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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                   FORM 10-KSB

(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998

|_| TRANSITION REPORT UNDER 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 registrant as specified in its charter)

                  Delaware                                    59-3343338
       (State or other jurisdiction of                     (I.R.S. Employer
       incorporation or organization)                     Identification No.)

              4802 Gunn Highway
               Tampa, Florida                                    33624
  (Address of principal executive offices)                    (Zip Code)

       Registrant's telephone number, including area code: (813) 908-0903

Securities registered under Section 12(b) of the Securities Exchange Act of
1934:

                                                         Name of each exchange
             Title of Each Class                          on which registered
             -------------------                          -------------------
        Common Stock, $0.01 par value                    Boston Stock Exchange
  Redeemable Common Stock Purchase Warrants              Boston Stock Exchange

                Securities registered under Section 12(g) of the
                        Securities Exchange Act of 1934:

                               Title of Each Class
                               -------------------
                                      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 |_| Yes |X| No

      The revenues of registrant for the fiscal year ended December 31, 1998
were approximately $11,500,000.

      The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 25, 1999, was approximately $45,747,202 based upon
a last sales price of $7.50.

      As of March 25, 1999, there were 7,597,096 shares of the registrant's
Common Stock outstanding.
<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

      The documents incorporated by reference into this Form 10-KSB and the
Parts hereof into which such documents are incorporated are listed below:

                     Document                                     Part

Those portions of the registrant's proxy                           III
statement for the registrant's 1999
Annual Meeting (the "Proxy Statement")
that are specifically incorporated by
reference into this Form 10-KSB.


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<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

General

      800 Travel is a leading direct marketer of travel related services,
focused primarily on providing air transportation reservation services. The
Company provides low-priced airline tickets for domestic and international
travel to its customers through its easy-to-remember, toll-free numbers
"1-800-LOW-AIR-FARE" (1-800-569-2473), "1-800-FLY-4-LESS" (1-800-359-4537) and
"1-888-999-VUELA" (1-888-999-8835), and through its website on the World Wide
Web (at www.lowairfare.com). The Company operates 7 days a week throughout the
year out of its two reservation centers, one in Tampa, Florida and the other in
San Diego, California. The Company's website was launched in late December 1998
and had over one million hits during its first full month of operation.

      The Company generates revenues principally from (i) commissions on air
travel tickets, (ii) override commissions on air travel tickets the Company
books on certain airlines, (iii) segment incentives under its contract with
SABRE, (iv) co-op promotions with other suppliers of travel-related products and
services, such as long-distance telephone companies, car rental companies and
hotels, and (v) service fees that it charges its customers. The Company markets
its services primarily by advertising in Yellow Pages throughout the continental
United States with populations whose general travel profiles are attractive to
the Company.

      The Company's website utilizes the Interactive Reservation Internet System
("IRIS(TM)"). IRIS enables the Company's customers to reserve airline tickets on
line with the real-time interactive assistance of the Company's trained travel
agents. IRIS capitalizes on various technologies to provide a unique and easy
means for the customers to find low airfares on the Internet. The Company's
website affords its customers the convenience of the internet and the expertise
of its reservation agents.

The Initial Public Offering; Stevens Merger

      In January 1998, the Company 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 under the underwriters over-allotment option). The
gross proceeds of the IPO were approximately $7,138,000.

      Simultaneously with the IPO, the Company completed the acquisition of the
Joseph Stevens Group, Inc. ("Stevens"). Stevens' 50 reservation agents provided
airline tickets for domestic and international travel to consumers through its
"1-800-FLY-4-LESS" (1-800-359-4537) toll-free number.

      In consideration for all of the outstanding capital stock of Stevens,
pursuant to the Merger Agreement among the Company, Stevens and the Joseph
Stevens Group, LLC ("JSG"), the sole shareholder of Stevens, the Company issued
to JSG (i) 383,333 shares of Common Stock, (ii) 250,000 Warrants identical to
those sold in the IPO and (iii) a promissory note in the amount of approximately
$1.6 million, which was subsequently repaid. In addition the Company agreed that
if on the second anniversary of the closing of the IPO the value of the portion
of the 383,333 shares issued to JSG then held by JSG, together with the value of
any consideration received for shares no longer held by JSG, was less then
$2,571,429, the Company would issue to JSG such number of shares of the
Company's Common Stock, based upon its then bid price, to make up the deficiency
(the "Make-Whole Rights").

      Subsequent to completion of the Stevens Merger, the Company entered into
an agreement with JSG whereby JSG forfeited its Make-Whole Rights and returned
184,615 shares of Common Stock to the Company for $558,000. In addition, the
Company concurrently agreed to close on the purchase of certain equipment
located in Stevens' office and assume certain equipment leases for an additional
$240,000.


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<PAGE>

Operating Strategy

      The Company's operating strategy is to (i) strive to provide its customers
with the lowest-priced airfare available for a particular travel route at the
time of reservation on those airlines whose tickets the Company sells, (ii)
focus on consumer air travel, which the Company believes is the most profitable
segment of the air travel agency industry, (iii) provide convenient, quick
service to its customers, (iv) maintain low operating costs by utilizing only
two operating facilities, (v) use state-of-the-art technology to maximize
operating efficiencies, (vi) constantly review and update its relationships with
major airlines and SABRE to obtain favorable commission structures, and (vii)
provide incentives to its sales force through a performance-based compensation
structure. The Company believes that this strategy distinguishes it from most
travel agencies in the United States, and that significant internal growth
opportunities exist as customers' demand for low-price air travel remains
unsatisfied through traditional sources and technological developments in the
area of information processing enable increasingly efficient global distribution
of travel information.

      Low-Priced Airfare on Major Airlines

      The Company strives to provide its customers with the lowest-priced
airfare available for a particular travel route at the time of the reservation
on those airlines whose tickets the Company sells (which includes most major
U.S. and international airlines), using the comprehensive ticket information
available on its customized Turbo SABRE system. The Company's turbo SABRE system
provides the operating reservation agent, within seconds of a request for a
particular route, up to 900 ticket options ranked in order of price. The
reservation agent can then 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's operating strategy
is based on generating large sales volume rather than on high margins on
individual tickets. The Company's customers generally have one objective --
lowest-priced airfares - and the Company's strategy allows it to satisfy its
customers' demands for low airfares while obtaining higher commissions and
additional incentives for higher volumes. The Company believes that its ability
to provide low-priced airfare on the airlines whose tickets it sells provides a
distinct competitive advantage in attracting and retaining customers.

      Until recently, the standard base commission rate paid by most airlines
was 10%, subject to a cap of $25 for one-way and $50 for roundtrip tickets. In
addition to the base commission, the Company and certain other large-volume
travel agents are sometimes paid "override" commissions as an incentive to
direct traffic to a particular airline. In September 1997, most major airlines
reduced to 8% from 10% the standard base commission paid to traditional travel
agents, following previous reductions in the commissions paid to online travel
services to 5% from 10%. The Company anticipates that this downward pressure on
commission rates will continue, putting financial pressure on both traditional
and online travel agencies.

      The Company sells tickets for a large number of major U.S. and
international airlines. The Company is authorized to sell tickets on behalf of
all major domestic airlines including Continental, United, Northwest, TWA,
American, Alaska, Delta, Midway, Southwest, and U.S. Airways. The Company
constantly monitors and periodically revisits its existing relationships with
individual airlines, and attempts to establish new relationships with other
airlines, as part of its general strategy of keeping abreast of market
conditions and industry trends.

      Focus on Consumer Air Travel

      The Company believes that consumer air travel is the most profitable
segment of the air travel industry, and that it can compete effectively in this
segment because of its high technology, telemarketing approach to the consumer
air travel business and the resulting efficiencies. The Company considers the
consumer market to include any person who pays for his or her own travel
expense, regardless of the purpose of the travel, as opposed to business
travelers whose employers pay for their travel expenses. However, the


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<PAGE>

Company does sell to certain customers who purchase air travel for business
purposes which is paid for by their employers.

      The Company believes that its 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 contrast to the more time-consuming arrangements for hotel and car-rental
reservations. 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.

      Convenient Service

      The Company believes that along with low prices, another significant
factor in a customer's decision to purchase air travel is convenience of
service. 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 telemarketing
service, coupled with its delivery of tickets by next-day courier, eliminates
the need for customers to visit a travel agency. The Company offers one source
for the low-priced airfares from numerous carriers, thus eliminating the need
for customers to call several air carriers or travel agents. In addition, the
easy-to-remember "1-800-LOW-AIR-FARE" and "1-800-FLY-4-LESS" names and
associated numbers, "1- 800-569-2473" and "1-800-359-4537" facilitate repeat
calls from customers who may call on subsequent occasions from other locations
where the area code may be different or where they may not have access to a
Yellow Pages directory.

      Low Operating Costs

      The Company seeks to have the lowest margin of operating costs in the
travel agency industry. The Company minimizes its operating costs by processing
all reservations and purchases through two centralized facilities, rather than
duplicating resources at numerous locations. Since customers generally do not
physically visit the Company's reservation centers, the Company did not
construct expensive locations like those of traditional travel agents.
Similarly, the Company does not need to incur the expense of furnishing its
reservation facilities to accommodate customers, but rather maintains functional
reservation centers geared toward maximizing the number of reservation agents
that can operate at any one time. The Company also minimizes its costs by basing
its marketing strategy on advertising through Yellow Pages directories
throughout the United States, which the Company believes is the most
cost-effective method of advertising available. The Company contracts for its
employees through a professional employee leasing organization. All of the
Company's workers (other than management) are retained on an hourly basis
through such services. The Company is responsible for training and supervising
the job performance of worksite employees. The Company has determined that it is
more economical to contract with employee providers than to directly employ
hourly workers.

      State-of-the-Art Technology

      The Company uses state-of-the-art computer technology to access all major
U.S. and international air carriers' routes and fares. Each of the Company's
computer terminals is linked directly to the SABRE system. 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.


                                       5
<PAGE>

      Review and Update Relationships with Airlines

      The Company's management constantly reviews and updates its relationships
with the major airlines and SABRE to obtain favorable commission structures. The
Company believes that as a result of such efforts, the Company has been able to
obtain commission structures that are more favorable than those obtained by
travel agents generally.

      Employee Incentives

      The Company's reservation agents are organized into teams of approximately
20 reservation agents under one supervisor. The reservation agents earn a base
salary 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 retain and constantly motivate the best-performing reservation agents.

Growth Strategy

      The Company has a three-point growth strategy:

      o Internal Growth.

      The Company's reservation centers are currently operating at less than
      maximum capacity because the Company can add additional reservation agents
      while maintaining the quality of its customer service and operating
      efficiencies. Consequently, the Company believes it can grow substantially
      over by adding additional personnel at its current facilities. The
      Company's Tampa and the San Diego facilities can accommodate a combined
      total of 1,560 reservation agents working in staggered shifts, or 520
      working at any one time.

      o Marketing.

      The Company's marketing strategy focuses on advertising in Yellow Pages
      directories in the largest standard metropolitan areas ("SMA's"). The
      Company has advertisements of its toll-free numbers listed in directories
      reaching a majority of the U.S. population. To increase the demand for its
      services the Company will expand the number of Yellow Page directories in
      which it is listed. Thereafter, the Company anticipates increasing
      consumer awareness of its easy-to-use, low-priced airfare approach to
      travel reservations through select print and radio advertising campaigns.

      o Strategic Acquisitions; Additional Services.

      The Company believes that opportunities exist for it to expand its market
      share in the travel market and telemarketing industries through the
      acquisition of other travel companies with valuable customer lists and
      intellectual property, and in markets outside the travel arena by
      acquiring other call center operations. The Company expects that such
      acquisitions would involve the purchase of the relevant names, service
      marks and telephone numbers, as well as any logos and other identifying
      features associated with them. The Stevens Merger is an example of one
      such strategic acquisition. The Company may also seek to increase demand
      for its services by providing new services in addition to airline
      reservations. In evaluating potential new services the Company will
      consider the profit potential as well as the potential for increased
      volume.


                                       6
<PAGE>

Services

      The primary service the Company offers to customers who call its
toll-free numbers or visit its website is a reservation service for domestic and
international flights. The Company strives to provide its customers with the
lowest-priced airfare available for a particular travel route at the time of the
reservation. The Company's Turbo SABRE system is customized to provide to the
reservation agent within seconds up to 900 ticket options, ranked in order of
price. Once tickets are purchased, they are printed at the Company's Tampa
reservation center and delivered by overnight courier to customers or made
available at the airline's ticket counter as an "electronic ticket."

      The Company's reservation centers operate 16 hours a day, throughout the
year. Each reservation agent operates a computer terminal that accesses the
SABRE travel reservation and information system. The Company adjusts the number
of reservation agents serving customers on an hourly basis. At the peak hours of
11:30 a.m. through 4:30 p.m., Eastern time, the Company has the most reservation
agents working, yet is not able to answer all of the calls it receives.

      Repeat Customers

      The Company believes that repeat customers are key to its growth. The
Company's "1-800-LOW- AIR-FARE" (1-800-569-2473) number has a rate of repeat
customers (meaning customers who purchase at least one more ticket within a
year) of approximately 40%, and the Company's "1-800-FLY-4-LESS" (1-800-
359-4537) number has a repeat customer rate of approximately 50%. The Company
believes that while customers are initially attracted by the low-priced airfares
made available by the Company, they become repeat customers because of their
satisfaction not only with the prices but also the convenience of being able to
book their reservations on one relatively brief toll-free telephone call. The
Company believes it can generate internal growth by obtaining an even larger
portion of the travel business of its existing customers and consequently
increasing its repeat customer business.

Operations

      The Company's operations generate revenues principally from (i)
commissions on air travel tickets, (ii) override commissions on air travel
tickets the Company books on certain airlines, (iii) segment incentives under
its contract with SABRE, (iv) co-op promotions with other suppliers of
travel-related products and services, such as long-distance telephone companies,
car rental companies and hotels, and (v) service fees that it charges its
customer.

      Standard Commissions

      In accordance with industry practice, the Company receives a commission of
approximately 8% of the price of each ticket that it sells. Though most airlines
pay online travel agencies base commissions of 5% or less, because of the manner
in which the Company's website operates, it receives the same commission whether
it services a customer online or over the phone. Most major U.S. airlines impose
caps on such commissions of $25 dollars for one-way domestic tickets, $50
dollars for round-trip domestic tickets, $50 for one-way international tickets
and $100 for round-trip international tickets. From time to time, major U.S. air
carriers informally waive the commission cap for the Company and other large
travel agencies. Such waivers generally apply to sales of tickets for travel on
selected routes and are granted to provide an incentive to increase sales for
those routes. In addition, the Company obtains higher commissions through the
receipt of override commissions in excess of the standard 8% commission pursuant
to agreements with most of the major U.S. airlines. Due to such override
commissions and waivers of the commission cap and the


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<PAGE>

Company's strategy of selling tickets on airlines with which it has override
commission arrangements, the Company often receives a commission above the
commission cap.

      Override Commissions

      The Company has entered into agreements with certain airlines for the
payment of override commissions above the standard industry commission rate.
Under such agreements, additional commissions are generally awarded if the
volume of ticket sales surpasses certain agreed upon thresholds based upon
ticket sales. Override commissions are generally paid quarterly and, depending
upon the specific agreement with the air carrier, may be paid directly by check
from the air carrier to the Company, by means of net payments by the Company to
the Airlines Reporting Corporation (the "ARC"), a corporation owned and
established by the airlines to provide reporting, settlement and related
services in connection with the sale of transportation by travel agencies in the
U.S., with respect to amounts owed to the air carrier, or through ARC by means
of a credit memo in favor of the Company.

      Segment Incentives under SABRE Contract

      The Company earns additional revenue in the form of a fee from SABRE for
each segment of air travel that it sells. A segment of air travel is non-stop
air travel between two destinations.

      Service Fee; Shipping and Handling

      The Company also charges customers a service fee per airline ticket
sold. These fees are calculated into the cost of a ticket when quoted to the
caller. Because of the Company's override commission structure, its quoted price
for tickets (inclusive of the service charge) is generally lower than the
lowest-priced published fare quoted by the airlines. The Company also earns a
shipping and handling fee (net of expenses) for delivering tickets to its
customers.

      Agreements with Consolidators

      The Company also sells air travel tickets offered by consolidators.
Consolidators purchase large number of tickets directly from air carriers for
resale to the public. When the Company sells such tickets, the reservation is
generally not booked through SABRE or settled through ARC, and the Company is
paid its commission directly from the consolidator. The Company has entered into
an agreement with a consolidator that sells tickets on TWA at a discount (the
"TWA Discounter") pursuant to which it (i) solicits customers to purchase
tickets for air travel on TWA at discounted fares from the TWA Discounter and
(ii) solicits businesses to enter into agreements for the purchase of air travel
on TWA from the TWA Discounter (the "TWA Agreement"). In 1998, the TWA Agreement
was extended to January 31, 2003, and is terminable before such date on 15 days'
prior written notice by either party. The Company receives a 15% commission on
each air travel ticket solicited by the Company or pursuant to an agreement
solicited by the Company. Air travel tickets sold by the Company pursuant to the
TWA Agreement, unlike sales from most other consolidators, are booked through
SABRE; however, the Company receives its commission directly from the TWA
Discounter monthly. Although the TWA Discounter estimates that it will be able
to continue to sell tickets on TWA through 2003, the expiration date of the TWA
Agreement, there can be no assurance that the TWA Discounter will be able to do
so. Also, there can be no assurance that the Company's TWA Agreement will not be
terminated before or be extended beyond its scheduled expiration date.

Marketing

      The Company focuses its marketing efforts on placing advertisements
listing its easy-to-remember names and toll-free telephone numbers in Yellow
Pages directories. Given the broad distribution of Yellow Pages directories in
metropolitan areas and other large markets, the Company's strategy is to place
advertisements in directories of the largest SMA's, thereby reaching the
greatest number of consumers with


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<PAGE>

each advertisement. The Company has advertisements of its toll-free numbers
listed in directories reaching a majority of the U.S. population. To increase
demand for its services, the Company intends to expand the number of Yellow Page
directories in which it advertises. Thereafter, the Company anticipates
increasing consumer awareness of its easy-to-use, low-priced airfare approach to
travel reservations through increased select print and radio advertising
campaigns.

SABRE Technology

      Computerized global distribution systems are the principal means of air
travel distribution in the United States and a growing means of air travel
distribution internationally. These systems provide real-time access to data on
airfares, availability and other travel information. Airfares are constantly
changing, with as many as one million changes being made in a day. Given the
complexity of the various global distribution systems, the Company believes that
the typical consumer will only be well served if a reservation agent is involved
in the transaction.

      The Company has chosen the SABRE system as its reservation system. A
typical SABRE transaction -- consisting of an information request by a
subscriber, a search in SABRE and a response to the subscriber -- is completed
within seconds. SABRE's "one-stop shopping" capabilities permit the Company to
locate, price, compare and purchase travel and travel-related products and
services that best satisfy the traveler's requirements.

      General

      SABRE was developed in the 1960's. SABRE evolved from American Airlines'
internal reservation system into a global distribution system when SABRE's
content was expanded to include additional airlines and other travel providers.
Other global distribution systems include Amadeus/System One (owned by Air
France, Continental Airlines, Iberia and Lufthansa); Covia, (owned by United
Airlines, British Airways, Swissair, KLM Royal Dutch and USAir, among others)
and Worldspan (owned by Delta, Northwest and TWA). Each offers similar products
and services.

      The SABRE system is able to perform high-volume, high-reliability,
real-time transactions processing 24 hours a day, 365 days a year, enabling the
creation of an efficient electronic marketplace for the sale and purchase of
travel. The SABRE system maintains approximately 45 million airfares (updated
throughout the day) and processes an average of 93 million requests for
information per day. Such frequent updates of airfares are essential for the
Company to be able to strive to provide its customers with the lowest-priced
airfares. Through SABRE, reservations may be booked on all major U.S. and
international airlines, but generally not on charter companies or certain small
airlines or on air travel offered for resale by consolidators. In addition to
providing information to subscribers about airlines and other travel providers
and their products and services, SABRE also allows travel agency subscribers to
print airline tickets, boarding passes and itineraries and purchase travel
insurance or book theater tickets or limousines. Additionally, SABRE provides
subscribers with travel information on matters such as currency, health and visa
requirements, weather and sightseeing.

      Turbo SABRE

      Because travel agencies have differing needs, based on, among other
things, volume and location, the SABRE interface can be modified to meet the
specific needs of different travel agents. Travel agents can choose SABRE
interfaces that range from simple text-based systems to feature-laden graphical
interfaces. The Company has taken advantage of these options by choosing the
Turbo SABRE system, an advanced point-of-sale interface that allows for screen
customization and reservations/sales process structuring but eliminates
SABRE-specific commands, thereby reducing keystrokes and training requirements.
Turbo SABRE also


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<PAGE>

provides data not provided in the basic SABRE system, such as back office hosts
and local area network (LAN) databases.

      The Company has added to its SABRE system a number of programs written and
developed exclusively for the Company. These include programs that generate
"pop-up" windows to supply frequently requested or used information, as well as
programs to alert reservation agents, supervisors and customer service agents to
errors frequently made by system operators. These customized features enhance
the speed and efficiency of the Company's operations.

      SABRE Agreements

      In April 1996, the Company renewed the agreement pursuant to which it
subscribes to the SABRE system at its Tampa headquarters for a five-year term.
In November 1996, the Company also executed a five-year subscriber agreement
pursuant to which it subscribes to the SABRE system at its San Diego reservation
center. Under these agreements, SABRE provides the Company with the hardware,
software, technical support and other services the Company needs to access SABRE
in return for leasing fees. These fees are reduced by the "segment incentives."
The Company is credited with for each flight segment it books (at both its Tampa
and San Diego facilities) through the SABRE system. To the extent that the
segment incentives earned by the Company exceed the fees payable by it to SABRE
during each quarter, the Company receives such excess in cash.

Intellectual Property

      The Company markets its services in the United States under the names,
"1-800-LOW-AIR-FARE," "1-800-FLY-4-LESS" and "1-888-999-VUELA."
"1-800-FLY-4-LESS" and "1-888-999 VUELA" together with their logos are federally
registered service marks. The Company has filed an application to register the
"1-800-LOW-AIR-FARE" name and logo as a federal service mark with the U.S.
Patent and Trademark Office.

      On January 12, 1998, the Company received a letter from counsel for Travel
800, LLC, a wholly-owned subsidiary or Travel Services International, Inc.
("Travel"), (i) stating that the Company's use and advertisement of its "1-800
LOW-AIRFARE" mark and corresponding number is causing confusion among consumers
and regulatory problems for Travel, (ii) claiming that Travel commenced use and
promotion of its "1-800 LOW-FARE" mark and number prior to the Company's use and
advertisement of its "1-800 LOW-AIRFARE" mark and number, and (iii) requesting
that the Company cease and desist from continued use and advertisement of its
"1-800 LOW-AIRFARE" 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 Office (the "Board") a Notice of Opposition (the "Opposition")
opposing the Company's application for registration of the "1-800 LOW-AIRFARE"
mark.

      The Company has investigated the facts underlying Travel's letter and
Opposition and, through its counsel, is mounting a vigorous defense of its
rights to use and market the "1-800 LOW-AIRFARE" name and number. In response to
Travel's letter and Opposition, the Company filed an answer in which it has
sought to have the Board overrule the Opposition and permit the Company to
register the "1-800 LOW-AIRFARE" mark. The parties are currently pursuing
discovery concerning the contentions advanced in this proceeding. If the Company
decides to abandon its "1-800 LOW-AIRFARE" mark and number, it will instead
promote its "1-800 FLY-4-LESS" mark and number.

      The Company considers its service marks and the related telephone numbers
to be valuable assets. There can be no assurance, however, that if others
develop trademarks or telephone numbers similar to those of the Company or
challenge the Company's use of its service marks, that the Company would be able
to successfully defend its marks.


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<PAGE>

Competition

      The travel agency industry is intensely competitive. The Company competes
with a variety of other providers of travel and travel-related products and
services. Its principal competitors are (i) other telemarketing travel
companies, (ii) traditional travel agencies, (iii) air carrier vendors, and (iv)
various online services available on the Internet. The Company's competitors
generally have access to the same technology the Company uses. See "-- SABRE
Technology." Although distribution through travel agents continues to be the
primary method of travel distribution, new channels of distributing directly to
businesses and consumers through computer on-line services, the Internet and
private networks are developing. In addition, individual consumers have access
to versions of SABRE and other computerized distribution systems of electronic
travel permitting consumer-direct travel distribution via personal computer,
cable television and other media. The Company faces competition in these
channels not only from its principal competitors but also from possible new
entrants in the sale of travel products and services and from travel providers
that distribute their products and services directly. Microsoft Expedia and
Preview Travel are some of the leading providers of on-line travel reservations,
and compete with directly with the Company. In addition, the Internet permits
consumers to have direct access to travel providers, thereby by-passing both
travel agents and global distribution systems such as SABRE. Some of the
Company's competitors have significantly greater financial or marketing
resources than the Company. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements
than the Company.

      During periods of recession in the travel industry, the Company's
competitive advantages with respect to quick, convenient processing of
reservations and purchases of lowest-priced airfare may be of reduced
importance. The Company's position in a recession may be more difficult than
some of its competitors, since the Company targets the consumer market which may
be the most adversely affected.

      The travel agency industry has also been experiencing consolidation. The
Company may experience increased competition in the future if this trend
continues and its competitors combine to form larger companies. The Company may
not be able to remain competitive with larger travel agencies in the future or
maintain its size and industry position relative to its competitors.

      The Company believes that its ability to compete depends upon a number of
factors, including price, reliability, name and toll-free number recognition and
speed of price quotations and reservations. There can be no assurance that the
Company will be able to continue to compete successfully with respect to these
or other factors.

Employees

      As of March 25, 1999, the Company had approximately 300 full-time
employees. All of the Company's reservation agents, supervisors and other
worksite employees are provided through a professional employee leasing
organization. The leasing organization is responsible for its employees'
benefits. The Company provides all necessary training. The services agreement
between the Company and the leasing organization may be terminated on 30 days'
prior written notice.


ITEM 2. DESCRIPTION OF PROPERTY

      The Company's corporate headquarters are located at its 33,000 square foot
reservation center in Tampa, Florida. The Company operates a second 9,200 square
foot reservation center in San Diego, California. The Company leases these
properties from unaffiliated third parties and believes that its existing
facilities are adequate for its current needs. The Company currently pays
approximately $15,600 per month for its Tampa headquarters and approximately
$12,000 per month for its San Diego reservation center.


                                       11
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

      The Company may be involved from time to time in routine litigation
incidental to its business. However, the Company believes that it is not a party
to any material pending litigation which is likely to have a significant
negative impact on the business, income, assets or operation of the Company.


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

      Not Applicable


                                       12
<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS

        The Company's 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 21, 1998 to
December 31, 1998 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.

                                                            High          Low
                                                            ----          ---
COMMON STOCK

     1998:

     First quarter (from January 21, 1998)                  5 3/4      1 3/32

     Second quarter                                         9 1/4      2 11/32

     Third quarter                                          7 1/8      3 1/4

     Fourth quarter                                        16 1/16     3 1/2

     1999:

     First quarter (through March 25, 1999)                10 5/16     5    

WARRANTS

     1998:

     First quarter (from January 21, 1998)                   23/32       3/16

     Second quarter                                         2 13/1       9/32

     Third quarter                                          2 1/16       15/16

     Fourth quarter                                        10            7/8

     1999:

     First quarter (through March 25, 1999)                 4 7/16     2 3/16

      On March 25, 1999, the closing bid prices of the Common Stock and the
Warrants, as reported by NASDAQ, were $7.50 and $3.25 respectively. As of
December 31, 1998, there were approximately 100 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 25, 1999, there were
approximately 4,000 beneficial holders of the Common Stock.

Dividends

      To date, the Company has neither declared nor paid any dividends on its
Common Stock nor does the Company anticipate that such dividends will be paid in
the foreseeable future. Rather, the Company 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 the Company's earnings, financial condition, capital requirements
and other factors which the Board of Directors deems relevant.


                                       13
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS

      The following is a discussion and analysis of the results of operations of
the Company for the years ended December 31, 1997 and 1998, and should be read
in conjunction with the financial statements of the Company and related notes
thereto included elsewhere herein.

Overview

      The Company operates as a direct marketer of travel related services,
primarily providing air transportation reservation services for domestic and
international travel to customers through its easy to remember, toll-free
numbers and through its website. The Company was formed in November 1995 to
acquire certain assets of and assume certain liabilities of 1-800-Low Airfare,
Inc. (the "Predecessor Business"). The acquisition was consummated on December
1, 1995. To expand its operations, in November 1996 the Company entered into a
Merger Agreement with Stevens and its sole shareholder, JSG. Pursuant to the
Merger Agreement, simultaneously with the closing of the Company's IPO on
January 21, 1998, Stevens was merged with and into the Company, with the Company
as the surviving corporation.

      The Company's operating revenues presently consist, and for the immediate
future will continue to consist, principally of (i) commissions on air travel
tickets; (ii) override commissions on air travel tickets booked on certain
airlines; (iii) segment incentives under the its contract with SABRE; (iv)
co-op promotions with other suppliers of travel-related products and services,
such as long-distance telephone companies, car rental companies and hotels; and
(v) service fees that it charge its customers.

      The Company's revenues are a function of the number and price of the
tickets its sells and the percentage of the price of such tickets it retains as
commissions and override commissions, as well as on the service charges imposed
on customers. As a result of its override agreements and an agreement with the
TWA Discounter, the Company is able to charge its customers a service charge
while still offering low priced tickets. The Company only began to impose
service charges in January 1997.

      The Company's operating expenses include primarily those items necessary
to advertise its services, maintain and staff its travel reservation centers,
including payroll, commissions and benefits; telephone; general and
administrative expenses, including rent and computer maintenance fees; and
interest, fees and expenses associated with the Company's financing activities.
Set forth below for the periods indicated are the gross dollar amounts of
reservations booked, revenues and revenues as a percentage of reservations, the
gross dollar amount of expenses, expenses as a percentage of revenues and net
loss as a percentage of revenues. The numbers in the following table for the
year ended December 31, 1995, include the results of operations of the
Predecessor Business.


                                       14
<PAGE>

<TABLE>
<CAPTION>
                            Year Ended                 Year Ended                 Year Ended                 Year Ended         
                           December 31,               December 31,               December 31,                December 31,
                               1995          %            1996           %          1997            %            1998          %
                           ------------   -------     ------------    ------     ------------    -------     ------------   ------
<S>                        <C>            <C>         <C>             <C>        <C>             <C>         <C>            <C>
Gross Reservations         $ 11,256,516               $ 23,590,782               $ 53,846,000                $ 76,680,000        
                           ============   =======     ============    ======     ============    =======     ============   ======
Revenues (including                      
override)(1)..............    1,224,908      10.9%       3,235,777      13.7%       8,321,916       15.5%      11,501,166     15.0%
                           ------------   -------     ------------    ------     ------------    -------     ------------   ------
OPERATING EXPENSES(2):                      
Employee Costs ...........    1,291,007     105.4%       2,490,770      77.0%       4,307,529       51.8%       5,421,019     47.1%
Telephone ................      407,396      33.3%         702,870      21.7%       1,250,888       15.0%       1,856,364     16.1%
Ticket Delivery ..........      156,694      12.8%         407,579      12.6%         771,249        9.3%       1,068,625      9.3%
Advertising ..............      333,957      27.3%         137,223       4.2%         293,036        3.5%         323,528      2.8%
General and                              
Administrative ...........    1,210,646      98.8%       1,768,058      54.6%       1,913,654       23.0%       2,609,034     22.7%
                           ------------   -------     ------------    ------     ------------    -------     ------------   ------
Total Expenses ...........    3,399,700     277.5%       5,506,500     170.2%       8,536,356      102.6%      11,278,570     98.1%
                           ------------   -------     ------------    ------     ------------    -------     ------------   ------
Other Income (Expense) ...     (129,133)     10.5%      (1,101,688)     34.0%         (48,065)       0.6%          79,270      0.7%
                           ------------   -------     ------------    ------     ------------    -------     ------------   ------
Net Earnings (Loss) ...... $ (2,303,925)    188.1%    $ (3,372,411)    104.2%    $   (262,505)       3.2%    $    301,866      2.6%
                           ============   =======     ============    ======     ============    =======     ============   ======
                                    
</TABLE>

(1) Revenues as a percentage of gross reservations.
(2) Expenses as a percentage of revenues.

Results of Operations

      In connection with the Stevens Merger, the Company and Stevens entered
into an Interim Operating Agreement pursuant to which the Company operated
Stevens' business for the account of the Company effective January 1, 1997
through the closing of the Stevens Merger. The numbers in the table above and in
the discussion below for the years ended December 31, 1997 and 1998, include the
operations of Stevens.

Year Ended December 31, 1998 ("Fiscal '98") Compared to Year Ended December 31,
1997 ("Fiscal '97")

      Revenues for Fiscal '98 increased 38% to $11,501,166 compared to
$8,321,916 for Fiscal '97. The increased revenues reflect the 42% increase in
gross reservations of $76,680,000 booked in Fiscal '98 as compared to
$53,846,000 booked in Fiscal '97. The increased gross reservations booked and
increased revenues reflect the increase in the volume of calls handled at each
of the Company's reservation centers as a result of increases in the number of
reservation agents and certain operating efficiencies. Revenues as percentage of
gross reservations decreased from 15.5% in Fiscal '97 to 15.0% in Fiscal '98 as
a result of lower commissions paid and caps on commissions imposed by many
airlines in Fiscal '98. This decrease was offset in part by the Company's
override commission agreements with certain airlines and consolidators, which
insulated the Company from the effects of the reduced commissions and caps, and
by the service fees the Company charges its customers.

      Operating expenses for Fiscal '98 increased 32% to $11,278,570 compared to
$8,536,356 for Fiscal '97. Despite the increase in operating expenses, operating
expenses declined from 103% of revenues in Fiscal '97 to 98% of revenues in
Fiscal '98. Operating expenses did not increase proportionate to the increase in
revenues due to the fact that many expenses (office rent, utilities, management
wages, etc.) remain relatively constant over a broad range of revenues. The
increase in operating expenses resulted primarily from increases in the
Company's payroll, commissions and employee benefits expenses; telephone and
ticket delivery expenses; and general and administrative expenses. The Company's
employee costs increased 26% to $5,421,019 in Fiscal '98 from $4,307,529 in
Fiscal '97. This increase reflects the increase in the number of reservation
agents, which were higher throughout Fiscal '98 as compared to the comparable
period of Fiscal '97. Consistent with the increase in the volume of tickets sold
by the Company, the Company recorded increases in its telephone and ticket
delivery expenses. The Company's ticket delivery expenses increased 39% to
$1,068,625 in Fiscal '98 as compared to $771,249 in Fiscal '97. The Company's
telephone expenses increased 48% from Fiscal '97 as compared to Fiscal '98
reflecting the increase in the volume of the Company's business and the
inefficiencies of its newer agents. These increases were not proportional with
the increase in the Company's volume. The Company's general and administrative
costs decreased slightly as a percentage of revenues, to 22.7% in Fiscal '98
compared to 23% in Fiscal '97. This decrease was achieved despite the


                                       15
<PAGE>

costs (legal, accounting, printing and others) incurred as a result of the
Company being a reporting company during Fiscal '98.

      During Fiscal '98 the Company generated a profit from operations of
$222,596; which was supplemented by net interest income of $79,270, to yield a
net profit of $301,866, as compared to Fiscal '97's operating loss and net loss
of $214,440 and $262,505, respectively. The Company's ability to generate a
profit during Fiscal '98 reflects the increase in the volume of its business as
outlined above.

Liquidity and Capital Resources

      The Company used $1,074,905 in operating activities during Fiscal '98. The
use of cash in Fiscal '98 reflects the Company's concerted effort to reduce
certain liabilities which had been allowed to grow during Fiscal '97 when the
Company applied its available cash to expenses in connection with its IPO.

      In Fiscal '98 the Company's capital expenditures were approximately
$2,600,000, reflecting costs associated with the Stevens Acquisition, software
development costs incurred in connection with its website, and leasehold and
equipment expenditures, portions of which were related to the website.

      In January 1998, the Company completed its IPO, from which it derived net
proceeds of approximately $2,993,000 after payments to Stevens in connection
with the Stevens merger.

      At December 31, 1998, the Company had intangible assets of approximately
$5,100,000, including goodwill of $4,762,864. The amount carried on the
Company's Financial Statements as Goodwill represents, primarily, the amounts
paid or the value of the shares of Common Stock issued in connection with the
acquisition of the assets of the Predecessor Business and the Stevens Merger, in
excess of the net fair value of the assets acquired. The ability of the Company
to realize the value of such Goodwill is a function of its ability to operate
profitably the business conducted with the assets acquired. The Company
periodically reviews the amount of Goodwill included in its Financial Statements
to determine whether it is appropriate to write-down all or any portion of such
amount. Any decision to write-down substantially the amount of Goodwill on the
Company's Financial Statements would result in a charge against the Company's
earnings.

Seasonality

      Based upon the results of its operations during 1998 and its knowledge of
the travel industry, the Company anticipates its business may be affected by
seasonality. Travel bookings typically are low in the first quarter, increase
during the second quarter as consumers plan their vacations and typically
decline in the fourth quarter. In response, the Company will vary the number of
agents on staff at any time. During 1998, the Company was able to decrease the
number of its reservation agents during the fourth quarter through attrition.
There can be no assurance that the Company may not have to take pro-active steps
to reduce its work force in response to seasonal fluctuations in the future.
Notwithstanding the Company's efforts, the seasonality of the travel industry is
likely to adversely impact the Company's business. Moreover, as a consequence of
such seasonality and other factors, the Company's quarterly revenue and
operating results will be difficult to forecast and period to period comparisons
of results may not be material.


                                       16
<PAGE>

OTHER CONSIDERATIONS

      In addition to the other information in this Report, the following should
be considered in evaluating the Company's business and prospects:

Limited Operating History; History of Losses; Future Operating Results. The
Company has been operating for less than four years and during that time it has
generated a significant accumulated operating loss. There can be no assurance
that the Company can continue to operate profitably, particularly if it seeks to
expand through acquisitions or the addition of new services. The Company only
recently initiated its online operations and, accordingly, its prospects in this
field must be considered in light of the difficulties encountered in any new
business.


                                       17
<PAGE>

Future Capital Needs. The Company intends to seek to expand its business to
increase sales volume. There can be no assurance that the Company's revenues
will increase or even continue at their current levels. If the Company were to
choose to expend significant resources to expand its operations, it is possible
that it would incur losses and negative cash flow. In such event it is likely
the Company would require additional capital. There is no assurance that such
capital will be available or, if available, be on terms acceptable to the
Company.

Unpredictability of Future Revenues; Fluctuations in Quarterly Results. As a
result of the Company's limited operating history, the Company is unable to
accurately forecast its revenues. The Company's current and future expense
levels are based on its operating plans and estimates of future revenues and are
to a large extent fixed. The Company 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 the Company's business, operating results and financial
condition. Further, if the Company should substantially increase its operating
expenses to offer expanded services, to fund increased sales and marketing or to
develop its technology and transaction-processing systems, and such expenses are
not subsequently followed by increased revenues, the Company's operating results
may deteriorate.

      The Company expects that it will experience seasonality in its business,
reflecting seasonal fluctuations in the travel industry. Seasonality in the
travel industry is likely to cause quarterly fluctuations in the Company's
operating results and could have a material adverse effect on the Company's
business, operating results and financial condition.

Risks Relating to Airline Commissions. In 1997 the major airlines announced
reductions in the commissions they will pay travel agents from approximately 10%
to approximately 8%. The Company anticipates continued downward pressure on
airline commission rates. Such future reductions, if any, could have a material
adverse effect on the Company.

      The Company is able to offer its customers attractive airfares in large
part due to the favorable override commission arrangements it has obtained for
selling tickets on certain airlines. For example, the Company is able to offer
attractive fares on TWA because of its override commission arrangement with a
consolidator which sells tickets on TWA at a discount (the "TWA Discounter").
The override commission agreements with most airlines are on a year-to-year
basis. If and when the TWA Discounter is no longer able to sell TWA tickets, or
such agreement otherwise expires, or if the Company is unable to extend its
current override commission arrangements with other carriers or enter into
similar arrangements with similar carriers, the Company could lose its
competitive advantages and its business could be materially adversely affected.

Risks Relating to the Airline Industry. Developments in the airline industry may
result in a decrease in the price or number of tickets the Company sells.
Concerns about passenger safety may result in a decrease in passenger air travel
and a consequent decrease in the number of tickets the Company sells. There can
be no assurance that any such developments will not occur or that the Company
will not be adversely affected by any such decrease in the level of passenger
air travel.

Risks of Year 2000 Non-Compliance. The economy in general, and the travel and
transportation industry in particular, may be adversely affected by risks
associated with the onset of the Year 2000. The Company's business, financial
condition, and results of operations could be materially adversely affected if
systems that it operates or systems that are operated by other parties (e.g.,
SABRE, members of the airline industry, utilities, telecommunications service
providers, data providers, credit card transaction processors) with which the
Company's systems interface, are not Year 2000 compliant in time. There can be
no assurance that the systems of the Company or the systems of these other
parties will continue to properly function and interface and will otherwise be
Year 2000 compliant. Although the Company is not aware of any threatened claims
related to the Year 2000, the Company may be subject to litigation arising from
such claims and, depending on the outcome, such litigation could have a material
adverse affect on the Company. It is not clear whether the Company's insurance
coverage would be adequate to offset these and other business risks related to
the Year 2000.

      The key systems integral to the operations of the Company's business are
the SABRE computer reservation system and its telephone switching equipment.
Because the Company books tickets in advance (in certain cases up to ten months
in advance), the Company may experience Year 2000 problems as early as the first
quarter of 1999. Representatives of SABRE have already implemented a project to
ensure that the SABRE system is Year 2000 compliant during the first half of
1999. Representatives of SABRE have already begun to upgrade the systems at the
Company's facilities and this work is substantially complete. The Company,
together with its telephone equipment vendors, have already completed service
intended to make sure its telephone switching equipment is Year 2000 compliant.

      The Company will continue to test its ancillary equipment and interface
with its vendors to determine if they are Year 2000 compliant and, if not, to
address any problems uncovered. The Company has substantially completed testing
its systems and does not see a need for substantial future expenditures with
respect to its systems.

      The expected costs and completion dates for the Year 2000 projected are
forward looking statements based on management's best estimates, which were
derived using numerous assumptions of future events, including the continued
availability of resources, third party modification plans and other factors.
Actual results could differ materially from these estimates as a result of
factors such as the availability and cost of trained personnel, the ability to
locate and correct all relevant computer codes, and similar uncertainties.

Contingency Plans.

      Given the inter dependence of the Company and certain third parties, for
example SABRE, ARC and other members of the airline industry, the Company may be
unable to maintain continuous operations if the systems of one or more of these
parties is not Year 2000 compliant. To the extent possible, the Company will
develop and implement contingency plans designed to allow continued operations
in the event of failure of the Company's or third parties' systems to be Year
2000 Compliant. For example, the Company plans to have dedicated staff available
at crucial dates to remedy unforeseen problems and may install defensive code to
protect its real-time systems from improperly formatted date data supplied by
third parties.

Dependence on SABRE System. The Company's ability to quote air travel ticket
prices, make reservations and sell tickets is dependent upon its contractual
right to use, and the performance of the SABRE electronic travel reservation
system. In April 1996, the Company entered into a five-year agreement with The
SABRE Group, Inc. to lease the SABRE system in its Tampa headquarters and in
November 1996, entered into a five-year agreement to lease the SABRE system in
its San Diego reservation center. If the Company were to lose the contractual
right to use the SABRE system through its inability to renew the agreements upon
expiration thereof or through the Company's default under the agreements during
the respective terms thereof, the Company 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


                                       18
<PAGE>

industry. There can be no assurance that a replacement system could be obtained
or, if obtained, leased on favorable terms or installed in time to successfully
continue operations.

      If the SABRE system were to cease functioning, the Company would not be
able to conduct operations until a replacement system were installed and became
operational. There can be no assurance that a replacement system could be
obtained or, if obtained, installed in time to successfully continue operations.
During any interruption in the operation of SABRE, the Company would lose
revenues. Other travel agencies using other travel reservation systems would not
be subject to such interruption of their operations, and the Company may lose
market share to such competitors. Upon the interruption of the operation of the
SABRE system, the Company could decide to commence operations with another
travel reservation system. Such a change in reservation systems could incur
substantial expenses for acquiring the right to use such system and retraining
its reservation agents. In addition, any impairment of the SABRE system which
does not cause it to cease operations could, nevertheless, adversely affect the
quality of the Company's services, resulting in lost revenues or market share
and could require the Company to subscribe to a different travel reservation
system.

Dependence Upon Key Personnel. The success of the Company is substantially
dependent upon the continuing services of Mark D. Mastrini, as well as other key
personnel. While the Company has employed a number of executives with industry
experience, the loss of Mr. Mastrini or other significant members of management
could have a material adverse effect on the Company's business, financial
condition and results of operations.

Shares Eligible for Future Sale. The Company has 7,597,096 shares of Common
Stock outstanding, without giving effect to an additional 4,501,156 shares
issuable upon exercise of options and warrants currently outstanding. Of the
currently outstanding shares, 2,821,966 are subject to "lock-up" agreements
which have prevented them from being offered on the open market. The lock-up
agreements with respect to 350,000 shares expires in July 1999 and the lock-up
agreements with respect to 2,471,966 shares expires in January 2000.

      The Company is unable to predict the effect, if any, that future sales of
Common Stock (or the potential for such sales), whether those currently subject
to lock-up agreements or otherwise, 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 could impair the Company's ability to raise
capital through an offering of securities and may adversely affect the market
price of the Common Stock.

Necessity to Maintain Current Prospectus and Registration Statement. The Company
must maintain an effective registration statement on file with the Commission
before the holder of any of the Warrants sold in its IPO may be redeemed or
exercised. It is possible that the Company may be unable to cause a registration
statement covering the Common Stock underlying the Warrants to be effective. It
is also possible that the Warrants could be acquired by persons residing in
states where the Company is unable to qualify the Common Stock underlying the
Warrants for sale. In either event, the Warrants may expire, unexercised, which
would result in the holders losing all the value of the Warrants.

State Blue Sky Registration Required to Exercise Warrants. Holders of the
Warrants have the right to exercise the Warrants only if the underlying shares
of Common Stock are qualified, registered or exempt from registration under
applicable securities laws of the states in which the various holders of the
Warrants reside. The Company cannot issue shares of Common Stock to holders of
the Warrants in states where such shares are not qualified, registered or
exempt. The Company has qualified the Warrants for listing on the Boston Stock
Exchange, which provides for blue sky registration in over 20 states.

Redeemable Warrants and Impact on Investors. The Warrants are subject to
redemption by the Company in certain circumstances. The Company's exercise of
this right would force a holder of a Warrant to exercise the Warrant and pay the
exercise price at a time when it may be disadvantageous for the holder to do so,
to


                                       19
<PAGE>

sell the Warrant at the then current market price when the holder might
otherwise wish to hold the Warrant for possible additional appreciation, or to
accept the redemption price, which is likely to be substantially less than the
market value of the Warrant in the event of a call for redemption. Holders who
do not exercise their Warrants prior to redemption by the Company will forfeit
their right to purchase the shares of Common Stock underlying the Warrants. The
foregoing notwithstanding, the Company may not redeem the Warrants at any time
that a current registration statement under the Securities Act covering the sale
of the shares of Common Stock issuable upon exercise of the Warrants is not then
in effect. See "Description of Securities--Warrants."

Forward-Looking Statements. This Report includes "forward looking statements"
within the meaning of Section 27A of the Securities Act, and Section 21E of the
Exchange Act. The actual results of the Company may differ significantly from
the results discussed in such forward-looking statements. Certain factors that
might cause such differences include, but are not limited to, the factors
discussed in this "Risk Factors" section. The safe harbors contained in Section
27A of the Securities Act and Section 21E of the Securities Act, which apply to
certain forward-looking statements, are not applicable to this Offering.

ITEM 7. FINANCIAL STATEMENTS.

      See Index to Financial Statements, Page F-1

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

      Not Applicable.

                                       20
<PAGE>

                                    PART III

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

      Incorporated by reference to the information in the Proxy Statement under
the captions "Election of Directors" and Executive Officers and Key Personnel."

ITEM 10. EXECUTIVE COMPENSATION

      Incorporated by reference to the information in the Proxy Statement under
the captions "Executive Compensation."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      Incorporated by reference to the information in the Proxy Statement under
the captions "Voting Securities and Principal Securityholders."


ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Incorporated by reference to the information in the Proxy Statement
under the captions "Election of Directors - Certain Transactions."


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

Exhibit                            Description
-------                            -----------

2.1    -- Asset Purchase Agreement dated as of November 13, 1995 among 1-800
          Low-Air Fare, Inc., S. Travel Inc. and the Company (1)
       
2.2    -- Amended and Restated Agreement and Plan of Merger dated November 1,
          1996 among the Company, Joseph Stevens Group, Inc. and Joseph Stevens
          Group, LLC (the "Merger Agreement") (1)
       
2.3    -- Amended and Restated Interim Operating Agreement between the Company
          and Joseph Stevens
          Group, Inc. (1)
       
2.4    -- Form of Indemnity and Release Agreement among the Company, Joseph
          Stevens Group, Inc., Joseph Stevens Group, LLC, Steve Rohrlick, Joe
          Elizondo, MOHS, Inc. and WH/JSG LLC (Exhibit C to the Merger
          Agreement, Exhibit 2.2 herein) (1)
       
2.5    -- Form of Mutual Release Agreement (Exhibit D to Merger Agreement,
          Exhibit 2.2 herein) (1)
       
2.6    -- Form of Promissory Note from Joseph Stevens Group, Inc. to Joseph
          Stevens Group, Inc. LLC (Exhibit E to the Merger Agreement, Exhibit
          2.2 herein) (1)
       
2.7    -- Form of Escrow Agreement among the Company, Joseph Stevens Group, Inc.
          and Vincent, Berg, Stalzer, Menendez, P.C. (Exhibit F to the Merger
          Agreement, Exhibit 2.2 herein) (1)
       
2.8    -- First Amendment dated September 9, 1997 to the Merger Agreement (1)
       
2.9    -- Second Amendment dated 17, 1997 to the Merger Agreement (1)
       
2.10   -- Third Amendment dated October 29, 1997 to the Merger Agreement (1)
       
2.11   -- Fourth Amendment dated December 16, 1997 to the Merger Agreement (1)
       
3.1    -- Amended and Restated Certificate of Incorporation (1)
       
3.2    -- Amended and Restated Bylaws (1)
       
       
                                       21
<PAGE> 
       
Exhibit                            Description
-------                            -----------

10.1   -- Form of Registrant's 1997 Stock Option Plan (1)

10.2   -- Promissory Note of the Company dated November 7, 1995 in the amount of
          $30,000 to the order of S. Travel, Inc. due and payable November 7,
          1997 (1)

10.3   -- Promissory Note of the Company dated November 7, 1995 in the amount of
          $30,000 to the order of S. Travel, Inc. due and payable November 7,
          1998 (1)

10.4   -- Redemption Agreement between the Company and Michael Cantor (1)

10.5   -- Form of Redemption Agreement between the Company and Jose Colon (1)

10.6   -- Agreement between the Company and Perry Trebatch (1)

10.7   -- Lease dated February 10, 1996 between JFJ Real Estate L.P. and the
          Company (1)

10.8   -- Airlines Reporting Corporation ("ARC") Agent Reporting Agreement (1)

10.9   -- Letter dated march 6, 1996 from ARC approving change of ownership (1)

10.10  -- Subscriber Service Agreement dated November 27, 1995 between the
          Company and Payroll Transfers Interstate, Inc. (1)

10.11  -- Form of Employment Agreement between the Company and Mark D. Mastrini
          (1)

10.12  -- Form of Employment Agreement between the Company and Jerrold B.
          Sendrow (1)

10.13  -- Form of Employment Agreement between the Company and Biagio Bellizzi
          (1)

10.14  -- Form of Consulting Agreement between the Company and Lucien Bittar (1)

10.15  -- Agreement of March 1, 1997 between the Company and Global Discount
          Travel Services (1)

10.16* -- SABRE Subscriber Agreement dated as of January 28, 1994 between S.
          Travel, Inc., (the Company's predecessor entity), and American
          Airlines, Inc. (1)

10.17* -- Amendment No. 1 to SABRE Subscriber Agreement dated February 14, 1994
          between 1800 Low-Air Fare Travel (predecessor entity of the Company),
          and American Airlines, Inc. (1)

10.18* -- Suspension of Service Agreement dated April 3, 1996 between the
          Company and American Airlines, Inc. (1)

10.19* -- Amendment to SABRE Subscriber Agreement dated July 19, 1996 between
          the Company, and American Airlines, Inc. (1)

10.20* -- SABRE Subscriber Agreement dated November 20, 1996 between the Company
          and The SABRE Group, Inc. (1)

10.21  -- Cluster Amendment to SABRE Subscriber Agreement dated November 20,
          1996 between the Company and The SABRE Group, Inc. (1)

10.22  -- Lease Agreement effective November 27, 1995 between the Company and
          Roque De La Fuente Alexander Revocable Trust No. 1, and addendum
          thereto dated June 27, 1995 (1)

10.23  -- Form of Promissory Note in amount of $50,000 issued by Michael Gaggi
          to the Company (1)

10.24  -- Form of Promissory Note in amount of $9,000 issued by Lucien Bittar to
          the Company (1)

10.25  -- Form of Promissory Note in amount of $50,000 issued by Vito Balsamo to
          the Company (1)

10.26  -- Form of Registration Rights Agreement among the Company, Michael Gaggi
          and Pasquale Guadagno (1)

10.27  -- Amended Release and Redemption Agreement, dated September 4, 1997,
          between the Company and Michael Cantor (amending the agreement listed
          as Exhibit 10.4 above (1)

10.28  -- Amended Release and Redemption Agreement, dated September 4, 1997,
          between the Company and Jose Colon (amending the agreement listed as
          Exhibit 10.5 above) (1)

10.29  -- Form of Amendment to Agreement, dated September __, 1997, between the
          Company and Perry Trebatch (amending the agreement listed as Exhibit
          10.6 above) (1)

10.30  -- Form of Amendment to Agreement, dated November __, 1997, between the
          Company and Perry Trebatch (amending the agreement listed as Exhibit
          10.6 above, as amended by the agreement listed as Exhibit 10.29 above)
          (1)

10.31  -- Amended and Restated Release and Redemption Agreement, dated November
          __, 1997, between the Company and Michael Cantor (amending the
          agreement listed as Exhibit 10.4 above, as amended by amended
          agreement listed as Exhibit 10.27 above) (1)

10.32  -- Amended and Restated Release and Redemption Agreement, dated November
          __, 1997, between the Company and Jose Colon (amending the agreement
          listed as Exhibit 10.5 above, as amended by amended agreement listed
          as Exhibit 10.28 above) (1)

10.33  -- Agreement dated March 20, 1998 between the Company and Joseph Stevens
          Group, LLC (2)


                                       22
<PAGE>

Exhibit                                   Description
-------                                   -----------

10.34  -- Pledge Agreement dated March 22, 1998 between the Company, Joseph
          Stevens Group, LLC and Phillips Nizer Benjamin Krim & Ballon LLP (2)

10.35  -- 1998 Stock Option Plan (3)

27.1   -- Financial Data Schedule (4)

23.1   -- Consent of Grant Thornton LLP (4)

23.2   -- Consent of Killman Murrell & Company, P.C. (4)

---------- 
(1)   Incorporated by reference to the Company's Registration Statement on Form
      SB-2 No. 333-28237.
(2)   Incorporated by reference to the Company's Report on Form 8-K filed March
      30, 1998.
(3)   Incorporated by reference to the Company's Registration Statement on Form
      S-8 filed December 15, 1998.
(4)   File herewith.
*     Portions of this exhibit are the subject of a confidential treatment
      request.

(b) Reports on Form 8-K.

    None.


                                       23
<PAGE>

                                   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 31, 1999

                                    800 TRAVEL SYSTEMS, INC.
                                    (Registrant)

                                    By: /s/  Mark D. Mastrini
                                        ----------------------------------------
                                        Mark D. Mastrini, President, Chief 
                                        Executive Officer and Chief Operating 
                                        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/ MARK D. MASTRINI         President, Chief Executive Officer and             March 31, 1999
----------------------       Chief Operating Officer and Director               
    Mark D. Mastrini                                                                 


/s/ JERROLD B. SENDROW       Vice President-- Finance,                          March 31, 1999
----------------------       Treasurer and Secretary        
    Jerrold B. Sendrow       (principal accounting officer) 


                             Director
----------------------                                                          March 31, 1999
    Michael Gaggi


/s/ GEORGE A. WARDE          Chairman of the Board                              March 31, 1999
-------------------
    George A. Warde


/s/ CARL A. BELLINI          Director                                           March 31, 1999
-------------------
    Carl A. Bellini


/s/ L. DOUGLAS BAILEY        Director                                           March 31, 1999
---------------------
   L. Douglas Bailey

</TABLE>


                                       24
<PAGE>

                                      INDEX

                                                                           Page
                                                                          Number
                                                                          ------
PART 1. FINANCIAL INFORMATION

      Item 1. Financial Statements                                   F-1 to F-24

                Reports of Independent Certified Public Accountants  F-1 to F-2
              
                      Balance Sheets                                        F-3
                      
                      Statements of Operations                              F-5
                      
                      Statement of Stockholders' Equity                     F-6
                      
                      Statements of Cash Flows                              F-7
                      
                      Notes to Financial Statements                         F-8
<PAGE>        

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
800 Travel Systems, Inc.

We have audited the accompanying balance sheet of 800 Travel Systems, Inc. as of
December 31, 1998 and the related statements of operations, stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 800 Travel Systems, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.

                                                  GRANT THORNTON LLP

Tampa, Florida
March 5, 1999


                                      F-1
<PAGE>        

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


800 Travel Systems, Inc.
Tampa, Florida

We have audited the accompanying balance sheets of 800 Travel Systems, Inc. as
of December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 800 Travel Systems, Inc. at
December 31, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.


/s/ Killman, Murrell & Company, P.C.

KILLMAN, MURRELL & COMPANY, P.C.

Certified Public Accountants

Dallas, Texas
February 28, 1998


                                       F-2
<PAGE>

                                     PART 1
                              FINANCIAL INFORMATION

Item 1. Financial Statements
          
                            800 TRAVEL SYSTEMS, INC.

                                 BALANCE SHEETS

                                     ASSETS

                                                          December 31,
                                                   -----------------------
                                                      1998         1997
                                                   ----------   ----------
CURRENT ASSETS

  Cash .........................................   $2,387,273   $   18,710
  Commissions receivable .......................      501,555      553,358
  Prepaids .....................................      166,547       16,617
                                                   ----------   ----------

     Total current assets ......................    3,055,375      588,685

LEASEHOLD IMPROVEMENTS AND EQUIPMENT, net ......      815,225      340,563

EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
  ACQUIRED, net ................................    4,762,864    1,024,385
                                                   ----------   ----------

DEFERRED OFFERING COSTS ........................           --    1,408,573

OTHER ASSETS
  Trademarks, net ..............................      350,971      185,384
  Capitalized software .........................      397,194           --
  Related party receivables ....................        3,500      308,425
  Bonds, security deposits and other assets ....       51,771       37,824
  Merger deposits and deferred acquisition costs           --      416,671
  Prepaid expenses .............................      154,494       68,000
                                                   ----------   ----------

     Total other assets ........................      957,930    1,016,304
                                                   ----------   ----------

     TOTAL ASSETS ..............................   $9,591,394   $4,378,510
                                                   ==========   ==========

                                   (continued)


                                       F-3
<PAGE>

                      LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                              December 31,
                                                      ----------------------------
                                                          1998            1997
                                                      ------------    ------------
<S>                                                   <C>             <C>         
CURRENT LIABILITIES
  Note payable ....................................   $         --    $     50,000
  Current maturities of long-term debt ............         61,645         260,000
  Accounts payable ................................        354,892       1,830,652
  Accrued liabilities .............................        394,733         479,670
                                                      ------------    ------------
     Total current liabilities ....................        811,270       2,620,322

DEFERRED RENT .....................................         75,641         138,228

LONG-TERM DEBT - less current maturities ..........         24,818          50,000
                                                      ------------    ------------

     Total liabilities ............................        911,729       2,808,550
                                                      ------------    ------------

COMMITMENTS AND CONTINGENCIES .....................             --              --

STOCKHOLDERS' EQUITY
  Preferred stock, $.01 par value, 1,000,000 shares
    authorized; none issued .......................             --              --
  Common stock, $.01 par value, 10,000,000 shares
    authorized; 7,597,096 and 5,959,709 shares
    issued and outstanding, respectively ..........         75,971          59,597
  Additional paid-in capital ......................     12,067,342       5,297,424
  Stock subscriptions receivable ..................             --         (21,547)
  Accumulated deficit .............................     (3,463,648)     (3,765,514)
                                                      ------------    ------------

     Total stockholders' equity ...................      8,679,665       1,569,960
                                                      ------------    ------------

     TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...   $  9,591,394    $  4,378,510
                                                      ============    ============
</TABLE>

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


                                       F-4
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                            STATEMENTS OF OPERATIONS

                                                    Year Ended December 31,
                                                 ----------------------------
                                                     1998            1997
                                                 ------------    ------------
REVENUES
  Commissions ................................   $  7,879,163    $  6,537,146
  Ticket delivery and service fees ...........      3,622,003       1,784,770
                                                 ------------    ------------
     Total revenues ..........................     11,501,166       8,321,916

OPERATING EXPENSES
  Payroll, commissions and employee benefits .      5,421,019       4,307,529
  Telephone ..................................      1,856,364       1,250,888
  Ticket delivery ............................      1,068,625         771,249
  Advertising ................................        323,528         293,036
  General and administrative .................      2,609,034       1,913,654
                                                 ------------    ------------
     Total operating expenses ................     11,278,570       8,536,356
                                                 ------------    ------------

EARNINGS (LOSS) FROM OPERATIONS ..............        222,596        (214,440)

OTHER INCOME (EXPENSE)
  Interest income ............................         99,348           6,461
  Interest expense ...........................        (20,078)        (54,526)
                                                 ------------    ------------

EARNINGS (LOSS) BEFORE INCOME TAXES ..........        301,866        (262,505)

INCOME TAXES .................................             --              --
                                                 ------------    ------------

NET EARNINGS (LOSS) ..........................   $    301,866    $   (262,505)
                                                 ============    ============

NET EARNINGS (LOSS) PER COMMON SHARE - BASIC .   $        .04    $       (.04)
                                                 ============    ============

NET EARNINGS (LOSS) PER COMMON SHARE - DILUTED   $        .04    $       (.04)
                                                 ============    ============

WEIGHTED AVERAGE NUMBER COMMON SHARES
  OUTSTANDING - BASIC ........................      7,475,611       5,957,584
                                                 ============    ============

WEIGHTED AVERAGE NUMBER COMMON SHARES
  OUTSTANDING - DILUTED ......................      7,886,488       5,957,584
                                                 ============    ============

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


                                       F-5
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                        STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                Common Stock                             Additional        Stock
                                        ----------------------------       Paid-in     Subscriptions     Retained
                                           Shares           Amount         Capital      Receivable        Deficit         Total
                                        ------------    ------------    ------------   ------------    ------------    ------------
<S>                                        <C>          <C>             <C>            <C>             <C>             <C>         
BALANCE, DECEMBER 31, 1996 ..........      5,951,209    $     59,512    $  4,976,259   $    (32,296)   $ (3,503,009)   $  1,500,466
  Issuance of common stock in
    connection with debt issuance
    and services ....................          8,500              85          21,165             --              --          21,250
  Issuance of stock options to
    Directors .......................             --              --         300,000             --              --         300,000
  Payment of stock subscription .....             --              --              --         10,749              --          10,749
  Net loss ..........................             --              --              --             --        (262,505)
                                        ------------    ------------    ------------   ------------    ------------    ------------

BALANCE, DECEMBER 31, 1997 ..........      5,959,709          59,597       5,297,424        (21,547)     (3,765,514)      1,569,960
  Sales of common stock and
    warrants net of issuance expenses
    of $2,253,000 ...................      1,350,000          13,500       4,872,024             --              --       4,885,524
  Joseph Stevens Group, Inc. ........
    Acquisition .....................        383,333           3,833       1,944,082             --              --       1,947,915
  Purchase and retirement of shares .       (204,615)         (2,046)       (405,954)            --              --        (408,000)
  Shares exchanged and retired in payment 
    of receivables ..................        (49,531)           (495)       (247,152)            --              --        (247,647)
  Payment of stock subscription .....             --              --              --         21,547              --          21,547
  Exercise of warrants ..............         58,200             582         363,168             --              --         363,750
  Exercise of stock options .........        100,000           1,000          99,000             --              --         100,000
  Issuance of options for services ..             --              --         144,750             --              --         144,750
  Net earnings ......................             --              --              --             --         301,866         301,866
                                        ------------    ------------    ------------   ------------    ------------    ------------
BALANCE, DECEMBER 31, 1998 ..........      7,597,096    $     75,971    $ 12,067,342             --    $ (3,463,648)   $  8,679,665
                                        ============    ============    ============   ============    ============    ============
</TABLE>

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


                                       F-6
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                                        --------------------------
                                                            1998           1997
                                                        -----------    -----------
<S>                                                     <C>            <C>         
Increase (decrease) in cash and cash equivalents
CASH FLOWS FROM OPERATING ACTIVITIES
  Net earnings (loss) ...............................   $   301,866    $  (262,505)
  Adjustments to reconcile net earnings (loss) to net
   cash provided by (used in) operating activities:
      Depreciation and amortization .................       387,803        129,411
      Stock options and warrants issued for expenses             --        321,250
      Changes in operating assets and liabilities,
       net of effects of acquisition:
          Commissions receivable ....................        51,803       (384,740)
          Prepaids and other assets .................      (193,093)      (194,055)
          Deferred rent .............................       (62,587)        41,507
          Accounts payable and accrued expenses .....    (1,560,697)     1,441,489
                                                        -----------    -----------
               Net cash provided by (used in)
                operating activities ................    (1,074,905)     1,092,357

CASH FLOW FROM INVESTING ACTIVITIES
  Purchase of leasehold improvements and equipment ..      (284,891)       (46,703)
  Software development costs ........................      (252,444)            --
  Merger deposits and deferred acquisition costs ....            --       (317,330)

  Cash paid for acquisition .........................    (2,047,054)            --
                                                        -----------    -----------
               Net cash used in investing activities     (2,584,389)      (364,033)

CASH FLOW FROM FINANCING ACTIVITIES
  Deferred offering costs ...........................            --     (1,358,573)
  Proceeds from borrowings, net .....................            --         50,000
  Principal payments on debt ........................      (343,537)          (750)
  Issuance of common stock ..........................     6,294,097             --
  Purchase of common stock ..........................      (408,000)            --
  Proceeds from exercise of options and warrants ....       463,750             --
  Stock subscription collection .....................        21,547         10,749
                                                        -----------    -----------
               Net cash provided by (used in)
                financing activities ................     6,027,857     (1,298,574)
                                                        -----------    -----------

NET INCREASE (DECREASE) IN CASH .....................     2,368,563       (570,250)

CASH AT THE BEGINNING OF PERIOD .....................        18,710        588,960
                                                        -----------    -----------

CASH AT THE END OF PERIOD ...........................   $ 2,387,273    $    18,710
                                                        ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
 Cash paid during the period for:
      Interest expense ..............................   $    28,752    $    39,953
                                                        ===========    ===========

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

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


                                       F-7
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 1 - BUSINESS AND BASIS OF PRESENTATION

800 Travel Systems, Inc. (the "Company") is a telemarketing travel company that
provides air transportation reservation services. The Company was formed in
November 1995 to acquire certain of the assets and assume certain liabilities of
1-800-Low Airfare, Inc. (the Predecessor Business), which occurred December 1,
1995. On January 15, 1998, the Company acquired the stock of Joseph Stevens
Group in a business combination accounted for as a purchase.

The Company strives to furnish the lowest airfare available at the time of
reservation within the parameters provided by a customer.

The Company incorporated LAF Financial Services, Inc. ("LAF") on January 16,
1996, in the State of Delaware. At December 31, 1998, LAF had not issued any
stock, has no assets and had conducted no business activities.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 and Equipment

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,
five to ten years for both financial reporting purposes and tax purposes.

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 twenty-five (25) years. Accumulated amortization at December 31, 1998
and 1997 approximates $293,000 and $93,000, respectively.

Trademarks

The cost of the trademarks is being amortized using the straight-line method
over their useful estimated lives of fifteen (15) years. Accumulated
amortization at December 31, 1998 and 1997 approximates $64,000 and $30,000,
respectively.

                                       F-8
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

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, and accrues 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.

Fair Value of Financial Instruments

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

      Accounts Receivable, Accounts Payable and Notes Payable: The carrying
      amounts reported in the balance sheet for accounts receivable, accounts
      payable 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, 1998, 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 and for the periods ended
December 31, 1998 and 1997, amounted to approximately $324,000 and $293,000,
respectively.

                                       F-9
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

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 companies not electing to account for stock based
compensation as prescribed by this statement, disclose the pro forma effects on
earnings and earnings per share as if SFAS No. 123 had been adopted (see Note
11).

Use of Estimates

The preparation of the financial statements in conformity with generally
accepted accounting principles, 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 (Loss) 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.

New Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income, be reported in a financial statement that is displayed
with the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an entity display
an amount representing total comprehensive income for the period in that
financial statement. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes, is required. The adoption of SFAS No. 130 had
no impact on the financial condition or results of operations of the Company.

                                      F-10
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, is effective for fiscal years beginning after December 15, 1997.
This Statement supersedes SFAS No. 14, Financial Reporting for Segments of a
Business Enterprise, and amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries. This Statement requires annual financial statements to disclose
information about products and services, geographic areas and major customers
based on a management approach, along with interim reports. The management
approach requires disclosing financial and descriptive information about an
enterprise's reportable operating segments based on reporting information the
way management organizes the segments for making business decisions and
assessing performance. It also eliminates the requirement to disclose additional
information about subsidiaries that were not consolidated. The Company has
adopted SFAS No. 131 in 1998 with impact only to the Company's disclosure
information and not its results of operations.

Effective for 1998, the Company adopted AICPA Statement of Position ("SOP")
98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. This standard states that costs to develop internal-use computer
software during the application development stage as defined in SOP 98-1, should
be capitalized. The adoption of this standard had no material effect on the
Company's financial statements, as this was the initial year of the software
project. Upon completion of a software project, the Company will amortize the
software costs over four years.

Reclassifications

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

NOTE 3 - INITIAL PUBLIC OFFERING

On January 15, 1998, the Company completed an initial public offering and sold
1,350,000 shares of its common stock (par share $.01) at a price of $5.00 per
share and 3,105,000 redeemable common stock purchase warrants at a price of
$.125 per warrant. The following summarizes this financial transaction:

      Proceeds:
        Common stock ..................................   $ 6,750,000
        Redeemable purchase warrants ..................       388,125
                                                          -----------
                                                            7,138,125

        Less underwriters' commission and expense (13%)      (927,956)
                                                          -----------
      Net proceeds to company .........................     6,210,169
        Less company's offering expenses ..............    (1,324,645)
                                                          -----------
      Net proceeds ....................................   $ 4,885,524
                                                          ===========


                                      F-11
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 3 - INITIAL PUBLIC OFFERING - Continued

Each warrant entitles its holder to purchase one (1) share of the Company's
common stock at a price of $6.25 per share during the five year period
commencing on January 15, 1998. The warrants are redeemable by the Company for
$0.05 per warrant on not less than thirty (30) nor more than sixty (60) days
written notice if the closing price for the common stock for seven (7) trading
days during a ten (10) day consecutive trading period ending not more than
fifteen (15) days prior to the date that the note of redemption is mailed,
equals or exceeds $10.00 per share.

NOTE 4 - BUSINESS COMBINATION

In November 1996, the Company entered into a merger agreement with the Joseph
Stevens Group, Inc. ("Stevens"). The agreement calls for all of the capital
stock of Stevens to be exchanged for shares of the Company's common stock and a
note payable for $1,578,000 (subject to adjustment for assumed liabilities). The
merger became effective on the effective date of the Company's initial public
offering (January 15, 1998). The Company had made an escrow payment of $46,665
to the seller in connection with the anticipated merger.

Upon the effective date, the Company acquired selected assets and selected
liabilities of Joseph Stevens Group, Inc. in exchange for the issuance of
383,333 shares of its common stock, 250,000 warrants to purchase common stock,
and the payment of a $1,578,000 purchase acquisition note. The following
summarizes the transaction:

       Purchase Price:
         Cash payment on note                                       $1,578,000
         Common stock                                                1,916,665
         Warrants                                                       31,250
         Cash payments                                                 536,665
         Acquisition expenses                                          345,315
         Capital lease assumed                                          70,000
                                                                    ----------
                                                                    $4,477,895
                                                                    ==========
       Assets Acquired:
         Equipment                                                  $  340,000
         Trademarks                                                    200,000
         Goodwill                                                    3,937,895
                                                                    ----------
                                                                    $4,477,895
                                                                    ==========

If, on the second anniversary date of the public offering, the value of the
Company's shares then held by the Selling Shareholder, together with the
aggregate amount of cash and the fair market value of any assets or properties
received by the Selling Shareholder in connection with the sale prior to the
second anniversary of the closing date of all or any of the shares received in
the merger, was less than $2,571,000, then the Company was required to issue to
the Selling Shareholder additional shares of the Company.

                                      F-12
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 4 - BUSINESS COMBINATION - Continued

In March 1998, the Company entered into an agreement with the previous
stockholders of Joseph Stevens Group, Inc. to purchase a telephone switch and
certain other fixed assets and to release the Company from its guaranty of the
future value of the Company's common stock issued to the principal stockholder
of Joseph Stevens Group, Inc. for payments totaling $490,000. These have been
included in the calculation of the purchase shown above. In connection with this
agreement, the Company also redeemed 184,615 shares of common stock for
$308,000.

As part of the merger agreement, the Company entered into an operating agreement
with Stevens, whereby the Company assumed all operations of Stevens as of
January 1, 1997, and assumed any economic gains or losses from these operating
activities.

The statements of operations and cash flows for the year ended December 31,
1997, include the operations of the Joseph Stevens Group, Inc. for the period
January 1, 1997 to December 31, 1997. For the year ended December 31, 1997,
approximately 37% of commission revenues were applicable to Stevens' operations.

The following unaudited pro forma financial information assumes the purchase had
occurred at the beginning of the respective period after the effect of certain
pro forma adjustments to reflect amortization of goodwill and trademarks. The
pro forma information is presented for informational purposes only and may not
be indicative of actual results had the purchase occurred at the beginning of
the respective period.

                                                               Year Ended
                                                              December 31,
                                                                  1997
                                                              ------------
                                                               (Unaudited)

      Revenues                                                $8,321,916
      Net loss                                                $ (433,354)
      Net loss per common share - basic                       $     (.07)
      Net loss per common share - diluted                     $     (.07)


                                      F-13
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 5 - NET INCOME (LOSS) PER COMMON SHARE

The following table reconciles the numerators and denominators of the basic and
diluted income per share computations, as computed in accordance with SFAS 128:

                                                        Year Ended December 31,
                                                       ------------------------
                                                          1998          1997
                                                       ----------   -----------
      Net earnings (loss) - (numerator) ............   $  301,866   $  (262,505)
                                                       ==========   ===========

      Basic:
        Weighted average shares outstanding
       (denominator) ...............................    7,475,611     5,957,584
                                                       ==========   ===========

        Net earnings (loss) per common share - basic   $      .04   $      (.04)
                                                       ==========   ===========

      Diluted:
        Weighted average shares outstanding ........    7,475,611     5,957,584
        Effect of dilutive options .................      410,877            --
                                                       ==========   ===========
        Adjusted weighted average shares
        (denominator) ..............................    7,886,488     5,957,584
                                                       ==========   ===========

        Net earnings (loss) per common share -
        diluted ....................................          .04          (.04)
                                                       ==========   ===========

All warrants outstanding are excluded from the calculation of diluted weighted
average shares, as they are anti-dilutive. Options for 215,000 shares of common
stock are excluded from the adjusted weighted average shares for the year ended
December 31, 1998, as they are anti-dilutive. All options outstanding for 1997
are excluded from the 1997 calculation of diluted weighted average shares, as
they are anti-dilutive.


                                      F-14
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 6 - LEASEHOLD IMPROVEMENTS AND EQUIPMENT

Leasehold improvements and equipment by major classification are as follows:

                                                          December 31,
                                                  --------------------------
                                                     1998           1997
                                                  -----------    -----------
      Leasehold improvements ..................   $   194,598    $   155,885
      Telephone equipment .....................       390,044        155,100
      Furniture and fixtures ..................       109,454         78,106
      Computer equipment ......................        27,028         14,858
      Office equipment ........................       358,178         46,718
                                                  -----------    -----------
                                                    1,079,302        450,667
        Less accumulated depreciation .........      (264,077)      (110,104)
                                                  -----------    -----------
      Leasehold improvements and equipment, net   $   815,225    $   340,563
                                                  ===========    ===========

Depreciation expense approximated $154,000 and $70,000 for the years ended
December 31, 1998 and 1997, respectively.

NOTE 7 - NOTE PAYABLE AND LONG-TERM DEBT

On December 18, 1997, the Company borrowed $50,000 from an individual and
executed a note agreement with the following terms:

      o     12% interest rate

      o     3% loan origination fee paid to noteholder

      o     Due date is the earlier of (1) the closing of the Company's initial
            public offering or (2) June 1, 1998

      o     Unsecured

This note was paid with the proceeds of the initial public offering.

At December 31, 1998 and 1997, long-term debt was as follows:

                                                             December 31,
                                                         ---------------------
                                                              1998       1997
                                                         ---------   --------

      10% purchase money notes, due November 1998,
      unsecured .....................................   $      --   $ 60,000

      12% note payable, payable in monthly principal
      installments of $16,667 plus interest, due
      February 29, 1999, secured by a telephone system      33,333    250,000

                                      F-15
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 7 - NOTES PAYABLE AND LONG-TERM DEBT - Continued

                                                             December 31,
                                                          ---------------------
                                                            1998        1997
                                                          --------    --------

       Capital lease,  payable in monthly  payments of
       $2,290 through November 2000                         53,130         --
                                                          --------    --------

                                                          $ 86,463    $310,000
                                                          ========    ========

Approximate maturities of long-term debt at December 31, 1998 are as follows:

       1999                                                            $61,645
       2000                                                             24,818
                                                                      --------
                                                                       $86,463
                                                                      ========

NOTE 8 - INCOME TAXES

Reconciliation of the federal statutory income tax rate of 34.0% to the
effective income tax rate for the years ended December 31, is as follows:

                                                         1998      1997
                                                         -----     ----

Federal statutory income tax rate                         34.0%    (34.0)%
States taxes, net of federal                               3.6      (3.6)
Excess of cost over fair value of net assets acquired     19.3        --
Net operating losses not currently utilizable               --      38.3%
Net operating loss carryforward                          (59.9)       --
Other                                                      3.0       (.7)
                                                         -----     -----
                                                            --%       --%
                                                         =====     =====

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

                                                 December 31,
                                           ----------------------
                                              1998         1997
                                           ---------    ---------
      Deferred tax assets:
        Net operating loss carryforward    $ 760,000    $ 811,000
        Accrued compensation ...........      45,000           -- 
                                           ----------------------
                                             805,000      811,000

      Deferred tax liabilities:
        Software developement costs.....     (93,000)          --
                                           ----------------------
                                             712,000      811,000
      Less: valuation allowance.........    (712,000)    (811,000)
                                           ----------------------
                                           $      --    $      --
                                           ======================

At December 31, 1998 and 1997, the Company has a tax net operating loss
carryforward of approximately $2,000,000 and $2,386,000, respectively, to offset
future taxable income. The tax net operating loss carryforwards begin to expire
in 2010. Realization of any portion of the deferred tax asset resulting from the
Company's net operating loss carryforward is not considered more likely than
not. Accordingly, a valuation allowance has been established for the full amount
of the deferred tax asset.

                                      F-16
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 9 - COMMITMENTS AND CONTINGENCIES

Operating Leases

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

       Year ending December 31,
             1999                                                   $  347,000
             2000                                                      366,000
             2001                                                      369,000
             2002                                                      385,000
             2003                                                      387,000
             Thereafter                                              1,328,000
                                                                    ----------
                                                                    $3,182,000
                                                                    ==========

Rent expense totaled approximately $361,000 and $229,000 for the years ended
December 31, 1998 and 1997, respectively.

Phone Agreements

In September 1996, the Company entered into an agreement with its telephone
service provider. Pursuant to the four-year agreement, the telephone service
provider granted the Company a credit of $15,000 towards installation charges
and an additional $180,000 for general charges in the fifth month following the
initiation of service (subject to forfeiture in the event the Company
discontinues service in the second year of the agreement) and was to grant the
Company a credit of $180,000 for general charges in the seventeenth month
following initiation of service. These credits were to be recognized as a
reduction in telephone expense ratably over the four-year term of the agreement.
The agreement required a minimum annual commitment to the telephone service
provider of $1,680,000. This agreement was terminated in September 1998, before
the receipt of the second $180,000 credit.

In September 1998, the Company entered into a new 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 of $1,200,000 in charges for its
long-distance services.

Letters of Credit

The Company has letters of credit totaling $35,000, which are collateralized by
certain cash accounts of the Company at December 31, 1998.


                                      F-17
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 9 - COMMITMENTS AND CONTINGENCIES - Continued

Risks and Uncertainties

The Company is dependent on four airlines for approximately 83% 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.

Employment Agreements

The Company entered into employment agreements with three (3) executive
employees, which include the following contract provisions:

      o     Aggregate initial base compensation of $252,000

      o     Annual pay raises of five percent (5%) of base compensation plus the
            annual increase in the consumer price index on each of October 1,
            1998 and 1999

      o     Agreements terminate September 30, 2000

      o     Each employee agrees not to compete with the business of the Company
            for a period of ninety (90) days following termination of their
            employment with the Company

      o     Options to purchase 87,500 shares of the Company's common stock at a
            price of $5.00 per share

      o     Registered warrants to purchase 25,000 shares of Company stock

As a further inducement to sign the above mentioned employment agreement, the
President of the Company will be issued 50,000 shares of the Company's common
stock in January 2000 (the second anniversary of the execution of his employment
agreement). The market value of the shares to be issued was $5.00, with the
aggregated value of $250,000 amortized as a charge against operations ratably
over two (2) years. During 1998, the Company recognized $120,000 of compensation
expense for this grant.

Consulting Agreement

The Company has entered into an agreement with an outside consultant to
supervise the development of the Company's new interactive website. The total
cost of such development is expected to be approximately $550,000. As of
December 31, 1998, the Company has capitalized approximately $397,000 in
software costs related to this project. $144,750 of this amount represents the
fair value of options granted to the consultant.


                                      F-18
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 9 - COMMITMENTS AND CONTINGENCIES - Continued

Litigation

The Company is engaged in various 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.

Year 2000

The Year 2000 issue relates to limitations in computer systems and applications
that may prevent proper recognition of the Year 2000. The potential effect of
the Year 2000 issue on the Company and its business partners will not be fully
determinable until the Year 2000 and thereafter. If Year 2000 modifications are
not properly completed either by the Company or entities with which the Company
conducts business, the Company's revenues and financial condition could be
adversely impacted.

NOTE 10 - 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
designations, preferences, participations, 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.

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 therefor, 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.


                                      F-19
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 10 - STOCKHOLDERS' EQUITY - Continued

Capital Transactions

In 1997, the Company issued 8,500 shares of its common stock valued at $21,250
for services.

In October and November 1997, three individuals were elected to the Board of
Directors of the Company and each of these new directors were issued options to
purchase 50,000 shares of the Company's common stock at a price of $3.00 per
share. The difference between the option price and the initial public offering
price of $5.00 was recognized as a charge against operations at the time the
options were issued.

During 1998, the Company received 49,531 shares of Common Stock as payment for
$247,647 of receivables from related parties.

During 1998, the Company granted options to a consultant to purchase 225,000
shares of Common Stock at prices ranging from $3.00 to $10.00 per share. The
fair value of these options is $144,750 and is included in the software
development costs.

NOTE 11 - STOCK OPTIONS AND WARRANTS

In 1997, the Company adopted its 1997 Stock Option Plan (the "Stock Option
Plan") under which 250,000 shares of common stock have been reserved for
issuance upon exercise of stock options. The Stock Option Plan is 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 Plan and is authorized
to grant options thereunder to all eligible employees, officers and directors of
the Company. The Stock Option Plan provides for the granting of both incentive
stock options and nonqualified stock options. Options are granted under the
Stock Option Plan 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.


                                      F-20
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 11 - STOCK OPTIONS AND WARRANTS - Continued

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.

The Stock Option Plan also authorizes 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 Plan, 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 Plan are subject to shareholder approval.
Unless terminated sooner, the Stock Option Plan will continue in effect until
all options granted thereunder 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 Plan.

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

                                                         Weighted Average
                                              Stock       Exercise Price
                                             Options        Per Share
                                             -------     ----------------
                                                         
      Outstanding as of December 31, 1996      300,000      $   1.00
        Granted .........................      387,500      $   3.46
        Expired or cancelled ............           --      $     --
                                            ----------    
                                                         
      Outstanding as of December 31, 1997      687,500      $   2.39
        Granted .........................      877,500      $   4.66
        Exercised .......................     (100,000)     $   1.00
        Expired or canceled .............     (150,000)     $   3.10
                                            ----------    
                                                         
      Outstanding as of December 31, 1998    1,315,000      $   3.94
                                            ==========
                                                         

                                      F-21             
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 11 - STOCK OPTIONS AND WARRANTS - Continued

The weighted average fair value of options granted during 1998 on granted
options whose exercise price exceeds the market price of the stock on the grant
date is $.94. The weighted average fair value of options granted during 1998 on
granted options whose exercise price is the market price of the stock on the
grant date is $.96.

The weighted average fair value of options granted during 1997 on granted
options whose exercise price equals the market price of the stock on the grant
date is $.86. The weighted average fair value of options granted during 1997 on
granted options whose exercise price is less than the market price of the stock
on the grant date is $2.53.

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

                                           Weighted Average                  
                                              Remaining          Weighted
               Range of        Number       Contractual Life     Average
            Exercise Prices  Outstanding        (Years)       Exercise Price
            ---------------  -----------   -----------------  --------------
            Outstanding Shares            
                 $1.00         200,000            8.00           $ 1.00
             $3.00 - $4.00     440,000            9.57           $ 3.15
             $5.00 - $5.50     650,000            9.87           $ 5.15
                  $10           25,000           10.00           $10.00
            Exercisable Shares
                 $1.00         200,000                           $ 1.00
             $3.00 - $4.00     400,000                           $ 3.16
             $5.00 - $5.50     391,250                           $ 5.00
                  $10               --                               --
                               -------
                               991,250                             3.78

            At December 31, 1997, the Company had 450,000 options exercisable at
            a weighted average exercise price of $1.67.


                                      F-22
<PAGE>

                            800 TRAVEL SYSTEMS, INC.
                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1998 AND 1997

NOTE 11 - STOCK OPTIONS AND WARRANTS - Continued

At December 31, 1998, warrants to purchase 3,052,200 shares of common stock at
an exercise price of $6.25 remain from the IPO. These warrants are redeemable by
the Company for $.05 per warrant on not less that (30) nor more than (60) days
written notice if the closing price for the common stock for seven (7) trading
days during a ten (10) day consecutive trading period ending not more than
fifteen (15) days prior to the date that the note of redemption is mailed,
equals or exceeds $10.00 per share.

The following is a summary of all warrant activity:

                                                  Range of      Weighted Average
                                                 Per Share       Exercise Price
                                    Warrants   Exercise Price      Per Share
                                    --------   --------------   ----------------
     Outstanding at December 31,                                
     1996                                  --      $ --              $  --
       Granted                        375,000  $6.25 - $10.00         7.25
       Expired                             --        --                 --
                                   ----------       
                                                                
     Outstanding at December 31,                                
     1997                             375,000  $6.25 - $10.00        $7.25
       Granted                      3,510,000  $6.25 - $8.25          6.46
       Expired                             --        --                 --
       Exercised                      (58,200)     $6.25              6.25
                                   ----------
                                                                
     Outstanding at December 31,                                
     1998                           3,826,800  $6.25 - $10.00        $6.37
                                   ==========                
                                                                
The weighted average fair value of warrants granted during 1998 and 1997 is
$1.91 and $-0-, respectively.

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:

                                                           1998          1997   
                                                         ---------    --------- 
      Net earnings (loss):                               
        As reported ..........................           $ 301,866    $(262,505)
        Pro forma ............................           $(355,090)   $(368,630)
                                                         
      Net earnings (loss) per common share - basic:      
        As reported ..........................           $     .04    $    (.04)
        Pro forma ............................           $    (.05)   $    (.06)
                                                         
      Net earnings (loss) per common share - diluted:    
        As reported ..........................           $     .04    $    (.04)
        Pro forma ............................           $    (.05)   $    (.06)


                                      F-23
<PAGE>

NOTE 12 - RELATED PARTY TRANSACTIONS

For the year ended December 31, 1997, a stockholder was paid $114,800 for
service fees and $296,109 for expenses.

Effective February 1998, the Company entered into a consulting agreement with a
shareholder and director, whereby the Company pays a monthly fee of $5,000.
During 1998, $55,000 was recorded as expense under this agreement.

NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION

For the year ended December 31, 1997:

1)    The Company issued 8,500 shares of common stock valued at $21,250 for
      services.

2)    The Company issued stock options for the purchase of 150,000 shares of the
      common stock at a price of $3.00, which was $2.00 per share less than its
      fair value. The aggregate $300,000 was charged against operations in 1997.

For the year ended December 31, 1998:

1)    The Company received common stock as payment for $247,647 of receivables
      from related parties.

2)    The Company granted stock options with a fair value of $144,750 to a
      consultant who is developing software. These costs were capitalized with
      software.

3)    The Company acquired assets with a fair value of approximately $4.5
      million in exchange for approximately $2.1 million of cash, $2.0 million
      of common stock and warrants, and approximately $400,000 of acquisition
      costs paid in 1997.


                                      F-24