenditures, earnings, or competitive position.

Competition

      In New York, the yellow page advertising market is dominated by Verizon.
In addition, there are a number of independent publishers of yellow page
directories, including bilingual directories for specific ethnic communities.
There are also independent publishers of yellow page directories that publish
community or neighborhood directories. However, we are not aware of any other
Hebrew-English yellow page directory in the New York metropolitan area. By
focusing on the special needs of the Hebrew speaking, Hasidic and ultra-Orthodox
Jewish communities, we believe that we have identified niche markets that allow
us to compete effectively with our larger rivals.

      Unlike the Jewish Israeli Yellow Pages and the Master Guide, NewYellow
competes directly with the Verizon Yellow Pages and other smaller, general
interest yellow page directories published by companies other than Verizon such
as Yellow Book USA. Since there are virtually no barriers to entry in this
market, any company with a reasonable amount of capital, like the regional bell
operating companies or publishers, are potential competitors . In addition, the
Internet is growing rapidly and is a current and potential source of even
greater competition. There are a number of online yellow page directories,
including Big Yellow, owned by Verizon. Finally, strategic alliances could give
rise to new or stronger competitors. Many of our competitors, such as Verizon,
can reduce advertising rates, particularly where directory operations can be
subsidized by other revenues, making advertising in our directories less
attractive. In response to competitive pressures, we may have to increase our
sales and marketing expenses or reduce our advertising rates.

Intellectual property

      To protect our rights to our intellectual property, we rely on a
combination of federal, state and common law trademarks, service marks and trade
names, copyrights and trade secret protection. We have registered some of our
trademarks and service marks on the supplemental register of the United States
and some of our trade names in Queens, New York and New Jersey. In addition,
every directory we publish has been registered with the United States copyright
office. The protective steps we have taken may be inadequate to deter
misappropriation of our proprietary information. We may be unable to detect the
unauthorized use of, or take steps to enforce, our intellectual property rights.
In addition, although we believe that our proprietary rights do not infringe on
the intellectual property rights of others, other parties may assert
infringement claims against us or claims that we have violated a trademark,
trade name, service mark or copyright belonging to them. These claims, even if
not meritorious, could result in the expenditure of significant financial and
managerial resources on our part


                                     - 8 -
<PAGE>

Employees

      As of December 31, 2001 we employed 8 people, all of whom are full-time
employees, filling executive, managerial or administrative positions. In
addition, we retained the services of 18 administrative, accounting and
production personnel, all of whom are independent contractors. Finally, we had a
network of 101 sales representatives, 30 contracted by us and 71 hired by the
sales agencies that sell ads for our directories. We believe that our
relationship with our employees and contractors is good. None of our employees
is represented by a labor union.

          CERTAIN RISK FACTORS THAT MAY AFFECT GROWTH AND PROFITABILITY

The following factors may affect the growth and profitability of the Company and
should be considered by any prospective purchaser of the Company.

Verizon and other existing or potential competitors have significant competitive
advantages.

      Many of our competitors, particularly Verizon, have significant operating
and financial advantages. Our competitors' advantages include:

      o     greater financial, personnel, technical and marketing resources,

      o     superior systems,

      o     stronger relationships with advertisers,

      o     greater production capacity,

      o     better-developed distribution channels, and

      o     greater name recognition.

Because we contract with sales agencies, we could lose a significant number of
our sales force on 30 days notice.

      A large number of our sales representatives is provided to us under
agreements with independent sales agencies, which are terminable upon 30 days
notice by either party. Accordingly, on 30 days notice we could lose a
significant portion of our sales force. In addition, due to the demands of the
job, many sales representatives leave within one year of their hire.
Replenishing our sales force involves significant time and expense for
recruiting and training.

We do not have any long-term commitments from advertisers, upon whom our success
depends.

      We do not have long-term contractual arrangements with advertisers. Thus,
we must obtain new advertisers and renewals from existing advertisers, for each
directory that we publish. There is no assurance that our current advertisers
will continue to place ads in our directories or that we will be able to attract
new advertisers. Any failure to achieve sufficient advertising revenues would
have a material adverse effect on our business, results of operations and
financial condition.

We do not have the ability to measure the effectiveness of advertisements. As
our business grows, our customers may require us to do so.


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<PAGE>

      We do not have the ability to quantify the effectiveness of advertising in
our directories. Eventually, however, we may have to provide this type of
information in order to retain existing customers as well as expand our customer
base. As we establish a longer history in publishing NewYellow, a directory that
competes directly with the Verizon Yellow Pages, we should be able to provide
such desired information. The effectiveness of advertising is usually based upon
demographic and other relevant statistical data. If we cannot provide our
advertisers with this information or if they perceive the information that we
provide to be unreliable, they may not advertise in NewYellow or refuse to pay
our standard advertising rates. Accordingly, we will have to either develop the
ability to provide this information to our advertisers or contract with third
parties to provide this information on our behalf. Either alternative will
result in additional personnel and equipment costs for which we have not
budgeted, and may also cause interruptions in our business operations.

Our growth depends on the continued services of Assaf Ran.

      We depend on the continued services of Assaf Ran, our founder, president
and chief executive officer. Mr. Ran supervises all aspects of our business,
including our sales force and production staff. Mr. Ran has the personal
relationships with the principals of our key service providers including our
printer, HaMakor Printing Ltd., and the heads of the independent sales agencies
that provide about two- thirds of our sales representatives. If Mr. Ran's
employment terminates, our relationships with our key suppliers and vendors may
be jeopardized. Mr. Ran has entered into an employment agreement, but that is no
guarantee that his employment will not terminate before its expiration on June
30, 2002. In addition, we have purchased a $500,000 key man life insurance
policy on Mr. Ran.

Item 2. Description of Property

      Our executive and principal operating office is located in Queens, New
York in 3,000 square feet. This space is occupied under a lease that expires
October 30, 2003. The monthly rent is $5,058. During 2001 we maintained a sales
office in Fair Lawn, New Jersey. The space was leased on a month-to-month basis
for $1,945 per month. We maintained a sales office in Manhattan from October
through December 2001 for a monthly rent of $1,500. In February 2002 both New
Jersey and Manhattan sales offices became independent sales agencies and have
taken over the related rent payments.

Item 3. Legal proceedings

      Not applicable.

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

      Not applicable.

                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

      (a) Market Information

      The Company's Common Stock is traded on The Nasdaq SmallCap Market under
      the symbol "DAGM".

      The following table sets forth the high and low bid prices as quoted by
      The Nasdaq SmallCap Market in the years 2001 and 2000. Such quotations
      reflect inter-dealer prices, without retail mark-up, markdown or
      commission and may not necessarily represent actual transactions.


                                     - 10 -
<PAGE>

                                                           Bid Price
                                                           ---------
                                                      High            Low
                           2000
                           ----
        ----------------------------------------------------------------------
        First Quarter                                $5.469        $3.875
        ----------------------------------------------------------------------
        Second Quarter                               $4.750        $2.188
        ----------------------------------------------------------------------
        Third Quarter                                $3.500        $2.125
        ----------------------------------------------------------------------
        Fourth Quarter                               $3.125        $1.563
        ----------------------------------------------------------------------
                           2001
                           ----
        ----------------------------------------------------------------------
        First Quarter                                $2.562        $1.562
        ----------------------------------------------------------------------
        Second Quarter                               $1.700        $1.330
        ----------------------------------------------------------------------
        Third Quarter                                $1.660        $1.000
        ----------------------------------------------------------------------
        Fourth Quarter                               $1.710        $1.050
        ----------------------------------------------------------------------

      (b) Holders

      As of March 4, 2002, the approximate number of record holders of the
      Common Stock of the Company was 16.

      (c) Dividends

      We have never declared or paid any cash dividends on our capital stock and
      do not anticipate paying any cash dividends on our capital stock in the
      foreseeable future. We may incur indebtedness in the future which may
      prohibit or effectively restrict the payment of dividends, although we
      have no current plans to do so.

Item 6. Management's Discussion and Analysis or Plan of Operations

The following management's discussion and analysis of financial condition and
results of operations should be read in conjunction with our audited financial
statements and notes thereto contained elsewhere in this report. This discussion
contains forward-looking statements based on current expectations that involve
risks and uncertainties. Actual results and the timing of certain events may
differ significantly from those projected in such forward-looking statements.

Overview

      We currently publish and distribute yellow page directories in print and
on the worldwide web. Our directories target the mainstream yellow page market
in New York City as well as niche markets in the New York metropolitan area. We
sell yellow page advertisements as part of an overall media package that
includes print advertising, on-line advertising and other added value services
such as our referral service and consumer discount club.

      We operate three internet portals, a mainstream general portal
NewYellow.com, targeting the general population, JewishYellow.com, targeting
worldwide Jewish communities and JewishMasterguide.com, targeting the
ultra-orthodox Hasidic communities. Our principal source of revenue derives from
the sale of ads in our print and on-line directories.


                                     - 11 -
<PAGE>

      Advertising fees, whether collected in cash or evidenced by a receivable,
generated in advance of publication dates, are recorded as "Advanced billings
for unpublished directories" on our balance sheet. Many of our advertisers pay
the ad fee over a period of time. In that case, the entire amount of the
deferred payment is booked as a receivable. Revenues are recognized at the time
the directory in which the ad appears is published. Thus, costs directly related
to the publication of a directory in advance of publication are recorded as
"Directories in progress" on our balance sheet and are recognized when the
directory to which they relate is published. All other costs are expensed as
incurred.

      The principal operating costs incurred in connection with publishing the
directories are commissions payable to sales representatives and costs for paper
and printing. Generally, advertising commissions are paid as advertising revenue
is collected. We do not have any long term agreements with paper suppliers or
printers. Since ads are sold before we purchase paper and print a particular
directory, a substantial increase in the cost of paper or printing costs would
reduce our profitability. Administrative and general expenses include
expenditures for marketing, insurance, rent, sales and local franchise taxes,
licensing fees, office overhead and wages and fees paid to employees and
contract workers (other than sales representatives).

Results of operations

The following table sets forth for the periods presented statement of operations
data as a percentage of advertising revenue. The trends suggested by this table
may not be indicative of future operating results.

                                                                  2001     2000
                                                                  ----     ----

Advertising revenues ........................................    100.0%   100.0%
Publishing costs ............................................     26.9%    22.8%
Gross profit ................................................     73.1%    77.2%
Selling expenses ............................................     35.0%    33.8%
Administrative and general expenses .........................     49.0%    47.4%
Total operating costs and expenses ..........................     84.0%    81.2%
Other income, net ...........................................      7.2%     6.8%
Earnings before provisions for income taxes and equity income     -3.6%     2.8%
(Benefit) provision for income taxes ........................     -1.5%     1.4%
Cumulative effect of change in accounting ...................       --     -8.2%
Net loss ....................................................     -2.1%    -6.8%

Years-ended December 31, 2001 and 2000

Advertising revenues

Advertising revenues in 2001 and 2000 were $ 5,586,000 and $ 6,237,000 ,
respectively, representing a decrease of $ 651,000 , or 10.4%, in 2001. This
decrease was primarily attributable to the general slowdown in business activity
and particularly to the decrease in sales of the October edition of our
NewYellow directory subsequent to the September 11th event. In addition, the
decrease also reflects that only five directories were published in 2001 whereas
six directories were published in 2000. The second edition of the Jewish Master
Guide, which was scheduled to be published at December 2001, was rescheduled to
be published in the middle of 2002.


                                     - 12 -
<PAGE>

Publishing costs

Publishing costs for 2001 and 2000 were $ 1,502,000 and $ 1,422,000,
respectively, representing an increase of $80,000, or 5.6 %, in 2001. As a
percentage of advertising revenues, publishing costs were 26.9 % in 2001
compared to 22.8% in 2000. The increase in publication costs primarily reflects
the retention of a more expensive distributor to obtain broader distribution of
NewYellow, as well as minor increases in the overall publication costs.

Selling expenses

Selling expenses for the year ended December 31, 2001 and 2000 were $ 1,953,000
and $ 2,109,000, respectively, representing a decrease of $ 156,000, or 7.4 %,
in 2001. As a percentage of advertising revenues, selling expenses increased to
35.0 % from 33.8 %. The decrease in selling expenses is primarily a result of
the decrease in sales. The increase in selling expenses as a percentage of
revenues results from the fact that more sales were through sales agencies
compared to sales from the in-house offices. The Company pays a higher
commission rate to its sales agencies then to the in-house offices.

Administrative and general costs

Administrative and general expenses for 2001 and 2000 were $ 2,737,000 and $
2,958,000 , respectively, representing a decrease of $ 221,000, or 7.4%, in
2001. This decrease is primarily attributable to (1) decreased write-offs of
uncollectible accounts due to decreasing sales and a more stringent Company
policy with respect of collecting debtor's balances and (2) a decrease in
investors relations expenses.

Other income, net

For the year ended December 31, 2001 and 2000 we had other income of $ 405,000,
and $ 425,000, respectively. This decrease of $ 20,000 was primarily
attributable to a decrease in interest and dividend income due to a decrease in
the interest rate offset by a realized gain on preferred stocks and other
marketable securities.

Earnings before provision for income taxes and cumulative effect of change in
accounting principle

Losses before provision for income taxes for the year ended December 31, 2001
was $(201,000) compared to earnings of $ 173,000 for the year ended December 31,
2000. The decrease of $ 374,000 was primarily attributable to the decrease in
advertising revenues partially offset by the decrease of selling expenses,
administrative and general expenses.

(Benefit) provision for income taxes

(Benefit) provision for income taxes in 2001 and 2000 was $ (84,000) and $
88,000 , respectively. The decrease in provision for income taxes reflects the
decrease in earnings. The change from provision to benefit is due to the fact
that during 2000 the Company operated in a gain position before the cumulative
effect of a change in accounting principal while in 2001 the Company operated in
a loss position and can utilize tax benefits.

Cumulative effect of change in accounting principle

The cumulative effect of change in accounting principles incurred in fiscal year
2000 was a loss of $ 511,000, net of tax benefit. This charge was incurred as a
result of the fact that in December 1999, the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements". SAB No. 101 expresses the views of the SEC
staff in applying generally accepted accounting principles to certain revenue
recognition issues. SAB 101 has since become a required accounting principle to
be applied with the onset of the fourth quarter of last year, effective from
January 1, 2000.


                                     - 13 -
<PAGE>

Net loss available to common shareholders

Net loss was $ (117,000) compared to $ (425,000) in 2001 and 2000, respectively.
This decrease in net loss is primarily attributable to the cumulative effect of
change in accounting principle in fiscal year 2000, the decrease in bad debt
expenses in fiscal year 2001 associated with a more stringent policy with
respect to collecting debtors' balances as well as a decrease in selling,
administrative and general expenses.

            Liquidity and Capital Resources

Until our initial public offering in 1999, our only source of funds was cash
flow from operations, which has funded both our working capital needs and
capital expenditures. As a result of our initial public offering in May 1999, we
received proceeds of approximately $6.7 million, which is also increased our
availability to pay operating expenses. We have no debt to third parties or
credit facilities. As of December 31, 2001 the funds from the initial public
offering are being invested as follows: $ 3,098,000 (representing 46.0% of the
total funds) in money market and $ 3,634,000 (representing 54.0% of the total
funds) in preferred stocks.

We do not have any material commitments under any leases, sales agency
agreements or employment agreements, other than those of the employment
agreements with Assaf Ran. This agreement calls for annual salary of $ 125,000.
Mr. Ran's employment term initially ends June 30, 2002 but renews automatically
for successive one-year periods until either party gives 180 days written notice
of its intention to terminate the agreement.

At December 31, 2001 we had cash and cash equivalents, preferred stocks and
other marketable securities of $ 6,941,000 and working capital of $ 6,562,000
compared to cash and cash equivalents of $ 7,149,000 and working capital of $
6,633,000 at December 31, 2000. The decrease is primarily attributable to the
use of cash in operating and investing activity.

Net cash used in operating activities was $232,000 for the year ended December
31, 2001 compared to net cash provided by operating activities of $ 66,000 for
the year ended December 31, 2000. The decrease in net cash provided by operating
activities is due to a decrease in corporate earnings in 2001.

Net cash used in investing activities was $ 3,687,000 for the year ended
December 31, 2001 compared to net cash used in investing activities of $ 118,000
for the year ended December 31, 2000. Net cash used in investing activities in
2001 is primarily the result of the company's investment in preferred stocks and
other marketable securities.

We anticipate that our current cash balances together with our cash flows from
operations will be sufficient to fund the production of our directories and the
maintenance of our web site as well as increases in our marketing and
promotional activities for the next 12 months. However, we expect our working
capital requirements to increase significantly over the next 12 months as we
continue to market NewYellow and expand our on-line services.

            Staff Accounting bulletin SAB 101 effects

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 expresses the views of the SEC staff in applying
generally accepted accounting principles to certain revenue recognition issues.
The Company has decided to apply this SAB effective fiscal year ending December
31, 2000. The effect of this application can be seen in the table below.


                                     - 14 -
<PAGE>

                                             Three month period ended -
                                             --------------------------
                                        3/31/00        6/30/00        9/30/00
                                        -------        -------        -------

As reported                           $   421,654    $  (124,065)   $   142,430
Effect for applying SAB 101              (568,733)      (133,746)       (33,921)
                                      -----------------------------------------
Net (loss) income                     $  (147,079)   $  (257,811)   $   108,509
                                      -----------------------------------------

Per Share Amounts:
Basic earnings per common share:
As reported                           $      0.15    $     (0.04)   $      0.05
Effect for applying SAB 101           $     (0.20)   $     (0.05)   $     (0.01)
                                      -----------------------------------------
Net (loss) income                     $     (0.05)   $     (0.09)   $      0.04
                                      -----------------------------------------

Diluted earnings per common share:
As reported                           $      0.15    $     (0.04)   $      0.05
Effect for applying SAB 101           $     (0.20)   $     (0.05)   $     (0.01)
                                      -----------------------------------------
Net (loss) income                     $     (0.05)   $     (0.09)   $      0.04
                                      -----------------------------------------

Recent Technical Accounting Pronouncements

      In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
This statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS No. 144 will be effective for financial
statements of fiscal years beginning after December 15, 2001. Dag Media expects
the adoption of SFAS No. 144 will not have a material impact on the Company's
financial position, results of operations or cash flows.

      In June 2001, the FASB issued SFAS No. 141 and 142 entitled, "Business
Combination" and "Goodwill and Other Intangible Assets", respectively, SFAS No.
141 among other things, eliminates the pooling of interest method of accounting
for business acquisitions entered into after June 30, 2001. SFAS No. 142
requires companies to use a fair-value approach to determine whether there is an
impairment of existing and future goodwill. SFAS No. 142 is effective beginning
January 1, 2002. The Company is in the process of evaluating the effect these
changes in accounting principles will have on the Company's financial position,
results of operations and cash flows.

Item 7. Financial Statements

The financial statements of the Company required by this item are set forth
beginning on page F-1.

Item 8. Change in and Disagreements with Accountants on Accounting Financial
        Disclosure.


                                     - 15 -
<PAGE>

Not applicable.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act.

Executive officers and directors

      Our executive officers and directors and their respective ages are as
follows:

<TABLE>
<CAPTION>
Name                                     Age                             Position
----                                     ---                             --------
<S>                                       <C>   <C>
Assaf Ran............................     36    Chairman of the board, chief executive officer, president and
                                                director
Yael Shimor - Golan..................     32    Chief financial officer, treasurer, secretary and director
Stephen A. Zelnick (1) (2)...........     64    Director
Phillip Michals (1) (2)..............     32    Director
Eran Goldshmid (1)...................     35    Director
Michael Jackson (2)..................     37    Director
</TABLE>

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

      All directors hold office until the next annual meeting of shareholders
and until their successors are duly elected and qualified. Officers are elected
to serve subject to the discretion of the board of directors.

      Set forth below is a brief description of the background and business
experience of our executive officers and directors:

      Assaf Ran, our founder, has been our chief executive officer and president
since our inception in 1989.

      Yael Shimor-Golan, our chief financial officer and a member of our board
of directors joined DAG Media in August 2001. Mrs. Shimor-Golan is an Israeli
licensed CPA and previously worked at Marks Paneth & Shron LLP, a Manhattan
accounting firm since 1999. From 1995 until 1999, Mrs. Shimor-Golan was a
partner at the firm Shimon Dill & Co. an accounting firm in Jerusalem, Israel.

      Stephen A. Zelnick, Esq., joined our board in July 2000. He has been a
partner in the law firm Morse, Zelnick, Rose & Lander LLP since its inception in
1995. Mr. Zelnick has been a practicing attorney in New York State for over 40
years. Mr. Zelnick is also a member of the board of directors of Milestone
Scientific, Inc, Adstar, Inc. and Hometown auto retailers, Inc.

      Phillip Michals has been a member of our board of directors since March
1999. He is the founder and, since August 1996, the president of Up-Tick
Trading, a consulting company to investment banking firms. Since November 2000,
he has also been a principal and a vice president of Italish Holding Consulting
Inc., a management-consulting firm. Mr. Michals received a BS degree in human
resources from the University of Delaware in May 1992.

      Eran Goldshmid has been a member of our board of directors since March
1999. Mr. Goldshmid received certification as a financial consultant in February
1993 from the School for Investment Consultants, Tel Aviv, Israel, and a BA in
business administration from the University of Humberside,


                                     - 16 -
<PAGE>

England in December 1998. From December 1998 until July 2001, he has been the
general manager of the Carmiel Shopping Center in Carmiel, Israel. Since August
2001, he is the president of the New York Diamond Center, New York, NY.

      Michael J. Jackson has been a member of the board since July 2000. Since
September 1999, he has been the corporate controller of AGENCY.COM, a global
internet professional services company, since May 2000 until September 2001 the
Chief Accounting Officer and from October 2001 the Chief Financial Officer of
the Company. From October 1994 until August 1999, Mr. Jackson was a manager at
Arthur Andersen, LLP and Ernst and Young. Mr. Jackson also served on the New
York State Society Auditing Standards and Procedures Committee from 1998 to 1999
and was serving on the New York State Society's SEC Committee from 1999 to 2001.

      The Company's Board of Directors has established compensation and audit
committees. The Compensation Committee reviews and recommends to the Board of
Directors the compensation and benefits of all the officers of the Company,
reviews general policy matters relating to compensation and benefits of
employees of the Company, and administers the stock option plan and authorizes
the issuance of stock options to the Company's officers, employees, directors
and consultants. The Audit Committee meets with management and the Company's
independent auditors to determine the adequacy of internal controls and other
financial reporting matters.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent
(10%) of a registered class of the Company's equity securities to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission ("SEC"). Officers, directors and greater than ten percent (10%)
stockholders are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms they file.

      To the best of the Company's knowledge, based solely on review of the
copies of such forms furnished to the Company, or written representations that
no other forms were required, the Company believes that all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
(10%) shareholders were complied with during 2001.

Item 10. Executive Compensation.

      The following Summary Compensation Table sets forth all compensation
earned, in all capacities, during the fiscal years ended December 31, 2001 and
2000 by (i) the Company's Chief Executive Officer and (ii) the most highly
compensated executive officers, other than the CEO, who were serving as
executive officers at the end of the 2001 fiscal year and whose salary as
determined by Regulation S-B, Item 402, exceeded $100,000 (the individuals
falling within categories (i) and (ii) are collectively referred to as the
"Named Executives").


                                     - 17 -
<PAGE>

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                                            Long-Term Compensation
                                                                  -------------------------------------------
                                         Annual
                                            Compensation                 Awards                 Payouts
                                        ----------------------    ----------------------    -----------------
                                                                      Common Stock             All Other
  Name and Principal                        Salary/ Bonus          Underlying Options         Compensation
       Position               Year               ($)                       (#)                    ($)
-----------------------     --------    ----------------------    ----------------------    -----------------
<S>                           <C>         <C>                                <C>                  <C>
Assaf Ran                     2001        $107,732        --                 --                   $3,400
Chief Executive               2000         $67,788        --                 --                   $2,250
Officer and                   1999         $75,000        --                 --
President
</TABLE>

Compensation of Directors

      Non-employee directors are granted, upon becoming a director, and renewal
of director term, five-year options to purchase 7,000 shares of Common Stock at
an exercise price equal to the fair market value of a share of Common Stock on
the date of grant. They also receive cash compensation of $200 per meeting
attended.

Employment Contracts

      In March 1999, the Company entered into an employment agreement with Assaf
Ran, its president and chief executive officer. Mr. Ran's employment term
initially ends June 30, 2002 but renews automatically for successive one-year
periods until either party gives 180 days written notice of its intention to
terminate the agreement. Under the agreement, Mr. Ran receives an annual base
salary of $75,000 and annual bonuses as determined by the compensation committee
of the Board of Directors in its sole and absolute discretion and is eligible to
participate in all executive benefit plans established and maintained by the
Company. Under the agreement, Mr. Ran agreed to a one-year non-competition
period following the termination of his employment. As of March 2001 the
compensation committee approved an increase in Mr. Ran's compensation to an
annual base salary of $125,000.

Item 11. Security Ownership of Certain Beneficial Owners and Management

      The following table, together with the accompanying footnotes, sets forth
information, as of March 4, 2002, regarding stock ownership of all persons known
by the Company to own beneficially more than 5% of the Company's outstanding
Common Stock, certain executive officers, all directors, and all directors and
officers of the Company as a group:


                                     - 18 -
<PAGE>

<TABLE>
<CAPTION>
                                                       Shares of
                                                      Common Stock
                                                      Beneficially     Percentage of
          Name of Beneficial Owner (1)                 Owned (2)         Ownership
----------------------------------------------      ---------------   ---------------
<S>                                                    <C>                 <C>
Executive Officers and Directors
Assaf Ran.....................................         1,418,595           48.6%
Yael Shimor-Golan                                          4,000             *
Stephen A. Zelnick............................            24,000             *
Michael Jackson...............................            14,000             *
Phillip Michals...............................            21,000             *
Eran Goldshmid................................            21,000             *
                                                       ---------

All officers and directors as a group.........         1,502,595           50.2%
                                                       ---------

5% and Greater Stockholders                               none
</TABLE>

*     Less than 1%

(1)   The addresses of the persons named in this table are as follows:

      Assaf Ran and Yael Shimor-Golan -
      c/o DAG Media Inc, 125-10 Queens Boulevard Kew Gardens, NY 11415

      Stephen A. Zelnick -
      c/o  Morse, Zelnick, Rose & Lander LLP, 450 Park Avenue New York, NY 10022

      Michael Jackson -
      20 Exchange Place New York, NY 10005

      Phillip  Michals -
      10 Greenbrier Road Oakhurst, NJ 07755

      Eran Goldshmid -
      65 Broadway New York, NY 10006

(2)   A person is deemed to be a beneficial owner of securities that can be
      acquired by such person within 60 days from the filing of this report upon
      the exercise of options and warrants or conversion of convertible
      securities. Each beneficial owner's percentage ownership is determined by
      assuming that options, warrants and convertible securities that are held
      by such person (but not held by any other person) and that are exercisable
      or convertible within 60 days from the filing of this report have been
      exercised or converted. Except as otherwise indicated, and subject to
      applicable community property and similar laws, each of the persons named
      has sole voting and investment power with respect to the shares shown as
      beneficially owned. All percentages are determined based on 2,907,460
      shares outstanding on March 4, 2002.


                                     - 19 -
<PAGE>

Item 12. Exhibits and Reports on Form 8-K.

(a)   Certain of the following exhibits were filed as Exhibits to the
      registration statement on form SB-2, Registration No. 333-74203 and
      amendments thereto (the "Registration Statement") filed by the Registrant
      under the Securities Act of 1933, as amended, or the reports filed under
      the Securities and Exchange Act of 1934, as amended, and are hereby
      incorporated by reference.


                                     - 20 -
<PAGE>

   Exhibit
      No.               Description
     -----              -----------

      3.1         Certificate of Incorporation of the Company. (1)

      3.2         By-laws of the Company. (1)

      4.1         Specimen Stock Certificate (2)

      4.2         Form of Underwriter's Warrant (1)

      10.1        Employment Agreement dated March 1, 1999 between Assaf Ran
                     and the Company (1)

      10.2        Form of the Company's 1999 Stock Option Plan As Amended (3)

      23          Consent of Auditors

      (1)   Previously filed as exhibit to Form SB-2 on March 10, 1999.

      (2)   Previously filed as exhibit to Form SB-2/A on April 23, 1999.

      (3)   Previously filed as exhibit to Form S-8 on February 8, 2002.

(b)   Reports on Form 8-K - none.


                                     - 21 -
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       DAG Media, Inc.


                                       By:/s/Assaf Ran
                                          ---------------------------------
                                           Assaf Ran,
                                           President and Chief Executive Officer

Date: March 4, 2002

In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on March
4, 2002:

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

/s/ Assaf Ran                       March 4, 2002    President, Chief Executive
-------------------------------                         Officer and Director
    Assaf Ran

/s/ Yael Shimor-Golan               March 4, 2002    Chief Financial Officer and
-------------------------------                         Director
    Yael Shimor-Golan

/s/ Stephen A. Zelnick              March 4, 2002       Director
-------------------------------
    Stephen A. Zelnick

/s/ Phillip Michals                 March 4, 2002       Director
-------------------------------
    Phillip Michals

/s/ Eran Goldshmid                  March 4, 2002       Director
-------------------------------
    Eran Goldshmid

/s/ Michael Jackson                 March 4, 2002       Director
-------------------------------
    Michael Jackson


                                     - 22 -
<PAGE>

                                 DAG MEDIA, INC.

                          Index to Financial Statements

                                                                     Page Number

Report of Independent Public Accountants..............................    F-2

Balance Sheet at December 31, 2001....................................    F-3

Statements of Operations for the years
ended December 31, 2001 and 2000......................................    F-4

Statements of Changes in Shareholders' Equity
for the years ended December 31, 2001 and 2000........................    F-5

Statements of Cash Flows for the
years ended December 31, 2001 and 2000................................    F-6

Notes to Financial Statements.........................................    F-7


                                       F-1
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Directors of DAG Media, Inc.:

We have audited the accompanying balance sheet of DAG Media, Inc. (a New York
corporation) as of December 31, 2001, and the related statements of operations,
changes in shareholders' equity and cash flows for the years ended December 31,
2001 and 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DAG Media, Inc. as of December
31, 2001, and the results of its operations and its cash flows for the years
ended December 31, 2001 and 2000, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 2, the Company changed its method of accounting for revenue
recognition effective January 1, 2000.


                                            By: /s/ Arthur Andersen LLP
                                                -----------------------
                                                Arthur Andersen LLP

New York, New York
February 28, 2002

<PAGE>

                                 DAG MEDIA, INC.
                                  BALANCE SHEET
                                DECEMBER 31, 2001

<TABLE>
<S>                                                                                                  <C>
Assets

Current assets:

Cash and cash equivalents                                                                            $ 3,229,179

Preferred stocks and other marketable securities                                                       3,711,892
                                                                                                     -----------
             Total cash and cash equivalents, preferred stocks and other marketable
securities                                                                                             6,941,071
                                                                                                     -----------

Trade accounts receivable, net of allowance for doubtful accounts of $632,633                          2,328,917
Directories in progress                                                                                1,501,961
Deferred tax asset                                                                                       190,972
Other current assets                                                                                     109,754
            Total current assets                                                                      11,072,675
                                                                                                     -----------

Fixed assets, net of accumulated depreciation of $124,041                                                258,987
Goodwill and trademarks, net of accumulated amortization of $141,855                                   1,209,126
Other assets                                                                                              19,462
                                                                                                     -----------
Total assets                                                                                         $12,560,250
                                                                                                     ===========

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable and accrued expenses                                                                $   100,105
Commissions payable                                                                                      595,000
Advanced billing for unpublished directories                                                           3,549,940
Income tax payable                                                                                       266,348
                                                                                                     -----------
        Total current liabilities                                                                      4,511,393
                                                                                                     -----------

Commitments and contingencies (Note 8)

Shareholders' equity:

Preferred shares - $.01 par value; 5,000,000 shares authorized; no shares issued                              --
Common shares - $.001 par value; 25,000,000 authorized; 2,976,190 issued and
2,907,460 outstanding                                                                                      2,976
Additional paid-in capital                                                                             7,896,953
Treasury stock, at cost- 68,730 shares                                                                 (231,113)
Deferred compensation                                                                                   (49,678)
Unrealized gains on preferred stocks and other marketable securities, net of taxes                        15,361
Retained earnings                                                                                        414,358
                                                                                                     -----------
         Total shareholders'  equity                                                                   8,048,857
                                                                                                     -----------
 Total liabilities and shareholders' equity                                                          $12,560,250
                                                                                                     ===========
</TABLE>

        The accompanying notes are an integral part of this balance sheet


                                       F-3
<PAGE>

                                 DAG MEDIA, INC.
                            STATEMENTS OF OPERATIONS
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                                  2001              2000
                                                                                  ----              ----
<S>                                                                           <C>               <C>
Advertising revenues                                                          $ 5,585,640       $ 6,237,173
Publishing costs                                                                1,501,574         1,421,994
                                                                              -----------       -----------
         Gross profit                                                           4,084,066         4,815,179

Operating costs and expenses:
Selling expenses                                                                1,952,939         2,109,136
General and administrative expenses                                             2,736,847         2,957,637
                                                                              -----------       -----------
         Total operating costs and expenses                                     4,689,786         5,066,773
                                                                              -----------       -----------

Loss from operations                                                             (605,720)         (251,594)
                                                                              -----------       -----------

Interest income                                                                   313,223           425,021
Realized gain on preferred stocks and other marketable securities                  91,667                --
                                                                              -----------       -----------
Other income                                                                      404,890           425,021

(Loss) income before provision for income taxes                                  (200,830)          173,427

Benefit (provision) for income taxes                                               83,752           (87,667)
                                                                              -----------       -----------

(Loss) income before cumulative effect of change in accounting principle         (117,078)           85,760

Cumulative effect of change in accounting principle, net of
tax benefit of  $ 435,356                                                              --          (511,071)
                                                                              -----------       -----------

Net loss                                                                      $  (117,078)      $  (425,311)
                                                                              ===========       ===========

Earnings per common share:
Basic -
  (Loss) income before cumulative effect of change in accounting principle    $     (0.04)      $      0.03
  Cumulative effect of change in accounting principle                                  --             (0.18)
                                                                              -----------       -----------
  Net loss                                                                    $     (0.04)      $     (0.15)
                                                                              ===========       ===========

Diluted -
  (Loss) income before cumulative effect of change in accounting principle    $     (0.04)      $      0.03
  Cumulative effect of change in accounting principle                                  --             (0.18)
                                                                              -----------       -----------
  Net loss                                                                    $     (0.04)      $     (0.15)
                                                                              ===========       ===========

Weighted average number of common shares outstanding
  - Basic                                                                       2,907,460         2,907,460
                                                                              ===========       ===========
  - Diluted                                                                     2,907,460         2,915,430
                                                                              ===========       ===========
</TABLE>

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


                                       F-4
<PAGE>

                                 DAG MEDIA, INC.
                  STATEMENTS OF CHANGES IN SHARHOLDERS' EQUITY
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                      Common Stock        Additional      Treasury Shares
                                      ------------         Paid-in       ------------------     Deferred
                                   Shares      Amount      Capital       Shares       Cost     Compensation
                                   ------      ------      -------       ------      ------    ------------
<S>                             <C>           <C>        <C>            <C>      <C>            <C>
Balance, December 31, 1999 ...  $ 2,976,190   $  2,976   $ 7,799,789    68,730   $  (231,113)   $      --

Issuance of stock option .....           --         --       116,912        --            --     (116,912)

Amortization of deferred
compensation .................           --         --            --        --            --       39,851

Net loss for the year ended
December 31, 2000 ............           --         --            --        --            --           --
                                -------------------------------------------------------------------------

Balance, December 31, 2000 ...  $ 2,976,190      2,976   $ 7,916,701    68,730   $  (231,113)   $ (77,061)

Issuance of  options to
consultants ..................           --         --        19,302        --            --      (19,302)

Amortization of deferred
compensation .................           --         --            --        --            --        7,635

Cancellation of options issued
to consultants ...............           --         --       (39,050)       --            --       39,050

Unrealized gains on
preferred stocks and other
marketable securities, net
of taxes .....................           --         --            --        --            --           --

Net loss for the year ended
December 31,
2001 .........................           --         --            --        --            --           --
                                -------------------------------------------------------------------------

Balance, December 31, 2001 ...  $ 2,976,190   $  2,976   $ 7,896,953    68,730   $  (231,113)   $ (49,678)
                                =========================================================================

<CAPTION>
                                  Unrealized   Retained
                                     Gain      Earnings       Total
                                     ----      --------       -----
<S>                              <C>       <C>           <C>
Balance, December 31, 1999 ...        --   $  956,747    $ 8,528,399

Issuance of stock option .....        --           --             --

Amortization of deferred
compensation .................        --           --         39,851

Net loss for the year ended
December 31, 2000 ............        --     (425,311)      (425,311)
                                ------------------------------------

Balance, December 31, 2000 ...        --      531,436    $ 8,142,939

Issuance of  options to
consultants ..................        --           --             --

Amortization of deferred
compensation .................        --           --          7,635

Cancellation of options issued
to consultants ...............        --           --             --

Unrealized gains on
preferred stocks and other
marketable securities, net
of taxes .....................    15,361           --         15,361

Net loss for the year ended
December 31,
2001 .........................        --     (117,078)      (117,078)

Balance, December 31, 2001 ...    15,361   $  414,358    $ 8,048,857
                                ====================================
</TABLE>

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


                                       F-5
<PAGE>

                                 DAG MEDIA, INC.
                            STATEMENTS OF CASH FLOWS
                 FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

<TABLE>
<CAPTION>
                                                                            2001           2000
                                                                            ----           ----
<S>                                                                     <C>            <C>
Cash flows from operating activities:
   Net loss                                                             $  (117,078)   $  (425,311)
   Adjustment to reconcile net loss to net cash (used in) provided by
    operating activities -
      Cumulative effect of change in accounting principle                        --        511,071
      Depreciation and amortization                                         110,452         93,445
      Amortization of deferred compensation                                   7,635         39,851
Bad debt expense                                                          1,134,827      1,311,924
Deferred taxes                                                              (14,155)      (303,058)
Realized gains on preferred stocks and other marketable securities          (91,667)            --
      Changes in operating assets and liabilities -
      Accounts receivable                                                (1,164,477)    (1,145,635)
      Directories in progress                                               (32,778)       (13,319)
      Other current and non current assets                                   (7,164)        60,205
      Accounts payable and accrued expenses                                  24,354         45,797
      Commissions payable                                                    41,884        (34,497)
      Advanced billings for unpublished directories                           4,729       (451,856)
      Income taxes payable                                                  (69,597)       377,301
      Advances to employees                                                 (59,189)            --
                                                                        -----------    -----------
              Net cash (used in) provided by operating activities          (232,224)        65,918
                                                                        -----------    -----------

Cash flows from investing activities:
      Investment in preferred stocks and other marketable securities     (4,019,305)            --
      Proceeds from sale of preferred stocks and other marketable
       securities                                                           424,681             --
      Purchase of fixed assets                                              (92,637)      (118,111)
                                                                        -----------    -----------
              Net cash used in investing activities                      (3,687,261)      (118,111)
                                                                        -----------    -----------

Net decrease in cash and cash equivalents                                (3,919,485)       (52,193)
                                                                        -----------    -----------

Cash and cash equivalents, beginning of year                              7,148,664      7,200,857
                                                                        -----------    -----------

Cash and cash equivalents, end of year                                  $ 3,229,179    $ 7,148,664
                                                                        ===========    ===========

Supplemental Cash Flow Information:
    Taxes paid during the years ................................                 --    $    15,579
                                                                        -----------    -----------
</TABLE>

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


                                       F-6
<PAGE>

                                 DAG MEDIA, INC.
                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2001 AND 2000

1. The Company

      Dag Media, Inc. ("the Company") currently publishes and distributes yellow
page directories in print and on the worldwide web, both in the mainstream
yellow page industry as well as in targeted niche markets in the New York
metropolitan area. The Company sells yellow page advertisements as part of an
overall media package that includes print advertising, on-line advertising and
other value added services such as a referral service and consumer discount
club.

      The Company operates three Internet portals, a mainstream general portal
NewYellow.com, targeting the general population, JewishYellow.com targeting
worldwide Jewish communities and JewishMasterguide.com, targeting the
ultra-orthodox Hasidic communities. The principal source of revenue is derived
from the sale of ads in our print and on-line directories.

2. Significant Accounting Policies

      Use of Estimates

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

      Cash and Cash Equivalents

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

      Preferred Stocks and other Marketable Securities

      Preferred stocks and other marketable securities are reported at fair
value and are classified as available-for-sale. Unrealized gains and losses from
those securities are reported as a separate component of shareholders' equity.

The Company's securities consist of the following at December 31, 2001:

<TABLE>
<CAPTION>
                                                                                      Gross                Gross
                                                                                    Unrealized           Realized
                              Fair Value         Cost        Sales Proceeds       Holding Gains        Holding Gains
                              ----------         ----        --------------       -------------        -------------
<S>                           <C>             <C>                <C>                 <C>                  <C>
Preferred Stocks              3,634,392       3,769,305          147,318             (10,601)             (1,804)
Marketable Securities           77,500         250,000           277,363             (15,000)            (89,863)
                              --------------------------------------------------------------------------------------
Total                         3,711,892       4,019,305          424,681             (25,601)            (91,667)
</TABLE>

<PAGE>

      Directories in Progress/Advanced Billings for Unpublished Directories

      Directories in progress include direct costs incurred applicable to
unpublished directories. Advanced billings for unpublished directories arise
from billings on advertising contracts. Upon publication, revenue and the
related expense are recognized.

      Fixed Assets

      Fixed assets are recorded at cost. Depreciation is provided on a
straight-line basis to distribute costs evenly over the estimated useful
economic lives of the assets, ranging from three to five years.

      Goodwill and Trademarks

      Goodwill and trademarks are amortized using the straight-line method over
twenty-five years.

      Income Taxes

      The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilites are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rate is recognized in income in the
period that includes the enactment date.

      Revenue Recognition

      Advertising revenues are recognized under the point-of-publication method,
which is generally followed by publishing companies. Under this method, revenues
and expenses are recognized when the related directories are published.
Similarly, costs directly related to the publication of a directory in advance
of publication are recorded as "Directories in progress" on the accompanying
balance sheet and are recognized when the directory to which they relate is
published. All other costs are expensed as incurred.

      In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements SAB No. 101" expresses the views of the SEC staff in applying
generally accepted accounting principles to certain revenue recognition issues.
The Company adopted SAB 101 effective January 1, 2000.

      In the past, the Company had recognized non-printed advertising revenues
related to its NewYellow directory sales upon launch of the applicable
advertisement. In accordance with SAB 101, the Company began to recognize such
revenues simultaneously with the related printed editions in which the
advertisement was sold. In addition, the Company allocates directory sales over
the number of printed editions, based on its past experience. Accordingly, the
Company recorded a cumulative effect of change in accounting principle of
$946,427, net

<PAGE>

of tax benefit of $435,356. The related revenues amounting to approximately
$1,472,000 were recognized in full during 2000. The following table represents
the net effect for applying SAB 101 in the 2000 interim periods.

                                               Three months period ended -
                                               ---------------------------
                                          3/31/2000    6/30/2000      9/30/2000
                                          ---------    ---------      ---------

As reported                              $ 421,654    $ (124,065)     $ 142,430

Effect for applying SAB 101               (568,733)     (133,746)       (33,921)
                                         ---------------------------------------
Net (loss) income                        $(147,079)   $ (257,811)     $ 108,509
                                         ---------------------------------------

Per Share Amounts:
Basic earnings per common share:
As reported                              $    0.15    $    (0.04)     $    0.05

Effect for applying SAB 101              $   (0.20)   $    (0.05)     $   (0.01)
                                         ---------------------------------------
Net (loss) income                        $   (0.05)   $    (0.09)     $    0.04
                                         ---------------------------------------

Diluted earnings per common share:
As reported                              $    0.15    $    (0.04)     $    0.05

Effect for applying SAB 101              $   (0.20)   $    (0.05)     $   (0.01)
                                         ---------------------------------------
Net (loss) income                        $   (0.05)   $    (0.09)     $    0.04
                                         ---------------------------------------

      Earnings Per Share ("EPS")

      Basic and diluted earnings per share are calculated in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". Under this standard, basic earnings per share is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share includes the
potential dilution from the exercise of stock options and warrants for common
shares using the treasury stock method.

      The following table reconciles the number of weighted average common
shares outstanding for basic and diluted earning per share:

                                                               Years ended
                                                              December 31,
                                                        ------------------------
                                                           2001          2000
                                                           ----          ----
Basic                                                   2,907,460      2,907,460
Incremental shares for assumed conversion of options           --          7,970
                                                        ---------      ---------
Diluted                                                 2,907,460      2,915,430
                                                        =========      =========

      292,440 and 103,884 stock options and warrants were not included in the
diluted earnings per share calculation for the 2001 and 2000 fiscal years,
respectively, as their effect would have been anti-dilutive.

      Accounting for Long-Lived Assets

      The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the impairment of Long-Lived Assets
and for Long-Lived Assets to be disposed of" ("SFAS 121"). This statement
establishes financial accounting and reporting

<PAGE>

standards for impairment of long-lived assets, certain identifiable intangibles
and goodwill related to those assets to be held and used, and for long-lived
assets and certain identifiable intangibles to be disposed of. SFAS 121
requires, among other things, that an entity review its long-lived assets and
certain related intangibles for impairment whenever changes in circumstances
indicate that the carrying amount of an asset may not be fully recoverable. The
Company does not believe that any such changes have taken place as of December
31, 2001.

      Stock-Based Compensation

      SFAS No. 123, "Accounting for Stock-Based Compensation", establishes a
fair market value based method of accounting for an employee stock option plan
but allows companies to continue to measure compensation cost for those plans
using the intrinsic value based method prescribed by APB Opinion No. 25
"Accounting for Stock Issued to Employees." Companies electing to continue using
the accounting under APB Opinion No. 25 are required to present pro forma
disclosure of net income and earnings per share as if the fair value based
method of accounting had been applied. The Company has elected to continue to
account for its stock-based compensation awards to employees and directors under
the accounting prescribed by APB Opinion No. 25, and to provide the necessary
pro forma disclosures as if the fair value method had been applied (Note 6).

      Concentrations of Credit Risk

      Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
preferred stocks, other marketable securities and accounts receivable. The
Company maintains cash and cash equivalents with various major financial
institutions, which invest primarily in tradable preferred stocks and high
quality corporate obligations. The Company believes that concentration of credit
risk with respect to trade accounts receivable are limited due to the large
number of customers comprising the Company's customer base. The Company performs
ongoing credit evaluations of its customers and maintains reserves for potential
losses.

      Fair Value of Financial Instruments

      For cash and cash equivalents, preferred stocks and other marketable
securities, the carrying amount approximates fair value.

      Recent Technical Accounting Pronouncements

      In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets".
This statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. SFAS No. 144 will be effective for financial
statements of fiscal years beginning after December 15, 2001. Dag Media expects
the adoption of SFAS No. 144 will not have a material impact on the Company's
financial position, results of operations or cash flows.

      In June 2001, the FASB issued SFAS No. 141 and 142 entitled, "Business
Combination" and "Goodwill and Other Intangible Assets", respectively, SFAS No.
141 among other things, eliminates the pooling of interest method of accounting
for business acquisitions entered into after June 30, 2001. SFAS No. 142
requires companies to use a fair-value approach to determine whether there is an
impairment of existing and future goodwill. SFAS No. 142 is effective beginning
January 1, 2002. The Company is in the process of

<PAGE>

evaluating the effect these changes in accounting principles will have on the
Company's financial position, results of operations and cash flows.

3. Fixed Assets, net

         Fixed assets, net consist of the following at December 31, 2001:

            Office equipment                                    $ 244,171
            Automobiles                                           117,696
            Leasehold improvements                                 21,161
                                                                ---------
                   Total fixed assets                             383,028
            Less: accumulated depreciation                       (124,041)
                                                                ---------
         Fixed assets, net                                      $ 258,987
                                                                =========

      Depreciation expense was approximately $56,000 and $39,000 for the years
ended December 31, 2001 and 2000, respectively.

4. Income Taxes

      The (benefit) provision for income taxes consists of the following:

                                         For the Years Ended
                                         -------------------
                                             December 31,
                                             ------------
                                          2001         2000
                                          ----         ----
Current Taxes:
   Federal .........................   $ (42,460)   $ 237,725
   State ...........................     (27,413)     153,000
                                       ---------    ---------
                                         (69,873)     390,725
                                       ---------    ---------

Deferred Taxes:
   Federal .........................      (8,466)    (184,000)
   State ...........................      (5,413)    (119,058)
                                       ---------    ---------
                                         (13,879)    (303,058)
                                       ---------    ---------
(Benefit) provision for income taxes   $ (83,752)   $  87,667
                                       =========    =========

      Deferred tax assets (liabilities) are comprised of the following:

                                                  For the Years Ended
                                                  -------------------
                                                      December 31,
                                                      ------------
                                                   2001           2000
                                                   ----           ----

Accounts receivable .........................   $(1,066,000)   $(1,053,000)
Directories-in-progress .....................      (688,000)      (673,000)
                                                -----------    -----------
   Gross deferred tax (liability) ...........    (1,754,000)    (1,726,000)
                                                -----------    -----------
Advanced billings for unpublished directories     1,625,000      1,624,000
Other deferred tax liability ................       329,254        289,058
                                                -----------    -----------
   Gross deferred tax asset .................     1,955,254      1,913,058
                                                -----------    -----------
   Net deferred tax asset ...................   $   190,972    $   187,058
                                                ===========    ===========

<PAGE>

      The Company is on the cash method of accounting for tax purposes. The
deferred tax items indicated above are primarily a result of recognizing items
of income or expense under the cash method in different periods from when those
items are recognized for accrual basis financial purposes. The (benefit)
provision for income taxes on earning differs from the amount computed by
applying the U.S. federal income tax rate (34%) because of the effect of the
following items:

                                                           For the Years Ended
                                                           -------------------
                                                               December 31,
                                                               ------------
                                                             2001       2000
                                                             ----       ----

Tax at U.S. federal income tax rate ....................   $(51,809)   $59,000
State income tax, net of U.S. federal income tax benefit    (22,360)    22,000
Other ..................................................     (9,583)     6,667
                                                           --------    -------
 (Benefit) provision for income taxes ..................   $(83,752)   $87,667
                                                           ========    =======

5. Simple IRA Plan

      On October 26, 2000, the Board of Directors approved a Simple IRA Plan
(the "IRA Plan") for the purpose of attracting and retaining valuable employees.
The IRA Plan was effective August, 2000 with a trustee, which allows up to 100
eligible employees to participate. It is a "Matching Contribution" plan under
which eligible employees may contribute up to 6% of their yearly salary, on a
pre-tax basis (with a cap of $6,000), with the Company matching on a
dollar-for-dollar basis up to 3% of the employees' compensation (with a cap of
$3,000). These thresholds are subject to change under notice by the trustee. The
Company is not responsible for any other costs under this plan. For fiscal year
2001 and 2000 the Company contributed $5,188 and $5,250, respectively, as a
matching contribution to the IRA Plan.

6. Stock Option Plan

      Immediately prior to the initial public offering, the Company adopted the
DAG Media, Inc. 1999 Stock Option Plan (the "Plan") reserving 124,000 common
shares of the Company for issuance upon exercise of stock options granted
pursuant to the Plan. At the Company's annual shareholder meeting held on July
18, 2000, an amendment to the Company's Stock Option Plan to increase the
maximum number of options issuable thereunder by 145,000 options was proposed
and passed as of December 31, 2000 and at the Company's annual shareholder
meeting held on June 22, 2001, an additional 145,000 options were approved. An
additional 20,000 options were granted under an individual option grant. At
December 31, 2001 and 2000, 141,560 and 34,116 options were available for future
grants under the plan, respectively.

      The exercise price of options granted under the Plan may not be less than
the fair market value on the date of grant. The options may vest over a period
not to exceed ten years. Stock options under the Plan may be awarded to
officers, key-employees, consultants and non-employee directors of the Company.
Under the Plan, every non-employee director of the Company is granted 7,000
options upon first taking office, and then upon each additional year in office.
The objectives of the Plan include attracting and retaining key personnel,
providing for additional performance incentives and promoting the success of the
Company by increasing

<PAGE>

the efforts of such officers, employees, consultants and directors. The Plan is
the only plan that the Company has adopted with stock options available for
grant.

      The Company accounts for the employee options under APB Opinion No. 25,
under which no compensation cost has been recognized as all options granted to
employees during 2001 and 2000 have been granted at the fair market value of the
Company's common stock. Options granted to consultants are accounted for under
SFAS No. 123 and are measured using Black-Scholes option pricing model.
Accordingly, a deferred compensation cost of approximately $ 19,000 and $117,000
was recorded in 2001 and 2000 respectively. Such costs will be amortized over
the option vesting period (generally five years). Compensation costs of $7,635
and $39,857 were charged to operations in 2001 and in 2000, respectively. Had
compensation cost for all options granted under the Plan been determined in
accordance with SFAS No. 123, the Company's net loss and EPS would have been
changed as follows:

                                                    Years ended December 31,
                                                    ------------------------
                                                  2001                     2000
                                                  ----                     ----
Net income (loss)           As reported     $ (117,078)              $ (425,311)
                            Pro-forma       $ (166,756)              $ (488,697)

Basic and Diluted EPS       As reported         $(0.04)                  $(0.15)
                            Pro-forma           $(0.06)                  $(0.17)

      Under SFAS No. 123, the fair value of each option is estimated on the date
of grant using Black-Scholes option-pricing model with the following
weighted-average share assumptions used for grants in 2001 and 2000,
respectively: (1) expected life of 5 years; (2) no dividend yield; (3) expected
volatility 70%; (4) risk free interest rate of 5% and 6%.

The following summarizes stock option activity for 2001 and 2000:

<TABLE>
<CAPTION>
                                                                                              Weighted Average
                                                                                  Shares       Exercise Price
----------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                <C>
Outstanding at December 31, 1999                                                  101,824           $4.82
----------------------------------------------------------------------------------------------------------------
Granted                                                                           157,000           $2.59
Forfeited                                                                         (23,940)          $4.32
----------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2000                                                  234,884           $3.67
                                                                                  -------           -----
----------------------------------------------------------------------------------------------------------------
Weighted average fair value of options granted at December 31, 2000                                 $1.53
                                                                                                    -----
----------------------------------------------------------------------------------------------------------------
Granted                                                                           198,000           $1.56
Forfeited                                                                        (140,444)          $3.07
----------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 2001                                                  292,440           $2.53
                                                                                  -------           -----
----------------------------------------------------------------------------------------------------------------
Weighted average fair value of options granted at December 31, 2001                                 $0.97
                                                                                                    -----
----------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

      As of December 31, 2001 and 2000 there were exercisable options amounting
to 143,440 and 144,884 respectively, with a weighted average exercise price of
$2.43 and $3.95, respectively.

      In connection with the Company's initial public offering the Company
issued 132,500 warrants to the underwriters of the initial public offering. The
warrants are convertible into the same number of common shares at an exercise
price of $7.80 per warrant. The warrants are exercisable over a four-year period
beginning on the first anniversary of the offering through 2003.

7. Shareholders' Equity

      In August 1999, the Board of Directors of the Company authorized a stock
repurchase program. The program authorizes the Company to purchase up to 150,000
common shares of the Company within the upcoming years. As of December 31, 2000,
the Company has purchased 68,730 common shares at an aggregate cost of
approximately $231,000. None of the proceeds of the Company's initial public
offering have been used in connection with this stock repurchase program. In
September 20, 2001 the Board of the Directors of the Company authorized a stock
repurchase program that allows the Company additional purchase up to 200,000
common shares of the Company, out of the available funds of the Company, in the
open market within the ensuing year. The purpose of the stock repurchase program
is to help the Company achieve its long-term goal of enhancing shareholder
value. No additional shares were repurchased during fiscal years 2001 and 2000.

8. Commitments and Contingencies

Operating leases -

      The Company has various lease and rental commitments ending 2003 for its
offices, automobiles and equipment. At December 31, 2001, approximate future
minimum rental payments under these commitments are as follows:

2002........................                                      85,886
2003........................                                      56,207
                                                                  ------
Total.......................                                    $142,093
                                                                ========

Rent expense was approximately $108,000 and $109,000 in 2001 and 2000,
respectively.

Employment Agreements -

      In March 1999, the Company entered into an employment agreement with Assaf
Ran, its president and chief executive officer. Mr. Ran's employment term
initially ends June 30, 2002 but renews automatically for successive one-year
periods until either party gives 180 days written notice of its intention to
terminate the agreement. Under the agreement, Mr. Ran will receive an annual
base salary of $75,000, annual bonuses as determined by the compensation
committee of the Board of Directors in its sole and absolute discretion, and is
eligible to participate in all executive benefit plans established and
maintained by the Company. Under

<PAGE>

the agreement, Mr. Ran has also agreed to a one-year non-competition period
following the termination of his employment. As of March 2001 the compensation
committee approved an increase in Mr. Ran's compensation to an annual base
salary of $125,000. Mr. Ran's annual compensation was $108,000 and $68,000
during fiscal years 2001 and 2000.