Alternet Systems, Inc.: Form 10-Q - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X] Quarterly report pursuant section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2010

[   ] Transition report pursuant section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________________to ________________

Commission file number 000-31909

ALTERNET SYSTEMS INC.
(Exact name of small business issuer as specified in its charter)

Nevada 88-047897
(State of Incorporation) (I.R.S. Employer Identification No.)

2665 S. Bayshore Dr.
Miami, Florida 33133
Tel: 786-265-1840
(Address and telephone number of Registrant's principal
executive offices and principal place of business)

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 [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ] Accelerated filer                  [   ]
Non-accelerated filer   [   ] Smaller reporting company [X]
(Do not check if a smaller reporting company)  

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class Outstanding at November 5th, 2010
Common Stock, $0.00001 par value per share 45,379,580 shares


PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Our unaudited interim consolidated financial statements for the six month period ended September 30, 2010 form part of this quarterly report. They are stated in United States Dollars (US$) and are prepared in accordance with United States generally accepted accounting principles.


     

 

 

ALTERNET SYSTEMS INC.

(A Development Stage Company)

CONSOLIDATED INTERIM FINANCIAL STATEMENTS

SEPTEMBER 30, 2010

(Unaudited – Prepared by Management)

 

 

CONSOLIDATED INTERIM BALANCE SHEETS
 
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
 
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS



ALTERNET SYSTEMS INC.
CONSOLIDATED INTERIM BALANCE SHEETS
(Unaudited)
 
As at September 30, 2010 and December 31, 2009
 

    September 30,     December 31,  
    2010     2009  
ASSETS            
             
Current Assets            
       Cash $  3,981   $  17,854  
       Accounts receivable   362,353     36,585  
       Share subscriptions receivable   8,900     8,900  
       Prepaids and deposits   58,743     -  
       Deferred financing costs   -     30,920  
Total Current Assets   433,977     94,259  
             
Fixed Assets (Note 3)   2,796     4,592  
             
TOTAL ASSETS $  436,773   $  98,851  
             
             
LIABILITIES            
             
Current Liabilities            
       Accounts payable   711,420     907,353  
       Accrued taxes   182,551     81,739  
       Customer deposits (Note 2)   60,000     -  
       Other loans payable (Note 4)   386,414     359,397  
       Due to related parties (Note 4 and 6)   66,001     82,916  
       Derivative liability   -     71,879  
TOTAL LIABILITIES   1,406,386     1,503,284  
             
             
STOCKHOLDERS' DEFICIENCY            
       Capital Stock (Note 5)   422     202  
       Additional paid-in capital   7,205,520     5,257,695  
       Private placement subscriptions   145,362     225,415  
       Obligation to issue shares   96,000     83,196  
       Deferred compensation (Note 7)   (695,576 )   (645,181 )
       Deficit   (7,656,726 )   (6,334,660 )
    (904,998 )   (1,413,333 )
       Non-controlling interest   (64,615 )   8,900  
TOTAL STOCKHOLDERS' DEFICIENCY   (969,613 )   (1,404,433 )
             
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $  436,773   $  98,851  

The accompanying notes are an intergral part of these consolidated financial statements.



ALTERNET SYSTEMS INC.
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
 
(Unaudited)
 

    Three months     Three months     Nine months     Nine months  
    ended     ended     ended     ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
REVENUE                        
       Sales $ 665,634   $  68,606   $  763,238   $  230,436  
       Sales discounts   (145,500 )   -     (145,500 )   -  
TOTAL REVENUE   520,134     68,606     617,738     230,436  
COST OF SALES                        
       Direct Cost of Sales   316,486     31,282     349,850     113,502  
GROSS PROFIT   203,648     37,324     267,888     116,934  
                         
OPERATING EXPENSES                        
       Bad Debt   -     14,038     -     14,038  
       Bank Charges and Interest   65,217     12,910     85,888     25,875  
       Depreciation and Amortization   252     537     756     1,611  
       Financing Costs   151,352     22,373     1,056,361     94,833  
       Investor Relations   27,243     -     77,823     80,167  
       License Fees   -     320     825     586  
       Management and Consulting   90,324     31,584     281,572     449,384  
       Marketing   -     -     21,916     1,490  
       Office and General   7,158     8,565     63,904     21,035  
       Professional fees   69,488     6,908     111,762     57,157  
       Rent   17,852     -     32,118     13,974  
       Salaries   52,143     21,017     130,610     60,200  
       Telephone and Utilities   3,777     949     10,531     5,515  
       Travel   11,395     11,243     69,564     15,167  
TOTAL OPERATING EXPENSES   496,201     130,444     1,943,630     841,032  
                         
NET LOSS BEFORE OTHER ITEMS   (292,553 )   (93,120 )   (1,675,742 )   (724,098 )
                         
OTHER ITEMS                        
       Customer fees   79     273     329     4,682  
       Other income/(expense)   -     (3,000 )   -     (3,922 )
       Loss on disposal of assets   -     -     (1,411 )      
       Gain on sale of investment   -     194,937     -     194,937  
       Gain on debt settlement   315,650     -     484,822     -  
       Increase (decrease) in derivative liability   (311,984 )   80,483     (203,497 )   (79,837 )
                         
NET LOSS BEFORE NON-CONTROLLING INTEREST $ (288,808 ) $  179,573   $  (1,395,499 ) $  (608,238 )
                         
NON-CONTROLLING INTEREST   18,479     -     (73,515 )   -  
                         
NET LOSS ATTRIBUTABLE TO ALTERNET SYSTEMS INC. FOR THE PERIOD $ (307,287 ) $  179,573   $  (1,321,984 ) $  (608,238 )
                         
BASIC NET LOSS PER SHARE $ (0.01 ) $  0.01   $  (0.05 ) $  (0.03 )
                         
WEIGHTED COMMON SHARES OUTSTANDING   41,469,096     20,552,770     26,895,554     20,049,737  

The accompanying notes are an intergral part of these consolidated financial statements.



ALTERNET SYSTEMS INC.
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
 
(Unaudited)
 

    Nine months     Nine months  
    ended     ended  
    September 30,     September 30,  
    2010     2009  
             
OPERATING ACTIVITIES            
       Net Loss From Operations Attributable to Alternet Systems Inc. $  (1,321,984 ) $  (608,238 )
       Non-controlling interest   (73,515 )   -  
       Add: Items Not Affecting Cash            
                 Depreciation   756     1,611  
                 Shares for services   96,000     20,000  
                 Reversal of shares for services   (40,000 )   -  
                 Shares for debt   927,905     -  
                 Loss on disposal of assets   1,411     -  
                 Deferred compensation   (50,395 )   235,477  
                 Gain on sale of investment   -     194,937  
                 Gain on debt settlement   (484,822 )   -  
                 Value of debt for share conversion features   881,891     -  
       Changes In Non-Cash Working Capital:            
                 Accounts receivable   (325,768 )   (6,015 )
                 Prepaids and deposit   (58,743 )   4,998  
                 Accounts payable and accrued charges   (195,933 )   (17,696 )
                 Accrued taxes   100,812     14,734  
                 Customer deposits   60,000     -  
                 Due to related parties   (16,915 )   51,216  
    (499,300 )   (108,976 )
             
INVESTING ACTIVITIES            
       Acquisition of fixed assets   (371 )   (212 )
             
FINANCING ACTIVITIES            
       Change in loans payable   511,839     (92,051 )
       Derivative liability   (71,879 )   201,878  
       Deferred financing costs   30,920     (27,208 )
       Net proceeds on sale of common stock and subscriptions   15,000     25,000  
    485,880     107,619  
             
OTHER COMPREHENSIVE INCOME   (82 )   (1,549 )
             
NET CHANGE IN CASH DURING THE PERIOD   (13,873 )   (3,118 )
             
CASH, BEGINNING OF PERIOD   17,854     4,326  
             
CASH, END OF PERIOD $  3,981   $  1,208  

The accompanying notes are an intergral part of these consolidated financial statements.



ALTERNET SYSTEMS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
For the Period from May 16, 2002 (Inception) to September 30, 2010
 

                Additional                 Private                 Obligation     Other              
          Common     Paid in     Treasury     Treasury     Pacement     Accumulated     Deferred     to Issue     Comprehensive     Noncontrolling        
    Shares     Stock     Capital     Shares     Stock     subscriptions     Deficit     Compensation     shares     Income     Interest     Total  
Balance May 16, 2002   -     -     -     -     -     -     -     -     -         -     -  
Issuance of common stock for cash at $0.223 per share - May 17, 2002   448,400     448     99,552     -     -     -     -     -     -     -     -     100,000  
Issuance of common stock for services at $0.223 per share - December 31, 2002   2,394,854     2,396     531,684     -     -     -     -     -     -     -     -     534,080  
Issuance of common stock for cash at $0.223 per share - December 31, 2002   156,776     157     34,805     -     -     -     -     -     -         -     34,962  
Net Loss for the year   -     -     -     -     -     -     (88,038 )   -     -         -     (88,038 )
Balance December 31, 2002   3,000,030     3,001     666,041     -     -     -     (88,038 )   -     -         -      581,004  
Net Loss for the year   -     -     -     -     -     -     (387,426 )   -     -         -     (387,426 )
Balance December 31, 2003   3,000,030     3,001     666,041     -     -     -     (475,464 )   -     -         -      193,578  
Issuance of common stock for cash at $0.31 per share - April 30, 2004   363,669     364     112,256     -     -     -     -     -     -     -     -     112,620  
Issuance of common stock for services at $0.31 per share - April 30, 2004   475,914     475     146,905     -     -     -     -     -     -     -     -     147,380  
Redemption of shares   -     -     -     1,615,445     360,260     -     -     -     -         -     (360,260 )
Issuance of common stock at $0.42 per share   -     -     148,698     (762,122 )   (167,668 )   -     -     -     -     -     -     316,366  
Issuance of common stock for acquisition at $0.50 per share - June 30, 2004   -     -     115,321     (411,268 )   (90,479 )   -     -     -     -     -     -     205,800  
Issuance of common stock for services at $0.50 per share - June 30, 2004   -     -     28,018     (99,919 )   (21,982 )   -     -     -     -     -     -     50,000  
Issuance of common stock for cash at $0.60 per share - September 30, 2004   33,516     34     76,917     (154,988 )   (36,299 )   -     -     -     -     -     -     113,250  
Issuance of common stock for Services at $0.60 per share - September 30, 2004   40,471     40     92,878     (187,148 )   (43,832 )   -     -     -     -     -     -     136,750  
Issuance of common stock for cash at $0.50 per share - September 30, 2004   204,834     205     102,295     -     -     -     -     -     -     -     -     102,500  
Issuance of common stock for services at $0.50 per share - September 30, 2004   644,600     644     321,856     -     -     -     -     -     -     -     -     322,500  
Issuance of common stock for cash at $0.48 per share - October 1, 2004   413,956     414     199,586     -     -     -     -     -     -     -     -     200,000  
Issuance of common stock for services at $0.48 per share - October 1, 2004   150,000     150     71,850     -     -     -     -     -     -             72,000  
Net Loss for the year   -     -     -     -     -     -     (1,619,425 )   -     -         -     (1,619,425 )
Balance December 31, 2004   5,326,990     5,327     2,082,621     -     -     -     (2,094,889 )   -     -         -      (6,941 )
Issuance of common stock for cash at $0.48 per share - June 30, 2005   357,477     357     172,304     -     -     -     -     -     -     -     -     172,661  
Issuance of common stock for services at $0.48 per share - June 30, 2005   1,137,880     1,138     548,201     -     -     -     -     -     -     -     -     549,339  
Issuance of common stock for acquisition at $0.48 per share - June 30, 2005   425,961     426     205,374     -     -     -     -     -     -     -     -     205,800  
Net Loss for the year   -     -     -     -     -     -     (837,842 )   -     -         -     (837,842 )



ALTERNET SYSTEMS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
For the Period from May 16, 2002 (Inception) to September 30, 2010
 

                Additional                 Private                 Obligation     Other              
          Common     Paid in     Treasury     Treasury     Pacement     Accumulated     Deferred     to Issue     Comprehensive     Noncontrolling        
    Shares     Stock     Capital     Shares     Stock     subscriptions     Deficit     Compensation     shares     Income     Interest     Total  
Balance December 31, 2005   7,248,308     7,248     3,008,500     -     -     -     (2,932,731 )   -     -     -     -     83,017  
Issuance of common stock for cash at $0.48 per share - June 30, 2006   594,585     595     286,676     -     -     -     -     -     -     -     -     287,271  
Issuance of common stock for services at $0.48 per share - June 30, 2006   781,818     782     376,947     -     -     -     -     -     -     -     -     377,729  
Issuance of common stock for services at $0.35 per share - June 30, 2006   425,961     426     146,574     -     -     -     -     -     -     -     -     147,000  
Net Loss for the year   -     -     -     -     -     -     (553,314 )   -     -     -     -     (553,314 )
Balance December 31, 2006   9,050,672     9,051     3,818,697     -     -     -     (3,486,045 )   -     -     -     -     341,703  
Net Loss for the year   -     -     -     -     -     -     (320,322 )   -     -     -     -     (320,322 )
Balance December 31, 2007   9,050,672     9,051     3,818,697     -     -     -     (3,806,367 )   -     -     -     -     21,381    
Alternet Systems Inc. balance before reverse acquisition   6,278,146     63     5,136,702     -     -     231,487     (5,540,778 )   (29,677 )   -     256     -     (201,947 )
Issued to effect reverse acquisition   4,000,000     40     21,791     -     -     -     -     -     -     -     -     21,831  
Reverse acquisition recapitalization adjustment   (9,050,672 )   (9,051 )   (5,552,854 )   -     -     -     5,540,778     -     -     (256 )   -     (21,383 )
Balance December 31, 2007   10,278,146     103     3,424,336     -     -     231,487     (3,806,367 )   (29,677 )   -     -     -     (180,118 )
                                                                         
Stock-based compensation at $0.025 per share - January 2, 2008   4,500,000     45     112,455     -     -     -     -     -     -     -     -     112,500  
Stock-based compensation at $0.025 per share - January 15, 2008   750,000     7     18,743     -     -     -     -     -     -     -     -     18,750  
Stock-based compensation at $0.025 per share - January 23, 2008   75,000     1     1,874     -     -     -     -     -     -     -     -     1,875  
Issuance of common stock for services at $0.30 per share - May 23, 2008   23,542     -     7,063     -     -     -     -     -     -     -     -     7,063  
Issuance of common stock for services at $0.51 per share - May 23, 2008   150,000     2     76,498     -     -     -     -     -     -     -     -     76,500  
Issuance of common stock for services at $0.50 per share - June 6, 2008   100,000     1     49,999     -     -     -     -     -     -     -     -     50,000  
Issuance of common stock for services at $0.42 per share - June 26, 2008   1,500,000     15     629,985     -     -     -     -     -     -     -     -     630,000  
Issuance of common stock for debenture note at $0.36 per share - July 16, 2008   277,778     3     99,997     -     -     -     -     -     -     -     -     100,000  
Issuance of common stock for debenture note at $0.21 per share - July 16, 2008   48,443     -     10,000     -     -     -     -     -     -     -     -     10,000  
Issuance of common stock for debenture note at $0.35 per share - July 16, 2008   57,143     1     19,999     -     -     -     -     -     -     -     -     20,000  
Issuance of common stock for cash at $0.35 per share - July 16, 2008   670,000     7     234,493     -     -     (234,500 )   -     -     -     -     -     -  
Issuance of common stock for services at $0.42 per share - July 16, 2008   500,000     5     209,995     -     -     -     -     -     -     -     -     210,000  



ALTERNET SYSTEMS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
For the Period from May 16, 2002 (Inception) to September 30, 2010
 

                Additional                 Private                 Obligation     Other              
          Common     Paid in     Treasury     Treasury     Pacement     Accumulated     Deferred     to Issue     Comprehensive     Noncontrolling        
    Shares     Stock     Capital     Shares     Stock     subscriptions     Deficit     Compensation     shares     Income     Interest     Total  
Issuance of common stock for services at $0.42 per share - August 6, 2008   310,000     3     130,197     -     -     -     -     -     -     -     -     130,200  
Issuance of common stock for cash at $0.35 per share - August 7, 2008   14,100     -     4,930     -     -     (4,930 )   -     -     -     -     -     -  
Issuance of common stock for cash at $0.35 per share - August 11, 2008   241,158     2     84,403     -     -     (84,405 )   -     -     -     -     -     -  
Issuance of common stock for cash at $0.35 per share - August 13, 2008   44,960     -     15,735     -     -     (15,735 )   -     -     -     -     -     -  
Issuance of common stock for services at $0.41 per share - September 16, 2008   200,000     2     81,998     -     -     -     -     -     -     -     -     82,000  
Private placement subscriptions received   -     -     -     -     -     333,498     -     -     -     -     -     333,498  
Foreign exchange translation adjustment   -     -     -     -     -     -     -     -     -     2,766     -     2,766  
Increase in derivative liability   -     -     -     -     -     -     -     -     -     143,480     -     143,480  
Obligation to issue shares per consulting agreement   -     -     -     -     -     -     -     -     90,000     -     -     90,000  
Services provided per term of contracts   -     -     -     -     -     -     -     (842,466 )   -     -     -     (842,466 )
Net loss for the year   -     -     -     -     -     -     (1,983,957 )   -     -     -     -     (1,983,957 )
Balance December 31, 2008   19,740,270     197     5,212,700     -     -     225,415     (5,790,324 )   (872,143 )   90,000     146,246     -     (987,909 )
Issuance of common stock for cash at $0.08 per share - April 9, 2009   312,500     3     24,997     -     -     (25,000 )   -     -     -     -     -     -  
Issuance of common stock for services at $0.10 per share - May 5, 2009   200,000     2     19,998     -     -     -     -     -     -     -     -     20,000  
Private placement subscriptions received   -     -     -     -     -     25,000     -     -     -     -     -     25,000  
Foreign exchange translation adjustment   -     -     -     -     -     -     -     -     -     (4,686 )   -     (4,686 )
Increase (decrease) in derivative liability   -     -     -     -     -     -     -     -     -     93,524     -     93,524  
Services provided per term of contracts   -     -     -     -     -     -     -     226,962     -     -     -     226,962  
Reversal of obligation to issue shares   -     -     -     -     -     -     -     -     (50,000 )   -     -     (50,000 )
Obligation to issue shares per consulting agreement   -     -     -     -     -     -     -     -     16,250     -     -     16,250  
Obligation to issue shares per debt settlement agreement   -     -     -     -     -     -     -     -     26,946     -     -     26,946  
Subsidiary shares issued to noncontrolling interest   -     -     -     -     -     -     -     -     -     -     8,900     8,900  
Net loss for the year   -     -     -     -     -     -     (779,420 )   -     -     -     -     (779,420 )
Balance December 31, 2009   20,252,770     202     5,257,695     -     -     225,415     (6,569,744 )   (645,181 )   83,196     235,084     8,900     (1,404,433 )
Issuance of common stock for services at $0.065 per share - Jan 5, 2010   250,000     2     16,248     -     -     -     -     -     (16,250 )   -     -     -  
Issuance of common stock for debt at $0.065 per share - Jan 5, 2010   414,554     4     26,942     -     -     -     -     -     (26,946 )   -     -     -  
Issuance of common stock for debt at $0.10 per share - Feb 18, 2010   1,000,000     10     99,990     -     -     -     -     -     -     -     -     100,000  



ALTERNET SYSTEMS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
For the Period from May 16, 2002 (Inception) to September 30, 2010
 

                Additional                 Private                 Obligation     Other              
          Common     Paid in     Treasury     Treasury     Pacement     Accumulated     Deferred     to Issue     Comprehensive     Noncontrolling        
    Shares     Stock     Capital     Shares     Stock     subscriptions     Deficit     Compensation     shares     Income     Interest     Total  
Issuance of common stock for debt at $0.13 per share - April 19, 2010   500,000     5     64,995     -     -     -     -     -     -     -     -     65,000  
Issuance of common stock for debt at $0.06 per share - May 5, 2010   800,000     8     49,592     -     -     -     -     -     -     -     -     49,600  
Issuance of common stock for debt at $0.06 per share - May 11, 2010   769,231     8     46,146     -     -     -     -     -     -     -     -     46,154  
Issuance of common stock for debt at $0.045 per share - May 12, 2010   800,000     8     35,992     -     -     -     -     -     -     -     -     36,000  
Issuance of common stock for debt at $0.05 per share - May 19, 2010   611,077     6     30,548     -     -     -     -     -     -     -     -     30,554  
Issuance of common stock for debt at $0.04 per share - May 20, 2010   1,600,000     16     63,984     -     -     -     -     -     -     -     -     64,000  
Issuance of common stock for debt at $0.05 per share - May 21, 2010   3,266,667     33     163,300     -     -     -     -     -     -     -     -     163,333  
Issuance of common stock for debt at $0.03 per share - June 1, 2010   923,680     9     27,701     -     -     -     -     -     -     -     -     27,710  
Issuance of common stock for debt at $0.03 per share - June 17, 2010   7,076,297     71     212,218     -     -     -     -     -     -     -     -     212,289  
Issuance of common stock for debt at $0.04 per share - July 22, 2010   3,331,604     34     133,231     -     -     -     -     -     -     -     -     133,265  
Share subscriptions issued   633,691     6     95,047     -     -     (95,053 )   -     -     -     -     -     -  
Private placement subscriptions received   -     -     -     -     -     15,000     -     -     -     -     -     15,000  
Value of debt for share conversion features   -     -     881,891     -     -     -     -     -     -     -     -     881,891  
Services provided per term of contracts   -     -     -     -     -     -     -     45,605     -     -     -     45,605  
Obligation to issue shares per consulting agreement   -     -     -     -     -     -     -     (96,000 )   96,000     -     -     -  
Reversal of obligation to issue shares   -     -     -     -     -     -     -     -     (40,000 )   -     -     (40,000 )
Foreign exchange translation adjustment   -     -     -     -     -     -     -     -     -     (82 )   -     (82 )
Increase (decrease) in derivative liability   -     -     -     -     -     -     -     -     -     (203,497 )   -     (203,497 )
Non-controlling interest   -     -     -     -     -     -     -     -     -     -     (73,515 )   (73,515 )
Net loss for the year   -     -     -     -     -     -     (1,118,487 )   -     -     -     -     (1,118,487 )
Balance September 30, 2010   42,229,571     422     7,205,520     -     -     145,362     (7,688,231 )   (695,576 )   96,000     31,505     (64,615 )   (969,613 )



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

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

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

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

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

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

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

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

The consolidated interim financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. At September 30, 2010 the Company had a working capital deficiency of $911,653. The Company’s continued operations are dependent on the successful implementation of its business plan, its ability to obtain additional financing as needed, continued support from creditors, settling its outstanding debts and ultimately attaining profitable operations.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

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

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

  a)

Revenue from the sale of licenses is recognized when the title of the license transfers to the customer, which occurs once a contract has been signed.

  b)

Revenue from implementation services performed is recognized upon completion of the service.

  c)

Revenue from telecommunications services are recognized when billed, which occurs at the end of the month the services are provided.

The Company requires customers to pay a non-refundable 50% deposit on all implementation services prior to any services being performed. The Company recognizes the 50% customer deposit in revenue either upon completion of the implementation or upon the contract being cancelled.

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

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

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



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

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

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

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

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

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

Recent Accounting Pronouncements

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

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



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

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

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

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

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

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

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

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

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



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recent Accounting Pronouncements (continued)

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

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

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

NOTE 3 – FIXED ASSETS

          September 30, 2010        
          Accumulated        
    Cost     Amortization     Net Book Value  
                   
Computer equipment $  319,221   $  317,539   $  1,682  
Computer software   72,560     71,939     621  
Equipment   10,576     10,083     493  
  $  402,357   $  399,561   $  2,796  

          December 31, 2009        
          Accumulated        
    Cost     Amortization     Net Book Value  
                   
Computer equipment $  328,029   $  324,818   $  3,211  
Computer software   72,560     71,759     801  
Equipment   10,576     9,996     580  
  $  411,165   $  406,573   $  4,592  



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

NOTE 4 – CONVERTIBLE DEBENTURE NOTES AND OTHER LOANS

Convertible Debentures

On February 4, 2008, the Company issued a note payable in the amount of $50,000. The note carries interest at the rate of 8% per annum and is due on May 4, 2008. If the note is not repaid on maturity or in any other event of default, the holder is entitled to convert all or any portion of the original principal face value of the note into shares of common stock of the Company at a conversion value equal to 50% of the average market price of the Company's stock for the 30 days prior to the date of conversion.

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

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

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

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

On December 18, 2009, the Company entered into a Debt Settlement agreement whereby a creditor agreed to receive shares in lieu of payment of a $152,916 promissory note. The holder is entitled to receive common stock of the Company at a conversion value equal to 50% of the lowest closing price of the Company's stock for the 10 days prior to the date of conversion. The holder may not hold more than 4.99% of the outstanding common stock of the Company at any point in time. During the nine months ended September 30, 2010, the creditor converted $93,660 of debt into 3,935,898 common shares of the company.



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

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

Convertible Debentures (continued)

On March 8, 2009, the Company issued a note payable in the amount of $25,000. The note carries interest at the rate of 12% per annum and is due on April 8, 2010. If the note is not repaid on maturity or in any other event of default, the holder is entitled to convert all or any portion of the original principal face value of the note into shares of common stock of the Company at a conversion value equal to 50% of the lowest closing price of the Company's stock for the 10 trading days immediately preceding and including the date of conversion.

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

On April 22, 2010, the Company entered into a Debt Settlement agreement whereby a creditor agreed to receive shares in lieu of payment of a $50,000 promissory note plus accrued interest calculated at 10% per annum. The creditor is entitled to receive common stock of the Company at a conversion value equal to 50% of the average daily low price of the Company’s stock for the 20 days prior to the date of conversion. The holder may not hold more than 4.99% of the outstanding common stock of the Company at any point in time. During the nine months ended September 30, 2010, the creditor converted $51,874 of debt into 1,703,169 common shares of the company.

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

On June 1, 2010, the Company entered into a Debt Settlement agreement whereby a creditor agreed to receive shares in lieu of payment of a $32,000 debt. The creditor is entitled to receive common stock of the Company at a conversion value equal to 50% of the lowest daily low price of the Company's stock for the 20 days prior to the date of conversion. The holder may not hold more than 4.99% of the outstanding common stock of the Company at any point in time. During the nine months ended September 30, 2010, the creditor converted $51,874 of debt into 1,703,169 common shares of the company.

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

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

Other Loans

On September 15, 2010, the Company signed a Promissory Note whereby the Company will repay a creditor $20,000 plus interest at 10% per annum on October 15, 2010.

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



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

NOTE 5 – CAPITAL STOCK

The Company is authorized to issue up to 100,000,000 shares of the Company's common stock with a par value of $0.00001. As at September 30, 2010, 42,229,571 shares of common stock were issued and outstanding.

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

The Company is obligated to issue 1,200,000 (December 31, 2009 – 864,554) common shares valued at $96,500 (December 31, 2009 - $83,196) as at September 30, 2010 of which zero (December 31, 2009 – 450,000) shares valued at $Nil (December 31, 2009 - $56,250) are for services rendered by consultants during the year ended December 31, 2009, 1,200,000 shares are for services rendered by consultants during the current year, and zero (December 31, 2009 - 414,554) shares valued at $Nil (December 31, 2009 - $26,946) are for a debt settlement agreed on October 1, 2009. During the nine months ended September 30, 2010, a liability to issued 200,000 (December 31, 2009 - 100,000) shares valued at $40,000 (December 31, 2009 - $50,000) owed to one consultant was written off to consulting fees as the consultant had not performed the services in accordance with the contract.

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

During the nine months ended September 30, 2010, the Company issued 250,000 shares valued at $16,250 for services rendered during the year ended December 31, 2009, 21,093,110 shares valued at $954,851 for debt settlement and convertible debenture agreements, and 633,691 shares valued at $95,053 for share subscriptions previously received. As at September 30, 2010, the Company has $145,362 (December 31, 2009 - $225,415) in private placement subscriptions which are reported as private placement subscriptions within stockholders' deficit.

The shares which were not issued as at September 30, 2010 or September 30, 2009 were not used to compute the total weighted average shares outstanding as at September 30, 2010 or September 30, 2009 respectively and were thus not used in the basic net loss per share calculation.

NOTE 6 - RELATED PARTY TRANSACTIONS

As at September 30, 2010, a total of $216,597 (December 31, 2009 - $566,714) was payable to directors and officers of which $155,841 (December 31, 2009 -$528,597) is non-interest bearing and has no specific terms of repayment and $60,756 (December 31, 2009 - $38,117) relates to the convertible debentures detailed in Note 4. Of the amount payable, $150,596 (December 31, 2009 - $484,684) is included in accounts payable for accrued fees for expense reimbursements.

During the nine months ended September 30, 2010, the company expensed a total of $279,742 (December 31, 2009 - $424,668) in consulting fees, investor relations, and salaries paid to directors and officers of the Company. Of the amounts incurred, $115,841 (December 31, 2009 - $424,668) was accrued and $127,801 (December 31, 2009 - $Nil) was paid in cash.

During the nine months ended September 30, 2010, the company issued 3,010,087 shares of the Company's common stock valued at $90,303 to two directors of the Company and 1,836,890 shares of the Company's common stock valued at $55,107 to a previous director of the Company for accrued consulting fees and investor relations.



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

NOTE 7 – DEFERRED COMPENSATION

On June 26, 2008, 1,500,000 common shares valued at $630,000 were issued to a consultant pursuant to a contract with certain terms and benchmarks. As at September 30, 2010 these benchmarks have not been met, thus the entire amount has been classified as deferred compensation.

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

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

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

On January 5, 2010, the Company entered into an agreement with a consultant for a one-year term whereby the consultant will provide business consulting services to the Company in exchange for 300,000 shares of the Company's common stock originally valued at $19,500. This amount is being expensed over the life of the contract. As the shares were not issued by September 30, 2010, the stated value is subject to change.

On July 1, 2010, the Company entered into an agreement with a consultant for a one-year term whereby the consultant will provide business consulting services to the Company in exchange for 1,200,000 shares of the Company's common stock of which 900,000 shares are to be issued by September 30, 2010 and 300,000 shares are to be issued by December 31, 2010. The 900,000 shares were not issued during the period; however, the Company included deferred compensation as at September 30, 2010 of $76,500. This amount is being expensed over the life of the contract. As the shares were not issued by September 30, 2010, the stated value is subject to change.

The Company recorded the aggregate fair value of the shares issued pursuant to the above agreements as deferred compensation and amortizes the costs of all these services on a straight-line basis over the respective terms of the contracts. During the nine months ended September 30, 2010, the Company expensed $45,605 (December 31, 2009 - $263,212) relating to the above contracts. At September 30, 2010, the unamortized portion of the deferred compensation totalled $695,576 (December 31, 2009 - $645,181). The shares issued were all valued at their market price on the date of issuance.

NOTE 8 – LAWSUITS

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

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



ALTERNET SYSTEMS INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 
September 30, 2010 and December 31, 2009
 

NOTE 9 – SUBSEQUENT EVENTS

a)

On October 5, 2010, the Company issued 900,000 common shares of the company to a creditor in accordance with consulting agreements dated January 5, 2010 and July 1, 2010.

   
b)

On October 5, 2010, the Company issued 2,250,000 common shares of the company to three employees in accordance with employment agreements previously entered into. One employee is a director of the Company and one employee is an Officer of the Company.

   
c)

On October 22, 2010, the Company signed a contract with a customer for $658,586.



ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS:

Overview

This quarterly report may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements about our expectations, beliefs, intentions or strategies for the future, which we indicate by words or phrases such as "anticipate," "expect," "intend," "plan," "will," "we believe," "our company believes," "management believes" and similar language. These forward-looking statements are based on our current expectations and are subject to certain risks, uncertainties and assumptions, including those set forth in the following discussion, including under the heading "Risk Factors". Our actual results may differ materially from results anticipated in these forward-looking statements. We base our forward-looking statements on information currently available to us, and we assume no obligation to update them. In addition, our historical financial performance is not necessarily indicative of the results that may be expected in the future and we believe that such comparisons cannot be relied upon as indicators of future performance. Other important factors that could cause actual results to differ materially include the following: business conditions, the price of precious metals, ability to attract and retain personnel; the price of the Company's stock; and the risk factors set forth from time to time in the Company's SEC reports, including but not limited to its annual report on Form 10-K; its quarterly reports on Forms 10-Q; and any reports on Form 8-K. In addition, the Company disclaims any obligation to update or correct any forward-looking statements in all the Company's annual reports and SEC filings to reflect events or circumstances after the date hereof.

Company History and Business

Alternet Systems, Inc. (the "Company"), was organized under the laws of the State of Nevada on June 26, 2000 under the name North Pacific Capital Corp. On December 20, 2001 the Company received shareholder approval to change its name from North Pacific Capital Corp. to "SchoolWeb Systems Inc.".

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

Alternet Systems, Inc. previous to the merger with TekVoice, sold network systems and software for education and healthcare, marketed under the names "SchoolWeb" and HealthWeb.

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

TekVoice Inc. Merger

Alternet Systems Inc. executed a merger with TekVoice Communications, Inc. of Miami, Florida, on December 31, 2007 . TekVoice is a telecommunications services company with operations in North America and Latin America. The combined entity is called Alternet Systems Inc. and its primary business is delivering electronic transaction services, telecom services; and education / healthcare application software and content; and to customers primarily located in Latin America, North America and the Caribbean. Alternet offers a portfolio of next-generation solutions for government, business, schools, hospitals and residents.


About TekVoice Communications Inc.

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

TekVoice Share Acquisition On December 31, 2007, Alternet Systems, Inc. (the “Company”) Fabio Alvino, Eduardo & Monica Bello, Henryk Dabrowski, Manfred Koroschetz, New Market Technology, Inc., John Puente, Red Hawke, Inc., Hector Rodriguez (each, a “Transferor” and collectively, the “Transferors”) and TekVoice Communications, Inc. ("TekVoice")entered into and closed a Stock Acquisition Agreement (the "Agreement") pursuant to which the Company acquired all of the issued and outstanding shares of capital stock of TekVoice from the Transferors in consideration for an aggregate amount of four million (4,000,000) shares of common stock of the Company (the "Acquisition Shares"). In addition to the Acquisition Shares, the Transferors, in the aggregate, shall be entitled to receive an up to an additional two million (2,000,000) shares of common stock of the Company if TekVoice's sales for the fiscal year ending December 31, 2008 exceed sales for fiscal year ended December 31, 2007 by twenty percent (20%) (the "Additional Consideration"). In the event the Company is merged with another entity prior to December 31, 2008, the Additional Consideration shall be issued to the Transferors on the day immediately prior to the day that such merger takes place. The Transferors shall be entitled to appoint three (3) members to the Company's board of directors, effective at the closing, provided , however , in no event shall Transferors be required to appoint a member to the Company's Board of Directors.

The Company's results, on a consolidated basis, reflected its own results consolidated with its subsidiary TekVoice Communications Inc. For the remainder of this part, the term "Company" refers to both the Company and its wholly owned subsidiary above.

On July 29, 2009 the Company incorporated Alternet Transactions Systems, Inc. ("ATS") in the State of Florida in partnership with Utiba PTE Ltd. The Company owns 5,100 shares (51%) of the outstanding shares of ATS with Utiba PTE Ltd. owning the remaining 4,900 (49%). ATS is doing business as Utiba Americas. As at December 31, 2009, ATS has not incurred nay transactions.

On September 17, 2009 the Company incorporated International Mobile Security, Inc. ("IMS") in the State of Florida in partnership with General Services Holdings, LLC. The Company owns 6,000 shares (60%) of the outstanding shares of IMS with General Services Holdings, LLC. owning the remaining 4,000 (40%). As at December 31, 2009, IMS has not incurred nay transactions

Plan of Operation

The Company has been concentrating on marketing its mobile financial transaction and telecommunications platforms, in the telecommunication, public utility, government and financial industries.

Sales and marketing is accomplished through the Company's existing sales staff, who contact potential clients through personal and agent sales, trade shows and industry associations.

Sales come from organic growth from its existing operations. The Company may identify in the course of business, strategic acquisition targets.

Company has accomplished the execution of framework agreements with critical vendors, and is in the process of launching its mobile financial and mobile commerce suite of services.

We have also initiated a program to participate in the financial services industry, by enabling cellular phone technologies that will allow customers to make "mobile to mobile", "mobile to cash" and "mobile to money remittances".

Demand for our services is driven primarily by mobile subscriber purchasing activity via their cellular phone. The global mobile commerce industry is in its early growth and adoption stages. The drivers for growth are cellular phone penetration, large unbanked population worldwide, user acceptance of the cell phone as a means of payment. Subscriber adoption of new wireless technologies and services can also drive demand for our services due to the resulting increase in interoperability complexities. We believe that as wireless usage expands and complexity continues to increase, the demand for our services will grow.


A structured plan has been defined to close and pursue opportunities. The company has a funnel of potential prospects in different stages of closing. The needs and opportunities of these initial prospects have been identified and we are preparing offers and agreements.

The Company will be updating its marketing material, including web presence and technical information. It will also be focusing on its electronic transaction products, targeting specific vertical industries, specifically the telecom, financial, utilities and transportation sectors.

Currently our sales and business development partners have identified and pursued projects in Colombia, Ecuador, Bolivia, Guatemala, Panama, Mexico, Brasil, Costa Rica, El Salvador, Honduras, Venezuela, Guyana, Haiti, Dominican Republic and the United States.

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

Six Months Ended September 30, 2010 Compared to the Six Months Ended September 30, 2009

Net Sales

For the nine months ended September 30, 2010, the Company had $763,238 in sales compared to $230,436 for the corresponding period in 2009. The increase in sales resulted from the sales of mobile commerce license software by Alternet Transaction Systems, DBA Utiba Americas, an Alternet majority owned subsidiary. VoIP telephony sales in the Company’s subsidiary, TekVoice Inc., continued to decline.

Gross Profit

Gross profit was $267,888 in the nine months ending September 30, 2010 compared to a gross profit of $116,934 in the nine month period ending September 30, 2009. This represents an increase in gross profit for the period of $150,954.

Selling, General and Administrative Expenses

For the nine months ended September 30 2010, the Company had office and general expenses of $63,904, marketing expenses of $21,916, management and consulting fees of $281,572 professional fees of $111,762 and rent of $32,118.

For the corresponding period in 2009 the Company incurred office and general expenses of $21,035; marketing expenses of $1490; management and consulting fees of $449,384; $57,157 in professional fees and $13974 in rent.

Accounts payable totaled $711,420 and accounts receivable were $362,353 at September 30, 2010

Net Loss

For the six months ended September 30, 2010, the Company had a net loss of $1,321,984 or $(0.05) per share, which was a increase of 43.6% when compared to the net loss for the corresponding period to September 30 2009 of $608,238 or $(0.03) per share. The increased loss was primarily due to increased financing costs during the period ending September 30 2010.

Interest and other expenses

The Company had no material interest expenses.

Liquidity and Capital Resources

The Company had current assets including cash on hand of $3,981 as at September 30, 2010. The Company also had a net loss of $1,321,984 during the nine months ended September 30, 2010.

The Company had a working capital deficiency of $911,653 at September 30 2010. Management of the Company has determined that the Company’s ability to continue as a going concern is dependent on raising additional capital and achieving increased sales of its TekVoice, Alternet Transaction Systems (DBA Utiba Americas), and International Mobile Security (IMS), products and services.

Management can give no assurance that any increase in sales will occur in the future and if they do occur, may not be enough to cover the Company’s operating expenses or any other costs. Should this be the case, we would be forced, unless sufficient working capital can be raised, to suspend operations and possibly liquidate the assets and wind up and dissolve the Company.


RISK FACTORS

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



Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No.161, Disclosures about Derivative Instruments and Hedging Activities , which is effective for fiscal years and interim periods beginning after November 15, 2008. The statement amends and expands the disclosure requirements of Statement 133 and requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The Company has expanded the information included in Note 4 – Convertible Debenture Notes to include the new requirements. This standard did not effect the Company’s reported financial position or results of operations.

In May 2008, the FASB issued SFAS No.162, The Hierarchy of Generally Accepted Accounting Principles, which is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. This statement identifies the sources of accounting principles and framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States, the GAAP hierarchy. This standard did not effect the Company’s reported financial position or results of operations.

In May 2008, the FASB issued SFAS No.163, Accounting for Financial Guarantee Insurance Contract, which is effective for financial statements issued for fiscal years beginning after December 15, 2008. This statement requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. This Statement also clarifies how Statement 60, Accounting and Reporting by Insurance Enterprises, applies to financial guarantee insurance contract, including the recognition and measurement to be used to account for premium revenue and claim liabilities. This standard did not effect the Company’s reported financial position or results of operations.

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

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

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


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

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable

Item 4. Controls and Procedures

Management’s Report on Disclosure Controls and Procedures

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

As of June 30, 2010, the end of our second quarter covered by this report, we carried out an evaluation, under the supervision and with the participation of our president (also our principal executive officer) and our secretary, treasurer and chief financial officer (also our principal financial and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our president (also our principal executive officer) and our secretary, treasurer and chief financial officer (also our principal financial and accounting officer) concluded that our disclosure controls and procedures were effective in providing reasonable assurance in the reliability of our financial reports as of the end of the period covered by this quarterly report.


Changes in Internal Control over Financial Reporting

There have been no significant changes in our internal controls over financial reporting that occurred during the quarter ended September 30, 2010 that have materially or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

On March 14, 2005 the Company was named as a defendant in a Writ of Summons and Statement of Claim in the Supreme Court of British Columbia, Vancouver Registry in which the Native Trade and Investment Association requested an order to pay the Plaintiff Cdn $53,500 and 100,000 common shares for trade shows attended by the Company. On February 6 2007 The Supreme Court of British Columbia ordered the Company to pay NITA $53,500 plus interest of $4,126 and costs of $5,673 and 100,000 common shares, which were paid in March 2007. No directors, officers, or affiliate of the Company is (i) a party adverse to the Company in any legal proceedings, or (ii) has an adverse interest to the Company in any legal proceedings.

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

On October 16 2009 the Company received notice that they had been named as Defendants in a lawsuit whereby the Plaintiffs are seeking a judgement of $39,000 plus interest thereon from March 11 2009 for breach of contract. As at September 30 2009 no amounts have been accrued as the result of the lawsuit is not determinable at this time.

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

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended June 30, 2010, the Company issued 250,000 shares valued at $16,250 for services rendered during the year ended December 31, 2009, 17,761,506 shares valued at $810,624 for debt settlement and convertible debenture agreements, and 633,691 shares valued at $95,053 for share subscriptions previously received. As at June 30, 2010, the Company has $145,362 (December 31, 2009 - $225,415) in private placement subscriptions which are reported as private placement subscriptions within stockholders’ deficit.

Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

None.


Item 6. Exhibits

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Reports on Form 8-K. The Registrant filed one report on Form 8K during the period ending June 30 2010 and one subsequent to the period on July 2 2010

(b) Exhibits. Exhibits included or incorporated by reference herein: See Exhibit Index below.

EXHIBIT INDEX

Number

Exhibit Description

3.1

Articles of Incorporation (incorporated by reference to Exhibit 3 of the Registration Statement on Form 10- SB filed on September 28, 2000).

3.2

Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 2 of the Form 10-SB filed on September 28, 2000).

3.3

Certificate of Amendment to Articles of Incorporation dated October 13, 2000. (incorporated by reference to Exhibit 3.3 of the Form 10-QSB filed on November 7, 2000)

3.4.1

ByLaws (incorporated by reference to Exhibit 3.3 of the Form 10-QSB filed on November 7, 2001)

14.1

Code of Business Conduct

31.1

Section 302 Certifications - CEO

31.2

Section 302 Certifications - CFO

32.1

Section 906 Certifications - CEO

32.2

Section 906 Certifications - CFO



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.

ALTERNET SYSTEMS INC.

By: /s/ Henryk Dabrowski
Henryk Dabrowski, President
(Principal Executive Officer)
November 9, 2010 

By: /s/ Luz Villanueva
Luz Villanueva, Secretary, Treasurer
(Principal Financial Officer and Principal Accounting Officer)
November 9, 2010