<PAGE>   1

                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-KSB


       (MARK ONE)
       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
            EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2000

       [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
            SECURITIES EXCHANGE ACT OF 1934

           FOR THE TRANSITION PERIOD FROM            TO
                                        -----------    -----------


                         COMMISSION FILE NUMBER 1-13271
                                                -------


                            800 TRAVEL SYSTEMS, INC.
                 ----------------------------------------------
                 (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)


               DELAWARE                                59-3343338
        ------------------------             ---------------------------------
        (STATE OF INCORPORATION)             (IRS EMPLOYER IDENTIFICATION NO.)


   4802 GUNN HIGHWAY, TAMPA, FLORIDA                      33624
  ----------------------------------------              ----------
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)              (ZIP CODE)


                    ISSUER'S TELEPHONE NUMBER (813) 908-0404

         SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                    COMMON STOCK, $0.01 PAR VALUE REDEEMABLE COMMON
                    STOCK PURCHASE WARRANTS

         SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

         Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. [X] Yes [ ] No

         Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]

         The revenues of registrant for the fiscal year ended December 31, 2000
were $13,142,066.

         The aggregate market value of the voting stock held by non-affiliates
of the registrant, as of March 20, 2001, was approximately $5,271,615 based upon
a last sales price of $0.813.

         As of March 20, 2001, there were 7,895,536 shares of the registrant's
Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Portions of the Registrant's Definitive Proxy Statement for its 2000
Annual Meeting of Shareholders are incorporated by reference into Part III of
this Form 10-KSB Report except with respect to information specifically
incorporated by reference in this Form 10-KSB Report the Definitive Proxy
Statement is not deemed to be filed as a part hereof.


<PAGE>   2

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

This description contains certain forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from the
results discussed in the forward-looking statements as a result of certain of
the risks set forth herein and elsewhere in this Form 10-KSB. The Company
assumes no obligation to update any forward-looking statements contained herein.

GENERAL

800 Travel Systems, Inc. and its wholly-owned subsidiary Prestige Travel
Systems, Inc. referred to herein as "the Company", "we", "our", "us", "800
Travel Systems", "800 Travel" is a leading direct marketer of travel related
services, focused primarily on providing leisure air, cruise and tour
reservation services. The Company provides low-priced air and cruise line
tickets for domestic and international leisure travel to its customers through
its easy-to-remember, toll-free numbers, through its websites on the World Wide
Web (at www.LowAirfare.com, www.CruiseBrokers.com and www.TourBrokers.com) and
through its nationwide network of approximately 1,500 independent remote travel
agents. A distinguishing feature of the www..LowAirfare.com website is its
ability to connect live reservation agents directly with on-line travel
consumers in an instant messaging format that allows consumers to book air
travel, on-line, in real time. The Company operates two reservation centers, one
in Tampa, Florida and the other in San Diego, California 7 days a week
throughout the year. Also in Tampa, Florida, the Company operates its cruise and
remote agent fulfillment center. As a result of its agreements to sell
discounted tickets with air and cruise lines directly, as well as other ticket
suppliers, the Company is able to charge its customers a service charge, while
still offering low-priced tickets. Since 800 Travel is currently a broker for
tickets, it does not purchase or inventory tickets and accordingly, has no costs
and/or risks associated with such inventory.

The Company generates revenues principally from (i) commissions on air and
cruise travel reservations and other travel related services including override
commissions on reservations the Company books on certain air and cruise lines,
(ii) segment incentives under its contract with SABRE, and (iii) service fees
that it charges its customers. The Company markets its services by (i)
advertising in Yellow Page directories across the United States, (ii)
advertising on the Internet, (iii) initiating sales efforts to businesses that
desire leisure travel fulfillment services over the telephone or the Internet
with live reservation agents, and iv) enrolling independent remote travel
agents.

In January 1998, 800 Travel Systems completed its initial public offering
("IPO") in which it sold 1,350,000 shares of Common Stock and 3,105,000 warrants
(including 405,000 warrants for the underwriters over-allotment option). The
gross proceeds of the IPO were approximately $7,138,000. Simultaneously with the
IPO, 800 Travel Systems completed the acquisition of the Joseph Stevens Group,
Inc. ("Stevens"). Stevens' 50 reservation agents provided airline tickets for
domestic and international leisure travel to consumers through its call center
located in San Diego, California. In consideration for all of the outstanding
capital stock of Stevens, pursuant to the Merger Agreement among 800 Travel
Systems, Stevens and the Joseph Stevens Group, LLC ("JSG"), the sole shareholder
of Stevens, 800 Travel Systems issued to JSG 383,333 shares of Common Stock;
250,000 Warrants identical to those sold in the IPO; and a promissory note in
the amount of approximately $1.6 million, which was subsequently repaid.

In August 2000, 800 Travel Systems acquired Prestige Travel Systems, Inc.
("Prestige"). Prestige is a full service travel company, headquartered in Tampa,
Florida that operate websites specializing in discount cruise and tour vacations
at www.CruiseBrokers.com and www.TourBrokers.com. In addition, Prestige has
developed a nationwide network of approximately 1,500 independent remote travel
agents who serve to generate travel bookings through Prestige, on a
nonexclusive, pre-negotiated, revenue sharing arrangement. Consideration for
this transaction included a combination of cash and stock from 800 Travel. The
addition of cruise reservations from the Prestige merger reflects the
furtherance of the Company's strategic plan to expand its services to offer
cruise, hotels and auto rentals in addition to discount airfares.

INDUSTRY BACKGROUND

U.S. Travel Industry. The travel industry is large and growing, with travelers
in the United States expected to spend over $600 billion on travel and tourism
in 2000 according to the Travel Industry Association of America. Historically,
airlines, hotels, rental car agencies, cruise lines and vacation packagers have
relied on internal sales


                                       2
<PAGE>   3

departments and travel agencies as their primary distribution channels.
According to the American Society of Travel Agents ("ASTA"), travel agency sales
in the United States grew from $86 billion in 1991 to almost $143 billion in
1999, of which approximately 55% was spent on leisure travel. Management
believes that the growth in leisure travel has been driven by a number of
factors, including an increase in disposable income levels in the United States,
the aging of the population and the availability of affordable airfares. Airline
travel (including business and leisure travel) continues to be the largest
segment of the travel industry, with $77.2 billion, or 54%, of total travel
booked through travel agencies in 1999. The traditional travel agency channel is
highly fragmented, with few nationally recognized brands. According to Travel
Weekly's 1999 U.S. Travel Agency Survey published in August 2000, there are over
32,000 travel agencies locations in the United States, with the average travel
agency location generating $4.4 million in annual gross bookings per location.

Worldwide Travel Industry. The travel industry is very large in terms of both
dollars spent and number of participants. According to the United States
Department of Transportation, there will be over 700 million air passengers
worldwide in 1999, rising to one billion air passengers in 2010. The World
Travel and Tourism Council estimates that spending on travel and tourism
worldwide will reach $7.5 trillion in 2010. According to the World Travel and
Tourism Council, approximately 72% of the revenues in this market are
attributable to personal travel and tourism.

Online Travel Market. As a result of pressures on traditional travel
distribution channels and the emergence of new "e-commerce" opportunities, the
online travel industry has grown rapidly in recent years. The Internet provides
a convenient and efficient medium for sales of airline tickets by affording
customers direct access to up-to-the-minute travel information, including
changing fares and routes, the ability to engage in competitive shopping, and
the capability to purchase tickets. According to Forrester Research, travel has
already become the largest online retail category with users making an estimated
$7.8 billion in airline ticket purchases and hotel and car rental reservations
through travel websites in 1999, growing to an estimated $32 billion in 2004.

INTERNET INITIATIVE

800 Travel's Internet initiative commenced in January 1999 when its website was
first established. Prior to this, during 1998, the Company determined that
Internet competitors i) were spending millions of dollars on Internet
advertising in an effort to develop a brand name; ii) were better capitalized;
iii) were larger in terms of transaction volume; and iv) had similar
functionality in their websites. Recognizing these competitive pressures, the
Company began to formulate an Internet strategy that would differentiate itself
from the competition. To accomplish this differentiation, the Company's website
was designed to have human interaction capabilities through a software product
developed in conjunction with the Company by a strategic partner. The Company
realized through these early efforts that enhanced Internet capabilities would
be required to effectively service the expected increase in demand from the
growth and popularity of e-commerce. In connection with the foregoing, 800
Travel commenced the development of the capabilities of the agent interactive
component to improve efficiencies and to further integrate such capabilities
with existing operations. In November 1999 and in furtherance of its Internet
initiative, the Company entered into agreements with SABRE that, in addition to
interfacing with certain operational systems, would enable 800 Travel to provide
its customers the ability to make travel reservations through its website
without the assistance of a reservation agent (often called "stand-alone
booking"). The Company initially launched these additions and enhancements in
April 2000. In January 2001, the Company suspended the stand-alone booking
functionality in favor of focusing and concentrating its efforts on the agent
interactive website capabilities, and in connection therewith, mutually agreed
with Sabre to terminate the development agreement. The Company may choose to
provide the stand-alone booking functionality again in the future when it
appears strategically advantageous to do so. During most of 1999 the interactive
website was staffed by approximately 2% of the Company's reservation agents and
has been increased to approximately 11% in March 2001.

OUR OPERATING STRATEGY

Overview. The Company's operating strategy consists of: (i) providing its
customers with low priced travel (ii) focusing on consumer leisure air, cruise
and travel (iii) providing convenient, quick service to its customers, (iv)
minimizing call center and Internet operating costs, (v) using technology to
maximize operating efficiencies, (vi) constantly reviewing and updating its
relationships with major travel vendors and SABRE to obtain favorable commission
structures and segment incentives, and (vii) providing incentives to its sales
force through a


                                       3
<PAGE>   4

performance based compensation structure. 800 Travel Systems believes this core
strategy distinguishes it from most traditional and online travel agencies.

(i) Low Priced Fare on Major Air and Cruise Lines. The Company has agreements
with many major air and cruise lines to offer discounted fares to its customers
which often allows the Company to provide its customers with the lowest priced
fares. Utilizing the comprehensive airline ticket information available on its
customized Turbo SABRE reservation system, the reservation agent, within seconds
of a request for a particular route, can offer ticket options in ascending order
of price until the customer chooses a suitable carrier and departure time. In
contrast, airlines typically quote only their own fares and often quote highest
fares first to avoid selling the low priced tickets. The Company believes that
its ability to provide low priced air and cruise fares provides a distinct
competitive advantage in attracting and retaining customers. The Company is
authorized to sell travel on behalf of all major domestic airlines including
Continental, United, Northwest, TWA, American, Alaska, Delta, Midway, Southwest,
and U.S. Airways as well as major cruise lines including Royal Caribbean,
Carnival, and Princess. The Company constantly monitors and periodically
revisits its existing travel vendor relationships, and attempts to establish new
travel vendor relationships, as part of its general strategy of keeping abreast
of market conditions and industry trends.

(ii) Consumer Leisure Air and Cruise Travel. The Company believes that consumer
leisure air and cruise travel is the most profitable segments of the leisure
travel industry and that it can compete effectively in this segment because of
its high technology, telemarketing approach and the resulting efficiencies. The
Company believes that its airline reservation agents require substantially less
time to book reservations because (i) all the information they need is
immediately available and the necessary steps can be conducted on their computer
screens, and (ii) the Company's services are focused on air travel, which does
not require research or follow-up work and can be completed in one phone call.
In addition, each of the Company's online agents interacts with multiple
customers as such customers proceed through the online booking process.
Consequently, the Company believes that the hourly dollar value of bookings
confirmed by its reservation agents are above the industry average. The Company
strives to increase its reservation agents' booking rates by rewarding
reservation agents with commissions for weekly sales in excess of various
levels. The Company believes that the cruise line business is a profitable
segment of the leisure travel industry because (i) the revenue per sale is the
highest of all travel sectors (air, auto, hotel, tour), and (ii) the Company's
network of nationwide independent remote agents is a cost effective method to
market, advertise and distribute the cruise products.

(iii) Convenient Service. Convenience of service and low prices are significant
factors in a customer's decision to purchase air and cruise travel. The Company
offers the convenience of one source for access to the low priced air and cruise
fares from numerous carriers, thus eliminating the need for customers to contact
several carriers or travel agents. Online customers can access the Company's
easy-to-use, interactive website at their convenience, make a toll free
telephone call to the Company's reservation centers or contact one of the 1,500
independent remote agents located across the United States. The Company believes
that its service compares favorably to that of its competitors because (i) its
reservation agents provide immediate and comprehensive information, and (ii) if
purchased early enough, tickets are delivered the next day by overnight courier.
The Company's online and telemarketing service, along with its delivery of
tickets by a next day service, eliminates the need for customers to visit a
travel agency. The Company believes that its toll free telephone "vanity
numbers" 1-800-LowAirFare (1-800-569-2473), 1-800-Fly4Less (1-800-359-4537) and
1-888-999-Vuela (1-888-999-8835) promote repeat calls because they are easy to
remember and can be dialed from anywhere in the U.S. or Canada.

(iv) Low Operating Costs. The Company minimizes its call center operating costs
by processing reservations through large, high-volume, centralized call center
facilities, rather than duplicating resources at numerous, expensive retail
locations like those of traditional travel agents. In addition, the Company
utilizes independent remote agents whose compensation is based on the amount of
travel reservations produced and the level of travel services they provide. The
Company minimizes its marketing costs by placing cost effective advertising in
the Yellow Pages directories throughout the United States and on the Internet
with banners and key words. In addition, the Company employs a sales team that
pursues revenue sharing, travel service contracts with business customers. The
Company contracts for its employees through a professional employee leasing
organization even though Company management is responsible for training and
supervising the job performance of worksite employees.

(v) Technology. 800 Travel Systems utilizes customized Internet sales and
customer service software that integrates the online customer with a live
reservation agent. These Internet reservation agents are capable of servicing
multiple


                                       4
<PAGE>   5

online customers at once. In addition, each of the Company's computer terminals
is linked directly to the SABRE system which provides access to all major U.S.
and international air carriers' routes and fares. The Company has customized the
Turbo SABRE system specifically for the Company's purposes. As a result, the
Company's reservation agents have fewer procedures to master and therefore
become proficient on the Company's reservation system quickly, thus incurring
lower training expenses.

(vi) Review and Update Relationships with Travel Vendors and SABRE. The Company
reviews and updates its relationships with the major travel vendors and SABRE to
obtain favorable commission structures and segment incentives. The Company
believes that as a result of such efforts, it has been able to obtain commission
structures that are generally more favorable than those obtained by other travel
agents. Typically, the travel vendor contracts range from one to one and a half
years in length and can be cancelled on short notice. These vendors typically
have no obligation to renew their contracts with travel agents at expiration,
but the Company has consistently been successful in obtaining such contract
renewals.

(vii) Employee and Independent Agent Incentives. 800 Travel Systems' reservation
agents are organized into teams of approximately 15 reservation agents under one
supervisor. The reservation agents earn a base hourly rate and commission, each
of which is dependent upon the volume of sales generated by an agent within a
moving, historic measuring period. The team supervisors, in turn, are paid based
on the average sales of their team. The Company believes that this performance
based compensation structure enables it to generally retain and constantly
motivate the best performing reservation agents. The Company's independent
remote agents are compensated on the amount of travel reservations produced and
the level of travel services they provide.

OUR GROWTH STRATEGY

Overview. The Company's objective is to become the leading provider of discount
leisure travel products and services to consumers as well other travel service
providers. The Company's diversified growth strategy seeks to expand its
customer and product base aggressively, form additional strategic relationships
and continue investing in technology. The key elements of the growth strategy
are as follows:

Increase Online Gross Reservations. The Company's website provides the
convenience that a "stand-alone" website provides to customers with the
additional benefit of communicating, real-time with an agent if needed to help
the customer complete his or her online purchase. 800 Travel Systems'
interactive "live-agent" website has been experiencing a higher ratio of
completed online sales ("look-to-book" or "close" ratio) than is currently being
realized by Internet travel competitors.

Broaden Existing Consumer Travel Products. The Company anticipates broadening
its existing revenue from primarily airline reservations and cruise tour sales
to selling higher volumes of hotel reservations, auto rentals and tours. The
Company intends to capitalize on its market presence, existing infrastructure
and customer base to promote these additional travel products. The Company is
focusing on developing complementary products that require minimal incremental
resources to sell and distribute.

Expand Strategic B2B Relationships. 800 Travel Systems seeks to develop
strategic relationships to capitalize on its call center and travel operating
experience and the Internet's popularity by providing travel operation functions
such as, order administration, ticketing, shipping, quality control and customer
service to online travel service providers who typically outsource these
functions. These services are typically referred to as "e-fulfillment,"
"outsourcing" or "fulfillment." The Company will also determine the feasibility
of providing these services along with certain Internet travel services to
traditional travel agencies.

Brand Recognition. By focusing on compelling content as well as unique Internet
consumer and business travel solutions with quality customer service, the
Company will continue to build its brand recognition and customer loyalty. The
Company employs a variety of marketing and promotional efforts, including public
relations activities, targeted advertising across a variety of electronic and
print media and strategic distribution arrangements.

Reliable, Secure and Scalable Technology Platform. We are designing our customer
service platform to provide a high level of reliability, security and
scalability. Our multi-layered platform design allows us to deliver a high
performance website capable of managing high transaction volumes and ensuring
reliable access for our customers and suppliers. We also offer advanced security
features, maintain excess capacity to handle peak traffic loads in the


                                       5
<PAGE>   6

rapidly expanding online travel market and have built dedicated distributed
storage for critical data such as customer profile information. Our selection of
technology and the scalability of our platform will enable us to generate future
revenue by offering core parts of our customer service platform to strategic
partners. In addition, our existing infrastructure is able to support certain
broadband technologies that may be utilized in the future to provide new
consumer services such as video and wireless.

Continue Investment in Technology. The Company uses scaleable, industry standard
hardware and software that enable rapid deployment of additional capacity. In
addition, the Company intends to continue to invest substantial resources in
developing, acquiring and implementing technology driven enhancements to its
online, call center and remote agent services.

Strategic Acquisitions, Joint Ventures, Alliances, Relationships. 800 Travel
Systems continually evaluates potential strategic relationships with companies
that may add to its customer base, product lines or distribution. 800 Travel
Systems currently has no agreements or understandings with respect to any such
transactions that is material or whose outcome can be reasonably assured.

International Expansion. Where appropriate 800 Travel Systems will seek to grow
internationally through acquisitions, joint ventures or internal expansion. 800
Travel Systems may seek to acquire, partner with or invest in, travel service
companies in foreign countries where there is the potential to apply the
Company's business model.

OUR OPERATIONS

Call Center Operations. Depending on the volume of incoming calls being received
during 2000, 800 Travel Systems has employed approximately 200 to 335
reservation agents and other call center employees at its two call centers.
Facilities are located in Tampa, Florida and San Diego, California and operate
16 hours a day, seven days a week, 363 days a year. Reservation agents at these
call centers receive all inbound calls to the Company's toll free numbers. In
2000, the call centers received on average, approximately 20,000 calls per day.
Reservation agents currently conduct fare searches for requested itineraries,
sell airline tickets, explain rules and restrictions applicable to fares and
ticket delivery details and provide other assistance. The call centers also
provide quality control, ticketing, shipping and customer service for both call
center customers and Internet users. 800 Travel Systems' reservation centers are
currently operating at less than the maximum capacity of 1,800 reservation
agents working in staggered shifts of 600.

Interactive Online Operations. 800 Travel Systems' website at www.LowAirfare.com
was initially launched in January 1999. This website currently enables 800
Travel Systems' customers to reserve airline tickets online with the real time
interactive assistance of 800 Travel Systems' trained travel agents in its call
centers. Since December 1999, the new enhanced technology allows each of the
Company's online agents to interact with multiple customers as such customers
proceed through the online booking process. 800 Travel Systems has experienced a
higher ratio of completed online sales ("look-to-book" or "close" ratio) than is
currently being realized by Internet travel competitors and that certain
operational efficiencies may be realized since multiple online customers are
capable of being serviced by a single agent. The Company considers a "look" to
be a unique online shopper who requests an airfare. 800 Travel Systems seeks to
capitalize on various technologies to provide a unique and easy means for the
customers to find low airfares on the Internet and to interface the website with
the SABRE electronic booking system and database. Once online customers purchase
tickets, the tickets are printed at 800 Travel Systems' Tampa reservation center
and delivered by overnight courier to customers or an "electronic ticket" is
made available at the airline's ticket counter. In addition to accessing the
Company's traditional reservation services, customers will use online travel
related services to make better informed travel purchase decisions such as
destination guides, mapping and weather services, vacation and cruise packages

Stand-Alone Online Operations. In April 2000, 800 Travel Systems launched a
joint venture with SABRE whereby the Company's existing human interactive
website was integrated with a "stand-alone" website. In January 2001, the
Company determined to concentrate its efforts and resources on the interactive
website, and accordingly, the stand-alone booking functionality was suspended.
The Company may choose to offer the stand-alone booking functionality again in
the future when strategically advantageous.

Independent Remote Agent Operations. In August 2000, 800 Travel Systems
announced the merger of a newly formed, wholly owned subsidiary of the Company
with Prestige Travel Systems, Inc., a full service travel company


                                       6
<PAGE>   7

with a nationwide network of approximately 1,500 independent remote travel
agents and the websites www.CruiseBrokers.com and www.TourBrokers.com, that
specialize in discount cruise and tour vacations.

OUR MARKETING AND SALES

Overview. The Company's marketing strategy is to build its brand name to improve
customer awareness; to communicate its B2B initiative; to develop loyalty
programs to better serve the Company's customers; to add new customers to the
Company's database; and to pursue complementary revenue opportunities by
leveraging the Company's distribution capabilities, travel expertise, compelling
content and customer database.

Consumer Marketing. 800 Travel Systems believes the important drivers of its
business are the ability to attract visitors to its websites, call centers and
independent remote agents, the ability to convert those visitors into purchasing
customers and the ability to convert first time purchasers into repeat
customers. The Company evaluates alternatives to attract new visitors to its
websites and call centers by increasing its brand enhancement efforts and
promotional advertising, both online and where appropriate in traditional
television, radio and print media, and by continuing to work with influential
press and industry analysts. 800 Travel Systems' strategy to convert visitors
into purchasers includes its online interactive customer service, offering a
combination of broad purchase related promotions, increased emphasis on
merchandising of available offers and increased efforts to work with travel
suppliers to offer greater selection and quality of travel inventory. 800 Travel
Systems converts first time purchasers to repeat customers by focusing on
enhanced customer satisfaction and offering unique online travel services. The
Company has the ability to maintain a proprietary customer database comprised of
demographic profiles, customer preferences, shopping and buying patterns and
other key customer attributes. This data will enable the Company to create and
quickly implement marketing programs targeted to specific customer segments. In
addition, the Company plans to regularly communicate with its customers through
targeted, relevant e-mail.

Online Co-Branded Business Sales. 800 Travel Systems is developing relationships
with strategic business partners who seek a cost effective way to add travel
products to their online content without compromising their own brand awareness.

Travel Service Providers. 800 Travel Systems is formulating a strategy and
evaluating alternatives to target online and traditional travel service
providers who desire to outsource any part or all of their travel operations.

TECHNOLOGY

During 2000, 800 Travel Systems began hiring internal information technology
(IT) employees. The Company believes this was necessary to support its
anticipated growth strategy. The Company's IT staff is working with strategic
technology partners to ensure that technological enhancements will continue to
differentiate our website and call centers from those of our competitors. Our
goal is to maintain a cost-effective, reliable, scalable and secure environment
for consumers to plan and purchase travel and for businesses to receive travel
services. Specifically, the new IT staff's immediate priority is to enhance
corporate infrastructure and secondarily, to pursue software development
initiatives using modern program languages such as Java and eXtensible Mark-up
Language (XML).

In January 2001, utilizing its new internal IT staff, 800 Travel Systems
announced the launch of its new corporate website www.800TravelSystems.com. The
Company has contracted with Aperian to host its new corporate website as well as
host future in-house development initiatives. Aperian operates several data
centers across the United States, including one based in Tampa, Florida that
services the Company. Aperian's servers are connected with the high capacity
Internet backbones of Genuity (GNI) and WorldCom (UUnet) which allows them to
bypass the bottlenecks and slowdowns of the local loop infrastructure, and
enable increased efficiencies and cost reductions. In addition, 800 Travel
Systems' IT staff maintains relational databases containing information compiled
from customer profiles, shopping patterns and sales data. The Company has
developed, and continues to develop, techniques for analyzing the information in
this database to develop targeted marketing programs, to provide personalized
and enhanced customer service and to take advantage of short-term opportunities
in the travel marketplace. The Company's complex databases were designed to be
scaleable to permit large transaction volumes with no significant software
changes. In most circumstances, capacity is increased through the addition of
new servers or the addition of processing boards to existing servers. In further
utilization of its new IT staff, the Company continues to expand its data
communications capacities and anticipates continuing to do so in the future to
support anticipated increased growth. The Company currently maintains a
dedicated Internet connection at its


                                       7
<PAGE>   8

Tampa and San Diego locations with Cisco Internet firewalls to protect its
internal systems. In addition, corporate file and email servers have been
installed to enhance interoffice communications, utilizing a secure virtual
private network (VPN) between the Tampa and San Diego locations. All credit card
transactions are processed using encryption and authentication technology,
including public key cryptography technology and secure socket layer technology.

e-Business Interactive Solutions, Inc. ("EIS") on behalf of 800 Travel Systems,
has contracted with Exodus to provide substantially all of our Internet systems,
software and hardware for the current interactive website. The Exodus Network is
today one of the largest internet protocol ("IP") networks in the world. The
Exodus Network achieves its greatest strength with one of the industry's most
comprehensive sets of public and private network interconnects. With a high
concentration in private connections with major internet service providers
("ISPs") and telecommunication providers, Exodus provides superior speed and
dependability by way of these greatly preferred private routes.

An Application Service Provider ("ASP") model supports 800 Travel Systems'
Internet initiative and allows the Company to leverage the Internet as a quick,
efficient and relatively inexpensive product and services distribution model for
both our B2C and B2B initiatives. Our booking engines' three-tier architecture
allows us to connect to each of the four major computer reservations systems:
Worldspan, Sabre, Apollo and Amadeus, giving our website the ability to choose
which computerized reservation system to support. The ASP applications are
highly scalable and built on industry standard architectures such as IBM's
X-architecture and Sun's Java 2 Enterprise Edition (J2EE) as well as industry
recognized best practices for software design. X-architecture is a design
blueprint which leverages existing, innovative IBM technologies to build the
most powerful, scalable and reliable Intel processor based servers. J2EE is an
open-architecture supported by multiple vendors and deployable on multiple
platforms. The three-tier hardware/software designs allows for one of the
highest levels of scalability, performance and reliability available for
distributed client server solutions. It also allows to seamlessly integrate
heterogeneous environments, such as Sun and Microsoft application servers with
Oracle and IBM databases on various hardware platforms and operating
environments.

The Company has chosen the SABRE system as its reservation system. SABRE is a
world leader in the electronic distribution of travel related products and
services and is a leading provider of information technology solutions for the
travel and transportation industry. SABRE's electronic booking system and
database contains flight schedules, availability, and published fare information
for more than 700 airlines, 50 auto rental companies, 45,000 hotel properties,
and dozens of railways, tour companies, passenger ferries, and cruise lines
located throughout the world. Through the SABRE reservations system, 800 Travel
Systems is able to offer approximately 65 million published airfares, including
those of all major domestic and international commercial airlines. In May 1999,
800 Travel Systems entered into a five-year agreement pursuant to which it
subscribes to the SABRE system at its call center facilities. Under this
agreement, SABRE provides 800 Travel Systems with segment incentives, the
software, technical support and other services the Company needs to access SABRE
in return for a minimum commitment of sales volume. This agreement was amended
in November 1999, whereby SABRE made its reservation system available to the
Company's customers via inclusion on the Company's website. In addition, the
Company entered into a development agreement with SABRE to enable the
reservation system to interface with 800 Travel's other operational systems
(collectively referred to as "stand-alone" booking) which was subsequently
terminated when the Company suspended its use of the stand-alone booking
functionality in January 2001. In December 2000, 800 Travel Systems entered into
a new five-year subscriber agreement with SABRE containing terms and conditions
substantially similar to the May 1999 agreement as amended and accordingly, the
May 1999 agreement is of no further force or effect.

In July 1998, 800 Travel Systems entered into an agreement with ZA, Inc., a
predecessor business of EIS, to develop its interactive, integrated website. The
online interactive agent component of 800 Travel's website was the result of
this initial agreement, which the Company believes was a cost effective way of
initiating its Internet business. In 1999, the Company furthered its development
relationship with EIS, as the successor in interest to ZA, Inc., to
significantly enhance the capabilities of the online agent interactive component
which included the ability to ultimately interface such functionality with the
online reservation system provided by SABRE and integrated with 800 Travel's
other operational systems.

While the Company has attempted to negotiate development, maintenance and
licensing agreements with EIS in conjunction with the joint development of the
agent interactive software as well as website maintenance and hosting,


                                       8
<PAGE>   9

the Company has been unable to enter into definitive written agreements to date.
The Company continues to work with EIS and make monthly payments to EIS for
maintenance and other services provided by EIS. The Company is simultaneously
attempting to perform certain website maintenance and modifications in-house in
order to minimize its payments to EIS and enhance its ability to improve its web
site operation. With this ability, the Company will be able to quickly and
efficiently modify the appearance and content of its web site as well establish
links to other sites pursuant to marketing agreements and alliances. Since it is
unclear whether the Company will ultimately be able to successfully and
satisfactorily conclude its negotiations with EIS with respect to any definitive
written development, maintenance or licensing agreements for the jointly
developed agent interactive software and related technological support, the
Company has begun to expend additional capital resources to ensure its ability
to provide the agent interactive services on a cost effective and beneficial
basis, which may include incurring the added expenses associated with operating
redundant interactive websites.

COMPETITION

The travel services market is rapidly evolving and intensely competitive and we
expect such competition to continue to intensify in the future. We compete on
the basis of operations, service, merchandising, reliability, amount and
accessibility of information and breadth of products and services offered. We
make available to our customers a wide range of products and prices offered by
our travel suppliers. The Company competes primarily with traditional travel
agency reservation methods, online travel reservation services and specialized
high volume call center travel agencies. The traditional travel agencies are
highly fragmented, with few nationally recognized brands. In the online travel
services market, several competitors maintain similar commercial websites, such
as Expedia (operated by Microsoft Corporation), Travelocity (majority owned by
SABRE Inc., a majority owned subsidiary of American Airlines), CheapTickets.com,
Cendant Corporation, TravelWeb (operated by Pegasus), Internet Travel Network,
and Biztravel.com (operated by Rosenbluth Travel) among others. Several
traditional travel agencies, including larger travel agencies such as American
Express Travel Related Services Co. Inc., Uniglobe Travel and Carlson Wagonlit
Travel, have established, or may establish in the future, commercial websites
offering online travel services. CheapTickets and Travel Services International
operate high volume call center based operations. Additionally, Priceline.com
operates a website that allows users to bid on airline tickets and hotel rooms.

In addition to the traditional travel agency channel, most travel suppliers also
sell their services directly to customers, predominantly by telephone. As the
market for online travel services grows, the Company believes that the range of
companies involved in the online travel services industry, including travel
suppliers, traditional travel agencies and travel industry information
providers, will increase their efforts to develop services that compete with the
Company's services. Most major airlines, car rental companies and hotel chains
offer travel services directly through their own websites, including travel
services from other travel suppliers, eliminating the need to pay commissions to
third parties such as the Company. These travel suppliers include many suppliers
with which we do business. In particular, five airline suppliers, American
Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United
Air Lines, have launched a direct-distribution website named "Orbitz. Moreover,
Northwest Airlines has recently announced that it will not pay commissions for
air travel booked on the Internet through stand-alone booking.

PROPRIETARY RIGHTS

The Company regards its name, logos, phone numbers, copyrights, service marks,
trademarks, domain names, trade dress, trade secrets and similar intellectual
property as critical to its success, and relies on trademark and copyright law,
trade secret protection and confidentiality and/or license agreements with the
Company's employees, customers, partners and others to protect its proprietary
rights. The Company pursues the registration of certain of its key trademarks
and service marks in the United States and internationally. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which the Company's products and services are made available
online. The Company has licensed in the past, and expects that it may license in
the future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties.

On January 12, 1998, 800 Travel Systems received a letter from Travel 800, LLC,
a wholly-owned subsidiary of Travel Services International, Inc. ("Travel"),
stating that 800 Travel Systems' use and advertisement of its "1-800-LowAirFare"
mark and corresponding number infringes upon certain proprietary rights of
Travel and requested that 800 Travel Systems cease and desist from continued use
and advertisement of such mark and number. On or about April 27, 1998, Travel
filed with the Trademark Trial and Appeal Board of the United States Patent and
Trademark


                                       9
<PAGE>   10

Office (the "Board") a Notice of Opposition (the "Opposition") opposing 800
Travel Systems' application for registration of the "1-800-LowAirFare" mark. The
parties have reached a settlement in principal that is currently being
documented. Pursuant to the settlement agreement, Travel will permit 800 Travel
Systems, Inc. to continue to utilize the trademark and telephone number 1-800
LOW-AIRFARE in the operation of its business in return for the Company's payment
of $20,000 in monetary consideration.

GOVERNMENT REGULATION

The laws and regulations applicable to the travel industry affect us and our
travel suppliers. We must comply with laws and regulations relating to the sale
of travel services, including those prohibiting unfair and deceptive practices
and requiring us to register as a seller of travel, to comply with disclosure
requirements and to participate in state restitution funds. In addition, many of
our travel suppliers and computer reservation systems providers are heavily
regulated by the United States and other governments. Our services are
indirectly affected by regulatory and legal uncertainties affecting the
businesses of our travel suppliers and computer reservation systems providers.

We must also comply with laws and regulations applicable to businesses generally
and online commerce specifically. Currently, few laws and regulations apply
directly to the Internet and commercial online services. Moreover, there is
currently great uncertainty whether or how existing laws governing issues such
as property ownership, sales and other taxes, libel and personal privacy apply
to the Internet and commercial online services. It is possible that laws and
regulations may be adopted to address these and other issues. Further, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws. New laws or different applications of
existing laws would likely impose additional burdens on companies conducting
business online and may decrease the growth of the Internet or commercial online
services. In turn, this could decrease the demand for our products and services
or increase our cost of doing business.

Federal legislation imposing limitations on the ability of states to impose
taxes on Internet based sales was enacted in 1998. The Internet Tax Freedom Act,
as this legislation is known, exempts certain types of sales transactions
conducted over the Internet from multiple or discriminatory state and local
taxation through October 21, 2001. It is possible this legislation will not be
renewed when it terminates in October 2001. Failure to renew this legislation
could allow state and local governments to impose taxes on Internet based sales,
and these taxes could decrease the demand for our products and services or
increase our cost of operations.

EMPLOYEES

In March 2001, the Company had 432 employees including 359 reservation agents
and other call center employees, 36 operations support employees and 37
corporate and administrative employees. The Company's ability to attract and
retain highly qualified employees will be the principal determinant of its
success. 800 Travel has a policy of using performance based and equity based
compensation programs to reward and motivate significant contributors among its
employees. Competition for qualified personnel in the industry is intense. Given
the nature of the Company's industry, a relatively constant amount of attrition
is considered normal. The Company has not experienced any work stoppages and
considers its relations with its employees to be good.

All of the Company's employees are provided through professional employee
leasing organizations. The leasing organizations are responsible for its
employees' benefits and payroll reporting and processing. 800 Travel provides
all necessary training. The services agreement between the Company and the
leasing organizations may be terminated on 30 days' prior written notice in
which case the Company believes a new professional employee leasing arrangement
could be entered.

ITEM 2.  DESCRIPTION OF PROPERTY

The Company's corporate headquarters are located at its 33,000 square foot
reservation center in Tampa, Florida. Our lease for this space expires in June
2008 with an option to renew for an additional five-year term. 800 Travel
Systems operates a second 9,200 square foot reservation center in San Diego,
California. Our lease for this space expires in December 2007 with an option to
renew for an additional five-year term. Prestige occupies 3,300 square feet in a
facility in Tampa, Florida. Our lease for this space expires in May 2001. 800
Travel Systems and Prestige lease these properties from unaffiliated third
parties and believe that its existing facilities are adequate for its current


                                       10
<PAGE>   11

needs and are sufficiently covered by insurance. The Company continually
evaluates from time to time the possibility of expansion to other areas when
strategically advantageous circumstances may exist to do so.

ITEM 3.  LEGAL PROCEEDINGS

From time to time the Company is involved in claims arising out of the ordinary
cause of business, including but not limited to the following:

An action is pending in the King County Superior Court for the State of
Washington entitled Trans West Communications, Inc. v. The Joseph Stevens Group,
Inc., ("JSG"), Case Number 98-2-04446-2 SEA. The action was started against JSG
after it had ceased to exist, having been previously merged into the Company.
The action arose out of a dispute regarding JSG's alleged non-payment for
certain telephone switching equipment it had purchased. A default judgment for
approximately $386,000 was entered against JSG in May, 1999. The Company is
seeking to have the default vacated and also believes it has substantial
defenses to the underlying claim. The action is currently on appeal as to
whether the Company has standing to participate therein to assert defenses as to
the merits of the underlying breach of contract claim and as to certain
procedural issues. If standing is found, the Court will then decide whether to
vacate the default judgment which was entered against JSG. If that default
judgment is vacated, the plaintiff could reinitiate the action against the
Company, which would then assert its substantial defenses on the merits. If the
Company is found to lack standing to participate by the appeals court, it
believes that it will, as a result, have substantial defenses to any attempt by
the plaintiff to enforce against the Company the default judgment previously
taken against JSG.

On March 24, 2000, the Company was sued in the 134th District Court of Dallas
County, Texas in a matter styled First London Securities Corporation v. 800
Travel Systems, Inc. a/k/a I Fly (Case No. 00-02222), in which the Plaintiff,
who was the Company's managing underwriter for the Company's initial public
offering in January 1998, maintains that it was unable to exercise its rights
under a particular Underwriting Agreement and a particular Representative's
Warrant Agreement. Plaintiff's petition seeks to recover allegedly unrealized
profits of no less than $377,343.75 and as much as $1,716.085.90, plus interest,
attorney's fees and court costs. On March 14, 2001, the Plaintiff and the
Company entered into an Initial Settlement Agreement under which the Plaintiff
and the Company also executed a new Warrant Agreement. These two documents
provided for the Company's payment of $60,000 in monetary consideration and the
Company's issuance of new warrant certificates exercisable for shares of the
Company's common stock at $1.5626 per share, as well as the cancellation of the
warrant certificates previously issued under the Underwriting Agreement and the
Representative's Warrant Agreement referenced above. In the event that the
registration statement related to the shares underlying the new warrants is not
declared effective by the SEC by a certain date, which is subject to adjustment,
the Company will then be obligated under the Initial Settlement Agreement to
issue additional new warrant certificates. In the event that a registration
statement related to the shares underlying the new warrants is still not filed
and subsequently declared effective by the SEC by a later certain date, the
Plaintiff may elect to retain the new warrant certificates and additional new
warrant certificates, or to surrender all of those new certificates back to the
Company and to proceed to trial on the underlying claims asserted in the pending
litigation. In that event, management of the Company intends a vigorous defense
of these claims. If the registration is completed by that later date, or if the
Plaintiff nonetheless elects to retain the new warrant certificates and
additional new warrant certificates, the litigation will be dismissed with
prejudice.

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

None during the fourth quarter of the fiscal year covered by this report.

                                    PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

800 Travel Systems' Common Stock and Warrants are traded in the NASDAQ SmallCap
Market under the symbols IFLY and IFLYW, respectively and on the Boston Stock
Exchange under the symbols IFL and IFLW, respectively. The following sets forth
the high and low closing bid prices for the Common Stock and Warrants on the
NASDAQ SmallCap Market for the periods indicated from January 1, 1999 to
December 31, 2000 as reported by the National Association of Securities Dealers
Automated Quotation System. Such prices represent prices between dealers without
adjustment for retail mark ups, mark downs, or commissions and may not
necessarily represent actual transactions.


                                       11
<PAGE>   12

<TABLE>
<CAPTION>
                                                              1999                               2000
                                                  High               Low                 High              Low
                                                 ------             -----               -----             -----
<S>                                              <C>                <C>                 <C>               <C>
COMMON STOCK
First quarter                                    14.500             4.875               4.000             2.188
Second quarter                                    8.313             3.969               2.625             1.313
Third quarter                                     4.719             2.688               2.250             1.531
Fourth quarter                                    6.000             1.625               1.625             0.563

<CAPTION>
                                                              1999                               2000
                                                  High               Low                 High              Low
                                                 ------             -----               -----             -----
<S>                                              <C>                <C>                 <C>               <C>
WARRANTS
First quarter                                     8.313             2.125               1.531             0.781
Second quarter                                    3.563             1.000               1.000             0.500
Third quarter                                     1.750             0.875               0.750             0.438
Fourth quarter                                    2.375             0.625               0.500             0.125
</TABLE>

On March 20, 2001, the closing bid prices of the Common Stock and the Warrants,
as reported by NASDAQ, were $0.813 and $0.188, respectively. As of March 20,
2001 there were approximately 70 record owners of the Common Stock. The number
of record holders does not reflect the number of beneficial owners of the Common
Stock for whom shares are held by banks, brokerage firms and others. Based on
information requests received from representatives of such beneficial owners,
management believes that as of March 20, 2001 there were approximately 3,700
beneficial holders of the Common Stock.

DIVIDENDS

To date, 800 Travel Systems has neither declared nor paid any dividends on its
Common Stock nor does 800 Travel Systems anticipate that such dividends will be
paid in the foreseeable future. Rather, 800 Travel Systems intends to retain any
earnings to finance the growth and development of its business. Any payment of
cash dividends on its Common Stock in the future will be dependent, among other
things, upon 800 Travel Systems' earnings, financial condition, capital
requirements and other factors which the Board of Directors deems relevant. In
addition, restrictive covenants contained in a recent financing agreement
preclude payment of dividends.

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

The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Form 10-KSB. This discussion contains certain forward-looking statements that
involve risks and uncertainties. The Company's actual results and the timing of
certain events could differ materially from those discussed in these
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth herein and elsewhere in this Form 10-KSB.

OVERVIEW

800 Travel Systems, Inc. and its wholly-owned subsidiary Prestige Travel
Systems, Inc. referred to herein as "the Company", "we", "our", "us", "800
Travel Systems", "800 Travel" is a leading direct marketer of travel related
services, focused primarily on providing leisure air and cruise reservation
services. The Company provides low-priced air and cruise line tickets for
domestic and international leisure travel to its customers through its
easy-to-remember, toll-free numbers, through its websites on the World Wide Web
(at www.LowAirfare.com, www.CruiseBrokers.com and www.TourBrokers.com) and
through its nationwide network of approximately 1,500 independent remote travel
agents. A distinguishing feature of the www..LowAirfare.com website is its
ability to connect live reservation agents directly with on-line travel
consumers in an instant messaging format that allows consumers to book air
travel, on-line, in real time. The Company operates two reservation centers, one
in Tampa, Florida and the other in San Diego, California 7 days a week
throughout the year. Also in Tampa, Florida, the Company operates its cruise and
remote agent fulfillment center. As a result of its agreements to sell
discounted tickets with air and cruise lines directly, as well as other ticket
suppliers, the Company is able to charge its customers a service charge, while
still offering low-priced tickets. Since 800 Travel is currently a broker for
tickets, it does not purchase or inventory tickets and accordingly, has no costs
and/or risks associated with such inventory.


                                       12
<PAGE>   13

The Company generates revenues principally from (i) commissions on air and
cruise travel reservations and other travel related services including override
commissions on reservations the Company books on certain air and cruise lines,
(ii) segment incentives under its contract with SABRE, and (iii) service fees
that it charges its customers. The Company markets its services by (i)
advertising in Yellow Pages directories across the United States, (ii)
advertising on the Internet with banner ads and keywords, (iii) initiating sales
efforts to businesses that desire travel fulfillment services, and (iv)
enrolling independent remote travel agents.

In January 1999, 800 Travel Systems began to broaden its ticket distribution by
offering online booking at "www.LowAirfare.com." Internet bookings as a
percentage of total gross reservations for year ended December 31, 2000 and 1999
were approximately 13.0%, and 3.2%, respectively. 800 Travel Systems expects
online gross reservations and online revenues to represent an increasing
percentage of gross reservations and revenues in future periods. To
differentiate itself from the competition, the Company's website was designed to
have online human interaction capabilities. The desired result from the
Company's Internet initiative is to increase completed Internet sales in a cost
effective manner by providing travel reservations through human interaction over
the Internet to business to business (B2B) and business to consumer (B2C)
customers. In April 2000, the Company announced the completion of certain
enhancements to its website whereby the Company's existing human interactive
website was integrated with a "stand-alone" website. As a result of the
Company's evaluation of the productivity of the stand-alone booking
functionality when compared to the Company's agent interactive website, the
stand-alone booking functionality was suspended in January 2001 so the Company
could concentrate and focus its efforts and resources on the agent interaction
capabilities. The Company may choose to offer the stand-alone booking
functionality in the future when it is strategically advantageous to do so. The
Company's interactive website is experiencing an approximate 16% completed sales
ratio (look-to-book ratio) which compares favorably to the e-commerce industry
average of approximately 5%. The Company considers a "look" to be a unique
online shopper who requests an airfare. In addition, this technology enables the
Company's experienced reservation agents to handle up to eight online customers
at once as each online customer progresses through the online booking process.

In August 2000, 800 Travel Systems acquired Prestige Travel Systems, Inc.
("Prestige"). Prestige is a full service travel company, headquartered in Tampa,
Florida that operate websites specializing in discount cruise and tour vacations
at www.CruiseBrokers.com and www.TourBrokers.com. In addition, Prestige has
developed a nationwide network of approximately 1,500 independent remote travel
agents who serve to generate travel bookings through Prestige, on a
nonexclusive, pre-negotiated, revenue sharing arrangement. Consideration for
this transaction included a combination of cash and stock from 800 Travel. The
addition of cruise reservations from the Prestige merger reflects the
furtherance of the Company's strategic plan to expand its services to offer
cruise, hotels and auto rentals in addition to discount airfares.

Net earnings for the year ended December 31, 2000 were negatively impacted from
the Internet initiative by approximately $275,000. While the online operation
had no material adverse affect on net earnings for the year ended December 31,
1999, the Company expects online revenues and expenses to increase in the
future. Net earnings for the year ended December 31, 2000 were negatively
impacted from the additional costs and compensation for new executives and
consultants associated with the continued implementation of the Company's growth
strategy by approximately $908,000. In addition, net earnings for the year ended
December 31, 2000 were negatively impacted by $214,000, excluding attorney fees,
resulting from a one-time charge taken with respect to the First London lawsuit.

Gross reservations represent the aggregate retail value of the tickets sold to
consumers, including delivery and service fees charged by the Company and taxes
and impact fees levied on the behalf of various authorities. For comparative
purposes, it is important to recognize that certain other travel companies
report their gross reservations as revenues. Gross reservations are not required
by generally accepted accounting principles (GAAP) and should not be considered
in isolation or as a substitute for other information prepared in accordance
with GAAP. Gross reservations for the year ended December 31, 2000 and 1999 were
$88,311,292 and $77,436,614 respectively. Substantially all of the gross
reservations are generated from air and cruise line ticket sales. As previously
disclosed, airline commissions were reduced in October 1999 and continue to
negatively impact revenues to the extent that such reduced commissions are not
able to be offset by increases in service fees charged to customers. The Company
anticipates being able to offset future commission reductions by negotiating
non-published fares directly with the airline carriers to which a mark up paid
by the consumer could be earned by the Company. Moreover, Northwest Airlines has
recently announced that it will no longer pay commissions for air travel booked
on the Internet through stand-alone booking.


                                       13
<PAGE>   14

The Company's operating expenses include primarily those items necessary to
advertise its services, maintain and staff its travel reservation and
fulfillment centers including technological enhancements, payroll, commissions
and benefits, telephone, ticket delivery, general and administrative expenses
including rent and computer maintenance fees; and interest, fees and expenses
associated with 800 Travel's financing activities. The Company expects to
continue to incur additional operating and selling expenses relating to its
Internet and technological initiatives.

Set forth below for the periods indicated are the revenues as a percentage of
gross reservations and operating expenses, other income and net earnings as a
percentage of revenues for year ended December 31, 2000 and 1999, respectively.

<TABLE>
<CAPTION>
                                                                                Year Ended
                                                                               December 31,
                                                                         ---------------------------
                                                                          2000                  1999
                                                                         ------                -----
              <S>                                                        <C>                   <C>
              Revenues
                   Commissions                                              8.2%*                9.9%*
                   Ticket delivery and service fees                         6.7                  5.9
                                                                         ------                -----
                   Total Revenue                                           14.9%                15.8%
                                                                         ======                =====
              Operating Expenses
                  Employee costs                                           57.1%**              49.6%**
                  SG & A, Other                                            57.9                 50.8
                                                                         ------                -----
                   Total Operating Expenses                               115.0%               100.4%
                                                                         ------                -----
              Loss from Operations                                        (15.0)%               (0.4)%
              Other Income                                                  0.5 %                0.9%
                                                                         ------                -----
              Net Earnings                                                (14.5)%                0.5%
                                                                         ======                =====

              * Revenues as a percentage of gross reservations.
              ** Expenses as a percentage of revenues.
</TABLE>

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Revenues. Revenues increased $.9 million, or 7.8%, to $13.1 million for the year
ended December 31, 2000. This increase was due to approximately $.5 million
resulting from the Prestige merger and the remainder from increases in the
average revenue per air ticket sold and the volume of air tickets sold. The
average revenue per ticket increased as increased service fees charged to
customers and commissions related to the new contract with 800 Travel Systems'
reservation system provider were partially offset by a reduction in commissions
paid by airlines. Revenues as a percentage of gross reservations decreased to
14.9% for the year ended December 31, 2000 from 15.8% for the year ended
December 31, 1999. This decrease was primarily due to the increased percentage
of Internet bookings, since the Company recorded lower service fees on such
bookings when compared to its call center bookings. The Company currently earns
the same amount of commissions and segment incentives on Internet and call
center bookings. Gross reservations booked for the year ended December 31, 2000
increased $10.9 million or 14.0% to $88.3 million. This increase was due to
approximately $4.1 million resulting from the Prestige merger and the remainder
from increases in the price and volume of tickets sold.

Revenues through call centers decreased $.7 million or 5.4% to $11.3 million for
the year ended December 31, 2000. This decrease primarily resulted from a
decreased volume of tickets sold and was partially offset by increases in the
average revenue per air ticket sold. The volume of tickets sold through the call
centers decreased primarily from a reduction in telephone calls received from
Yellow Page advertising and was partially offset by an increase in telephone
calls received from fulfillment sales efforts. The reduction in telephone calls
received was primarily due to increased competitive pressures from
Internet-based, on-line travel agencies and airlines selling directly to
customers on-line. When compared to prior year, 800 Travel anticipates the
volume of telephone calls from Yellow Page advertising to continue to decline,
however the Company believes this decline is slowing and may level off in


                                       14
<PAGE>   15

the near future. To improve the volume of telephone calls 800 Travel intends to
increase and/or reallocate advertising dollars to new marketing programs and
initiatives. Gross reservations booked through call centers for the year ended
December 31, 2000 decreased $2.2 million or 3.0% to $72.7 million. This decrease
primarily resulted from a decreased volume of tickets sold and was partially
offset by increases in the price of tickets sold.

Revenues from Internet bookings (which consist of bookings made online with the
assistance of an agent and stand-alone bookings) increased $1.1 million or
552.4% to $1.3 million (or 9.9% of total revenues) for the year ended December
31, 2000. Gross reservations from Internet bookings for the year ended December
31, 2000 increased $9.0 million or 363% to $11.5 million. This increase resulted
primarily from increases in the volume of and average revenue per tickets sold.
800 Travel Systems expects Internet gross reservations and revenues to represent
an increasing portion of gross reservations and revenues in future periods.
Stand-alone bookings represented an immaterial part of the revenues earned from
Internet bookings.

Operating expenses. Operating expenses, which include $.5 million and $.2
million resulting from the Prestige merger and the 1st London lawsuit,
respectively, increased $2.9 million, or 23.5%, to $15.1 million for the year
ended December 31, 2000. Operating expenses as a percentage of revenues
increased 14.6% to 115.0%. Employee costs increased $1.5 million to $7.5 million
(or 57.1% of revenues) for the year ended December 31, 2000 from $6.0 million
(or 49.6% of revenues) for the year ended December 31, 1999. This increase
resulted primarily from the Prestige merger, new corporate personnel hired to
implement the Company's growth strategy and the addition of reservation agents.
Other selling, general and administrative ("SG&A") expenses increased $1.4
million to $7.6 million (or 57.9% of revenues) for the year ended December 31,
2000 from $6.2 million (or 50.8% of revenues) for the year ended December 31,
1999. This increase resulted primarily from the First London lawsuit, increases
in advertising, depreciation, technology and software maintenance, legal and
consulting expenses and were partially offset by decreases in telephone
expenses. This decrease resulted primarily from a new telecommunications
contract that became effective in October 2000. In addition, the Company expects
to reduce certain professional fees by having its existing employees perform
these services in the future.

Income taxes. No provision for income taxes has been recorded since 800 Travel
Systems currently does not record a benefit for losses.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $.3 million for the year ended
December 31, 2000 primarily as a result of a net loss that was offset by
depreciation and amortization expenses, decreases in commissions receivable and
increases in accounts payable and accrued liabilities. For the year ended
December 31, 1999 net cash provided by operating activities was $.6 million
primarily as a result of net earnings, depreciation and amortization expenses
and increases in accounts payable and unearned revenues and offset by an
increase in commissions receivables.

Net cash used in investing activities was $1.0 million for the year ended
December 31, 2000 primarily as a result of the purchase of computer hardware and
software, software development costs incurred in connection with the Company's
Internet and technological initiatives and the merger with Prestige Travel. For
the year ended December 31, 1999, net cash used in investing activities was $.8
million primarily as a result of software development costs incurred in
connection with the Company's Internet and technological initiatives.

Net cash used by financing activities was $147,394 for the year ended December
31, 2000 primarily as a result of principal payments on debt. For the year ended
December 31, 1999 net cash used by financing activities was $8,522 primarily as
a result of principal payments on debt.

While the Company has attempted to negotiate development, maintenance and
licensing agreements with EIS in conjunction with the joint development of the
agent interactive software as well as website maintenance and hosting, the
Company has been unable to enter into definitive written agreements to date. The
Company continues to work with EIS and make monthly payments to EIS for
maintenance and other services provided by EIS. The Company is simultaneously
attempting to perform certain website maintenance and modifications in-house in
order to minimize its payments to EIS and enhance its ability to improve its web
site operation. With this ability, the Company will be able to quickly and
efficiently modify the appearance and content of its web site as well establish
links to other sites pursuant to marketing agreements and alliances. Since it is
unclear whether the Company will ultimately be able to successfully and
satisfactorily conclude its negotiations with EIS with respect to any definitive


                                       15
<PAGE>   16

written development, maintenance or licensing agreements for the jointly
developed agent interactive software and related technological support, the
Company has begun to expend additional capital resources to ensure its ability
to provide the agent interactive services on a cost effective and beneficial
basis, which may include incurring the added expenses associated with operating
redundant interactive websites.

In January 2001, the Company entered into a $1.8 million term note agreement
("Term Note Agreement"), with a strategic vendor. In February 2001 the Company
borrowed $1.8 million under the Term Note Agreement. The Term Note Agreement
matures in January 2006 and is payable in sixty equal consecutive monthly
installments beginning one month from funding the advance and such payments will
be offset by certain amounts due the Company from the strategic vendor. This
agreement pays interest at the Prime Rate plus 2.5% and requires that we
maintain certain financial ratios and contains limitations on, among other
things, our ability to incur additional indebtedness, pay dividends and make
acquisitions without the vendor's permission. The Term Note Agreement is secured
by substantially all of the assets of the Company.

Management believes that the existing cash and cash expected to be provided by
operating activities will be sufficient to fund the short term capital and
liquidity needs of 800 Travel Systems' operations. In anticipation of the
Company's longer-term capital requirements, the Company currently has made plans
to seek to raise between $1 million and $2 million of additional private equity
capital. 800 Travel Systems has budgeted approximately $2 million for capital
expenditures for computer hardware and software purchases and upgrade and
telecommunication equipment which it expects to make over the next 12 months,
provided the Company is able to raise additional capital or obtain, to the
extent available, acceptable vendor financing. 800 Travel Systems will need to
seek to sell additional equity or debt securities or obtain credit lines from
financial institutions to meet its longer-term liquidity and capital
requirements. There is no assurance that 800 Travel Systems will be able to
obtain additional capital or financing in amounts or on terms acceptable to 800
Travel Systems, if at all or on a timely basis. The sale of equity securities or
convertible debt securities would result in additional dilution to 800 Travel
Systems' shareholders.

NEW ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission issued Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides
guidance on applying accounting principles generally accepted in the United
States of America to revenue recognition in financial statements and is
effective in the fourth quarter of all fiscal years beginning after December 15,
1999. Annually, the effect of SAB 101 is not significant to the Company's
financial statements. However, due to the nature of the agreement with the
reservation system provider (see Note 8), the Company will not record revenue
until a minimum booking threshold is obtained which the Company believes will
occur in the fourth quarter of each year. The Company is currently negotiating
with its reservation system provider to set quarterly booking thresholds which
will allow the Company to record the revenues from the bookings each quarter.
Prior to SAB 101, the Company accrued revenue as bookings were made.

In April 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of APB Opinion No. 25. FIN 44 is effective for
transactions occurring after July 1, 2000. The application of FIN 44 did not
have a material impact on the Company's financial statements.

SEASONALITY

Based upon the results of its operations during 1999 and 2000 to date and its
knowledge of the travel industry, 800 Travel Systems anticipates its business
may be affected by seasonality. Travel bookings typically are lower in the
months November through March and higher in April through October as consumers
plan their vacations. In response, 800 Travel Systems will vary the number of
agents on staff at any time. There can be no assurance that 800 Travel Systems
may not have to take proactive steps to reduce its work force in response to
seasonal fluctuations in the future. Notwithstanding 800 Travel Systems'
efforts, the seasonality of the travel industry is likely to adversely impact
800 Travel Systems' business. Moreover, as a consequence of such seasonality and
other factors, 800 Travel Systems' quarterly revenue and operating results will
be difficult to forecast and period to period comparisons of results may not be
relevant or informative.


                                       16
<PAGE>   17

FORWARD LOOKING STATEMENTS -- RISK FACTORS

         Investors should carefully consider the following risk factors, in
addition to the other information concerning the factors affecting
forward-looking statements. Each of these risk factors could adversely affect
our business, operating results and financial condition as well as adversely
affect the value of an investment in 800 Travel Systems. You should be able to
bear a complete loss of your investment.

Certain oral statements made by management from time to time and certain
statements contained herein and in documents incorporated herein by reference
that are not historical facts are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 and, because such statements involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. The terms "800 Travel Systems,"
"company," "we," "our," and "us" refer to 800 Travel Systems, Inc. The words
"expect", "believe", "goal", "plan", "intend", "anticipate", "estimate", "will"
and similar expressions and variations thereof if used, are intended to
specifically identify forward-looking statements. Forward-looking statements are
statements regarding the intent, belief or current expectations, estimates or
projections of 800 Travel Systems, our Directors or our Officers about 800
Travel Systems and the industry in which we operate, and assumptions made by
management, and include among other items, (i) our strategies regarding growth,
including our intention to further develop and improve our Internet capabilities
and diversify revenues utilizing our call center operation and travel industry
expertise; (ii) our financing plans; (iii) trends affecting our financial
condition or results of operations; (iv) our ability to continue to control
costs and to meet our liquidity and other financing needs; (v) our ability to
respond to changes in customer demand, including as a result of increased
competition and the increase of Internet activity. Although we believe our
expectations are based on reasonable assumptions, we can give no assurance that
the anticipated results will occur. We disclaim any intention or obligation to
update or revise forward-looking statements, whether as a result of new
information, future events or otherwise.

         Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those in the forward-looking statements as a result of various factors which
include, among others, (i) general economic conditions, particularly those
affecting fuel and other travel costs and their effect on the volume of consumer
air travel; (ii) conditions in the capital markets, including the interest rate
environment and the availability of capital, which could affect our internal
growth and possibilities for strategic alliances in the travel and telemarketing
areas; (iii) changes in the competitive marketplace that could affect our
revenue and/or cost bases, such as increased competition from traditional and
Internet based travel agencies, consolidators and the airlines themselves,
changes in the commissions paid by airlines, and increased labor, marketing,
computer software/hardware and telecommunications costs; (iv) the availability
and capabilities of the SABRE electronic travel reservation system and ancillary
software; (v) the success of our Internet initiatives; (vi) changes in
commission rates; (vii) the retention of our reservation agents and improved
productivity of our reservation agents as they gain experience and utilize
technological improvements; (viii) our rights to the use of software and other
intellectual property and the potential for others to challenge and otherwise
adversely affect or impair such rights; and (ix) other factors including those
identified in our filings with the SEC including but not limited to information
under the heading "Risk Factors" in the Form SB-2 Registration Statement and
Prospectus for our initial public offering as amended from time to time, and the
following risk factors:

WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES. OUR FUTURE
OPERATING RESULTS MAY NOT BE PROFITABLE.

         We have been operating for less than four years and during that time we
have generated a significant accumulated operating loss. There can be no
assurance that we will be able to operate profitably, particularly if we seek to
expand through acquisitions or the addition of new Internet services. We only
recently initiated our online operations and, accordingly, our prospects in this
field must be considered in light of the difficulties encountered in any new
business. These risks include our failure to:

         -        attract additional travel suppliers and consumers to our
                  service

         -        maintain and enhance our brand

         -        expand our service offerings


                                       17
<PAGE>   18

         -        operate, expand and develop our operations and systems
                  efficiently

         -        maintain adequate control of our expenses

         -        raise additional capital

         -        attract and retain qualified personnel

         -        respond to technological changes

         -        respond to competitive market conditions

         -        operate at a profit

OUR LOSSES AND NEGATIVE CASH FLOWS MAY CONTINUE.

         We have incurred net losses and negative cash flows on both an annual
and interim basis. For the year ended December 31, 2000, we had a net loss of
$1,916,197 and we had a net decrease in cash of $911,894. We may continue to
incur net losses for the foreseeable future and we cannot assure you that we
will ever achieve, or if achieved, sustain profitability or generate positive
cash flow. We expect our operating expenses to grow. These increased expenses
will result primarily from our Internet initiatives, advertising and expansion
of our operations. As a result, we will need to increase our revenues to become
profitable. If our revenues do not grow as expected, or if increases in our
expenses are not in line with our plans, there could be a material adverse
effect on our business, operating results and financial condition.

WE WILL NEED FUTURE CAPITAL.

         We expect to increase sales volumes by expanding our business with both
our Internet initiatives as well as our traditional "bricks and mortar" call
center operations. There can be no assurance that our revenues will increase as
a result of our expansion efforts or even continue at their current levels. As
we expend significant resources to expand our operations, it is possible that we
would continue to incur losses and negative cash flow. It is likely that we will
require additional capital to meet our capital requirements. There is no
assurance that such capital will be available to us or, if available, be on
terms acceptable to us. An increase in capital resulting from a capital raising
transaction could result in dilution to existing holders of our common stock and
adversely impact our stock price.

WE ARE DEPENDENT ON THE SABRE SYSTEM.

         Our ability to quote air travel ticket prices, make reservations and
sell tickets is dependent upon our contractual right to use, and the performance
of, the SABRE electronic travel reservation system. In May 1999, we entered into
a five-year agreement with SABRE, Inc. to lease the SABRE system in our Tampa
and San Diego reservation centers. If the SABRE system were to cease
functioning, or if we were to lose our contractual right to use the SABRE system
through our inability to renew the agreement, upon expiration thereof or through
a default by us or other termination event under the agreement during the term
thereof, we would not be able to conduct operations until a replacement system
was installed and became operational. Only a very limited number of companies
provide reservation systems to the travel agency industry. There can be no
assurance that a replacement system could be obtained on comparable terms or if
obtained, installed in time to successfully continue operations.

         During any interruption in the operation of SABRE, we would lose
revenues. Other travel agencies using other travel reservation systems would not
be subject to such interruption of their operations, and we may lose market
share to such competitors. Upon the interruption of the operation of the SABRE
system, we could decide to commence operations with another travel reservation
system. Substantial expenses could be required for acquiring the right to use a
new system and retraining reservation agents. In addition, any impairment of the
SABRE system which does not cause us to cease operations could, nevertheless,
adversely affect the quality of our services, resulting in lost revenues or
market share and could require us to subscribe to a different travel reservation
system.

WE ARE SUBJECT TO ADJUSTMENTS IN AIRLINE COMMISSIONS WHICH COULD REDUCE OUR
REVENUES.

         In October 1999, the major airlines announced reductions in the
commissions they will pay traditional travel agents from approximately 8% to 5%
and subject to a cap of $50.00 for domestic round trip ticket sales. In
addition, many airlines have implemented a fixed-rate commission of $10.00 for
domestic online round trip ticket sales. We anticipate continued downward
pressure on airline commission rates. Such reductions and future reductions, if
any, could have a material adverse effect on our operations. We may not be paid
commissions by


                                       18
<PAGE>   19

airlines for online agent assisted bookings on our web site. We also may not be
able to impose service charges for our Internet services, which could adversely
affect our future online revenues and earnings.

A DECLINE IN COMMISSION RATES OR THE ELIMINATION OF COMMISSIONS COULD REDUCE OUR
REVENUES AND MARGINS.

         A substantial majority of our online revenues depends on the
commissions paid by travel suppliers for bookings made through our call centers
and through our online travel service. Generally, we do not have written
commission agreements with most of our suppliers. As is standard practice in the
travel industry, we rely on informal arrangements for the payment of commissions
which applies to all travel agencies. Travel suppliers are not obligated to pay
any specified commission rate for customer bookings made online through our
websites. We cannot assure you that airlines, hotel chains or other travel
suppliers will not reduce current industry commission rates or eliminate
commissions entirely, either of which could reduce our revenues and margins. For
example, in 1995, most of the major airlines placed a cap on per-ticket
commissions payable to all travel agencies for domestic airline travel. In
September 1997, the major United States airlines reduced the commission rate
payable to traditional travel agencies from 10% to 5%. In 1997, the major United
States airlines reduced the commission rate payable for online reservations from
8% to 5%. In addition, since 1998, many airlines have implemented a commission
cap of $10.00 for domestic online round-trip ticket sales. Because a high
percentage of our business relates to airline ticket sales, a further reduction
in airline ticket commissions could reduce our revenues. In February 2001,
Northwest Airline and its alliance partner KLM Royal Dutch Airline announced
that effective March 1, 2001 they would eliminate its 5% commissions on
US/Canada point of sale travel booked through the Internet.

WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE AND OPERATE OUR NEW CRUISE BUSINESS.

         We recently acquired Prestige in order to add cruise services to our
service mix. We may not be able to successfully operate or integrate the cruise
operation into our existing business. Integration of the cruise business may
take longer and cost more than we anticipated.

RISKS RELATING TO THE AIRLINE INDUSTRY

         Developments in the airline industry may result in a decrease in the
price of tickets or number of tickets we sell. Consolidation of airline carriers
could adversely impact ticket prices, the available discounts on same as well as
commission rates. Concerns about passenger safety or strikes may result in a
decrease in passenger air travel and a consequent decrease in the number of
tickets we sell. Airlines could offer similar online booking service that would
compete with our agent assisted booking system. There can be no assurance that
any such developments will not occur or that we will not be adversely affected
by any such decrease in the level of passenger air travel.

IF TRAVEL RELATED INTERNET SERVICES OR THE DIVERSIFIED USE OF OUR CALL CENTER
OPERATIONS DO NOT ACHIEVE WIDESPREAD MARKET ACCEPTANCE, OUR BUSINESS MAY NOT
GROW.

         Our success will depend in large part on widespread market acceptance
of the Internet as a vehicle for the buying of airline tickets and other travel
related products and services as well as the diversified use of our call center
operations. Consumers who have historically purchased airline tickets and other
travel related products and services using traditional commercial channels, such
as local travel agents and calling airlines directly, must instead purchase
these products through our website or through call center operations. Consumers
frequently use our website or call centers for route pricing and other travel
information and then choose to purchase airline tickets or make other
reservations directly from travel suppliers or other travel agencies. If the
online market develops more slowly than expected, or if our services do not
achieve widespread market acceptance, our business may decline, may not grow or
may grow more slowly than expected. Our future growth, if any, will depend on
critical factors including but not limited to: (i) the growth of the Internet as
a tool used in the process of buying airline tickets and other travel related
products and services; (ii) our ability to successfully and cost effectively
market our services to a sufficiently large number of people and thereby attract
new and repeat customers; and (iii) our ability to consistently deliver high
quality and fast and convenient service at competitive prices.

         Our revenues will not grow as much as we anticipate if the market for
our services does not continue to develop, our services do not continue to be
adopted or consumers fail to significantly increase their use of the Internet as
a tool in the process of buying airline tickets and other travel related
products and services or opt to use competitors services or airline carriers
Internet services directly. In order to achieve the acceptance of consumers,


                                       19
<PAGE>   20

travel suppliers and advertisers, we will need to continue to make substantial
investments in our technology. However, we cannot assure you that these
investments will be successful. Our failure to make progress in these areas will
harm the growth of our business.

WE MAY BE UNABLE TO DEVELOP NEW RELATIONSHIPS WITH STRATEGIC PARTNERS AND
MAINTAIN OUR EXISTING RELATIONSHIPS.

         Our business depends on establishing and maintaining relationships with
airlines, SABRE and others. As a result of our agreements to sell discounted
tickets with airlines directly, as well as other ticket suppliers, we are able
to charge our customers a service charge, while still offering low priced
tickets. We cannot assure you that we will be able to establish new
relationships, maintain existing relationships, charge service charges or offer
low priced tickets. If we fail to establish or maintain these relationships, it
could adversely affect our business.

         Our business model relies on relationships with travel suppliers, and
it would be negatively affected by adverse changes in these relationships. We
depend on travel suppliers to enable us to offer our customers comprehensive
access to travel services and products. It is possible that travel suppliers may
choose not to make their inventory of services, discounts and products available
to us or through our online distribution. Travel suppliers could elect to sell
exclusively through other sales and distribution channels or to restrict our
access to their inventory, either of which could significantly decrease the
amount or breadth of our inventory of available travel offerings. Of particular
note is the airline direct-distribution website, which is currently named
"Orbitz." Orbitz was launched in 2001 and is reportedly owned by American
Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines and United
Air Lines. Forester Research reports that Orbitz is the only website for
consumers to find unpublished special fares on these and at least 23 other
airlines. If a substantial number of our airline suppliers collectively agree or
choose to restrict their special fares solely to Orbitz, such action may have a
material adverse affect on our business. Adverse changes in any of these
relationships, whether due to Orbitz or otherwise, could reduce the amount of
travel services which we are able to offer through our websites.

WE OPERATE IN A HIGHLY COMPETITIVE MARKET WITH LOW BARRIERS TO ENTRY WHICH COULD
HARM OUR BUSINESS.

         While the market for buying airline tickets and other travel related
products and services on the Internet is relatively new and rapidly evolving, it
is already competitive and characterized by entrants that may develop services
similar to ours. Many of our existing online competitors, as well as our
potential competitors, have longer operating histories on the Web, greater name
recognition, higher amounts of user traffic and significantly greater financial,
technical and marketing resources than we do. In addition, there are relatively
low barriers to entry to our business. We do not have patents or other
intellectual property that would preclude or inhibit competitors from entering
the market. Moreover, due to the low cost of entering the market, competition
may intensify and increase in the future. We compete against other online travel
web sites, including those of airline carriers. We also compete with traditional
methods used by travel agents to market airline tickets, including yellow pages,
classified ads, travel brochures and other media advertising. This competition
may limit our ability to become profitable or result in the loss of market
share.

WE COMPETE WITH A VARIETY OF COMPANIES WITH RESPECT TO EACH PRODUCT OR SERVICE
WE OFFER. THESE COMPETITORS INCLUDE:

         -        Internet travel agents such as Travelocity.com, Expedia and
                  American Express Interactive, Inc.;
         -        local, regional, national and international traditional travel
                  agencies;
         -        consolidators and wholesalers of airline tickets, hotels and
                  other travel products, including online consolidators such as
                  Cheaptickets.com and Priceline.com and online wholesalers such
                  as Hotel Reservations Network, Inc.;
         -        airlines, hotels, rental car companies, cruise operators and
                  other travel service providers, whether working individually
                  or collectively, some of which are suppliers to our websites;
                  and
         -        operators of travel industry reservation databases.

         In addition to the traditional travel agency channel, many travel
suppliers also offer their travel services as well as third-party travel
services directly through their own websites. These travel suppliers include
many suppliers with which we do business. In particular, five airline suppliers,
American Airlines, Continental Airlines, Delta Air Lines,


                                       20
<PAGE>   21

Northwest Airlines and United Air Lines, have launched a direct- distribution
website, currently named "Orbitz," in 2001. Forester Research reports that
Orbitz is the only website for consumers to find unpublished weekly special
fares on at least 23 other airlines. Suppliers also sell their own services
directly to consumers, predominantly by telephone. As the market for online
travel services grows, we believe that travel suppliers, traditional travel
agencies, travel industry information providers and other companies will
increase their efforts to develop services that compete with our services by
selling inventory from a wide variety of suppliers. We cannot assure you that
our online operations will compete successfully with any current or future
competitors.

         Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than us and may enter into
strategic or commercial relationships with larger, more established and well
financed companies. Certain of our competitors may be able to secure services
and products from travel suppliers on more favorable terms, devote greater
resources to marketing and promotional campaigns and devote substantially more
resources to website and systems development than us. In addition, new
technologies and the expansion of existing technologies may increase competitive
pressures on us. In particular, Microsoft Corporation has publicly announced its
intent to continue to invest heavily in the area of travel technology and
services. Increased competition may result in reduced operating margins, loss of
market share and brand recognition. There can be no assurance that we will be
able to compete successfully against current and future competitors, and
competitive pressures faced by us may have a material adverse effect on our
business, operating results and financial condition.

         Our sales affiliates and employees are generally not subject to
non-competition agreements. In addition, our business model does not involve the
use of a large amount of proprietary information. As a result, we are subject to
the risk that our sales affiliates or employees may leave us and may work for
competitors or may start competing businesses. The emergence of these
enterprises would further increase the level of competition in our market and
could harm our growth and financial performance.

WE MAY NOT BE ABLE TO MAINTAIN OUR WEB DOMAIN NAME, WHICH MAY CAUSE CONFUSION
AMONG WEB USERS AND DECREASE THE VALUE OF OUR BRAND NAME.

         We currently hold a Web domain name relating to our brand. Currently,
the acquisition and maintenance of domain names is regulated by governmental
agencies and their designees. The regulation of domain names in the U.S. and in
foreign countries is expected to change in the near future. As a result, we may
not be able to maintain our domain name. These changes could include the
introduction of additional top level domains, which could cause confusion among
Web users trying to locate our sites. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. We may be unable to prevent third parties from
acquiring domain names that are similar to ours. The acquisition of similar
domain names by third parties could cause confusion among Web users attempting
to locate our site and could decrease the value of our brand name and the use of
our site.

WE MAY NOT BE ABLE TO ATTRACT AND EXPAND OUR ONLINE TRAFFIC.

         We believe that establishing, maintaining and enhancing our websites is
a critical aspect of our efforts to attract and expand our online traffic. The
number of Internet sites that offer competing services increases the importance
of establishing and maintaining brand recognition. Many of these Internet sites
already have well-established brands in online services or the travel industry
generally. Promotion of our websites will depend largely on our success in
providing a high-quality online experience supported by a high level of customer
service. In addition, to the extent capital resources are available, we intend
to increase our spending on marketing and advertising with the intention of
expanding the recognition of our websites to attract and retain online users and
to respond to competitive pressures. However, we cannot assure you that these
expenditures will be effective to promote our brands or that our marketing
efforts generally will achieve our goals.

IF WE ARE UNABLE TO INTRODUCE AND SELL NEW PRODUCTS AND SERVICES, OUR BUSINESS
COULD BE ADVERSELY EFFECTED.

         We need to broaden the range of travel products and services and
increase the availability of products and services that we offer in order to
enhance our service. We will incur substantial expenses and use significant
resources trying to expand the range of products and services that we offer.
However, we may not be able to attract sufficient travel suppliers and other
participants to provide desired products and services to our consumers. In


                                       21
<PAGE>   22

addition, consumers may find that delivery through our service is less
attractive than other alternatives. If we launch new products and services and
they are not favorably received by consumers, our reputation, business and the
value of our brands could be adversely effected.

         Our relationships with consumers and travel suppliers are mutually
dependent since consumers will not use a service that does not offer a broad
range of travel services. Similarly, travel suppliers will not use a service
unless consumers actively make travel purchases through it. We cannot predict
whether we will be successful in expanding the range of products and services
that we offer. If we are unable to expand successfully, this could also
adversely effect our business.

WE MAY NOT BE ABLE TO RECRUIT AND RETAIN THE PERSONNEL WE NEED TO SUCCEED.

         We may be unable to retain our key employees and consultants and key
sales agents or attract, assimilate or retain other highly qualified employees
and sales agents in the future. Our future success depends on our ability to
attract, retain and motivate highly skilled employees and sales agents. If we do
not succeed in attracting new personnel or retaining and motivating our current
personnel, it may be difficult for us to manage our business and meet our
objectives. The labor market is currently very tight and it is difficult to find
qualified and capable individuals willing to work as selling agents. We may be
unable to attract and retain selling agents to handle the volume of business we
generate. We may experience significant turnover and incur higher training and
recruitment costs. If we are unable to hire and retain selling agents our
business may be adversely affected.

A FAILURE IN THE PERFORMANCE OF OUR WEB HOSTING FACILITY SYSTEMS COULD HARM OUR
BUSINESS AND REPUTATION.

         We depend upon a third party Internet service provider to host and
maintain our websites. Any system failure, including network, software or
hardware failure, that causes an interruption in the delivery of our websites or
a decrease in responsiveness of our websites' service could result in reduced
revenue, and could be harmful to our reputation and brands. Our Internet service
provider does not guarantee that our Internet access will be uninterrupted,
error free or secure. Any disruption in the Internet service provided by such
provider could significantly harm our business. In the future, we may experience
interruptions from time to time. Our insurance may not adequately compensate us
for any losses that may occur due to any failures in our system or interruptions
in our service. Our Web servers must be able to accommodate a high volume of
traffic and we may in the future experience slower response times for a variety
of reasons. If we are unable to add additional software and hardware to
accommodate increased demand, this could cause unanticipated system disruptions
and result in slower response times. The costs associated with accommodating
such increased demand may exceed the revenues the increased demand may generate.
Ticket buyers may become dissatisfied by any system failure that interrupts our
ability to provide access or results in slower response time and thereby not
return to our sites.

         Any reduction in performance, disruption in the Internet access or
discontinuation of services provided by our Internet service provider, EIS,
Sabre, Verizon and AT&T, or other telecommunications provider, or any disruption
in our ability to access the SABRE systems or systems and software provided by
EIS, could have a material adverse effect on our business, operating results and
financial condition. There can be no assurance that our transaction processing
systems and network infrastructure will be able to accommodate increases in
traffic in the future, or that we will, in general, be able to accurately
project the rate or timing of such increases or upgrade our systems and
infrastructure to accommodate future traffic levels on our online sites. In
addition, there can be no assurance that we will be able in a timely manner to
effectively upgrade and expand our transaction processing systems or to
successfully integrate any newly developed or purchased modules with our
existing systems. There can be no assurance that we will successfully utilize
new technologies or adapt our online sites, proprietary technology and
transaction processing systems to customer requirements or emerging industry
standards.

         Our call center computer and communications hardware is provided under
a leasing arrangement and is located at the respective centers in Tampa, Florida
and San Diego, California. If either call center experiences a disaster that
interrupts service, inbound telephone calls can be re-routed to the other
center. Substantially all of our current Internet computer and communications
hardware is provided by Exodus and is located at Exodus' New York Internet data
center. Our systems and operations are vulnerable to damage or interruption from
fire, flood, power loss, telecommunications failure, break-ins, earthquakes and
similar events. We currently do not have redundant systems or a formal disaster
recovery plan and may not carry sufficient business interruption insurance to
compensate us for losses that may occur. Despite the implementation of network
security measures by us, our


                                       22
<PAGE>   23

servers are vulnerable to computer viruses, physical or electronic break-ins and
similar disruptions, which could lead to interruptions, delays, loss of data or
the inability to accept and confirm customer reservations. Recently, California
electrical power services providers have experienced difficulties in meeting the
electricity demands of the citizens and accordingly, announced that rolling
blackouts may occur during the summer as electricity needs peak. There can be no
assurance that our California call center will not be adversely affected by such
blackouts should they occur.

OUR INTERNET SOFTWARE DEVELOPMENT EFFORTS MAY NOT SUCCEED.

         We are in the process of working to enhance and expand our business and
opportunities through the use of the Internet and we are exposed to various
risks and uncertainties related to our arrangements or agreements with third
parties for the co-development or development of software systems for use in
conjunction with our Internet initiatives. Such risks and uncertainties include
but are not limited to the following: (i) we may expend significant funds for
co-development or development of software that exceed the benefits, if any,
ultimately derived from such software or the benefits that could be derived from
less expensive software available from other sources; (ii) any software
co-developed by us or developed for us may be functionally or technologically
obsolete by the time co-development or development is completed; (iii) the
timetables necessary to attain the advantages anticipated from such
co-development or development may not be achieved; (iv) others may develop
similar software and make such software available to our competitors or our
competitors may develop similar software or the software developed by others may
have features and benefits beyond the capabilities of the software co-developed,
licensed or otherwise utilized by us; (v) our rights with respect to any
co-development or development arrangement may become the subject of disputes and
may result in our not having any rights in or to such software and result in
claims of violations of intellectual property rights which could result in
significant prosecution or defense cost and the possibility of damages being
assessed against us; and (vi) key individuals involved in connection with any
software co-development arrangement with us could become unable to complete or
continue the co-development, which could cause the co-development to end, or
result in significant delays and increases in costs to continue or replace such
co-development efforts or in maintaining or conducting fundamental daily
modifications to our website and existing co-developed software.

WE MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

         We may receive in the future, notice of claims of infringement of other
parties' proprietary rights. Infringement or other claims could be asserted or
prosecuted against us in the future and it is possible that past or future
assertions or prosecutions could harm our business. Any such claims, with or
without merit, could be time consuming, resulting in costly litigation and
diversion of technical and management personnel, cause delays in the development
and release of new products or services, or require us to develop non-infringing
technology or enter into royalty or licensing arrangements. Such royalty or
licensing arrangements, if required, may not be available on terms acceptable to
us, or at all. For these reasons, infringement claims could harm our business.

OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR
BRANDS AND OUR BUSINESS.

         We rely on a combination of trademark and copyright law and trademark
protection. Despite our efforts, we cannot be sure that we will be able to
prevent misappropriation of our intellectual property. It is possible that
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Litigation could result in substantial costs
and diversion of our resources away from the operation of our business and the
loss of our ability to use certain intellectual property.

DECLINES OR DISRUPTIONS IN THE TRAVEL INDUSTRY GENERALLY COULD REDUCE OUR
REVENUES.

         We rely on the health and growth of the travel industry. Travel is
highly sensitive to business and personal discretionary spending levels, and
thus tends to decline during general economic downturns. In addition, other
adverse trends or events that tend to reduce travel are likely to reduce our
revenues. These may include:

         -        price escalation in the airline industry or other
                  travel-related industries
         -        increased occurrence of travel-related accidents


                                       23
<PAGE>   24

         -        airline or other travel-related strikes
         -        political instability
         -        regional hostilities and terrorism
         -        bad weather

REGULATORY AND LEGAL CHANGES MAY IMPOSE TAXES OR OTHER BURDENS ON OUR BUSINESS.

         The laws and regulations applicable to the travel industry affect us
and our travel suppliers. We must comply with laws and regulations relating to
the sale of travel services, including those prohibiting unfair and deceptive
practices and those requiring us to register as a seller of travel, comply with
disclosure requirements and participate in state restitution funds. In addition,
many of our travel suppliers and computer reservation systems providers are
heavily regulated by the United States and other governments. Our services are
indirectly affected by regulatory and legal uncertainties affecting the
businesses of our travel suppliers and computer reservation systems providers.

         We must also comply with laws and regulations applicable to businesses
generally and online commerce. Currently, few laws and regulations directly
apply to the Internet and commercial online services. Moreover, there is
currently great uncertainty about whether or how existing laws governing issues
such as property ownership, sales and other taxes, libel and personal privacy
apply to the Internet and commercial online services. It is possible that laws
and regulations may be adopted to address these and other issues. Further, the
growth and development of the market for online commerce may prompt calls for
more stringent consumer protection laws. New laws or different applications of
existing laws would likely impose additional burdens on companies conducting
business online and may decrease the growth of the Internet or commercial online
services. In turn, this could decrease the demand for our products and services
or increase our cost of operations.

         Federal legislation imposing limitations on the ability of states to
tax Internet-based sales was enacted in 1998. The Internet Tax Freedom Act, as
this legislation is known, exempts specific types of sales transactions
conducted over the Internet from multiple or discriminatory state and local
taxation through October 21, 2001. It is possible that this legislation will not
be renewed when it terminates in October 2001. Failure to renew this legislation
could allow state and local governments to impose taxes on Internet-based sales,
and these taxes could decrease the demand for our products and services or
increase our costs of operations.

RISKS RELATED TO THE INTERNET INDUSTRY

RAPID TECHNOLOGICAL CHANGES MAY RENDER OUR TECHNOLOGY OBSOLETE OR DECREASE THE
COMPETITIVENESS OF OUR SERVICES.

         To remain competitive in the online travel industry, we must continue
to enhance and improve the functionality and features of our websites. The
Internet and the online commerce industry are rapidly changing. In particular,
the online travel industry is characterized by increasingly complex systems and
infrastructures. If competitors introduce new services embodying new
technologies, or if new industry standards and practices emerge, our existing
websites and proprietary technology and systems may become obsolete. Our future
success will depend on our ability to do the following:

         -        enhance our existing services;
         -        develop and license new services and technologies that address
                  the increasingly sophisticated and varied needs of our
                  prospective customers and suppliers;
         -        respond to technological advances and emerging industry
                  standards and practices on a cost-effective and timely basis.

         Developing our websites and other proprietary technology entails
significant technical and business risks. We may use new technologies
ineffectively or we may fail to adapt our websites, transaction-processing
systems and network infrastructure to customer requirements or emerging industry
standards. If we face material delays in introducing new services, products and
enhancements, our customers and suppliers may forego the use of our services and
use those of our competitors.


                                       24
<PAGE>   25
INTERNET RELATED REGULATORY AND LEGAL UNCERTAINTIES COULD HARM OUR BUSINESS.

         There are an increasing number of laws and regulations pertaining to
the Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, domain name registration, online content regulation, user privacy,
taxation and quality of products and services. Moreover, the applicability to
the Internet of existing laws governing issues including intellectual property
ownership and infringement, copyright, patent, trademark, trade secret,
obscenity, libel, employment and personal privacy is uncertain and developing.
Further, the growth and development of the market for online commerce may prompt
calls for more stringent consumer protection laws. New laws or different
applications of existing laws would likely impose additional burdens on
companies conducting business online and may decrease the growth of the Internet
or commercial online services. In turn, this could decrease the demand for our
products and services or increase our cost of operations.

         Federal legislation imposing limitations on the ability of states to
impose new state taxes on e-commerce was enacted in 1998. The Internet Tax
Freedom Act, as this legislation is known, exempts specific types of sales
transactions conducted over the Internet from multiple or discriminatory state
and local taxation through October 21, 2001. It is possible that this
legislation will not be renewed when it terminates in October 2001. Failure to
renew this legislation or the enactment of new legislation could allow state and
local governments to impose taxes on Internet-based sales and use. Such taxes
could decrease the demand for our products and services or increase our costs of
operations.

OUR ABILITY TO GENERATE BUSINESS DEPENDS ON CONTINUED GROWTH OF ONLINE COMMERCE.

         Our ability to generate business through our websites depends on
continued growth in the use of the Internet and in the acceptance and volume of
commerce transactions on the Internet. Rapid growth in the use of the Internet
and online services is a recent phenomenon. This growth may not continue. A
sufficiently broad base of consumers may not accept, or continue to use, the
Internet as a medium of commerce. We cannot assure you that the number of
Internet users will continue to grow in general or with respect to our sites or
that commerce over the Internet will become more widespread or that our sales
will grow at a comparable rate. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced services
are subject to a high level of uncertainty. The Internet may not prove to be a
viable commercial marketplace for a number of reasons including but not limited
to: (i) the lack of acceptable security technologies; (ii) the lack of access
and ease of use; (iii) congestion of traffic; inconsistent quality of service
and the lack of availability of cost effective, high speed service; (iv)
potentially inadequate development of the necessary infrastructure; (v)
governmental regulation and/or taxation; and (vi) uncertainty regarding
intellectual property ownership or the enforcement of intellectual property
rights.

DUE TO OUR ANTICIPATED GROWTH, WE MAY BE UNABLE TO PLAN OR MANAGE OUR OPERATIONS
AND GROWTH EFFECTIVELY.

         Our growth to date has placed, and our anticipated future operations
will continue to place, a significant strain on our management, systems and
resources. We continue to increase the scope of our operations and the size of
our workforce. In addition to needing to train and manage our workforce, we will
need to continue to improve and develop our financial and managerial controls
and our reporting systems and procedures. A failure to plan, implement and
integrate these systems successfully could adversely affect our business.

         We cannot assure you that the Internet will support increasing use or
will prove to be a viable commercial marketplace. The Internet has experienced,
and is expected to continue to experience, significant growth in the number of
users and amount of traffic. Our success will depend upon the development and
maintenance of the Internet's infrastructure to cope with this increased
traffic. This will require a reliable network backbone with the necessary speed,
data capacity and security and the timely development of complementary products
for providing reliable Internet access and services. Major online service
providers and the Internet itself have experienced outages and other delays as a
result of software and hardware failures and could face such outages and delays
in the future. Outages and delays are likely to affect the level of Internet
usage and the processing of transactions on our websites. In addition, the
Internet could lose its viability because of delays in the development or
adoption of new standards to handle increased levels of activity or of increased
government regulation. The adoption of new standards or government regulation
may require us to incur substantial compliance costs.


                                       25
<PAGE>   26


INFORMATION DISPLAYED ON OUR WEB SITE MAY SUBJECT US TO LITIGATION AND THE
RELATED COSTS.

         We may be subject to claims for defamation, libel, copyright or
trademark infringement or based on other theories relating to information
published or contained on our web site. We could also be subject to claims based
upon the content that is accessible from our web site through links to or from
other web sites. Defending against any such claims could be costly and divert
resources and the attention of management from the operation of our business.

ADDITIONAL RISKS

OUR REVENUES ARE UNPREDICTABLE AND ARE SUBJECT TO FLUCTUATION.

         As a result of our limited operating history and the recent addition of
our online operations, we are unable to accurately forecast our revenues. Our
current and future expense levels are based on our operating plans and estimates
of future revenues and are subject to increase as we implement our strategy. We
may be unable to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall in revenues
would likely have an immediate material adverse effect on our business,
operating results and financial condition. Further, if we should substantially
increase our operating expenses to offer expanded services, to increase sales
and marketing or to develop our technology and transaction processing systems,
and such expenses are not subsequently followed by increased revenues, our
operating performance and results would be adversely effected and if sustained
could have a material adverse effect on our business.

         We will experience seasonality in our business, reflecting seasonal
fluctuations in the travel industry. Seasonality in the travel industry is
likely to cause quarterly fluctuations in our operating results and could have a
material adverse effect on our business, operating results and financial
condition.

OUR BUSINESS IS EXPOSED TO RISKS ASSOCIATED WITH ONLINE COMMERCE SECURITY AND
CREDIT CARD FRAUD.

         Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To transmit confidential information such as customer credit
card numbers securely, we rely on encryption and authentication technology.
Unanticipated events or developments could result in a compromise or breach of
the systems we use to protect customer transaction data. Furthermore, our
servers may also be vulnerable to viruses transmitted via the Internet. While we
proactively check for intrusions into our infrastructure, a new and undetected
virus could cause a service disruption.

OUR SUCCESS IS SUBSTANTIALLY DEPENDENT UPON CERTAIN KEY PERSONNEL.

         Our success is substantially dependent upon the continuing services of
certain key personnel. While we have employed a number of executives with
industry experience, the loss of any significant member of management could have
a material adverse effect on our business, financial condition and results of
operations.

SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY IMPACT THE MARKET PRICE OF THE
COMMON STOCK.

         We are unable to predict the effect, if any, that future sales of
Common Stock (or the potential for such sales) may have on the market price of
the Common Stock prevailing from time to time. Future sales of substantial
amounts of Common Stock in the public market, including those obtained from the
exercise of the Warrants or Options, could impair our ability to raise capital
through an offering of securities and may adversely affect the market price of
the Common Stock.

THE COMPANY MUST MAINTAIN A CURRENT PROSPECTUS AND REGISTRATION STATEMENT IN
ORDER FOR OUR PUBLIC WARRANTS TO BE EXERCISED BY THEIR HOLDERS.

         We must maintain an effective registration statement on file with the
Commission before the holder of any of the Public Warrants may be redeemed or
exercised. It is possible that we may be unable to cause a registration
statement covering the Common Stock underlying the Public Warrants to be
effective. It is also possible that the


                                       26
<PAGE>   27


Public Warrants could be acquired by persons residing in states where we are
unable to qualify the Common Stock underlying the Public Warrants for sale. In
either event, the Public Warrants may expire unexercised, which would result in
the holders losing all the value of their investment in the Public Warrants.
There can be no assurance that we will be able to maintain an effective
registration statement covering the issuance of Common Stock upon redemption or
exercise of the Public Warrants. If we are unable to maintain an effective
registration for the issuance of Common Stock upon redemption of exercise of the
Public Warrants, we may be subject to claims by the Public Warrant holders.

OUR COMMON STOCK PRICE AND WARRANT PRICE MAY BE VOLATILE.

         The market price for our Common Stock and Warrants are likely to be
highly volatile and are likely to experience wide fluctuations in response to
factors including the following:

-        actual or anticipated variations in our quarterly operating results
-        announcements of technological innovations or new services by us or our
         competitors
-        changes in financial estimates by securities analysts
-        conditions or trends in the Internet or online commerce industries
-        changes in the economic performance or market valuations of other
         Internet, online commerce or travel companies
-        announcements by us or our competitors of significant acquisitions,
         strategic partnerships, joint ventures or capital commitments
-        additions or departures of key personnel
-        release of lock-up or other transfer restrictions on our outstanding
         shares of common stock or sales of additional shares of common stock
-        potential litigation
-        adverse announcements by our competitors

         The market prices of the securities of Internet-related and online
commerce companies have been especially volatile. Broad market and industry
factors may adversely affect the market price of our Common Stock and Warrants,
regardless of our actual operating performance. In the past, following periods
of volatility in the market price of their stock, many companies have been the
subject of securities class action litigation. If we were sued in a securities
class action, it could result in substantial costs and a diversion of
management's attention and resources and would adversely affect our stock price.

WE MAY NOT BE ABLE TO MAINTAIN THE LISTING OF OUR COMMON STOCK ON THE NASDAQ
SMALL CAP MARKET WHICH WOULD MAKE IT MORE DIFFICULT FOR YOU TO DISPOSE OF YOUR
COMMON STOCK.

         Our common stock is listed on the Nasdaq Small Cap Market. We cannot
guarantee that it will always be listed. The Nasdaq Small Cap Market rules for
continual listing include minimum stock price and other requirements, which we
may not meet in the future, particularly if the price of our common stock
declines.

         If our common stock is delisted from the Nasdaq Small Cap Market,
trading in our common stock would be conducted, if at all, on the NASD's OTC
Bulletin Board. This would make it more difficult for stockholders to dispose of
their common stock and more difficult to obtain accurate quotations on our
common stock. This could have an adverse effect on the price of the common
stock.

ITEM 7.  FINANCIAL STATEMENTS

See Index to Financial Statements, beginning on Page F-1

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

Not Applicable.


                                       27
<PAGE>   28


                                    PART III

Certain information required by Part III is omitted from this Report in that the
Company expects to file a definitive proxy statement with the Securities and
Exchange Commission (the "Commission") within 120 days after the end of its
fiscal year pursuant to Regulation 14A, as promulgated by the Commission, for
its 2000 Annual Meeting of Shareholders (the "Proxy Statement"), and certain
information included in the Proxy Statement will be incorporated herein by
reference.

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS COMPLIANCE
         WITH SECTION 16(A) OF THE EXCHANGE ACT

The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement under the heading "Management-Directors and Executive
Officers."

ITEM 10. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement under the heading "Summary Compensation Table."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement under the headings "Voting Securities and Principal
Security Holders."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated herein by reference to the
Company's Proxy Statement under the heading "Certain Transactions."

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

<TABLE>
<CAPTION>
Exhibit                            Description
-------                            -----------

<S>               <C>
2.1       --      Agreement and Plan of Reorganization between 800 Travel
                  Systems, Inc., 800 Travel Acquisition Sub, Inc., Prestige
                  Travel Systems, Inc., Anita K. LaScala, Ron LaScala and
                  Kimberly D. LaScala, dated August 21, 2000. (Schedules (or
                  similar attachments) have been omitted and the Registrant
                  agrees to furnish supplementally a copy of any omitted
                  schedule to the Securities and Exchange Commission upon
                  request.) (7)
3.1       --      Amended and Restated Certificate of Incorporation (1)
3.2       --      Amended and Restated Bylaws (1)
4.1       --      1997 Stock Option Plan (1)
4.2       --      1998 Stock Option Plan (2)
4.3       --      2000 Stock Option Plan (7)
10.1      --      Lease dated February 10, 1996 between JFJ Real Estate L.P.
                  and 800 Travel Systems (1)
10.2      --      Airlines Reporting Corporation ("ARC") Agent Reporting
                  Agreement (1)
10.3      --      Letter dated March 6, 1996 from ARC approving change of
                  ownership (1)
10.4      --      Subscriber Service Agreement dated November 27, 1995 between
                  800 Travel Systems and Payroll Transfers Interstate, Inc. (1)
10.5      --      Form of Employment Agreement between 800 Travel Systems and
                  Mark D. Mastrini (1)
10.6      --      Form of Employment Agreement between 800 Travel Systems and
                  Biagio Bellizzi (1)
10.7      --      Agreement of March 1, 1997 between 800 Travel Systems and
                  Global Discount Travel Services (1)
10.8      --      SABRE Subscriber Agreement dated May 1, 1999 between 800
                  Travel Systems and SABRE, Inc.(3)
</TABLE>


                                       28
<PAGE>   29


<TABLE>
<S>               <C>
10.9      --      Loan and Pledge Agreement dated April 1, 1999 between 800
                  Travel Systems and Mark D. Mastrini (3)
10.10     --      Deferred Compensation Agreement dated April 20, 1999 between
                  800 Travel Systems and Mark D. Mastrini (3)
10.11*    --      Phone Agreement dated August 24, 1999 between 800 Travel
                  Systems and AT&T (4)
10.12     --      Employment agreement dated September 16, 1999 between 800
                  Travel Systems and Robert B. Morgan (4)
10.13*    --      Amendment to SABRE Subscriber Agreement dated November 5,
                  1999 between 800 Travel Systems and SABRE, Inc. (5)
10.14*    --      Software Development Agreement dated November 5, 1999
                  between 800 Travel Systems and SABRE, Inc. (5)
10.15     --      Employment agreement dated November 22, 1999 between 800
                  Travel Systems and Peter M. Sontag (5)
10.16     --      Employment agreement dated November 5, 1999 between 800 Travel
                  Systems and Michael Gaggi (5)
10.17     --      Amendment to Employment Agreement dated November 23, 1999
                  between 800 Travel Systems and Mark D. Mastrini (5)
10.18     --      Agreement of Separation and Release dated June 5, 2000 between
                  800 Travel Systems and Mark D. Mastrini (6)
10.19     --      Consulting agreement dated June 5, 2000 between 800 Travel
                  Systems and Mark D. Mastrini (6)
10.20     --      Stock Option agreement dated June 12, 2000 between 800 Travel
                  Systems and Peter M. Sontag (8)
10.21     --      Employment agreement dated October 9, 2000 between 800 Travel
                  Systems and Robert B. Morgan (8)
10.22     --      Amendment to Employment agreement dated October 26, 2000
                  between 800 Travel Systems and Peter M. Sontag (8)
10.23     --      Amendment to Employment agreement dated October 26, 2000
                  between 800 Travel Systems and Michael Gaggi. (8)
10.24     --      Phone Agreement dated October 23, 2000 between 800 Travel
                  Systems and AT&T (8)
10.25     --      SABRE Subscriber Agreement and Amendment dated December 1,
                  2000 between 800 Travel Systems and SABRE, Inc.(8)
10.26             Term Note Agreement dated January 22, 2001 between 800 Travel
                  Systems and Sabre, Inc. (8)
21.0      --      Subsidiaries of 800 Travel Systems, Inc. (8)
23.1      --      Consent of Grant Thornton LLP (8)
</TABLE>

(1)  Incorporated by reference to 800 Travel Systems' Registration Statement
     on Form SB-2 No. 333-28237.

(2)  Incorporated by reference to 800 Travel Systems' Registration Statement on
     Form S-8 filed December 15, 1998.

(3)  Incorporated by reference to 800 Travel Systems' Report on Form 10-QSB
     filed August 14, 1999.

(4)  Incorporated by reference to 800 Travel Systems' Report on Form 10-QSB
     filed November 11, 1999.

(5)  Incorporated by reference to 800 Travel Systems' Report on Form 10-KSB
     filed March 27, 2000.

(6)  Incorporated by reference to 800 Travel Systems' Report on Form 10-QSB
     filed August 11, 2000.

(7)  Incorporated by reference to 800 Travel Systems' Report on Form 10-QSB
     filed November 14, 2000.

(8)  Attached herein.

 * Portions of this exhibit are the subject of a confidential treatment request.


(b) Reports on Form 8-K:

     None.


                                       29
<PAGE>   30


                                   SIGNATURES

Pursuant to the requirements of Section 13 and 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.

Dated:  March 26, 2001

                                800 TRAVEL SYSTEMS, INC.
                                (Registrant)


                                By:      /s/ Peter M. Sontag
                                   --------------------------------------------
                                   Peter M. Sontag, Chief Executive Officer

                                By:      /s/ Robert B. Morgan
                                   --------------------------------------------
                                   Robert B. Morgan, Chief Financial Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
    SIGNATURE                                        TITLE                                               DATE
    ---------                                        -----                                               ----


<S>                                       <C>                                                        <C>
/s/ PETER M. SONTAG                       Chief Executive Officer and Director                       March 26, 2001
-------------------
Peter M. Sontag                           Chairman of the Board

/s/ ROBERT B. MORGAN                      Chief Financial Officer,                                   March 26, 2001
--------------------                      Director , Treasurer and Secretary
Robert B. Morgan                          (principal accounting officer)

/s/ MICHAEL GAGGI                         Director                                                   March 26, 2001
-----------------
Michael Gaggi


/s/ L. DOUGLAS BAILEY                     Director                                                   March 26, 2001
---------------------
L. Douglas Bailey


/s/ VINCE VITTI                           Director                                                   March 26, 2001
---------------
Vince Vitti


/s/ ANTOINE TOFFA                         Director                                                   March 26, 2001
-----------------
Antoine Toffa
</TABLE>


                                       30
<PAGE>   31


                                      INDEX


<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                             NUMBER

<S>                                                                                                          <C>
FINANCIAL INFORMATION

Financial Statements

      Report of Independent Certified Public Accountants                                                        F-2

      Consolidated Balance sheets                                                                               F-3

      Consolidated Statements of Earnings                                                                       F-4

      Consolidated Statement of Stockholders' Equity                                                            F-5

      Consolidated Statements of Cash Flows                                                                     F-6

      Notes to Consolidated Financial Statements                                                                F-8
</TABLE>



                                       F-1


<PAGE>   32



               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


Board of Directors
800 Travel Systems, Inc.


We have audited the accompanying consolidated balance sheets of 800 Travel
Systems, Inc. as of December 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for the years then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of 800 Travel
Systems, Inc. as of December 31, 2000 and 1999, and the consolidated results of
its operations and its consolidated cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.


                                         Grant Thornton LLP


Tampa, Florida
February 12, 2001


                                       F-2


<PAGE>   33



                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                        December 31,
                                                                                           --------------------------------------
                                                                                                2000                     1999
                                                                                           -------------            -------------
<S>                                                                                        <C>                      <C>
                                                          ASSETS
CURRENT ASSETS
  Cash                                                                                     $   1,269,126            $   2,181,020
  Receivables, net                                                                               604,460                1,217,144
  Prepaids                                                                                        57,297                  166,986
                                                                                           -------------            -------------
     Total current assets                                                                      1,930,883                3,565,150

LEASEHOLD IMPROVEMENTS, EQUIPMENT AND COMPUTER
  SOFTWARE, net                                                                                2,257,684                1,799,050
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, net                                     4,964,883                4,560,640

OTHER ASSETS
  Trademarks, net                                                                                295,632                  323,299
  Capitalized software                                                                            55,251                  387,007
  Related party receivables                                                                       19,225                    6,325
  Bonds, security deposits and other assets                                                       91,424                   70,700
                                                                                           -------------            -------------
     Total other assets                                                                          461,532                  787,331
                                                                                           -------------            -------------

     TOTAL ASSETS                                                                          $   9,614,982            $  10,712,171
                                                                                           =============            =============

                                           LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
  Current maturities of long-term debt                                                     $     133,454            $     135,901
  Accounts payable and accrued liabilities                                                       978,731                  646,150
  Accrued compensation                                                                           289,827                  311,898
  Unearned revenue                                                                               112,796                  100,529
                                                                                           -------------            -------------
     Total current liabilities                                                                 1,514,808                1,194,478

LONG-TERM DEBT - less current maturities                                                         139,777                  273,231
DEFERRED RENT                                                                                    178,685                  136,517
UNEARNED REVENUE                                                                                 292,595                  299,325
                                                                                           -------------            -------------
     Total liabilities                                                                         2,125,865                1,903,551
                                                                                           -------------            -------------

STOCKHOLDERS' EQUITY
  Preferred stock, $.01 par value, 1,000,000 shares authorized; none issued                           --                       --
  Common stock, $.01 par value, 20,000,000 shares authorized;
    7,895,536 and 7,616,296 shares issued and outstanding, respectively                           78,955                   76,163
  Additional paid-in capital                                                                  12,731,052               12,137,150
  Accumulated deficit                                                                         (5,320,890)              (3,404,693)
                                                                                           -------------            -------------
     Total stockholders' equity                                                                7,489,117                8,808,620
                                                                                           -------------            -------------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $   9,614,982            $  10,712,171
                                                                                           =============            =============
</TABLE>



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


                                      F-3
<PAGE>   34


                       CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31,
                                                                                          --------------------------------------
                                                                                                2000                     1999
                                                                                           -------------            -------------
<S>                                                                                        <C>                      <C>
REVENUES
  Commissions                                                                              $   7,238,065            $   7,648,748
  Ticket delivery and service fees                                                             5,904,001                4,544,885
                                                                                           -------------            -------------
     Total revenues                                                                           13,142,066               12,193,633
                                                                                           -------------            -------------

OPERATING EXPENSES
  Payroll, commissions, and employee benefits                                                  7,503,300                6,048,545
  Telephone                                                                                    1,410,009                1,696,055
  Ticket delivery                                                                                854,898                  886,025
  Advertising                                                                                    937,323                  693,291
  General and administrative                                                                   4,412,184                2,914,752
                                                                                           -------------            -------------
     Total operating expenses                                                                 15,117,714               12,238,668
                                                                                           -------------            -------------

LOSS FROM OPERATIONS                                                                          (1,975,648)                 (45,035)

INTEREST INCOME, net                                                                              59,451                  103,990
                                                                                           -------------            -------------

(LOSS) EARNINGS BEFORE INCOME TAXES                                                           (1,916,197)                  58,955

PROVISION FOR INCOME TAXES                                                                            --                       --
                                                                                           -------------            -------------

NET (LOSS) EARNINGS                                                                        $  (1,916,197)           $      58,955
                                                                                           =============            =============

NET (LOSS) EARNINGS PER COMMON SHARE - BASIC                                               $        (.25)           $         .01
                                                                                           =============            =============

NET (LOSS) EARNINGS PER COMMON SHARE - DILUTED                                             $        (.25)           $         .01
                                                                                           =============            =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
  OUTSTANDING - BASIC                                                                          7,734,738                7,615,892
                                                                                           =============            =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
  OUTSTANDING - DILUTED                                                                        7,734,738                7,978,299
                                                                                           =============            =============
</TABLE>

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


                                      F-4
<PAGE>   35


                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                       Common Stock           Additional          Accumulated
                                             ------------------------          Paid-in             Retained
                                                Shares        Amount           Capital              Deficit              Total
                                             ---------        -------         ----------          -----------         -----------

<S>                                          <C>              <C>            <C>                  <C>                 <C>
BALANCE, DECEMBER 31, 1998                   7,597,096        $75,971        $ 12,067,342         $(3,463,648)        $ 8,679,665
  Exercise of warrants                           2,000             20              12,480                  --              12,500
  Exercise of stock options                     17,200            172              57,328                  --              57,500
  Net earnings                                      --             --                  --              58,955              58,955
                                             ---------        -------        ------------         -----------         -----------

BALANCE, DECEMBER 31, 1999                   7,616,296         76,163          12,137,150          (3,404,693)          8,808,620
  Common stock issued for services              50,000            500             249,500                  --             250,000
  Common stock issued for acquisition          229,240          2,292             355,895                  --             358,187
  Issuance cost for warrants                        --             --             (11,493)                 --             (11,493)
  Net loss                                          --             --                  --          (1,916,197)         (1,916,197)
                                             ---------        -------        ------------         -----------         -----------

BALANCE, DECEMBER 31, 2000                   7,895,536        $78,955        $ 12,731,052         $(5,320,890)        $ 7,489,117
                                             =========        =======        ============         ===========         ===========
</TABLE>

                  The accompanying notes are an integral part
                    of this consolidated financial statement.


                                      F-5
<PAGE>   36


                      CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                   Year Ended December 31,
                                                                                           --------------------------------------
                                                                                                2000                     1999
                                                                                           -------------            -------------
<S>                                                                                        <C>                      <C>
Increase (decrease) in cash
CASH FLOWS FROM OPERATING ACTIVITIES
  Net (loss) earnings                                                                      $  (1,916,197)           $      58,955
  Adjustments to reconcile net (loss) earnings to net cash provided by
    operating activities, net of acquisition:
      Depreciation and amortization                                                              938,824                  465,341
      Loss on sale of fixed assets                                                                49,958                       --
      Receivables                                                                                610,967                 (715,589)
      prepaids and other assets                                                                  104,109                  132,301
      deferred rent                                                                               42,168                   60,876
      Unearned revenue                                                                             5,537                  399,854
      accounts payable and accrued liabilities                                                   439,897                  208,423
                                                                                           -------------            -------------

               Net cash provided by operating activities                                         275,263                  610,161
                                                                                           -------------            -------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of leasehold improvements and equipment                                              (570,863)                (173,079)
  Software development costs                                                                    (337,025)                (634,813)
  Cash paid for acquisition                                                                     (200,000)                      --
  Proceeds from sale of fixed assets                                                              68,125                       --
                                                                                           -------------            -------------


               Net cash used in investing activities                                          (1,039,763)                (807,892)
                                                                                           -------------            -------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Principal payments on debt                                                                    (135,901)                 (78,522)
  Issuance cost for warrants                                                                     (11,493)                      --
  Proceeds from exercise of options and warrants                                                      --                   70,000
                                                                                           -------------            -------------


               Net cash used in financing activities                                            (147,394)                  (8,522)
                                                                                           -------------            -------------

NET DECREASE IN CASH                                                                            (911,894)                (206,253)

CASH AT THE BEGINNING OF PERIOD                                                                2,181,020                2,387,273
                                                                                           -------------            -------------

CASH AT THE END OF PERIOD                                                                  $   1,269,126            $   2,181,020
                                                                                           =============            =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
   Cash paid during the period for:
      Interest                                                                             $      35,505            $       3,523
                                                                                           =============            =============

      Income taxes                                                                         $          --            $          --
                                                                                           =============            =============
</TABLE>


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


                                      F-6
<PAGE>   37


       CONSOLIDATED STATEMENT OF CASH FLOWS -- Continued


SUPPLEMENTAL CASH FLOW INFORMATION

For the year ended December 31, 2000:

1)       The Company transferred $668,781 of capitalized software to fixed
         assets.

2)       The Company, in conjunction with an employment agreement with its
         former CEO, issued 50,000 shares of common stock valued as of the date
         of such agreement at $250,000.

3)       In August 2000, the Company completed an acquisition of Prestige Travel
         Systems, Inc. in exchange for a cash payment of $200,000, 229,240
         shares of common stock valued at $358,000, and assumption of
         liabilities and acquisition costs of $148,000. The Company allocated
         approximately $620,000 of the purchase price to goodwill.


For the year ended December 31, 1999:

1)       The Company transferred $645,000 of capitalized software to fixed
         assets.

2)       The Company entered into a capital lease, which resulted in $401,000 of
         fixed asset additions.


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


                                      F-7
<PAGE>   38


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999


NOTE 1 - BUSINESS AND BASIS OF PRESENTATION

800 Travel Systems, Inc. is a leading direct marketer of travel related
services, focused primarily on providing leisure air and cruise reservation
services. The Company provides low-priced air and cruise line tickets for
domestic and international leisure travel to its customers through its
easy-to-remember, toll-free numbers, through its websites on the World Wide Web
(at www.LowAirfare.com and www.CruiseBrokers.com) and through its nationwide
network of approximately 1,500 independent remote travel agents. The Company was
formed in November 1995 in Tampa, Florida to acquire certain of the assets and
assume certain liabilities of 1-800-Low airfare, Inc. (the Predecessor
Business), which occurred December 1, 1995. In August 2000, the Company acquired
the assets and liabilities of Prestige Travel Systems, Inc. (Prestige) in a
merger accounted for as a purchase.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The financial statements include the accounts of 800 Travel Systems, Inc. and
its wholly owned subsidiary. All significant inter-company balances and
transactions have been eliminated.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with maturities of three months or less to be cash
equivalents.

Leasehold Improvements, Equipment and Computer Software

Leasehold improvements are amortized over the lives of the respective leases or
the service lives of the improvements, whichever is shorter. Equipment is stated
at cost, less accumulated depreciation. Depreciation is computed on the
straight-line method over the estimated useful lives of the respective assets,
three to ten years for both financial reporting purposes and on the accelerated
method for tax purposes. Capitalized software for internal use is transferred to
computer software and amortized over four years, when Management has deemed that
the software is fully operational. Software costs are capitalized when the
project stage is complete, management has authorized the project, and completion
of the project is probable.

Excess of Cost Over Fair Value of Net Assets Acquired

The excess of cost over fair value of net assets acquired is amortized over a
period of fifteen (15) to twenty-five (25) years. Accumulated amortization at
December 31, 2000 and 1999 approximates $714,000 and $495,000, respectively.

Trademarks

The costs of the trademarks are being amortized using the straight-line method
over their useful estimated lives of fifteen (15) years. Accumulated
amortization at December 31, 2000 and 1999 approximates $119,000 and $92,000,
respectively.


                                      F-8
<PAGE>   39


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999


NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Impairment of Long-Lived Assets

The Company periodically reviews the projected undiscounted cash flows for each
business unit to determine whether or not there has been permanent impairment of
its long-lived assets, including identifiable intangibles and goodwill, and
records expenses for the amounts, if any, determined to be permanently impaired.
No impairment exists for the years presented.

Revenue Recognition

Commission revenues are recognized when travel services are ticketed. Ticket
delivery and service fees are recognized when the services are performed. As of
December 31, 2000 and 1999, the allowance for bad debts was approximately
$33,000 and $59,000, respectively. The Company believes that such allowance is
adequate based upon review of the receivables as of December 31, 2000 and 1999.

Fair Value of Financial Instruments

The Company, in estimating its fair value disclosures for financial instruments,
used the following methods and assumptions:

         Receivables, Accounts Payable and Accrued Expenses, and Notes Payable:
         The carrying amounts reported in the balance sheet for receivables,
         accounts payable and accrued expenses, and notes payable approximate
         their fair value due to their relatively short maturity.

         Long-Term Debt: the fair value of the Company's fixed-rate long-term
         debt is estimated using discounted cash flow analyses, based on the
         Company's current incremental borrowing rates for similar types of
         borrowing arrangements. At December 31, 2000, the fair value of the
         Company's long-term debt approximated its carrying value.

Income Taxes

The Company records income tax expense using the liability method of accounting
for deferred income taxes. Under the liability method, deferred tax assets and
liabilities are recognized for the expected future tax consequences of temporary
differences between the financial statement and income tax bases of the
company's assets and liabilities. An allowance is recorded when it is more
likely than not that any or all of a deferred tax asset will not be realized.

Advertising

Advertising costs are charged to expense as incurred. for the periods ended
December 31, 2000 and 1999, these costs amounted to approximately $937,000 and
$693,000, respectively.


                                      F-9
<PAGE>   40


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Stock Based Compensation

The Company accounts for its stock based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". the
Company has elected only the disclosure option of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based
Compensation", which requires that the Company disclose the pro forma effects on
earnings and earnings per share as if SFAS No. 123 had been adopted (see Note
10).

Use of Estimates

The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that effect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from estimated amounts.

Earnings Per Share

The Company follows the provisions of SFAS No. 128, "Earnings per Share", which
requires the presentation of basic and diluted earnings per share (see Note 4).

New Accounting Pronouncements

In December 1999, the Securities and Exchange Commission issued Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides
guidance on applying accounting principles generally accepted in the United
States of America to revenue recognition in financial statements and is
effective in the fourth quarter of all fiscal years beginning after December 15,
1999. Annually, the effect of SAB 101 is not significant to the Company's
financial statements. However, due to the nature of the agreement with the
reservation system provider (see Note 8), the Company will not record revenue
until a minimum booking threshold is obtained which the Company believes will
occur in the fourth quarter of each year. The Company is currently negotiating
with its reservation system provider to set quarterly booking thresholds which
will allow the Company to record the revenues from the bookings each quarter.
Prior to SAB 101, the Company accrued revenue as bookings were made.

In April 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock
Compensation," an interpretation of APB Opinion No. 25. FIN 44 is effective for
transactions occurring after July 1, 2000. The application of FIN 44 did not
have a material impact on the Company's financial statements.

Reclassifications

Certain reclassifications have been made to the prior year balances to conform
to the current presentation.


                                      F-10
<PAGE>   41


NOTE 3 - BUSINESS COMBINATION

In August 2000, the Company acquired 100% of the common stock of prestige Travel
Systems, Inc., in exchange for the issuance of 229,240 shares of its common
stock and the cash payment of $200,000. The following summarizes the
transaction:

<TABLE>
          <S>                                                          <C>
          Purchase Price:
            Cash payment                                               $ 200,000
            Common stock                                                 358,187
                                                                       ---------
                                                                         558,187
                                                                       ---------
          Assets Acquired:
            Equipment                                                     31,798
            Other assets                                                  56,327
                                                                       ---------
                                                                          88,125
          Liabilities Assumed:
            Accounts payable, accrued liabilities and
            acquisition costs                                            150,613
                                                                       ---------
          Net liabilities assumed                                         62,488
                                                                       ---------
          Excess of purchase price over net liabilities assumed        $ 620,675
                                                                       =========
</TABLE>

Pro forma financial information is not provided for Prestige due to its
immateriality.

NOTE 4 - NET INCOME PER COMMON SHARE

The following table reconciles the numerators and denominators of the basic and
diluted income per share computations:

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                                  ------------------------------
                                                                      2000              1999
                                                                  -----------       ------------
         <S>                                                      <C>                 <C>
         Net (loss) earnings - (numerator)                        $(1,916,197)      $    58,955
                                                                  ===========       ===========
         Basic:
           Weighted average shares outstanding (denominator)        7,734,738         7,615,892
                                                                  ===========       ===========


           Net (loss) earnings per common share - basic           $      (.25)      $       .01
                                                                  ===========       ===========
         Diluted:
           Weighted average shares outstanding                      7,734,738         7,615,892
           Effect of dilutive options                                      --           362,407
                                                                  -----------       -----------

           Adjusted weighted average shares (denominator)           7,734,738         7,978,299
                                                                  ===========       ===========

           Net (loss) earnings per common share - diluted         $      (.25)      $       .01
                                                                  ===========       ===========
</TABLE>

All warrants outstanding are excluded from the calculation of diluted weighted
average shares, as they are anti-dilutive. As of December 31, 2000, all options
outstanding are excluded from the calculation of diluted weighted average
shares, as they are anti-dilutive. Options for 886,400 shares of common stock
are excluded from the adjusted weighted average shares for the year ended
December 31, 1999, as they are anti-dilutive.


                                      F-11
<PAGE>   42


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999


NOTE 5 - LEASEHOLD IMPROVEMENTS, EQUIPMENT, AND COMPUTER SOFTWARE

Leasehold improvements, equipment and computer software by major classification
are as follows:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                       ------------------------------
                                                          2000                1999
                                                       -----------        -----------
         <S>                                           <C>                  <C>
         Computer software                             $ 1,318,781            631,562
         Telephone equipment                               660,374            408,605
         Computer equipment                                601,551            455,598
         Office equipment                                  462,315            442,117
         Leasehold improvements                            220,543            204,823
         Furniture and fixtures                            170,689            156,355
                                                       -----------        -----------
                                                         3,434,253          2,299,060
           Less accumulated depreciation                (1,176,569)          (500,010)
                                                       -----------        -----------

         Leasehold improvements, equipment and
           computer software, net                      $ 2,257,684        $ 1,799,050
                                                       ===========        ===========
</TABLE>

Depreciation expense approximated $695,000 and $235,000 for the years ended
December 31, 2000 and 1999, respectively.


NOTE 6 - NOTE PAYABLE AND LONG-TERM DEBT

At December 31, 2000 and 1999, long-term debt was as follows:

<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                              ---------------------------
                                                                                 200              1999
                                                                              ----------        ---------
         <S>                                                                  <C>               <C>

         Capital lease, payable in monthly payments of $13,166
         through December 2002                                                $  273,231        $ 384,537

         Capital lease,  payable in monthly payments of $2,290 through
         November 2000                                                                --           24,595
                                                                              ----------        ---------
                                                                                 273,231          409,132
         Less current maturities                                                (133,454)        (135,901)
                                                                              ----------        ---------

                                                                              $  139,777        $ 273,231
                                                                              ==========        =========
</TABLE>

Approximate maturities of long-term debt at December 31, 2000 are as follows:


                  2001                        $133,454
                  2002                         139,777
                                              --------
                                              $273,231
                                              ========


Interest expense totaled approximately $36,000 and $5,000 for the years ended
December 31, 2000 and 1999, respectively.


                                      F-12
<PAGE>   43


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999


NOTE 6 - NOTE PAYABLE AND LONG-TERM DEBT - Continued

In January 2001, the company entered into a term note agreement with a strategic
vendor. Under the terms of this agreement, the Company will have $1,800,000 of
financing available that is payable in sixty equal consecutive monthly
installments beginning one month from funding the advance and such payment will
be offset by certain amounts due the Company from the strategic vendor. This
agreement pays interest at the Prime Rate plus 2.5% and contains certain
financial covenants regarding the current ratio, tangible net worth, and total
liabilities to tangible net worth.


NOTE 7 - INCOME TAXES

Reconciliation of the Federal statutory income tax rate of 34% to the effective
rate for the year ended December 31, is as follows:

<TABLE>
<CAPTION>
                                                                       2000          1999
                                                                     -------        -------

        <S>                                                          <C>            <C>
        Federal statutory income tax rate                              34.00%         34.00%
        State taxes, net of Federal                                     3.60           3.60
        Excess of cost over fair value of net assets acquired          (3.40)        100.40
        Net operating loss carryforward                               (30.40)       (147.70)
        Other                                                          (3.80)          9.70
                                                                     -------        -------

                                                                          --             --
                                                                     =======        =======
</TABLE>

The tax effects of temporary differences that give rise to deferred tax assets
and liabilities are as follows:

<TABLE>
<CAPTION>
                                                                December 31,
                                                  -------------------------------------
                                                      2000                    1999
                                                   ------------            ------------
        <S>                                        <C>                     <C>

        Deferred tax assets:
          Net operating loss carryforwards         $  2,607,000            $  2,027,000
          Deferred revenue                              152,000                 150,000
          Accrued expenses                               80,000                  92,000
          Allowance for bad debt                         12,000                  22,000
                                                   ------------            ------------
                                                      2,851,000               2,291,000
        Deferred tax liabilities:
          Software development costs                   (409,000)               (383,000)
          Depreciation expense                         (147,000)               (207,000)
          Goodwill amortization                         (57,000)                (46,000)
                                                   ------------            ------------
                                                      2,238,000               1,655,000
        Less:  valuation allowance                   (2,238,000)             (1,655,000)
                                                   ------------            ------------

                                                   $         --            $         --
                                                   ============            ============
</TABLE>

At December 31, 2000, the Company had net operating loss carryforwards of
approximately $7,000,000 and $5,500,000 for federal and state income tax
purposes, respectively, that begin to expire in 2010.


                                      F-13
<PAGE>   44


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999


NOTE 8 - COMMITMENTS AND CONTINGENCIES

Operating Leases

The minimum future office rental commitment for leases approximates the
following:

<TABLE>
<CAPTION>

<S>                                             <C>
Year ending December 31,
         2001                                   $  380,564
         2002                                      396,145
         2003                                      406,162
         2004                                      421,731
         2005                                      427,296
         Thereafter                                542,411
                                                ----------
                                                $2,574,309
                                                ==========
</TABLE>

Rent expense totaled approximately $491,000 and $448,000 for the years ended
December 31, 2000 and 1999, respectively.

Phone Agreements

In September 2000, the company entered into an agreement with its telephone
provider which provided an agreed upon rate for its services. This rate is based
upon the Company reaching an annual minimum charge for its long-distance
services. The Company anticipates reaching this annual minimum charge.

Agreements with Reservation System Provider

Effective December 1, 2000, the Company entered into a new five-year agreement
with its reservation system provider. In doing so, the previous agreement was
terminated and the unrecognized portion of the incentive payment will continue
to be recognized ratably over the remaining life of the original contract.
Pursuant to signing this new agreement, the reservation system provider paid 800
Travel Systems an additional incentive of $100,000 that is recorded as unearned
revenue and will be recognized as revenue ratably over the life of the
agreement. If 800 Travel Systems should terminate or be deemed in default upon
the terms of this agreement, 800 Travel Systems agrees to repay this incentive
in full.

The Company accrues revenue based upon the number of bookings made with the
reservation system provider in accordance with SAB 101 (see Note 2) when a
minimum number of annual bookings are obtained. As of December 31, 2000 and
1999, the Company has recorded approximately $842,000 and $546,000,
respectively, of revenue based on the bookings.

Risks and Uncertainties

The Company is dependent upon the airline industry for the majority of its
revenues and the Company's ability to quote air travel ticket prices, make
reservations, and sell tickets is dependent upon the performance of the Sabre
electronic travel reservation system.


                                      F-14
<PAGE>   45


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999

NOTE 8 - COMMITMENTS AND CONTINGENCIES - Continued

Employment Agreements

As of December 31, 2000, the Company has employment agreements with six (6)
executive and key employees, which include the following contract provisions:

         -        Aggregate initial base compensation of $845,000

         -        Annual pay raises of five percent (5%) of base compensation
                  plus the annual increase in the consumer price index

         -        Agreements terminate between September 3, 2002 through
                  December 31, 2003

         -        Options to purchase 1,200,000 shares of the Company's common
                  stock at prices ranging from $3.00 to $11.00 per share

Consulting Agreement

The Company has entered into an agreement with an outside consultant in July
1998, to supervise the development of the Company's recent interactive website.
Costs capitalized related to this project were approximately $337,000 and
$1,032,000 for the years ended December 31, 2000 and 1999, respectively. During
2000 and 1999, the Company transferred approximately $669,000 and $645,000 of
capitalized software to fixed assets.

Litigation

An action is pending in the King County Superior Court for the State of
Washington entitled Trans West Communications, Inc. v. The Joseph Stevens
Group, Inc., ("JSG"), Case Number 98-2-04446-2 SEA. The action was started
against JSG after it had ceased to exist, having been previously merged into
the Company. The action arose out of a dispute regarding JSG's alleged
non-payment for certain telephone switching equipment it had purchased. A
default judgment for approximately $386,000 was entered against JSG in May,
1999. The Company is seeking to have the default vacated and also believes it
has substantial defenses to the underlying claim. The action is currently on
appeal as to whether the Company has standing to participate therein to assert
defenses as to the merits of the underlying breach of contract claim and as to
certain procedural issues. If standing is found, the Court will then decide
whether to vacate the default judgment which was entered against JSG. If that
default judgment is vacated, the plaintiff could reinitiate the action against
the Company, which would then assert its substantial defenses on the merits. If
the Company is found to lack standing to participate by the appeals court, it
believes that it will, as a result, have substantial defenses to any attempt by
the plaintiff to enforce against the Company the default judgment previously
taken against JSG.


                                      F-15
<PAGE>   46


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999


NOTE 8 - COMMITMENTS AND CONTINGENCIES - Continued

On March 24, 2000, the Company was sued in the 134th District Court of Dallas
County, Texas in a matter styled First London Securities Corporation v. 800
Travel Systems, Inc. a/k/a I Fly (Case No. 00-02222), in which the Plaintiff,
who was the Company's managing underwriter for the Company's initial public
offering in January 1998, maintains that it was unable to exercise its rights
under a particular Underwriting Agreement and a particular Representative's
Warrant Agreement. Plaintiff's petition seeks to recover allegedly unrealized
profits of not less than $377,343.75 and as much as $1,716,085.90, plus
interest, attorney's fees and court costs. On March 14, 2001, the Plaintiff and
the Company entered into an Initial Settlement Agreement under which the
Plaintiff and the Company also executed a new Warrant Agreement. These two
documents provided for the Company's payment of $60,000 in monetary
consideration and the Company's issuance of new warrant certificates exercisable
for shares of the Company's common stock at $1.5626 per share, as well as the
cancellation of the warrant certificates previously issued under the
Underwriting Agreement and the Representative's Warrant Agreement referenced
above. In the event that the registration statement related to the shares
underlying the new warrants is not declared effective by the SEC by a certain
date, which is subject to adjustment, the Company will then be obligated under
the Initial Settlement Agreement to issue additional new warrant certificates.
In the event that a registration statement related to the shares underlying the
new warrants is still not filed and subsequently declared effective by the SEC
by a later certain date, the Plaintiff may elect to retain the new warrant
certificates, and additional new warrant certificates, or to surrender all of
those new certificates back to the Company and proceed to trial on the
underlying claims asserted in the pending litigation. In that event, management
of the Company intends a vigorous defense of these claims. If the registration
is completed by that later date, or if the Plaintiff nonetheless elects to
retain the new warrant certificates and additional new warrant certificates, the
litigation will be dismissed with prejudice. The Company has accrued $214,000
regarding the First London Security litigation, based on the preliminary
settlement.

The Company is engaged in other lawsuits in the normal course of business. In
the opinion of management, based upon advice of counsel, the ultimate outcome of
these lawsuits will not have a material impact on the Company's financial
statements.


NOTE 9 - STOCKHOLDERS' EQUITY

Preferred Stock

The Board of Directors is authorized, without any action of the stockholders, to
provide for the issuance of one or more series of Preferred Stock and to fix the
designation, preferences, participating, optional and other rights,
qualifications, limitations and restrictions thereof including, without
limitation, the dividend rate, voting rights, conversion rights, redemption
price and liquidation preference per series of Preferred Stock. Any series of
Preferred Stock so issued may rank senior to Common Stock with respect to the
payment of dividends or amounts to be distributed upon liquidation, dissolution
or winding up. There are no agreements or understandings for the issuance of
Preferred Stock, and the Board of Directors has no present intent to issue any
Preferred Stock, although it may determine to do so in the future.


                                      F-16
<PAGE>   47


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999


NOTE 9 - STOCKHOLDERS' EQUITY - Continued

Common Stock

Subject to the rights of the holders of any Preferred Stock which may be
outstanding, each holder of Common Stock on the applicable record date is
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefore and, in the event of liquidation, to
share pro rata in any distribution of the Company's assets after payment or
providing for the payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Each holder of Common Stock is entitled to one vote
for each share held of record on the applicable record date on all matters
presented to a vote of stockholders, including the election of directors.
Holders of Common Stock have no cumulative voting rights or preemptive rights to
purchase or subscribe for any stock or other securities. There are no conversion
rights or redemption or sinking fund provisions with respect to the Common
Stock.


NOTE 10 - STOCK OPTIONS AND WARRANTS

The Company has adopted the 1997, 1998, and 2000 Stock option Plans
(collectively, the "Stock Option Plans") under which 1,000,000 shares of common
stock have been reserved for issuance upon exercise of stock options for each
plan. The Stock Option Plans are designed as a means to attract, retain and
motivate qualified and competent persons who are key to the Company, including
employees, officers and directors, and those upon whose efforts and judgment the
success of the Company is largely dependent, through the encouragement of stock
ownership in the Company by such persons.

The Compensation Committee of the Board of Directors (the "Compensation
Committee") administers and interprets the Stock Option Plans and is authorized
to grant options there under to all eligible employees, officers, and directors
of the Company. The Stock Option Plans provide for the granting of both
incentive stock options and nonqualified stock options. Options are granted
under the Stock Option Plans on such terms and at such prices as determined by
the Compensation Committee, except that the per share exercise price of
incentive stock options cannot be less than the fair market value of the common
stock on the date of grant. Each option is exercisable after the period or
periods specified in the option agreement, but no option may be exercisable
after the expiration of ten years from the date of grant. Incentive stock
options granted to an individual who owns (or is deemed to own) at least 10% of
the total combined voting power of all classes of stock of the Company, must
have an exercise price of at least 110% of the fair market value of the common
stock on the date of grant and a term of no more than five years.

No incentive stock option may be transferred other than by will or the laws of
descent and distribution, unless the Compensation Committee's prior written
consent is obtained (which consent may be obtained at the time an option is
granted) and the transaction does not violate the requirements of Rule 16b-3
promulgated under the Exchange Act on nonqualified stock options. Each option
may be exercisable during the optionee's lifetime only by the optionee, or in
the case of a nonqualified stock option that has been transferred with the
Compensation Committee's prior written consent, only by the transferee consented
to by the Compensation Committee. Unless the Compensation Committee's prior
written consent is obtained (which consent may be obtained at the time an Option
is granted) and the transaction does not violate the requirements of Rule 16b-3
promulgated under the Exchange Act, no shares of common stock acquired by an
officer of the Company (as that term is defined under Rule 16b-3) or director,
pursuant to the exercise of an option, may be transferred prior to the
expiration of the six-month period following the date on which the option was
granted.


                                      F-17
<PAGE>   48


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999


NOTE 10 - STOCK OPTIONS AND WARRANTS - Continued

The Stock Option Plans also authorize the Company to make or guarantee loans to
optionees to enable them to exercise their options. Such loans must (i) provide
for recourse to the optionee, (ii) bear interest at a rate no less than the
prime rate of interest, and (iii) be secured by the shares of common stock
purchased. The Board of Directors has the authority to amend or terminate the
Stock Option Plans, provided that no such action may substantially impair any
outstanding option without the written consent of the holder, and provided that
certain amendments of the Stock Option Plans are subject to shareholder
approval. Unless terminated sooner, the Stock Option Plans will continue in
effect until all options granted there under have expired or been exercised,
providing that no options may be granted after 10 years from the date the Board
of Directors adopted the Stock Option Plans.

The following is a summary of all the stock option activity:

                                                                   Weighted
                                                                    Average
                                                    Stock        Exercise Price
                                                   Options         Per Share
                                                  ---------      -------------

          Outstanding as of December 31, 1998     1,315,000          $ 3.93
          1999 activity
            Granted                                 710,000          $ 3.87
            Exercised                               (17,200)         $ 3.34
            Expired or canceled                        (600)         $ 5.00
                                                  ---------          ------

          Outstanding as of December 31, 1999     2,007,200          $ 3.91
          2000 Activity
            Granted                                 780,000          $ 6.06
            Exercised                                    --              --
            Expired or canceled                     (87,500)         $ 4.13
                                                  ---------          ------

          Outstanding as of December 31, 2000     2,699,700          $ 4.53
                                                  =========          ======


The weighted average fair value of options granted during 1999 and 2000 on
granted options whose exercise price exceeds the market price of the stock on
the grant date is $.80 and $.81. There were no options granted during 2000 on
granted options whose exercise price is less than the market price of the stock
on the grant date.



                                      F-18
<PAGE>   49


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999

NOTE 10 - STOCK OPTIONS AND WARRANTS - Continued

The following table summarizes information concerning currently outstanding and
exercisable stock options:

<TABLE>
<CAPTION>
                                                    Weighted Average
                                                        Remaining          Weighted
          Range of                    Number        Contractual Life       Average
       Exercise Price              Outstanding           (Years)       Exercise Price
       --------------              -----------      ----------------   --------------

     <S>                           <C>              <C>                <C>
     Outstanding Shares
               $ 1.00                 200,000             6.00              $1.00
       $3.00 - $ 4.00               1,038,334             8.45              $3.06
       $5.00 - $ 5.50               1,061,367             8.07              $5.15
       $7.00 - $10.00                 399,999             9.46              $8.47

     Exercisable Shares
               $ 1.00                 200,000                               $1.00
       $3.00 - $ 4.00                 588,334                               $3.11
       $5.00 - $ 5.50                 878,034                               $5.10
               $10.00                  50,000                               $8.50
</TABLE>

The following is a summary of all warrants activity:

<TABLE>
<CAPTION>
                                                                        Range of       Weighted Average
                                                                        Per Share       Exercise Price
                                                     Warrants         Exercise Price      Per  Share
                                                    ---------         --------------   ----------------

          <S>                                       <C>               <C>              <C>
          Outstanding at December 31, 1998          3,826,800          $5.25 - 7.98         $6.37
          1999 Activity
            Granted                                        --                    --            --
            Expired or canceled                            --                    --            --
            Exercised                                  (2,000)         $       6.25         $6.25
                                                    ---------

          Outstanding at December 31, 1999          3,824,800          $5.25 - 7.98         $6.34
          2000 Activity
            Granted                                        --                    --            --
            Expired or canceled                            --                    --            --
            Exercised                                      --                    --            --
                                                    ---------

          Outstanding at December 31, 2000          3,824,800          $5.25 - 7.98         $6.34
                                                    =========
</TABLE>


                                      F-19
<PAGE>   50


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2000 AND 1999

NOTE 10 - STOCK OPTIONS AND WARRANTS - Continued

The Company has adopted only the disclosure provisions of SFAS No. 123, as it
relates to employee awards. APB No. 25 is applied in accounting for the
Company's plans. Accordingly, no compensation expense is recognized related to
the stock based compensation plans. The pro forma net earnings and net earnings
per common share, if the Company had elected to account for its plans consistent
with the methodology prescribed by SFAS No. 123, are as follows:

<TABLE>
<CAPTION>

                                                                      2000               1999
                                                                  ------------        -----------
          <S>                                                     <C>                 <C>
          Net (loss) earnings:
            As reported                                           $ (1,916,197)       $    58,955
            Pro forma                                             $ (2,815,994)       $  (135,655)

          Net (loss) earnings per common share - basic:
            As reported                                           $       (.25)       $       .01
            Pro forma                                             $       (.36)       $      (.02)

          Net (loss) earnings per common share - diluted:
            As reported                                           $       (.25)       $       .01
            Pro forma                                             $       (.36)       $      (.02)
</TABLE>

The fair value of each option grant is estimated on the date of grant using the
binomial option pricing model with the following weighted average assumptions
used for grants in 2000 and 1999, respectively, no dividend yields for both
years; expected volatility of 90% and 43.1%; risk free interest rates of 5.75%
and 5.92%; and expected lives of 3.0 and 3.0 years.

NOTE 11 - RELATED PARTY TRANSACTIONS

In July 1999, The Colonial Group, a company that is majority owned by a director
and stockholder, agreed to provide investor-relations services to the Company
for $3,000 per month. During 1999, $18,000 was recorded as expense under this
agreement. This service agreement was terminated on January 1, 2000.

In April 1999, 800 Travel Systems entered into a $60,000 loan agreement and a
$100,000 deferred compensation agreement with Mr. Mark Mastrini, then President
and CEO of 800 Travel Systems. Pursuant to the terms of the loan agreement, the
loan amount would be forgiven in two $30,000 installments if Mr. Mastrini was
employed by 800 Travel Systems as of January 1, 2000 and 2001, respectively. In
June 2000, Mark D. Mastrini resigned from the Company, the deferred compensation
agreement was terminated, and the remaining outstanding loan balance of $30,000
is due to the Company according to the terms of the agreement. In June 2000, 800
Travel Systems entered into a consulting agreement for the term of 12 months
with Mark D. Mastrini, under which $180,000 of fees will be paid and expensed
over the life of the agreement. During 2000, $105,000 was recorded as expense
under this agreement.

The Company provides office space to a business owned by the current Chief
Executive Officer, as agreed to in his employment agreement. Annual costs of the
Company amount to approximately $10,000. The Company also provides space and
administrative support and charged fees to a company of which the current Chief
Executive Officer is the Chairman.


                                      F-20