**SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549****Form 10-QSB**
(Mark one)[X]    Quarterly report under section 13 or 15(d) of theSecurities Exchange Act of 1934 For the fiscal year ended September 30, 2001[ ]    Transition report under section 13 or 15(d) of theSecurities Exchange Act of 1934 For the transition Period from _______ to_______

 Commission file number 001-15643

**Cyber Merchants Exchange, Inc.**(Exact name of small business issuer in its charter)

**California**

 

**95-4597370**

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

**600 S. Lake Avenue, Suite 208      Pasadena, California**

Issuer's telephone number: **(626) 793-5000**

**91106**      (Zip Code)

(Address of principal executive offices)

 

Check whether the Issuer (1) filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act during the past 12 months (or forsuch 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 __

Number of shares outstanding of the issuer'sclasses of common equity, as of November 13, 2001**7,583,673 shares of Common Stock (One Class)**

Transitional Small Business Disclosure Format: Yes __  No   X

**CYBER MERCHANTS EXCHANGE, INC.Table of Contents**

**PART I - FINANCIAL INFORMATION**Item 1: Financial Statements           BalanceSheets as of June 30, 2001 and September 30, 2001 (unaudited)           Statements ofOperations for the Three Months Ended September 30, 2001 and 2000 (unaudited)           Statements of CashFlows for the Three Months Ended September 30, 2001 and 2000 (unaudited)           Notes to FinancialStatements (unaudited)Item 2: Management's Discussion and Analysis or Plan ofOperation**PART II**Item 1: Legal ProceedingsItem 2: Changes in Securities and use of ProceedsItem 3: Defaults upon Senior SecuritiesItem 4: Submission of Matters to a Vote of SecuritiesHolders  Item 5: Other InformationItem 6: Exhibits and Reports on Form 8-K

**Signatures**

 

**PART I**

ITEM1. FINANCIAL STATEMENTS

**CYBER MERCHANTS EXCHANGE, INC.**

**BALANCE SHEETS**

June 30 2001
Sept. 30 2001
(Unaudited)**ASSETS**Current assets:   Cash and cash equivalents
$     205,384
$               61,802   Certificates of deposit
2,800,000
2,150,091   Accounts receivable, net of          allowance for doubtful account of $4,000
367,400
585,333   Accrued interest receivable
37,043
14,777**Total current assets**
3,409,827
2,812,003Property and equipment, net71,24756,056Investment in ABNet851,121829,359Investment in overseas joint ventures658,201589,715Convertible note receivable600,000600,000Other assets11,49753,032Total assets
$5,601,893

$4,940,165
**LIABILITIES AND STOCKHOLDERS' EQUITY**Current Liabilities:   Accounts payable 
$   279,946

$   463,407
   Accrued expenses112,83546,316   Line of credit borrowings400,000-Total current liabilities792,781509,723Commitments and contingencyShareholders' equity   Common stock, no par value;          40,000,000 shares authorized; 7,583,673              shares issued and outstanding10,032,01710,032,017Additional paid-in capital3,523,3643,525,364Accumulated deficit(8,746,269)(9,124,939)Total stockholders' equity4,809,1124,430,442Total liabilities and stockholders' equity
$5,601,893    
$  4,940,165    
            See accompanying notes to financial statements
 

**CYBER MERCHANTS EXCHANGE, INC.**

**STATEMENT OF OPERATIONS**

Three Months Ended          Sept. 30 2001
2000          
          2001          
(Unaudited)
(Unaudited)**REVENUES:**   Transaction sales
$                          -
$    500,273   Cost of goods sold
69,532
447,205   Net revenues from transaction          sales
(69,532)
53,068   Subscribers' fees
12,900          
4,010          Net revenue
(56,632)      
(57,078)      Operating expenses:   General and administrative          expenses
421,619
372,564   Stock-based compensation259,024-   Depreciation and amortization-17,588Total operating expenses680,643390,152Loss from operations
(737,275)
(333,074)Other income (expenses)   Interest income, net of          interest expense 76,38245,452   Equity in losses on investments          in overseas joint ventures (60,679)(151,819)   Amortization of software sales83,33383,333   Impairment write-down on          investments in ABNet -(21,762)   Other(1,454)-Loss before income taxes(639,693)(377,870)Income taxes414800Net loss$    (640,107)$    (378,670)Basic and diluted net loss available to          common Stockholders per share$                (0.08) $       (0.05)Weighted-average number of common shares          outstanding
7,589,669
7,583,623
            See accompanying notes to financial statements
 

**CYBER MERCHANTS EXCHANGE, INC.**

**STATEMENT OF CASH FLOWS**

Three Months Ended          Sept. 30 2001
2000          
          2001          
(Unaudited)
(Unaudited)Cash flows from operating activities   Net loss
          $   (640,107)

          $  (378,670)
   Adjustments to reconcile net          loss to net cash used in operating activities:      Depreciation          and amortization          10,861          17,588      Amortization          of negative goodwill          (83,333)          (83,333)      Equity in          losses on investments in overseas joint ventures      60,679            151,819            Impairment          write-down on investments in ABNet-21,762      Compensation          expense for options and warrants granted      259,024            -         Changes in assets and          liabilities:      Accounts          receivable (19,583)(217,933)      Interest          receivable-22,266      Inventory(311,976)      Other assets(3,131)(41,535)      Accounts          payable and accrued expenses          (594,685)          428,918Net Cash used in operating activities(1,010,275)(391,094)Cash flows from investing activities:   Gross investment in          certificates of deposit(932,284)-   Sales of certificated of          deposit-649,909   Investment in overseas joint          ventures, net of software sales(734,237)-   Purchases of property and          equipment(10,844)(2,397)Net cash (used in) provided by investing          activities(1,677,365)647,512Cash flows from financing activities:   Repayments of borrowings under          line of credit-(400,000)   subscriptions receivable          1,481,240          -Net cash provided by (used in) financing          activities1,481,240(400,000)Net decrease in cash and cash equivalents          (1,206,400)          (143,582)Cash and cash equivalents, beginning of          period1,274,395205,384Cash and cash equivalents, end of period
$      67,995    
          $      61,802          Supplemental disclosure of cash flow          informationCash paid during the period:   Income Taxes
$                       -
$                   800   Interest
$                      -
$                   547
           See accompanying notes to financial statements
 
NOTES TO THE FINANCIAL STATEMENTS
*Certain statements contained in this Report, including, withoutlimitation, statements containing the words, "believes,""anticipates," "expects," and other words of similar import,constitute "forward-looking statements" within the meaning of Section27A of the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Such forward-looking statements involveknown and unknown risks, uncertainties and other factors, which may cause theactual results, performance or achievements of Cyber Merchants Exchange, Inc. tobe materially different from any future results, performance, or achievementsexpressed or implied by such forward-looking statements.  These factorsinclude, but are not limited to, the factors discussed under the caption"Company Risks" elsewhere in Item 1 of this Report.  Given theseuncertainties, readers are cautioned not to place undue reliance on suchforward-looking statements.  Cyber Merchants Exchange, Inc. disclaims anyobligation to update any such factors or to announce publicly the results of anyrevision of the forward-looking statements contained or incorporated byreference herein to reflect future events or developments.*

 **Basis of Presentation**

The accompanying unaudited consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and with theinstructions to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for fair presentation have been included. Operating results for the three-month period ended September 30, 2001 arenot necessarily indicative of the results that may be expected for the yearending June 30, 2002.  For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the Company's annualreport on Form 10-KSB for the year ended June 30, 2001. 

**Our Company**

Cyber Merchants Exchange, Inc. (the "Company" or "C-Me")is an international business-to-business electronic trading company that createsefficiencies for retailers worldwide to source and finance internationalpurchases.  C-Me, a California corporation, was formed in July 1996.

The Company provides its customers with an Internet-based communicationsystem that enables retailers and vendors to conduct negotiations and toelectronically facilitate the sourcing, and the purchase and sale of merchandiseon a global basis.  Using C-Me's proprietary software, the Companymaintains a secure yet open electronic network that allows retailers to manageon-line communications and transactions with their vendors.  The front-endcommunications and trading process is generally referred to in the retailindustry as "sourcing".   High volumes of product and transactiondata are exchanged between retailers and their vendors in order for buy-selltransactions to be initiated, negotiated, and consummated.  This criticalsourcing process typically requires a substantial amount of time and attentionfrom both the retail merchandise buyer and the salesperson of a vendor. The Company's related software products and services are designed to make thesourcing and transaction function substantially more effective and efficient.
    C-Me's patent pending Global Financial Platform ("GFP") eliminates    the need for letters of credit by allowing foreign suppliers to ship    merchandise to pre-approved credit worthy retailers in the United States.     C-Me pioneered this process by establishing the first tri-party agreement    with The CIT Group and Bank SinoPac in Taiwan.  Through this    arrangement, each of the tri-party participants plays an integral role.     First, CIT guarantees the credit worthiness of the U.S. retailer.     Secondly, Bank SinoPac provides working capital financing and acts as the    conduit for foreign manufacturers to receive payment.  Through C-Me's    GFP, U.S. retailers can purchase overseas merchandise, just as they purchase    domestic merchandise, with open terms and without the need or hassle of    opening a letter of credit.
C-Me has adopted a buyer-centric business focus by creating a proprietary    Internet Sourcing Network which consists of specialized private extranets    for retailers that centralizes the merchandise review and search process.     Its current retail partners are, among others, Burlington Coat Factory,    Factory 2-U Stores, and Bermo Enterprises.  Additional retailers have    benefited by using C-Me's services including but not limited to Value City    Department Stores, Ames Department Stores, Ross Stores, and 99 cents only    Stores.

In January 2001, the Company began to focus and continues to focus on    sourcing overseas goods for off-price retailers who do not have their own    import department.  The Company is using email to show the overseas'    closeout merchandise in a standard format, and then C-Me's sales staff    personally presents pre-qualified goods to the retailer who responds to the email marketing.  The management team believes, that the mix of    electronic trading and a national sales force is the future of the Company's    success.

During September 2001, C-Me began to undertake a new and exciting project    called the Apparel Sourcing Association Pavilion ("ASAP"), Trade    Show.  ASAP is an international sourcing and manufacturing trade show    that brings leading manufacturers from around the world to one venue to    greet, meet, and sell to buyers.  The ASAP Show is a natural extension    of C-Me's business model.  In the past four years, C-Me has created a    comprehensive base of manufacturers from around the world.  Through C-Me's    network of global offices, the Company anticipates that several hundred international    manufacturers will exhibit at the ASAP Show.

**Risks    and Uncertainties**

The Company operates in a highly competitive consumer product and    high-technology environment that is subject to intense competition,    government regulation and rapid change.  The Company's operations are    subject to significant risk and uncertainties including financial,    operational and other risks associated with the business, including the    potential risk of business failure.     

**Current Vulnerability Due to Certain Concentrations**

Certain financial instruments, principally trade receivables, potentially    subject the Company to credit risk.  The Company performs ongoing    credit evaluations of its customers but does not require collateral.     The Company maintains an allowance for doubtful receivable and sales returns    based upon factors surrounding the credit risk of specific customers,    historical trends and the Company's estimate of future product returns.

The Company has invested $2,150,091 in certificates of deposit at five    different banks as of September 30, 2001.  These certificates mature    within the next six months.  The amount invested at each bank exceeds    the FDIC insurance coverage limit of $100,000, resulting in approximately    $1,650,000 being uninsured at September 30, 2001.  At September 30,    2001, the Company has accrued interest income of $14,777 related to these    certificates of deposit.    

Two customers account for approximately 88% of sales for the three months    ended September 30, 2001.     There were no such concentrations for the three months ended September 30, 2000.  Two customers    account for 96% of accounts receivable at June 30, 2001.  The loss of    either of these customers may have a material impact on the Company's    financial statements.

**Investments in Overseas Joint Ventures and ABNet**

Investments in overseas joint ventures are accounted for under the equity    method.  Investment in ABNet is accounted for under the cost method and    valued at the lower of cost or net realizable value with any impairment    being recognized in the statements of operations at the time the impairment    exists (see below).
**Property and Equipment**
Property and equipment are stated at cost.     Depreciation of property and equipment is calculated on the straight-line    method over the estimated useful lives of the assets, generally three to    five years.  Leasehold improvements are amortized over the shorter of    the amortized useful lives or lease term.

Maintenance, repairs and minor renewals are charged directly to expense    as incurred. Additions and betterments to property and equipment are    capitalized.  When assets are disposed of, the related cost and    accumulated depreciation thereon are removed from the accounts and any    resulting gain or loss is included in the statement of operations.

**Impairment of Long Lived Assets**
    Impairment of Long-Lived Assets Statement of Financial Accounting Standards    No. 121, "Accounting for the Impairment of Long-Lived Assets and    Long-Lived Assets to be Disposed Of," establishes guidelines regarding    when impairment losses on long-lived assets, which include property and    equipment, investments in overseas joint ventures, convertible note    receivable, and investment in ABNet, should be recognized and how impairment    losses should be measured.  The Company periodically reviews such    assets for possible impairments and expected losses, if any, are recorded    currently.  Based on its analysis, management determined that it has    incurred an impairment loss of $21,762 in its investment in ABNet, which    was recorded in the accompanying statement of operations for the quarterended September 30, 2001.      
**Revenue Recognition**

Net revenues include amounts earned under product transaction sales and    subscriptions.  Product transaction revenues are recorded in accordance    with EITF 99-19 "Reporting Revenue Gross as a Principal versus net as    an Agent."  The Company recognizes net revenues from product    transaction sales when title to the product passes to the customer, net of    factoring fees.  For all product transactions with its customers, the    Company acts as a principal, takes title to all products sold upon shipment,    bears inventory risk for return products that the Company is not able to    return to the supplier, although these risks are mitigated through    arrangements with factors, shippers and suppliers. Due to the Company    not bearing credit risk, the Company records the respective revenue on a net    basis.  However, for financial reporting purposes the Company presents    the details of gross transaction sales and related costs of sales in the    accompanying statements of operations.  The Company also recognizes    revenue from monthly subscription fees.  Subscriber fees represent    revenue generated through one-time, non-refundable setup fees and monthly    hosting fees.  Subscription and subscriber fees are recognized as    revenue after the services have been provided.
    In December 1999, the Security and Exchange Commission issued Staff    Accounting Bulletin 101 ("SAB 101"), "Revenue    Recognition" which outlines the basic criteria that must be met to    recognize revenue and provide guidance for presentation of revenue and for    disclosure related to revenue recognition policies in financial statements    filed with Security and Exchange Commission.  The effective date of    this pronouncement is the fourth quarter of the fiscal year beginning after    December 15, 1999.  The adoption of SAB101 in fiscal 2001 did not have    a material impact on the Company's financial position or results of    operations.     
**Income Taxes**

The Company accounts for income taxes under Statement of Financial    Accounting Standards No. 109 ("SFAS 109"), "Accounting for    Income Taxes."  Under SFAS 109, deferred tax assets and    liabilities are recognized for the future tax consequences attributable to    differences between the financial statement carrying amounts of existing    assets and liabilities and their respective tax bases.  Deferred tax    assets and liabilities are measured using enacted tax rates expected to    apply to taxable income in the years in which those temporary differences    are expected to be recovered or settled.  A valuation allowance is provided for significant deferred tax assets when it is more likely    than not that those assets will not be recovered.  
**Stock-based Compensation**
The Company accounts for stock-based compensation issued to employees    using the intrinsic value based method as prescribed by Accounting    Principles Board Opinion No. 25 ("APB 25"), "Accounting for    Stock issued to Employees."  Under the intrinsic value based    method, compensation is the excess, if any, of the fair value of the stock    at the grant date or other measurement date over the amount an employee must    pay to acquire the stock.  Compensation, if any, is recognized over the    applicable service period, which is usually the vesting period.  

The Financial Accounting Standards Board ("FASB") issued    Statement of Financial Accounting Standards No. 123 ("SFAS 123"),    "Accounting for Stock-Based Compensation."  This standard, if    fully adopted, changes the method of accounting for employee stock-based    compensation plans to the fair value based method.  For stock options    and warrants, fair value is determined using an option pricing model that    takes into account the stock price at the grant date, the exercise price,    the expected life of the option or warrant and the annual rate of quarterly    dividends. Compensation expense, if any, is recognized over the    applicable service period, which is usually the vesting period.

The adoption of the accounting methodology of SFAS 123 is    optional and the Company has elected to continue accounting for stock-based    compensation issued to employees using APB 25; however, pro forma    disclosures, as if the Company adopted the cost recognition requirement    under SFAS 123, are required to be presented (in audited financial    statements).

In March 2000, the FASB issued Interpretation No. 44 ("FIN    44"), "Accounting for Certain Transactions Involving Stock    Compensation, an Interpretation of APB 25."  FIN 44 clarifies the    application of APB 25 for (a) the definition of employee for purpose of    applying APB 25, (b) the criteria for determining whether a plan qualifies    as a no compensatory plan, (c) the accounting consequence for various    modifications to the terms of a previously fixed stock option or award, and    (d) the accounting for an exchange of stock compensation awards in a    business combination.  The adoption of FIN 44 did not have a material    effect on the Company's financial statements.
**Loss Per Share**         
    The Company has adopted Statement of Financial Accounting Standards No. 128    ("SFAS 128"), "Earnings per Share."  Under SFAS No.    128, basic earnings per share is computed by dividing income available to    common shareholders by the weighted-average number of common shares assumed    to be outstanding during the period of computation.  Diluted earnings    per share is computed similar to basic earnings per share except that the    denominator is increased to include the number of additional common shares    that would have been outstanding if the potential common shares had been    issued and if the additional common shares were dilutive (totaling zero    shares in 2001 and 2000).  Because the Company has incurred net losses,    basic and diluted loss per share are the same as additional potential common    shares and would have an anti-dilutive effect on earnings per share. 

**Segments of an Enterprise and Related information**

The Company had  adopted Statement of Financial Accounting Standards No.131 ("SFAS 131").  "Disclosures about Segments of anEnterprise and Related Information."  SFAS 131 changes the way publiccompanies report them to report selected segment information in their quarterlyreports issued to shareholders.  It also requires entity-wide disclosuresabout the products and services an entity provides, the material countries inwhich it holds assets and reports revenues and its major customers.  Asapproximately 99% of the Company's revenues, loss from operations andidentifiable assets are from the transaction sales, the Company has notmade segment disclosures in the accompanying financial statements. 
**Recent Accounting Pronouncement**
In July 2001, FASB issued Statement of Financial Accounting Standards No.    141 ("SFAS 141"), "Business Combinations" which is    effective for business combinations initiated after June 30, 2001.     SFAS 141 eliminates the pooling of interest method of accounting for    business combinations and requires that all business combinations occurring    on or after July 1, 2001 be accounted for under the purchase method.     The Company does not expect SFAS No. 141 to have a material impact on its    financial statements.

In July 2001, FASB issued Statement of Financial Accounting Standards No.    142 ("SFAS 142"), "Goodwill and Other Intangible    Assets," which is effective for fiscal years beginning after December    15, 2001.  Early adoption is permitted for entities with fiscal years    beginning after March 15, 2001 provide that the first interim financial    statements have not been previously issued.  SFAS 142 address how    intangible assets that are acquired individually or with a group of other    assets should be accounted for in the financial statements upon their    acquisition and after they have been initially recognized in the financial    statements.  SFAS 142 requires that goodwill and intangible assets that    have indefinite useful lives not be amortized but rather be tested at least    annually for impairment, and intangible assets that have finite useful lives    be amortized over their useful lives.  SFAS 142 provides specific    guidance for testing goodwill and intangible assets that will not be    amortized for impairment.  In addition, SFAS  142 expands the    disclosure requirements about goodwill and other intangible assets in the    years subsequent to their acquisition.  Impairment losses for goodwill    and indefinite-life intangible assets that arise due to the initial    application of SFAS 142 are to be reported as resulting from a change in    accounting principle.  However, goodwill and intangible assets acquired    after June 30, 2001 will be subject immediately to be provision of SFAS 142.     The Company does not expect SFAS 142 to have a material effect on its    financial statements.

In July 2001, the FASB issued Statement of Financial Accounting Standards    No. 143 ("SFAS 143"), "*Accounting for Asset    Retirement Obligations,"*SFAS 143 establishes standards associated with    the retirement of tangible long-lived assets and the associated asset    retirement costs.  This statement is effective for financial statements    issued for fiscal years beginning after June 15, 2002.  The Company has    not yet assessed the impact of this standard on its financial statements,    but does not expect the impact to be material.

In August 2001, the FASB issued Statement of Financial Accounting StandardsNo. 144 (SFAS 144). Accounting for the Impairment or Disposal of Long-LivedAssets, SFAS 144 addresses and for long-lived assets to be disposed of. The provisions of SFAS 144 are effective for financial statements issued forfiscal years beginning after December 15, 2001, and interim periods within thesefiscal years, with early adoption encouraged.  The Company does not expectSFAS 144 to have a material impact on its financial statements.
**Convertible Note Receivable**     
    In June 2001, the Company advanced $600,000 to an unrelated non-public    company for a convertible note receivable ("Note").  The    Note, which accrues interest at 6%, is payable in monthly interest    installments, with the entire principal balance plus any unpaid and accrued    interest due June 12, 2003.  The Note is convertible into common stock    at the discretion of the Company at $3 per share, which is estimated by both    the Company and the note maker to be the fair market value of the common    stock.  Total interest accrued related to this note was $5,400 and is    recorded under accrued interest receivable in the accompanying balance sheet    at September 30, 2001.

**Agreement with CIT and Bank Sinopac**

    On October 19, 2000, the Company and CIT Commercial Services entered into a    Factoring Agreement.  Under the agreement, the Company sells and    assigns to CIT all accounts receivable arising from transaction sales.     CIT assumes the credit risk on a non-recourse basis on each account    approved.  For each sales transaction processed to CIT for collection,    CIT will charge 1.5% of the assigned invoice value as their factoring    fee.  As of September 30, 2001 and 2000 and for the periods then ended, the    amounts of factoring have not been significant to the Company.

**Pending Litigation**

The Company has been named as a defendant, along with Burlington Coat    Factory Warehouse ("BCF"), in a lawsuit brought by Stanley Rosner    ("Rosner"), an individual.  In March 1998, Rosner commenced    an action in the Supreme Court of the State of New York alleging breach of    oral and written contracts between the Company and Rosner and between BCF    and Rosner in 1997.  Rosner claims that he is due certain fees from    both the Company and BCF for services allegedly rendered in connection with    certain transactions involving the Company and BCF.  These transactions    relate to the Internet services that the Company has and will provide to BCF,    and current and anticipated transactions arising from vendors of BCF.     Rosner claims that he is due damages in an amount not less than $5,000,000    plus unspecified punitive damages from both the Company and BCF. 

Rosner's attorney has agreed that the Company and BCF are entitled to    have the venue of the lawsuit transferred from Nassau County, New York    to New York County (Manhattan), New York; Rosner's attorney also    agreed to arrange for the transfer.  Rosner's attorney also agreed that    the Company's and BCF's responsive papers would be due no later than ten    (10) days after notice of such transfer had been served.  To date, the    Company has not received notice of the proposed transfer of venue and has    not filed its responsive papers or otherwise moved against the complaint. 

The Company intends to vigorously defend this action.  The Company    believes that it is not obligated to make any payments to Rosner and has    meritorious defenses to all of Rosner's allegations.  However, if the    Company does not prevail and a significant damage award against the Company    is granted, this would have a material adverse effect upon the Company. 

**Investment in overseas Joint Ventures**

On July 11, 2001, the Company announced the establishment of C-Me Hong    Kong.  The joint venture corporation was formed to further expand the    Company's global merchandise sourcing and retail sales network. On August 7, 2001, the Company announced the establishment of C-ME Korea.     The joint venture corporation was formed to further expand the Company's    global merchandise sourcing and retail sales network.

Both Joint Venture operation's expenses  are funded by the overseas    Joint Venture partners.  The Company will share the profit, not the    losses.

**ITEM 2.             MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
    The following discussion of the financial condition and results of    operations of the Company should be read in conjunction with the financial    statements and the related notes thereto included elsewhere in this    quarterly report for the three months ended September 30, 2001.  This    quarterly report contains certain forward-looking statements and the    Company's future operating results could differ materially from those    discussed herein.  Certain statements contained in this Report,    including, without limitation, statements containing the words    "believes," "anticipates," "expects" and the    like, constitute "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.  Such forward-looking    statements involve known and unknown risks, uncertainties and other factors    which may cause the actual results, performance or achievements of the    Company to be materially different from any future results, performance or    achievements expressed or implied by such forward-looking statements.     These factors are discussed in more detail in the Risk Factors section of    the Company's Annual Report on Form 10-KSB for the fiscal year ended June    30, 2001.  Given these uncertainties, readers are cautioned not to    place undue reliance on such forward-looking statements.  The Company    disclaims any obligation to update any such factors or to announce publicly    the results of any revisions of the forward-looking statements contained or    incorporated by reference herein to reflect future events or developments. 
**INVESTMENTS IN OVERSEAS JOINT VENTURES**

On December 22, 1999, the Company entered into an agreement with ABNet toform a joint venture in Taiwan named C-Me Technology Co., Ltd. (C-Me Taiwan) tofacilitate the buying and selling activities between U.S.-based retailers andTaiwan-based exporters through the Company's web-based communicationsystem.  The Company invested $300,000 (which was used to purchasedsoftware back from the Company) for a 30% interest in February 2000 and accountsfor this investment under the equity method.  The Company invested anadditional $200,000 for an additional 10% interest in May 2001.  For theperiod ended September 30, 2001 and 2000, the Company recognized an investmentloss in the accompanying statements of operations from this joint venture of$19,457 and $39,300 respectively, based on the Company's equity ownershippercentage.

On March 11, 2000, the Company entered into an agreement with Vickem PatanaCo., Ltd., a Thailand Corporation, to form a joint venture named E-SouthEastAsia, Inc. (E-SEA), a Delaware corporation, which will use the Company'sproprietary web-based communication system to facilitate the front-endmerchandise sourcing.  The Company invested $300,000 during fiscal yearended June 30, 2000 (which was used to purchase software back from theCompany).  During the fiscal year ended June 30, 2001, the Company investedan additional $100,000 for a total equity interest of 40% and accounts for thisinvestment under the equity method.  For the period ended September 30,2001 and 2000, the Company recognized an investment loss in the accompanyingstatements of operations from this joint venture of $44,534 and $932,respectively, based on the Company's equity ownership percentage.

On March 25, 2000, the Company entered into an agreement with Good SupportInternational Limited, a British Virgin Islands Company, to form a joint venturenamed Global Purchasing Dotcom, Inc. (GP.com), a Washington corporation, whichwill focus on implementing several targeted businesses in China's e-commercemarket.  The Company invested $400,000 during fiscal year ended June 30, 2000 (which was used to purchase software back from the Company).  Duringfiscal year ended June 30, 2001, the Company invested an additional $600,000 fora total interest of 50% and accounts for this investment under the equitymethod.  For the period ended September 30, 2001and 2000, the Company recognized an investment loss in the accompanyingstatements of operations from this joint venture of $87,838 and $20,447,respectively, based on the Company's equity ownership percentage. 

During fiscal year 2000, each of C-Me Taiwan, E-SEA, andGP.com entered into an agreement to purchase the Company's software for$300,000, $300,000 and $400,000, respectively. The Company has reduced thecarrying amount of its investment in each of the joint ventures by the amount ofthe software sale. These amounts will be recognized in income as an adjustmentto the Company's investments in the overseas joint ventures on a straight-linebasis over a three-year period, the estimated life of the software sold. As ofSeptember 30, 2001 and 2000, the Company recognized income in the statements ofoperations from the amortization of these software sales in the amount of$416,665 and $83,333, respectively. The respective joint ventures are amortizingthe cost of software over the same three-year period; As a result, the totalamortization expense recognized was $416,665, and $83,333 respectively.

 **STATUS OF OPERATIONS**

The Company currently provides two technical services to its customers:    Internet Sourcing Network and Virtual Trade Show.  Both services are    embedded with custom Web-site design.  The Company also has three    supporting technologies:  (i) Product Driven Search Engine; (ii)    Focused Broadcasting; and            (iii) Dynamic End-User Profile System.  All these technologies were    developed in 1997 and 1998.  

C-Me has targeted its service solutions to off-price and discounts    retailers, and their merchandise suppliers.  The Company adopted a plan    to identify retailers with the same merchandising strategies as those    implemented by our partners among others, such as Factory 2-U Stores, Inc.    and Burlington Coat Factory.  C-Me now markets its merchandise directly    to individual buyers within these retail organizations for transaction-based    sales.

Beginning 2001, C-Me established an internal sales and marketing force in    order to build direct relationships with our retailer customers, and better    facilitate customer product feedback and program needs.  The Company    will explore opportunities to expand its transaction-based services with new    retailers.  C-Me will continue prospecting for new retailers to add to    the ISN through a team of national sales executives located in key market    areas.  C-Me's ISN provides a valuable sales tool and means for    multiple vendors to exchange company and product information with multiple    retailers on a widespread basis. The Company will leverage existing retailer    and vendor relationships by offering additional services provided by C-Me,    such as program development, Web design and hosting, open to buy broadcasts    and product marketing.

Currently, The Company's sources of revenue are anticipated to be    transaction-based generated by retailers' purchases of the Company's    goods.  The Company has moved into this role primarily because of the    slow acceptance of retailers to engage directly with the ISN.  C-Me has    found that domestic vendors are unwilling to pay subscription fees for the    ISN due to an insufficient number of retailers utilizing the system.     Until significant masses of retailers actively implement the network, the    Company will be unable to depend solely on revenue generated from    subscription fees paid by vendors.  The Company envisions made-to-order    and programmed goods as a viable new source of revenue for 2002.

The Company also anticipates generating revenue in the form of    transaction fees associated with buyers utilizing the GFP to finance their    purchases outside of our ISN.  Marketing the Company's GFP financial    platform and global sourcing consortium through its foreign offices will be    key to the development of long-term retailer and vendor relationships.     The Company's overseas joint ventures will expand its efforts to identify    and target key overseas manufacturers to subscribe to C-Me's ISN.

Management estimates that the net revenue for ASAP Show will increase    each year.  The trade show industry is a lucrative business both in    revenue generation and corporate branding of the shows management.  The    Company anticipates that the valuation of the new ASAP subsidiary will    exceed C-Me's core international B2B electronic trading business.  ASAP    will accomplish these objectives through the sales of exhibitor space,    governmental, trade and corporate advertising sponsorships, and advertising    sales.

**Accumulated Losses**

The Company has incurred significant losses since its inception and may    never generate or sustain a profit. For the first quarter ended September    30, 2001, the Company reported a net loss of $378,670.  The Company    devotes significant resources to developing, enhancing, selling and    marketing its products and services.  As a result, the Company will    need to generate significant revenues to maintain profitability.  The    Company may not continue its historical growth or generate sufficient    revenues to sustain or increase profitability on a quarterly or annual basis    in the future.
**RESULTS OF OPERATION**     
**Three Months Ended September 30, 2001 and 2000****Revenue**

Net gross revenues on transaction sales for the quarter ended September    30, 2001 were $500,273, an increase of $500,273 or 100% compared to the same    period last year.  The Company expects the volume of gross sales    transactions and the gross profit margin percentage to maintain and grow, as    it begins to fully utilize its overseas sourcing network and its external    sales force.

Subscriber fees decreased $8,890 or 69% to $4,010 in the quarter ended    September 30, 2001 from $12,900 in the prior year, due to the shift in focus    on the revenue received from the users of the Company's VTS, ISN and Web    design services to transaction sales. 
**Operating Costs and Expenses**
General and administrative expenses decreased by $49,055, or 12%, to    $372,564 for the three months ended September 30, 2001, as compared to    $421,619 for the same period last year. The decrease in general and    administrative expenses is primarily due to the decrease in payroll and    professional consulting expenses.  Payroll expenses decreased by    $19,291 to $208,126 for the three months ended September 30, 2001 as    compared to $227,417 for the same period last year, due to a decrease in    full time employees.  Professional fees decreased by $26,752 to $23,812    for the three months ended September 30, 2001 as compared to $50,564 for the    same period last year, due to a decrease in fees paid to consultants and    professionals for accounting, legal and other professional services.

The Company recognized non-cash stock compensation expense of $0 for    the three-months ended September 30, 2001 compared to last year of $259,024.    
**Net Loss**

The Company recorded a net loss of $378,670 for the three months ended    September 30, 2001, a $261,437 decrease in net loss, as compared to a net    loss of $640,107 for the same period last year.  The decrease in net    loss is attributable to a $57,078 increase in revenue compared to a loss of    $69,532 from the same quarter last year.  The decrease in net loss is    also attributable to no non-cash stock based compensation as    compared to $259,024 from the same quarter last year, in addition to the    reduction of General and Administrative expenses of $49,055.  Loss per    share as of September 30, 2001 was $0.05 as compared to $0.08 as of    September 30, 2000 due to a decrease in net loss and increase in the number    of outstanding shares of common stock.

**LIQUIDITY AND CAPITAL RESOURCES**

The Company's net working capital decreased from $2,617,046 as of June    30, 2001 to $2,302,280 as of September 30, 2001, primarily due to cash used    in operations of $391,094.  During the current year, the Company had    average monthly general and administrative expenses (excluding non-cash    compensation expenses) of approximately $124,000 as compared to $150,000 in    2000. The cost reduction plan includes reduction of its staff, professional    consulting fees, investor relations and marketing costs.  With working    capital of approximately $2.3 million and average monthly expenses of    approximately $124,000, coupled with a growing net revenue, the Company    believes its operations can breakeven or become profitable by fiscal year    end 2002. 

The Company believes it has sufficient cash to operate its business over    the next 12 months.  Depending on market acceptance of the Company's    current business model, the Company may raise additional funds, either in    debt or equity, to augment future growth of the business.

Over the next two to five years, the Company plans to utilize a    combination of internally generated funds from operations, potential debt    and / or equity financing to fund its longer-term growth.  The    availability of future financing will depend on market conditions.

On September 19, 2001, the Company entered into non-revolving lines of    credit with a commercial bank for up to $750,000.  Borrowings under    this line of credit bear interest at certain percentage over the CD rate per    annum and is secured by a $500,000 and $250,000 time certificates of deposit    at the bank.  The line of credit will expire on February 22, 2002 and    December 17, 2001 respectively.  As of September 30, 2001 the Company    has an outstanding loan balance of $0.

**EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATE**

The Company's current joint ventures are located in countries outside the    United States. The functional currency for each foreign operation is the    local currency.  The carrying value of the Company's investments in the    Pacific Rim are subject to the risk of foreign currency fluctuations.     Any dividends received from the Company's international joint ventures will    also be subject to foreign exchange risk.

**PART II - OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

Previously reported on the Company's Form 10-KSB for the year ended June    30, 2001. The Company has been named as a defendant, along with BCF, in a    lawsuit brought by Stanley Rosner ("Rosner"), an individual.     In March, 1998, Rosner commenced an action in the Supreme Court of the State    of New York, Nassau County, New York (Index No. 98-006524).  Rosner    alleges breach of oral and written contracts between the Company and Rosner    and between BCF and Rosner in 1997.  Rosner claims that he is due    certain fees from both the Company and BCF for services allegedly rendered    in connection with certain transactions and alleged transactions involving    the Company and BCF.  Such transactions and alleged transactions relate    to the Internet services that the Company may provide to BCF, and    contemplated transactions arising from vendors of BCF.  Rosner claims    that he is due damages in an amount not less than $5,000,000 plus    unspecified punitive damages from both the Company and BCF.  Rosner's    attorney has agreed that the Company and BCF are entitled to have the venue    of the lawsuit transferred from Nassau County, New York to New York County    (Manhattan), New York; Rosner's attorney also agreed to arrange for the    transfer.  Rosner's attorney also agreed that the Company's and BCF's    responsive papers would be due no later than ten (10) days after notice of    such transfer had been served.  To date, the Company has not received    notice of the proposed transfer of venue and has not filed its responsive    papers or otherwise moved against the complaint.

**ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS**

None.

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES    HOLDERS**

None.

**ITEM 5.  OTHER INFORMATION**

None.

**ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K**

(a) Exhibits

None.

(b) Reports on 8-K

On August 17, 2001 the Company filed a form 8-K to report a    change in registrant's certifying accountant from BDO Seidman, LLP to Corbin    & Wertz. The Company and BDO did not have any disagreements with regard    to any matter of accounting principles or practices, financial statement    disclosure, or auditing scope or procedure.

 

**SIGNATURES**

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

CYBER MERCHANTS EXCHANGE, INC. d.b.a. C-ME.com

(Registrant)

Date:  November 15, 2001        

         

/s/ Frank S.        Yuan                                                                Frank S. Yuan Chairman, Chief Executive Officer        
        Date:  November 15, 2001        /s/ Luz M.        Jimenez                                                                         Luz M. Jimenez (Acting Chief Financial Officer)