<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

   [X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended JANUARY 31, 1998

                                       OR

   [ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
   For the transition period from _________________ to ______________________

                           Commission File No. 0-22541

                          MERCRISTO DEVELOPMENTS, INC.
                          ----------------------------
             (Exact name of Registrant as specified in its charter)


<TABLE>
<S>                                                           <C>       
         DELAWARE                                                     98-0166912
----------------------------------                            ------------------------------------
(State or other jurisdiction                                  (I.R.S. Employer Identification No.)
of incorporation or organization)

         240 ARGYLE AVENUE
         OTTAWA, ONTARIO, CANADA                                      K2P 1B9
----------------------------------                            ------------------------------------
(Address of principal executive offices)                      (Zip Code)
</TABLE>



Registrant's telephone number, including area code  (613) 230-9803
                                                    --------------

Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                                                Name of each exchange
         Title of Each Action                     on which registered
         --------------------                   ---------------------

<S>      <C>                                            <C>
         None                                            None
</TABLE>

Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock $.001 par value
                          ----------------------------
                                (Title of Class)



<PAGE>   2


         Indicate by check mark 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 preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

         Yes  x       No
             ---         ---

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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-K or any
amendment to this Form 10-K. [X]

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant is $27,571,557. Market value is determined by reference to the
last sale price of the Registrant's common stock as of the close of business on
April 22, 1998.

         The number of shares outstanding of the Registrant's common stock, as
of April 22, 1998, is as follows: 17,840,519 shares

         Documents incorporated by reference and the Part of the Form 10-K into
which they are incorporated are listed hereunder.

<TABLE>
<CAPTION>
         PART OF FORM 10-K                           DOCUMENT INCORPORATED BY REFERENCE
         -----------------                           ----------------------------------

<S>                                                  <C>                                                       
         Part III, items 10, 11, 12 and 13           Registrant's proxy statement to be issued in
                                                     connection with the Annual Meeting of Stockholders
                                                     of the Registrant to be held on July 22, 1998
</TABLE>



                                     - 2 -
<PAGE>   3

                                     PART I

ITEM 1.  BUSINESS

         GENERAL
         -------

         The Company was incorporated in the State of Delaware on January 4,
1996 as MAC Systems Inc. ("MAC") for the purposes of acquiring new businesses.
The Company changed its name to Internet@iDirect.com Inc. in March, 1996.

         On or about January 27, 1997, David G. Edwards, principal shareholder
and owner of 622291 Ontario Limited ("622291"), a private Canadian company with
diversified financial investment/operational interests located in Ottawa,
Ontario, Canada, purchased 200,000 shares of the Company's Common Stock from an
existing stockholder of the Company. By Board of Directors and stockholder
action on February 10, 1997, Mr. Edwards, his wife and his brother became the
Company's Directors and officers. The Company changed its name from Internet @
iDirect.com Inc. to Mercristo Developments, Inc. on February 10, 1997.

         Effective January 31, 1997, pursuant to the terms and conditions of an
Agreement and Plan of Reorganization by and among the Company, Egyptian Arabians
Inc. and Egyptian Arabians' sole stockholder (Resi Corp.), Egyptian Arabians
Inc. became a wholly-owned subsidiary of the Company. Simultaneous with that
transaction, 622291 became a wholly-owned subsidiary of the Egyptian Arabians
and 622291 was reorganized, pursuant to which operations of 622291 other than
the Blue Moon Farms breeding and care operations of 622291's wholly-owned
subsidiary, Edwards Arabian Inc., were spun off from 622291. The transaction
pursuant to which Egyptian Arabians Inc. (including directly and indirectly its
wholly-owned subsidiaries, 622291 and Edwards Arabians) became a wholly-owned
subsidiary of the Company has been accounted for as a recapitalization,
resulting in the historical operations of 622291 being treated as the historical
operations of the Company. Accordingly, the following discussion and analysis of
financial condition and results of operations is a discussion of the historical
financial performance of 622291's operations relating to the Blue Moon Farms
operations and the operations of 622291's wholly-owned subsidiary, Edwards
Arabians Inc.

         As a result of the above transactions, the breeding and care operation
of 622291 and the sales and marketing activities of 622291's wholly-owned
subsidiary, Edwards Arabians Inc., are presented as the Company's historical
operations. Until recently, the Company has generated revenue primarily by
selling Straight Egyptian Arabian horses to investment limited partnerships and
individual investors and by operating the breeding and care facilities at its
Blue Moon Farms facility. The Company has increased sales historically primarily
as a result of increased levels of investing activities promoted by Edwards
Securities Inc., an Ontario corporation of which David G. Edwards is a director
and President and of which he is indirectly the sole controlling shareholder.
The Company historically received cash consideration from the limited
partnerships and individual investors to whom it sold horses and would take from
each of the limited partnerships to which horses were sold a promissory note in
an amount equal to the cost for providing board and care of the horses sold.
These notes generate interest which is paid to the Company on a monthly basis,
and the principal amount of the notes gets repaid when the investment
partnerships sell the horses or transfer ownership of the horses to corporations
into which the partnerships' assets are transferred. During calendar year 1997,
as a result of Revenue Canada's actions regarding proposed assessments on
investors who invested in the investment limited partnerships that purchased
Straight Egyptian Arabian horses from the Company, the Company's sales of horses
to limited partnerships diminished significantly.

                                     - 3 -
<PAGE>   4

         Unless otherwise indicated herein, all references to the "Registrant"
or the "Company" herein include Mercristo Developments, Inc., the Company's
wholly-owned subsidiary, Egyptian Arabians Inc., and the direct and indirect
wholly-owned subsidiaries of Egyptian Arabians Inc., 622291 Ontario Limited and
Edwards Arabians Inc., respectively. Also, unless otherwise indicated herein,
the financial information set forth herein is expressed in terms of Canadian
dollars.


<TABLE>
<CAPTION>
         CORPORATE STRUCTURE
         -------------------


         The Company's corporate structure is as follows:

<S>      <C>                                         <C>
         Company:
         a Delaware Corporation                      Mercristo Developments, Inc.



         Canadian Subsidiary:
         an Ontario Corporation                      Egyptian Arabians Inc.
         (100% Subsidiary of
         Mercristo Developments)



         Original Holding Company:
         Includes Blue Moon Farms                    622291 Ontario Limited
         operations, and the corporate
         offices at 240 Argyle Avenue,
         Ottawa
         (100% Subsidiary of
         Egyptian Arabians)



         Marketing & Sales:
         (100% Subsidiary of 622291)                 Edwards Arabians Inc.
</TABLE>


         OVERVIEW - COMPANY'S OPERATIONS
         -------------------------------

         The Company, through its wholly-owned subsidiary, Egyptian Arabians
Inc., is a private breeder of Straight Egyptian Arabian horses. Straight
Egyptian Arabian horses are the finest and rarest of Arabian horses in the
world. Out of an estimated 100 million world general horse population,
approximately 6,000 are Straight Egyptian Arabian horses. An Egyptian Arabian
horse is a pure-bred Arabian horse that has been bred or that is descended from
horses that were bred in Egypt. A Straight Egyptian Arabian horse is an Egyptian
Arabian horse whose pedigree is unmixed with other blood-line groups. The
characterization "Straight Egyptian" is officially recognized in the Arabian
horse arena.

         North America is the world's foremost repository of these highly prized
and rare creatures. Egyptian Arabians Inc. is one of five large Canadian farms
which are solely dedicated to the breeding 


                                     - 4 -
<PAGE>   5

of Straight Egyptian Arabian horses. Each of these five farms is independently
owned and operates strictly on an arms length basis from one another. The five
farms utilize and access semen from a major international organization which
currently controls the largest collection of senior, world class Straight
Egyptian Arabian stallions available today. In addition, subsidiaries of
Egyptian Arabians Inc. have previously purchased semen from other senior
stallions which are owned by other independent North American breeders of
Straight Egyptian Arabian horses.

         Egyptian Arabians Inc. manages a large private breeding facility for
Straight Egyptian Arabian horses, with more than 225 Straight Egyptian Arabian
horses under its care and management with approximately 90 mares which will
produce foals in 1998. There are a total of 145 mares which are eligible and
will be bred in 1998 as well. As a result of the 1997 foaling and breeding
activities, it is expected that, by the summer of 1998, Egyptian Arabians Inc.
will provide care and management for approximately 300 Straight Egyptian Arabian
mares and fillies at its present facilities.

         The Company operates through two subsidiaries of its main Canadian
subsidiary - Egyptian Arabians Inc. The two subsidiaries are:

                  (a) 622291 Ontario Limited, an Ontario company, located in
         Addison, Ontario. The Company's Blue Moon Farms operations reside
         within 622291. Blue Moon Farms is the farm operating facility for the
         breeding and care of the Straight Egyptian Arabian horses tenanted
         there.

                  (b) Edwards Arabians Inc., an Ontario company, with its head
         office located at 240 Argyle Avenue, Ottawa, Ontario. Edwards Arabians
         Inc. is the marketing and sales arm for the Company's Straight Egyptian
         Arabian horse business.

         In the past five years, the Company has generated revenue principally
by (a) selling Straight Egyptian Arabian horses to investment limited
partnerships, other breeders and to individual clients and (b) operating the
breeding and care facilities at Blue Moon Farms for the Straight Egyptian
Arabian horse assets of the limited partnerships and other individual owners. As
noted previously, sales to investment limited partnerships diminished
significantly during the fiscal year ended January 31, 1998.

         These limited partnerships center around shared ownership by individual
clients of world class Straight Egyptian Arabian horses, and utilize various
Canadian legislation that exists in the area of farm-loss write-offs, registered
savings plans deductions through share ownership in private client owned
Canadian corporations, income splitting, and the deductibility of loan servicing
interest on investments loans. Revenue Canada has recently proposed certain
assessments on investors in these types of partnerships which has resulted in
reduced limited partnership investing activity in Straight Egyptian Arabian
horses. Additionally, individual clients have also purchased Straight Egyptian
Arabian mares in order to take advantage of their breeding potential and the
premium prices commanded by Straight Egyptian Arabian horse fillies borne by
these mares over an average 15 years breeding life.

         The Company believes that its techniques for artificial insemination,
pregnancy care, foaling care, medical care and training are technologically
superior to those of other breeders and boarders of Straight Egyptian Arabian
horses. Coupled with a work force of approximately 25 highly trained staff and
management, these techniques have contributed to the Company's profitability.
Continued growth in revenues, tightly engineered cost optimization, and top
quality Straight Egyptian Arabian horse breeding rates exceeding 85% (compared
to the worldwide industry average of approximately 65% - 70%) have allowed the
Company to become a major player in the Straight Egyptian Arabian horse
business.



                                     - 5 -
<PAGE>   6

         The Company, through its subsidiary, Edwards Arabians Inc., is
participating in an extensive R&D program with one of North America's leading
equine research centers - Guelph University, Guelph, Ontario. This research
program is investigating one of the leading causes of death among new born
foals, Rhodococcus Equi. The Company hopes that its sponsorship of this program
will provide it with access to technology that will reduce the death rate of new
born foals and thereby improve the Company's prospects for greater volumes of
annual foal production.

         EMPLOYEES
         ---------

         The Blue Moon Farms operation employs approximately 25 staff members
and has several local veterinarians on 24 hour call. The actual number of staff
at Blue Moon Farms varies with seasonal aspects of the business from 20 to 30
individuals. Staffing at the Company's Blue Moon Farms operations is heaviest
during the months of January through September, which months represent a full
breeding season, the entire foaling season and the time of year when
weather-related work such as fencing, pasture management and haying activities
are most commonly undertaken. The months of October, November and December see
fewer staff in that the major work load of the operations would have been
completed by the end of September. In addition, due to greater operating
efficiencies over the past several years, the Company's staff count has remained
relatively constant despite annual increases in the number of horses under
management or ownership. The entire Straight Egyptian Arabian horse breeding and
care system is continuously and carefully monitored, electronically and
physically, to ensure maximum productivity of Straight Egyptian Arabian
foalings. Leading edge medical and electronic equipment and highly trained staff
enable minimization of costs and optimization of Straight Egyptian Arabian horse
production output.

         The Company's marketing and sales organization, housed within Edwards
Arabians Inc., employs five individuals at its Ottawa, Canada facility.

         COMPANY'S MISSION AND STRATEGY
         ------------------------------

         The Company has a primary mission to profitably carry on the business
of breeding, raising, showing, exhibiting, and selling Straight Egyptian Arabian
horses for the purpose of supporting external and internal growth and returning
value to the Company's stockholders. The Company's ultimate goal is to become
the largest private breeder of Straight Egyptian Arabian horses in the world. To
accomplish this goal, the Company has made major investments in re-engineering
the Straight Egyptian Arabian horse breeding and care operations at the
Company's Blue Moon Farms facilities in Addison, Ontario, using the most
advanced technologies for breeding, maternity care and monitoring, physical
security, safety, and medical care.

         SHORT-TERM AND MEDIUM-TERM STRATEGIES
         -------------------------------------

         The Company's strategy is to improve the Company's position in the
Straight-Egyptian Arabian marketplace. In the short term, the Company intends to
pursue the following core strategies:

         Complete the re-engineering and modernization of the Company's
facilities at Blue Moon Farms.

         Establish North American market awareness of the Company and its
business.



                                     - 6 -
<PAGE>   7

         Establish market awareness of the Company and its business in select
international markets.

         In the medium term, the Company intends to pursue the additional
following strategies:

         Establish a Straight Egyptian Arabian horse export market from North
America to select international markets.

         Create a niche lifestyle awareness in North America as to the benefits,
both social and economic, of participation in the ownership of Straight-Egyptian
Arabian horses.

         In recognition of the fact that sales of horses to investment limited 
partnerships have diminished as a result of Revenue Canada pronouncements, the
Company has decided to diversify its base of operations by expanding into 
unrelated and totally distinct consumer sector businesses. The Company's 
management has identified several possible acquisition candidates and is 
evaluating the merits of pursuing those candidates.


         THE ARABIAN HORSE
         -----------------

         The Arabian horse has the distinction of being the oldest living breed
of horse. "Equus Arabicus", one of the four original species of horse, has been
identified in modern times as the Arabian horse. While other breeds disappeared
or mixed with different breeds, the Arabian remained essentially the same.
Although the first recorded history of the Arabian horse was 3,000 years ago,
some archaeologists believe the breed existed as long as 40,000 years ago.

         Raised originally in Arabia and adjacent countries and noted for its
intelligence, grace and stamina, Arabians have the longest bloodline record of
any horse breed and have been bred by the Bedouins in the Near East for three
millennia, primarily for use in war because of their endurance. Tomb paintings
indicated that Egyptians raised Arabian horses as early as 1580 BC. The Muslim
conquests of the sixth and seventh centuries introduced Arabian horses to Europe
and many parts of Asia.

         Many of the Arabian horse's characteristics (such as stamina, hardiness
and agility) were developed due to the careful breeding practices and harsh
lifestyle of the desert Bedouin tribes. The natural culling that occurred
because of the strenuous life in the desert was enhanced by careful breeding
practices of owners. Because of these breeding practices the Arabian horse is
considered to be the most prepotent of all breeds of horses, for its ability in
passing on its characteristics to foals.

         For thousands of years, owners bred Arabian horses to own more stock
and to pick up the famous Arabian qualities. In fact, the Arabian horse is the
genetic predecessor of every light horse breed in existence today. Arabians have
been bred with other horses to produce new breeds, including thoroughbreds,
standardbreds, quarter horses, lippizaners and national show horses.




                                     - 7 -
<PAGE>   8

         STRAIGHT EGYPTIAN ARABIAN HORSES
         --------------------------------

         Straight Egyptian Arabians, which account for approximately 1.0% of all
purebred Arabian horses, trace their heritage exclusively to the Arabians which
were bred in, or whose bloodline was used as part of, the established breeding
programs in Egypt, referred to below. Many Arabian horses in North America and
Europe today are Egyptian-related in recognition of the superior qualities of
the Straight Egyptian Arabian.

         Straight Egyptian Arabians are considered by breeders to be very
prepotent in passing their characteristics on to their foals because of their
intense line breeding. The Straight Egyptian Arabian is known for its elegant
features. Its dished head, large eyes, arched neck and high tail carriage
justify its reputation as the most beautiful of all breeds. Straight Egyptian
Arabian horses have a body which is shorter than other breeds, usually a rib and
one vertebrae less than a Thoroughbred and two vertebrae in the tail. Colourings
are primarily grey, bay and chestnut.

         The Straight Egyptian Arabian horse's natural physical characteristics
have contributed to its outstanding performance in today's equine activities.
The short, dished head and wide flaring nostrils allow for maximum oxygen
intake. The arched neck keeps the windpipe defined and clear to carry air to the
lungs. Through careful breeding, strong resilient legs, free of most lameness
problems, are more common than in other breeds. Such qualities give the Straight
Egyptian Arabian horse superior athleticism and versatility.


         INTERNATIONAL MARKETS
         ---------------------

         As the demand for Straight Egyptian Arabian horses has increased,
markets have opened up in many parts of the world to meet this demand. Out of
the general Arabian horse population of 1 million, and a general world horse
population of an estimated 100 million, only approximately 6,000 horses are
registered Straight Egyptian Arabians. This exclusivity has helped to support
the market value of these horses. See "BUSINESS - The Industry."

         Outside of North America, countries with well developed markets and
businesses leading in the breeding and growth of the Straight Egyptian Arabian
horse industry include: Sweden, Norway, Germany, Netherlands, Belgium, Spain,
Portugal, France, Switzerland, Austria, Hungary, Russia, Poland, Morocco, Egypt,
South Africa, Australia, Argentina, Chile, Uruguay, and Brazil.


         NORTH AMERICAN MARKETS
         ----------------------


         Arabian horses made their debut in North America during the 1893
Chicago World's Fair, where Bedouins exhibited 29 horses. The breed gradually
grew, but it was not until the 1940's that the Arabian horses gained widespread
popularity through the advent of horse shows. Some of the best Arabian horses
bred throughout the world have been exported to North American breeders over the
last 40 years. North American breeders have achieved a reputation as leaders in
the preservation, through selective breeding, of purebred Arabian bloodlines.

         After countless centuries, and only in the last 30 to 40 years, North
America has achieved the undisputed status as the world guardian and protector
of Straight Egyptian Arabian horses in terms of 


                                     - 8 -
<PAGE>   9

both quality and quantity. North American interest in Straight Egyptian Arabian
horses has soared after major wins in the show ring, and consequently as a
better understanding was achieved of the pure, refined type and elegance for
which these horses were prepotently line-bred. The Pyramid Society was formed in
the United States to ensure the strictly controlled perpetuation of this rare
genetic pool and to provide valuable outcross bloodlines to other Arabian
breeders.

         Several countries maintain their own registration systems for Arabian
horses. Registration of Arabians in North America began in 1908, although
Arabian horses were imported occasionally to North America during the 18th and
19th centuries. Up to the end of December 1991, all Arabian horses owned in
Canada could be registered with either or both the Arabian Horse Registry of
America, Inc. (the "AHRA") or the Canadian Arabian Horse Registry (the "CAHR").
Effective January 1992, all Canadian Arabian horses must be registered only with
the CAHR as, at the request of the CAHR, the AHRA has ceased to offer its
registration services to Canadian owners for foals born in Canada. A breeder
usually registers a foal within six months of its birth. The CAHR rules limit
registration to one foal per year per mare. Effective January 1, 1991, all foals
must be blood-typed as they approach breeding age. The CAHR also maintains
records of the blood-type of every Arabian breeding stallion. The particular
markings of the horse, including hair whorl location, are recorded on the
Certificate of Registration.

         Since neither the CAHR nor the AHRA registers specific bloodlines, the
Pyramid Society was formed to establish standards for and act as a record keeper
of Straight Egyptian genealogy. An extensive reference handbook of Straight
Egyptian Arabian horses is published every four years by the Pyramid Society.
The latest reference handbook was published in 1994. The Pyramid Society also
holds an annual World Egyptian Event in Lexington, Kentucky. The Egyptian Event
includes a stallion exhibition, lectures, halter, performance and futurity
competitions for Straight Egyptian Arabian horses and Egyptian-related horses.
Horses which are nominated en utero to compete at a future date, usually for a
period of three years after nomination, participate in various futurity
competitions.

         Canadian breeders of Straight Egyptian Arabian horses consider it
desirable that their horses be registered with the CAHR and be confirmed by the
Pyramid Society to be Straight Egyptians to ensure recognition and adequate
protection of the bloodline. Breeders also seek membership with the
International Arabian Horse Association located in Westminster, Colorado. This
Association organizes and operates various Arabian horse shows throughout the
year and prescribes ethical standards to be followed by its members.


         THE INDUSTRY
         ------------

         The major criteria for determining the value of Straight Egyptian
Arabian horses are substantially similar to those utilized to determine the
value of race horses: pedigree, performance in competition, and the ability to
produce marketable foals. The owner of a Straight Egyptian Arabian horse need
not bear the costs of training for, or risk the many health hazards involved
with, racing in order to derive value. The show arena is equivalent to the race
track for a racehorse since the Straight Egyptian Arabian accumulates honors by
winning show competitions as opposed to winning races. However, professional
Arabian and Straight Egyptian Arabian horse racing is rapidly becoming quite
popular.

         Straight Egyptian Arabian horses have become increasingly popular in
the last three decades in North America and interest has increased following not
only major competitive wins by these horses in the show ring, but also a growing
public appreciation of the refinement and elegance of the Straight


                                     - 9 -
<PAGE>   10

Egyptian. As previously noted, Straight Egyptian Arabian horses represent
approximately 1% of the entire Arabian horse population, and yet Straight
Egyptian Arabian horses consistently win 20%-30% of the North American show
events. These performance results have generated increased interest in the
breeding of Straight Egyptian Arabian horses.

         Arabians are considered to be the one of the fastest growing breeds of
all of the major light horse breeds on the North American continent. The
American Horse Council of Washington, D.C. has published registration figures
indicating that the number of Arabian foals registered in North America has
increased from 1,610 in 1960 to 24,578 in 1988, which is approximately four
times the rate of growth of the total number of registrations during these years
for the major North American light horse breeds. Purebred Arabian horse
registrations have declined, however, from their highest levels in the
mid-1980's to approximately 13,000 registrations in each of 1994 and 1995.

         Arabians are generally sold either by private agreement or at public
auction, often by a sales agent. Due to their rarity and aesthetic qualities,
Straight Egyptian Arabian horse foals will normally fetch considerably higher
prices than Egyptian-related foals. Also, a filly is usually much more valuable
than a colt because of her potential value for breeding. In general, the
percentage of live foals born in a group of mares confirmed by a veterinarian as
"checked to be in foal" is normally approximately 90% and the usual ratio of
colts to fillies is one to one. Generally, breeders evaluate a breeding program
on the basis of the number of foals one may expect to be produced by a mare, the
reproductive capabilities of fillies so produced and the anticipated selling
price of each foal. The anticipated breeding life of an Arabian mare under good
management conditions is approximately 15 years. Because the gestation period
for horses is eleven months, a mare can carry only one foal a year, assuming
that a breeder is utilizing only a direct breeding program for his mares.

         The rarity of Arabians is preserved by the CAHR rules providing for
only one foal per year per mare. Subsequent to the 1990 breeding season, the
CAHR rules permit the transportation of semen for artificial insemination and
the storage of semen. To reduce the risk associated with breeding, some breeders
have in recent years employed embryo transfers and artificial insemination.
Unlike the standards applicable to the thoroughbred horse industry, regulations
regarding Arabian horses permit immediate artificial insemination and embryo
transfers, thus reducing the risk of injury to the stallions and reducing the
risks for mares associated with breeding, carrying and delivery of foals.


         COMPANY'S PRIMARY SOURCES OF REVENUES AND INCOME
         ------------------------------------------------

         The Company's primary sources of revenue are:

                  
                  (a) Services related to the breeding and care of Straight
         Egyptian Arabian horses for the limited partnerships, and for other
         individuals who choose to utilize the Company's services.

                  (b) Sales of Straight Egyptian Arabian horses to various
         limited partnerships, offered by Edwards Securities Inc. ("ESI"),
         acting as the General Partner. ESI is a corporation incorporated under
         the laws of Ontario and licensed by the Ontario Securities Commission
         to create, promote, and sell securities. David G. Edwards is indirectly
         the sole controlling shareholder, Director, and President of ESI.

                  (c) Sales of Straight Egyptian Arabian horses to individual
         owners.

                  (d) Sales of Straight Egyptian Arabian horses to other
         breeders.



                                     - 10 -
<PAGE>   11

         As noted previously, sales to limited partnerships have abated in the
wake of Revenue Canada proposals to impose assessments against investors in
these types of partnerships. See - "Management's Discussion and Analysis."

         In order to maximize the net income that results from these
revenue-generating sources, the Company increases margins by optimizing the use
of in-house re-engineered processes, which are designed to achieve the maximum
breeding rates and foaling rates in the shortest time frames and to minimize the
costs related to the breeding and care services provided by the Company at its
Blue Moon farm facilities.

         The Company's facilities at Blue Moon Farms have been customized to
accommodate the breeding, caring and delivery procedures used at every stage of
the Straight Egyptian Arabian horse's productive life. For example, pregnant
Straight Egyptian Arabian mares move through a staged sequence and live in
different facilities as their pregnancy progresses. At the final stages, the
pregnant Straight Egyptian Arabian mare has moved into facilities adjacent to
the birthing center and breeding laboratories, so that expert help is at hand.
Here, the Straight Egyptian Arabian mare is internally monitored by remote
electronics and by wireless alert systems, 24 hours a day, including up to the
precise moment that her "water breaks". Use of in-house expertise and state of
the art equipment makes the above possible while cutting industry standard costs
substantially.


         COMPETITION
         -----------

         Competition is very limited, given the infancy of the modern Straight
Egyptian Arabian horse business. There are only a handful of operators who are
willing and able to structure and run the Straight Egyptian Arabian horse
breeding business like any other high-technology business, using
state-of-the-art management and production-line techniques. Although there are
numerous horse farms throughout North America that breed and raise Egyptian
Arabian horses, only a handful of farms are devoted exclusively to the breeding
and raising of Straight Egyptian Arabian horses. The competitive success of any
breeding operation will depend on its ability to produce on a consistent basis
Straight Egyptian Arabian horses that fare well in competitions and on its
ability to control costs associated with the breeding of and caring for the
horses.

         The Company believes that, by applying to the Straight Egyptian Arabian
horse business all the techniques and tools applied to any other high technology
business, it has achieved a competitive advantage. The focus has been to achieve
a world class quality product (top bred Straight Egyptian Arabian mares), with
the highest productivity rates (successful births of Straight Egyptian Arabian
fillies), and lowest defects rate (failed inseminations and aborted
pregnancies). This combined with Mr. Edwards' successful track record, via ESI,
in successfully packaging and marketing the Straight Egyptian Arabian horse
product into affordable investment units which clients could buy, has given the
Company a competitive advantage.

         The North American and international markets are so large and in such
an embryonic growth stage, that there is room for any number of companies
engaged in the same business as the Company. The Company anticipates that, as
the demand for Straight Egyptian Arabian horses grows, existing horse farms as
well as potential new farms will enter the market and place greater emphasis on
the breeding


                                     - 11 -
<PAGE>   12

and development of Straight Egyptian Arabian horses. As additional farms enter
this marketplace, competition will increase, and the Company will need to
continue to devote resources to the development and maintenance of facilities
and systems that are designed to reduce the costs of breeding and maintaining
horses without sacrificing the quality of the horses that are produced through
the Company's efforts.


         RISK FACTORS
         ------------

         The major risk factors that could directly impact the Company's
         business are as follows:

                  * Future, potential infestation of the Company's Straight
         Egyptian Arabian horses by a yet unknown but assumed deadly equine
         illness. The Straight Egyptian Arabian horses that are boarded at the
         Company's Blue Moon Farms facility are fully insured by Lloyds of
         London, and their immediate value would be recoverable. However, to
         rebuild the Straight Egyptian Arabian horse herd would take time and,
         in the interim, ongoing revenue streams from sales of horses would be
         curtailed, as sales to the limited partnerships and individual
         purchasers would be interrupted.

                  * Future, potential unplanned death or departure of key
         personnel, specifically David G. Edwards, Patricia L. Edwards, Kenneth
         A. Edwards, and Stephane Robillard, would adversely impact the business
         in the near-term. There can be no assurance that the Company would be
         able to replace any of these individuals. Furthermore, the Company does
         not carry key man insurance on any of these individuals.

                  * Future, potential, unanticipated changes in governmental tax
         laws and tax rulings on individual client's affairs disallowing the
         farming tax status and associated investment costs/losses deductions
         for clients of the limited partnerships that purchase the horses from
         the Company and the deductibility of Straight Egyptian Arabian horse
         investment interest expense. These changes could make investing by
         individual clients in the limited partnerships less attractive, and
         could adversely impact the demand for the Company's horses.

                  * Termination of the Company's close association with its four
         associated Canadian farms could temporarily hamper, in the near-term,
         the Company's sales. Specifically, if Egyptian Arabians Inc. was ever
         unable to access semen from senior Straight Egyptian Arabian stallions
         owned by its current major supplier, it would have to make arrangements
         to purchase semen from other sources. Semen would then have to be
         purchased from the owners of other world class senior stallions and any
         unplanned changes in the supply of semen would be viewed as disruptive
         but only temporary.

                  * A sudden, unforeseen, glut in production of quality Straight
         Egyptian Arabian horses into the North American markets would drive
         unit prices down and thus adversely affect gross revenues and net
         margins.

                  * Until relatively recently, there has been no public market
         for the Company's Common Stock. There can be no assurance that an
         active public market will develop or be sustained or that the market
         price of the Common Stock will not decline below that which is
         originally quoted by any broker-dealer. Future announcements concerning
         the Company or its competitors, quarterly variations in operating
         results, announcements of litigation or changes in earnings estimates
         by analysts could cause the market price of the Company's Common Stock
         to fluctuate substantially. These fluctuations, as well as general
         economic, political and market conditions such as recessions,
         international instabilities or military conflicts, may materially and
         adversely affect the market price of the Company's Common Stock.




                                     - 12 -
<PAGE>   13

         FORWARD-LOOKING STATEMENTS
         --------------------------

         The Company has, in discussions of its future plans, objectives and
expected performance in this Report, included projections or other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 or Section 21E of the Securities Exchange Act of 1934, as amended.
Such projections and forward-looking statements are based on assumptions that
the Company believes are reasonable, but are by their nature inherently
uncertain. In all cases, there can be no assurance that such assumptions will
prove correct or whether projected events will occur, and actual results could
differ materially from those projected. Some of the important factors that could
cause actual results to differ from any such projections or other
forward-looking statements are set forth above.

ITEM 2.        PROPERTIES

         The Company's principal properties consist of its owned corporate
offices in Ottawa, Ontario and its operating farm facilities in Addison,
Ontario.

         The Company owns its corporate offices at 240 Argyle Avenue, Ottawa,
which offices are encumbered by mortgages with Sun Life Trust Company and a
private mortgagee having a total outstanding indebtedness of approximately
$418,000 as of January 31, 1998. These facilities house the operations of
Edwards Arabians, a wholly-owned subsidiary of 622291, which is a Canadian
subsidiary of the Company's subsidiary Egyptian Arabians Inc. The Company's
operations with respect to marketing and sales, finance and accounting, as well
as its executive offices, are located within this facility.

         The Company's farm operating facilities are located at Addison, Ontario
and come under the Blue Moon Farms umbrella of 622291. These facilities cover
approximately 270 acres of land, of which 130 acres, including buildings, are
owned by the Company and encumbered by a mortgage with the Business Development
Bank of Canada having a total outstanding indebtedness of $430,000 as of January
31, 1998, and the remaining 140 acres are adjacent leased farm land.

         The Blue Moon Farms facilities include over 50,000 square feet of
building space, covering buildings for vehicles and equipment, the reception
center, lodge, meeting facilities for sales staff, brokers, potential investors,
agricultural and equine specialists, farm administration offices, farm hospital,
quarantine center, breeding center, reproductive and R&D laboratories, R&D
barns, main and subsidiary barns with 62 stalls, "in-utero" stalls, foaling
stalls, nursery center, training ring, run-in buildings, food storage
facilities, exhibition facilities and exercise facilities. The entire complex is
protected by high voltage, low amperage electrical fencing. The Blue Moon Farms
operations are staffed 24 hours a day with three shifts of trained personnel,
and protected from fire hazard by advanced sensor and extinguishing systems.

         POTENTIAL ENVIRONMENTAL LIABILITIES

         The Company's operations are subject to various Canadian national,
provincial and local laws and regulations covering the discharge of materials
into, and protection of, the environment. Although the Company believes that its
operations and facilities are in general compliance with applicable
environmental laws and regulations, risks of substantial costs and liabilities
are inherent in farming operations.




                                     - 13 -
<PAGE>   14

ITEM 3.        LEGAL PROCEEDINGS

         Neither the Company, nor any of its direct or indirect subsidiaries, is
a party to any material pending legal proceedings, nor is any of them a party to
any routine litigation incidental to the business.

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

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended January 31, 1998.

                                     PART II
ITEM 5.        MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED 
               STOCKHOLDER MATTERS

         The Company's Common stock began trading on the OTC Bulletin Board
under the symbol "MDEX" on or about January 7, 1998. The OTC Bulletin Board is
a NASD-sponsored and operated inter-dealer automated quotation system for equity
securities not included in the Nasdaq system. The OTC Bulletin Board has only
recently been introduced as an alternative to "pink sheet" trading of
over-the-counter securities. Consequently, the liquidity and stock price of the
Company's securities in the secondary market may be adversely affected. There is
no assurance that a regular trading market will develop for the Company's
securities or that, if developed, any such market will be sustained. The range
of high and low bid quotations presented below was obtained from the NASD. The
volume of trading in the Company's Common Stock has been limited and the bid
prices reported may not be indicative of the value of the Common Stock or the
existence of an active trading market. At January 31, 1998 there were
approximately 466 record holders of the Company's Common stock. The following
table sets forth, for the period indicated, the high and low sale prices per
share of the Company's Common Stock as quoted over-the-counter. As trading in
the Company's Common Stock did not commence until approximately December 9,
1997, the information presented below reflects less than a full quarter of
trading activity.

<TABLE>
<S>                <C>                 <C>              <C>
                  Fiscal Year Ended January 31, 1998
                  Fourth Quarter       $   4.875        $    .25                                       
                                       ---------        --------
                                         High             Low
</TABLE>

         The Company has not paid any cash dividends since its inception, and
does not anticipate the payment of cash dividends in the foreseeable future.

         No equity securities were sold by the Company during Fiscal 1998,
although the Company did issue pursuant to Rule 701 promulgated under the
Securities Act, 1,280,000 shares of Common Stock to a consultant in January 1998
for services rendered.


                                     - 14 -
<PAGE>   15

ITEM 6.        SELECTED FINANCIAL DATA

The following table summarizes certain selected financial data of the Company
and should be read in conjunction with the related Consolidated Financial
Statements and accompanying Notes to Consolidated Financial Statements (Item 8
hereof).

<TABLE>
<CAPTION>
                                           MERCRISTO DEVELOPMENTS, INC.
                                        FIVE YEAR SUMMARY OF FINANCIAL DATA
                                   (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

      SELECTED FINANCIAL DATA(1)
      --------------------------
      (all expressed in terms of Canadian
      dollars)
                                                                          Year Ended January 31,
                                                                          ----------------------
                                                1998             1997              1996             1995             1994
                                                ----             ----              ----             ----             ----
<S>                                         <C>              <C>               <C>              <C>              <C>         
     STATEMENTS OF OPERATIONS DATA
     REVENUES
     Farm(2)                                $  2,828,665     $  2,485,218      $  1,867,067     $  1,647,780     $  1,004,326
     Horses(3)                                 2,326,025        9,690,500         6,829,100        4,234,895        3,439,506
     Interest and Other                          267,255          308,406           357,257          444,913          497,446
                                            ------------     ------------      ------------     ------------     ------------
               Total Revenues               $  5,421,945     $ 12,484,124      $  9,053,424     $  6,327,588     $  4,941,278
                                            ------------     ------------      ------------     ------------     ------------

     COSTS AND EXPENSES
     Farm                                      1,314,137        1,117,619         1,148,804          973,666          481,208
     Horses                                    2,083,321        9,459,150         7,000,000        4,194,050        3,218,795
     Marketing and Sales                         118,287           71,918           114,219           18,656           25,342
     General and Administrative                  595,518          456,232           407,778          368,131          173,540
     Depreciation and Amortization                68,276           57,814            55,308           46,063           35,991
     Interest Expense                             71,763           54,260            65,842           73,771           47,038
     Consulting Fees - Business
     Acquisitions                                338,000          987,687               ---              ---              ---
                                            ------------     ------------      ------------     ------------     ------------
               Total Costs and Expenses     $  4,589,302     $ 12,204,680      $  8,791,951     $  5,674,337     $  3,981,914
                                            ------------     ------------      ------------     ------------     ------------

     Income (Loss) before Taxes                  832,643     $    279,444      $    261,473     $    653,251     $    959,364
     Provision for Income Taxes                  249,793          510,000            88,883          243,000          377,960
                                            ------------     ------------      ------------     ------------     ------------
     Income (Loss) from Continuing
      Operations                            $    582,850     $   (230,556)     $    172,590     $    410,251     $    581,404
                                            ------------     ------------      ------------     ------------     ------------
     Income from Discontinued
      Operations (Net of Income Taxes)               ---          145,502           142,947          157,531          118,148
                                            ------------     ------------      ------------     ------------     ------------
     Net Income (Loss)                      $    582,850     $    (85,054)     $    315,537     $    567,782     $    699,552
                                            ============     ============      ============     ============     ============
     Income (Loss) per Common Share
      from Continuing Operations            $       .035        $  ( .014)     $       .020     $       .049     $       .069
                                            ============     ============      ============     ============     ============
------------------
<FN>
1 The Selected Financial Data presented is the historical data of 622291 Ontario Ltd. for the years ended January 31, 1994
through 1997 which is the historical data of the Company after the reorganization of 622291 with Mercristo Developments, Inc.
Factors that affect the comparability of financial data from year to year and for comparable interim periods include timing of
the foaling season, demand for investment limited partnerships, unusual horse mortality and illness rates and non-recurring
marketing expenses. See "Management's Discussion and Analysis."

2 Farm revenues and costs and expenses relate to the Company's breeding operations and care of the horses.


3 Horse revenues and costs and expenses relate to the Company's sale of horses.
</FN>
</TABLE>

                                     - 15 -
<PAGE>   16

<TABLE>
<S>                                        <C>             <C>             <C>            <C>              <C>         
     Weighted Average Number of
       Common Shares Outstanding            16,714,820      16,560,519       8,654,719      8,450,000        8,450,000
                                           -----------     -----------     -----------    -----------      -----------
     (all expressed in terms of Canadian dollars)
<CAPTION>
                                                                             As of January 31,
                                                                             -----------------
                                                  1998            1997            1996           1995             1994
                                                  ----            ----            ----           ----             ----
<S>                                        <C>             <C>             <C>            <C>              <C>         
      BALANCE SHEET DATA
      Working Capital                      $   711,161     $   646,806     $    29,617    $  (554,926)     $(1,606,083)
      Total Assets                           9,762,593       8,969,522       9,909,083      8,877,188        7,217,144
      Long-Term Debt, less current
         portion                               770,409         430,025         386,920        420,280          220,000
      Stockholders' Equity                   2,160,571       1,239,721         661,887        356,260         (195,622)
      Cash Dividends Declared                                      Not             Not            Not              Not
        Per Common Share(4)                       None      Applicable      Applicable     Applicable       Applicable


<FN>
-----------------------

4 The Company has not declared any dividends on common stock since the reorganization became effective on January 31, 1997.
</FN>
</TABLE>




                                     - 16 -
<PAGE>   17

ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
               RESULTS OF OPERATIONS

INTRODUCTION

        Effective January 31, 1997, pursuant to the terms and conditions of an
Agreement and Plan of Reorganization by and among the Company, Egyptian Arabians
Inc. and Egyptian Arabians' sole stockholder (Resi Corp.), Egyptian Arabians
Inc. became a wholly-owned subsidiary of the Company. Simultaneous with that
transaction, 622291 became a wholly-owned subsidiary of the Egyptian Arabians
and, 622291 was reorganized pursuant to which operations of 622291 other than
the Blue Moon Farms breeding and care operations of 622291's wholly-owned
subsidiary, Edwards Arabian Inc., were spun off from 622291. The transaction
pursuant to which Egyptian Arabians Inc. (including directly and indirectly its
wholly-owned subsidiaries, 622291 and Edwards Arabians) became a wholly-owned
subsidiary of the Company has been accounted for as a recapitalization,
resulting in the historical operations of 622291 being treated as the historical
operations of the Company. Accordingly, the following discussion and analysis of
financial condition and results of operations is a discussion of the historical
financial performance of 622291's operations relating to the Blue Moon Farms
operations and the operations of 622291's wholly-owned subsidiary, Edwards
Arabians Inc.

        Since the inception of the Company's Canadian operations in 1991, the
Company has generated revenues primarily by selling Straight Egyptian Arabian
horses to investment limited partnerships, other breeders and individual
investors and by operating the breeding and care facilities at its Blue Moon
Farms facilities. Prior to 1997 revenues generated by these two activities had
remained fairly constant as a percentage of the Company's overall revenues, with
sales representing approximately 78% and management fees for the breeding and
care of the horses representing approximately 20%. The Company increased sales
primarily as a result of increased levels of investing activities promoted by
Edwards Securities Inc. which, in turn, resulted in a greater number of horses
being boarded at the Company's Blue Moon Farms facilities. Sales to limited
partnerships traditionally accounted for approximately 50% of the Company's
sales of horses while the balance consisted of sales to other farms and
individual owners.

        During 1997, as a result of Revenue Canada's proposed assessments with
the investors in the investment limited partnerships, sales of horses were
limited primarily to other breeders and individual investors. As a result, as a
percentage of the Company's overall revenues for the 1997 Operating Year, sales
of horses declined to approximately 43% of sales and management fees for the
breeding and care of the horses increased to approximately 52% of sales. The
volume of sales of horses in the 1998 Operating Year will continue to be
negatively impacted pending the outcome of the Revenue Canada assessments with
the individual investors. The Company expects farm revenues to continue to
increase during the 1998 Operating Year since the foaling activity and the
limited sales of horses will result in a greater number of horses under the
Company's care.

         Revenues from the Company's Blue Moon Farms operations, as those
operations relate to the care and maintenance of the horses boarded there, are
generated almost entirely (97%) from services rendered to the various limited
partnerships that purchased Straight Egyptian Arabian horses from the Company.

        The Company continues to believe that the markets outside of Canada
represent significant opportunities for the Company. Management intends to
allocate greater resources to expanding sales channels and establishing
marketing alliances in non-Canadian and international markets. Management has
also identified a need to diversify the Company's operations and thereby become
less dependent on the sale, breeding and care of Straight Egyptian Arabian
horses.

        The Company recognizes the need to continue to apply technology in a
manner that will increase the operating margins relative to the Straight
Egyptian Arabian horse business. In furtherance of those


                                     - 17 -
<PAGE>   18

goals, the Company expects to allocate a greater percentage of its overall
revenues to research and development and sales and marketing activities over the
next several years.

        The following discussion and analysis of the Company's financial
condition and results of operations focuses on the Company's operations and does
not include any discussion or analysis with respect to the operations that were
spun-off from 622291 during the reorganization of the Company.



                                     - 18 -
<PAGE>   19

RESULTS OF OPERATIONS

        The following table sets forth for the periods indicated the percentages
that the selected items in the Company's Consolidated Statements of Operations
bear to total revenues:


<TABLE>
<CAPTION>
                                             Year Ended January 31,
                                             ----------------------

                                        1998        1997         1996
                                       ------      ------       ------
<S>                                     <C>         <C>          <C>   
     REVENUES
     Farm(1)                             52.2%       19.9%        20.6%
     Horses(2)                           42.9%       77.6%        75.4%
     Interest and Other                   4.9%        2.5%         4.0%
                                       ------      ------       ------

         Total Revenues                 100.0%      100.0%       100.0%
                                       ------      ------       ------

     COSTS AND EXPENSES
     Farm(1)                             24.2%        9.0%        12.7%
     Horses(2)                           38.4%       75.8%        77.3%
     Marketing and Sales                  2.2%        0.6%         1.3%
     General and Administrative          11.0%        3.7%         4.5%
     Depreciation and Amortization        1.3%        0.4%         0.6%
     Interest Expense                     1.3%        0.4%         0.7%
     Consulting Fees - Business
     Acquisitions                         6.2%        7.9%         ---
                                       ------      ------       ------

         Total Costs and Expenses        84.6%       97.8%        97.1%
                                       ------      ------       ------

     Income Before Taxes                 15.4%        2.2%         2.9%

     Provision for Income Taxes           4.6%        4.1%         1.0%
                                       ------      ------       ------

     Income (Loss) from Continuing
     Operations                          10.8%       (1.9%)        1.9%
                                       ======      ======       ======


<FN>
1 - Farm revenues and costs and expenses relate to the Company's breeding
operations and care of the horses.

2 - Horse revenues and costs and expenses relate to the Company's sale of
horses.
</FN>
</TABLE>



                                     - 19 -
<PAGE>   20

        The following table sets forth for the periods indicated the number of
horses in the Company's inventory and the changes in that inventory. Horses
enter life as weanling fillies or colts, and fillies are allowed to grow up to
mare status at age three. At this time, mares will begin to breed, and
management of the company expects that a mare will have an economic reproductive
life of at least 15 years, although actual experience has shown that some mares
have been bred and have foaled out beyond the 15 year reproductive life span.
Horses have been sold to investors within a broad range of age groupings, from
weanling fillies up to mature mares. The Company does not sell colts to
investors. As the inventory of horses maintained by the Company constantly
changes, the ages of the horses in that inventory vary depending on the ages of
the horses sold and purchased by the Company. The Company does not own any
stallions and instead utilizes and accesses semen from a major international
organization which currently controls the largest collection of senior, world
class Straight Egyptian Arabian stallions available. In addition, the Company
has previously purchased semen from other senior stallions that are owned by
other independent North American breeders of Straight Egyptian Arabian horses.
The number of horses in the Company's inventory is significantly less than the
number of horses under the Company's care and supervision.

<TABLE>
<CAPTION>
                                                     Year Ended January 31
                                                  ---------------------------
     NUMBER OF HORSES                              1998       1997       1996
                                                  -----      -----      -----
<S>                                                <C>        <C>        <C> 
        Beginning Inventory                          12         16         10
        Horses Acquired                              64        115         97
        Horses Sold or Exchanged                    (72)      (119)       (91)
                                                  -----      -----      -----
        Ending Inventory                              4         12         16
                                                  =====      =====      =====
</TABLE>

         There was a significant decrease in the number of horses in ending
inventory at January 31, 1998 when compared to January 31, 1997 due primarily
to the Company's self-imposed limitation on the purchase of horses when
compared to prior years. There was a decrease in the number of horses in ending 
inventory at January 31, 1997 when compared to January 31, 1996, but an increase
in total carrying value for those horses due to a favorable mix in mares to 
colts. The ratio of mares to colts can vary significantly at any point in time.

        The range of sales and purchase prices and the average sale and purchase
price of horses for all periods were as follows:

<TABLE>
<CAPTION>
                                          Range                  Average
                                          -----                  -------
<S>                                 <C>                          <C>    
     Mares                          $70,000-$95,000              $92,000
     Fillies                        $50,000-$60,000              $55,000
     Colts:
         Purchase                                                $10,000
         Sale                                                    $500 or
                                                                    less
</TABLE>

        The limited partnerships to which the Company frequently sells fillies
and mares generally have a one to three year life until, for tax reasons, they
are rolled over into corporations. Prior to the occurrence of these roll-overs,
the Company will evaluate the holdings of a given partnership, focusing on the
number of horses and the mix of colts to fillies, in order to support and
maintain the investment value of those partnerships. The Company will often take
fillies or mares from its existing inventory and exchange them for colts owned
by the various investment partnerships. Fillies and mares are much more valuable
than colts, and the price differential between the fillies and mares surrendered
by the Company and the colts received in exchange is expensed as part of the
cost of horses sold. In determining the value of the fillies and mares
surrendered by the Company and colts received in exchange from the limited
partnerships, the Company recognizes the historical market value of the horses
based on the Company's costs of purchasing fillies, mares and colts. Total
replacement costs reflected in cost of sales were $570,000, $710,000 and
$458,000 for the years ended January 31, 1998, 1997 and 1996, respectively.



                                     - 20 -
<PAGE>   21

         In addition, the average management fees charged by the Company for all
periods presented were approximately $5,000 per investment limited partnership
per year, or approximately $417 per month.


YEAR ENDED JANUARY 31, 1998 ("1997 OPERATING YEAR") COMPARED WITH YEAR ENDED
JANUARY 31, 1997 ("1996 OPERATING YEAR")

REVENUES. Total revenues for the 1997 Operating Year decreased by $7,062,179
(56.6%) to $5,421,945 from $12,484,124 for the 1996 Operating Year. Revenues
from breeding and care of horses increased by $343,447, revenues from the sale
of horses decreased by $7,364,475, and interest and other revenues decreased by
$41,151 during the 1997 Operating Year. The increase in farm revenues was
primarily attributed to the increase in the number of horses under the Company's
care and the corresponding increase in the foaling and breeding activities. The
primary reason for the large decrease in the sale of horses was the limited
activity in horse purchases and sales pending the outcome of the Revenue Canada
proposed assessments with the investors. Interest income and other revenues
decreased by $41,151 during the 1997 Operating Year as a result of the continued
decline in the use of the Company's resources to support secondary financing of
the investment partnerships.

COSTS AND EXPENSES. Total costs and expenses for the 1997 Operating Year
decreased by $7,615,378 (62.4%) to $4,589,302 from $12,204,680 for the 1996
Operating Year. As a percentage of total revenues, costs and expenses decreased
to 84.6% in the 1997 Operating Year from 97.8% in the 1996 Operating Year. As
the Company's horse purchases and sales activity was limited during the 1997
Operating Year, the Company was able to control the incurring of expenses
associated with those activities.

        Farm expenses as a percentage of farm revenues increased marginally to
46.5% in the 1997 Operating Year from 45.0% in the 1996 Operating Year. The
increase was primarily due to the increases in the cost of purchasing feed, hay,
seed and fertilizer during the 1997 Operating Year.

        The cost of horses sold as a percentage of horse sales decreased to
89.6% in the 1997 Operating Year from 97.6% in the 1996 Operating Year. The
decrease was primarily due to increased margins on the sales of colts during the
fourth quarter of the 1997 Operating Year and the unusually high mortality rate
of horses during the 1996 Operating Year.

        The Company incurred consulting fees of $338,000 during the fourth
quarter of the 1997 Operating Year in connection with investigating prospective
business acquisitions as compared to $987,687 of consulting fees associated with
the failed acquisition of ComputerLink Online and Tucows during the 1996
Operating Year. In both years the consultants were compensated through the
issuance of common stock of the Company.


                                     - 21 -
<PAGE>   22

MARKETING AND SALES. Marketing and sales expenses for the 1997 Operating Year
increased by $46,369 (64.5%) to $118,287 from $71,918 in the 1996 Operating
Year. Marketing and sales expenses as a percentage of total revenues were 2.2%
in the 1997 Operating Year as compared to .6% in the 1996 Operating Year. The
primary reason for the increase was the incurring of costs in the fourth quarter
of the 1997 Operating Year for investment seminars to promote horse investing
and sales.

GENERAL AND ADMINISTRATIVE. General and administrative expenses for the 1997
Operating Year increased by $139,286 (30.5%) to $595,518 from $456,232 in the
1996 Operating Year. As a percentage of total revenues, general and
administrative expenses were 11.0% in the 1997 Operating Year as compared to
3.7% in the 1996 Operating Year. The primary reason for the increase was
accounting, legal and consulting fees incurred in connection with the
recapitalization of the Company and the registration of the Company's Common
Stock with the United States Securities and Exchange Commission during the first
half of 1997.

INCOME TAXES. The provision for income taxes for the 1997 Operating Year is
based upon an effective Canadian tax rate of 30.0% as compared with a rate of
182.5% in the 1996 Operating Year. The primary reason for the decrease in the
effective tax rate was the nondeductible consulting fees incurred in connection
with the failed acquisition of ComputerLink Online and Tucows in the 1996
Operating Year and the effect of the Canadian tax brackets based on income
levels.


YEAR ENDED JANUARY 31, 1997 ("1996 OPERATING YEAR") COMPARED WITH YEAR ENDED
JANUARY 31, 1996 ("1995 OPERATING YEAR")

REVENUES. Total revenues for the 1996 Operating Year increased by $3,430,700
(37.9%) to $12,484,124 from $9,053,424 for the 1995 Operating Year. Revenues
from breeding and care of horses accounted for $618,151, and the sale of horses
accounted for $2,861,400 of the increase in total revenues during the 1996
Operating Year. The increase in revenues was primarily attributed to the
increased level of investment in Straight Egyptian Arabian horses and the
corresponding increase in the Company's foaling and breeding activities. These
increases were offset, in part, by a decrease in interest and other revenue.
Interest income and other revenues decreased by $48,851 during the 1996
Operating Year as a result of the continued decline in the use of the Company's
resources to support secondary financing of the investment partnerships.

COSTS AND EXPENSES. Total costs and expenses for the 1996 Operating Year
increased by $3,412,729 (38.8%) to $12,204,680 from $8,791,951 for the 1995
Operating Year. As a percentage of total revenues, costs and expenses increased
to 97.8% in the 1996 Operating Year from 97.1% in the 1995 Operating Year. In
the 1996 Operating Year, the Company was beset by several unusual and
non-recurring events that contributed to the increase in overall costs and
expenses. The Company incurred consulting fees associated with the failed
acquisition of ComputerLink Online and Tucows in the amount of $987,687 during
the 1996 Operating Year. The consultants were compensated through the issuance
of common stock of the Company. The Company lost an average of one horse each
month during the year due to various causes of death and replacement costs for
those horses approximated $400,000. In addition, normal veterinary costs
quadrupled due to prolonged illnesses with the Company's colts and fillies.
Despite the occurrence of these events, which the Company believes are not
indicative of any adverse trends, the Company was able to tightly control its
other operating expenses. In response to and in partial resolution of the
prolonged illnesses resulting from Rhodococcus Equi, the Company engaged in
extensive consultations with veterinarians and professors at the University of
Guelph. The Company, through its subsidiary, Edwards Arabians Inc., is currently
participating in an extensive research and development study with the University
of Guelph to aid in the prevention of Rhodococcus Equi in young foals. The
program consists of administering Guelph Plasma and Polymune R and monitoring
the foals' fibrinogen levels every two weeks as well as obtaining nasal swabs
and tracheal aspirations as needed.


                                     - 22 -
<PAGE>   23

The Company believes that this will allow the Company to monitor much more
closely the impact of this disease on young foals.

MARKETING AND SALES. Marketing and sales expenses for the 1996 Operating Year
decreased by $42,301 (37.0%) to $71,918 from $114,219 in the 1995 Operating
Year. Marketing and sales expenses as a percentage of total revenues were .6% in
the 1996 Operating Year as compared to 1.3% in the 1995 Operating Year. The
primary reasons for the decrease were the incurrence in the 1995 Operating Year
of costs for new advertising materials promoting sales to limited partnerships
and a special one-time sales commission.

GENERAL AND ADMINISTRATIVE. General and administrative expenses for the 1996
Operating Year increased by $48,454 (11.9%) to $456,232 from $407,778 in the
1995 Operating Year. As a percentage of total revenues, general and
administrative expenses were 3.7% in the 1996 Operating Year as compared to 4.5%
in the 1995 Operating Year. These expenses increased primarily as the result of
salary increases, greater than normal professional fees and office expenses
incurred in connection with expanding the business.

INCOME TAXES. The provision for income taxes for the 1996 Operating Year is
based upon an effective Canadian tax rate of 182.5% as compared with a rate of
33.5% in the 1995 Operating Year. The primary reason for the increase in the
effective tax rate was the nondeductible consulting fees incurred in connection
with the failed acquisition of ComputerLink Online and Tucows and the effect of
the Canadian tax brackets based on income levels.

LIQUIDITY AND CAPITAL RESOURCES

        At January 31, 1998, the Company's primary source of liquidity included
cash and cash equivalents of $14,612 and open trade credit with vendors of
$3,845,612. The Company has not borrowed any moneys from financial institutions
for working capital needs with the exception of its commercial mortgages on the
construction and improvements to its facilities. The Company's working capital
increased by $64,355 during the 1997 Operating Year to $711,161 at January 31,
1998 from $646,806 at January 31, 1997.

        Net cash flows from operating activities during the 1997 Operating Year
were $338,796 as compared to a negative $1,672,236 for the 1996 Operating Year.
The increase of $2,011,032 resulted primarily from higher operating income and
the significant reduction in inventories during the 1997 Operating Year coupled
with a smaller increase in accounts receivable as compared to the 1996 Operating
year.

        Net cash flows used in investing activities (primarily for loans to
partnerships and capital expenditures net of the collection of amounts due from
related companies) during the 1997 Operating Year were $745,477 as compared to
net cash flows from investing activities (primarily from collections of amounts
due from the limited partnerships) of $1,556,245 for the 1996 Operating Year.

        Net cash flows from financing activities during the 1997 Operating Year
were $368,131 as compared with net cash flows used in financing activities of
$71,964 for the 1996 Operating Year. The increase reflects the borrowings on new
commercial property of 439,138 during the 1997 Operating Year.

        The balance sheet at January 31, 1998, shows an increase in current
assets for the 1997 Operating Year from $4,764,832 to $4,880,702 and an increase
in current liabilities from $4,118,026 to $4,169,541 and a decrease in deferred
revenues from $2,350,750 to $1,646,472 all compared with those figures at
January 31, 1997. The decrease in deferred revenues was primarily attributable
to the decline in the formation of new investment partnerships pending the
outcome of Revenue Canada's assessments with individual investors.

                                     - 23 -
<PAGE>   24

COMPANY'S FINANCING REQUIREMENTS

        The Company has no current need for any externally generated financing
to fund its continued operations or to fund continued internal growth. As the
Financial Statements show, the Company's business has been profitable, is
self-financing, and does not depend on any institutional debt or commercial
lines of credit (except for commercial mortgages on the Company's properties).

OTHER MATTERS

        In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income", which is applicable to the Company effective February 1, 1998. This
Statement establishes standards for the reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. Comprehensive income is defined as the
change in the equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. It includes all
changes in equity during a period (from net income and other sources) except
those resulting from investments by owners and distributions to owners.
Management believes that the adoption of this Statement will not have a material
effect on the Company's consolidated results of operations or financial
position.

        In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
which is applicable to the Company effective February 1, 1998. This Statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief financial decision maker in
deciding how to allocate resources and in assessing performance. The Statement
requires disclosure of a measure of segment profit or loss, certain specific
revenue and expense items, and segment assets. It requires reconciliations of
total segment revenues, total segment profit or loss, total segment assets, and
other amounts disclosed for segments to corresponding amounts in the
enterprise's general purpose financial statements. It requires that all public
business enterprises report information about the revenues derived from the
enterprise's products or services, about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. Management believes that
the adoption of this Statement will not have a material effect on the Company's
consolidated results of operations or financial position.



                                     - 24 -
<PAGE>   25

ITEM 8.        FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL INFORMATION











<TABLE>
<CAPTION>
     =================================================================================================




                              Mercristo Developments, Inc.
                                (A Delaware Corporation)
                                Ottawa, Ontario - Canada


                                    TABLE OF CONTENTS
                                    -----------------


<S>         <C>
            Independent Auditors' Report

            Consolidated Balance Sheets at January 31, 1998 and 1997

            Consolidated Statements of Changes in Stockholders' Equity for the
            Years Ended January 31, 1998, 1997 and 1996

            Consolidated Statements of Operations for the
            Years Ended January 31, 1998, 1997 and 1996

            Consolidated Statements of Cash Flows for the
            Years Ended January 31, 1998, 1997 and 1996

            Notes to the Consolidated Financial Statements



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


                                      - 25 -
<PAGE>   26





                          INDEPENDENT AUDITORS' REPORT





To the Board of Directors
  and Stockholders
Mercristo Developments, Inc.
(A Delaware Corporation)
Ottawa, Ontario - Canada


    We have audited the accompanying consolidated balance sheets of Mercristo
Developments, Inc. and its subsidiaries as of January 31, 1998 and 1997, and the
related consolidated statements of changes in stockholders' equity, operations
and cash flows for each of the three years in the period ended January 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

    In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Mercristo Developments, Inc. and its subsidiaries as of January 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended January 31, 1998, in conformity with generally
accepted accounting principles.











Rotenberg & Company, LLP
Rochester, New York
March 24, 1998


                                      - 26 -
<PAGE>   27



<TABLE>
<CAPTION>
                          Mercristo Developments, Inc.
                            (A Delaware Corporation)
                            Ottawa, Ontario - Canada

                         Consolidated Balance Sheets at
                         ------------------------------
                          January 31, 1998 and 1997
                            ------------------------
                  (All Expressed in Terms of Canadian Dollars)
                  --------------------------------------------

                                            ASSETS
                                            ------

                                                                                1998           1997
                                                                          ----------     ----------
<S>                                                                       <C>            <C>       
Current Assets
--------------
   Cash and Cash Equivalents                                              $   14,612     $   53,162
   Accounts Receivable                                                     4,805,590      3,768,851
   Inventories                                                                60,500        925,246
   Prepaid Expenses                                                              ---         17,573
                                                                          ----------     ----------

                                      Total Current Assets                $4,880,702     $4,764,832

   Due from Partnerships                                                   2,717,107      2,000,910
   Due from Related Companies                                                210,743        848,444
   Property and Equipment - Net of
     Accumulated Depreciation                                              1,954,041      1,355,336
                                                                          ----------     ----------

                                          Total Assets                    $9,762,593     $8,969,522
                                          ------------                    ==========     ==========


                              LIABILITIES AND STOCKHOLDERS' EQUITY
                              ------------------------------------

Current Liabilities
-------------------
   Accounts Payable and Accrued Expenses                                  $4,018,267     $4,067,926
   Income Taxes Payable                                                       73,427            ---
   Current Portion of Long Term Debt                                          77,847         50,100
                                                                          ----------     ----------

                                    Total Current Liabilities             $4,169,541     $4,118,026

   Deferred Revenue                                                        1,646,472      2,350,750
   Long Term Debt                                                            770,409        430,025
   Deferred Income Taxes                                                   1,015,600        831,000
                                                                          ----------     ----------

                                        Total Liabilities                 $7,602,022     $7,729,801
                                        -----------------                 ----------     ----------

Stockholders' Equity
--------------------
   Common Stock:  $.001 Par; 100,000,000 Shares Authorized,
                17,840,519 Shares Issued and Outstanding at 1/31/98
                 16,560,519 Shares Issued and Outstanding at 1/31/97          17,840         16,560
   Additional Paid Capital                                                 1,324,627        987,907
   Retained Earnings                                                         818,104        235,254
                                                                          ----------     ----------

                                   Total Stockholders' Equity             $2,160,571     $1,239,721
                                   --------------------------             ----------     ----------

                           Total Liabilities and Stockholders' Equity     $9,762,593     $8,969,522
                           ------------------------------------------     ==========     ==========
</TABLE>



  The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.


                                      - 27 -
<PAGE>   28


                          MERCRISTO DEVELOPMENTS, INC.
                            (A Delaware Corporation)
                           Ottawa, Ontario --- Canada

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
               FOR THE YEARS ENDED JANUARY 31, 1998, 1997 AND 1996
                  (all expressed in terms of Canadian dollars)


<TABLE>
<CAPTION>
                                                                Common                                             Total
                                                Shares           Stock          Additional       Retained       Stockholders'
                                                               $.001 Par        Paid---in        Earnings          Equity
                                                                 Value           Capital   
                                              -----------      -----------      -----------     -----------      -----------
<S>                                            <C>             <C>              <C>             <C>              <C>        
BALANCE -
  JANUARY 31, 1995                              8,450,000      $     8,450      $       ---     $   347,810      $   356,260
Issuance of Shares:
  Initial Capitalization                        4,090,448            4,090              ---             ---            4,090
  20 for 1 Reverse Split                       (3,885,925)          (3,886)           3,886             ---              ---
  Adjustment for Fractional
   Shares                                             196              ---              ---             ---              ---
  Net Income                                          ---              ---              ---         315,537          315,537
  Dividends                                           ---              ---              ---         (14,000)         (14,000)
                                              -----------      -----------      -----------     -----------      -----------
BALANCE -
  JANUARY 31, 1996                              8,654,719      $     8,654      $     3,886     $   649,347      $   661,887
Issuance of Shares:
Acquisition of ComputerLink
Online Inc. and Tucows Ltd.                     7,000,000            7,000              ---             ---            7,000
                                                
Recision of ComputerLink                    
Online Inc. and Tucows Ltd.                    (7,000,000)          (7,000)             ---             ---           (7,000)
                                             
Private Placement --- Reg. S                    4,240,000            4,240              ---             ---            4,240
Compensation - Rule 701                         3,665,800            3,666          984,021             ---          987,687
Net Loss                                              ---              ---              ---         (85,054)         (85,054)
Dividends                                             ---              ---              ---        (113,000)        (113,000)
Spin Off                                              ---              ---              ---        (216,039)        (216,039)
                                              -----------      -----------      -----------     -----------      -----------
BALANCE -
  JANUARY 31, 1997                             16,560,519      $    16,560      $   987,907     $   235,254      $ 1,239,721
Net  Income                                           ---              ---              ---         582,850          582,850
Compensation - Rule 701                         1,280,000            1,280          336,720             ---          338,000
                                              -----------      -----------      -----------     -----------      -----------
BALANCE -
  JANUARY 31, 1998                             17,840,519      $    17,840      $ 1,324,627     $   818,104      $ 2,160,571
                                              ===========      ===========      ===========     ===========      ===========
</TABLE>




The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.



                                      - 28 -
<PAGE>   29


                          Mercristo Developments, Inc.
                            (A Delaware Corporation)
                            Ottawa, Ontario - Canada


                      Consolidated Statements of Operations
                      -------------------------------------
             For the Years Ended January 31, 1998, 1997 and 1996
            -----------------------------------------------------
                  (All Expressed in Terms of Canadian Dollars)
                  --------------------------------------------


<TABLE>
<CAPTION>
                                                            1998             1997              1996
                                                       ------------     ------------      ------------
<S>                                                    <C>              <C>               <C>         
Revenues
--------
     Farm
         Limited Partnership                           $  2,740,246     $  2,435,538      $  1,824,125
         Other                                               88,419           49,680            42,942
     Horses
         Limited Partnership                                175,950        4,351,035         2,820,419
         Other                                            2,150,075        5,339,465         4,008,681
     Interest                                               254,292          302,524           354,696
     Other                                                   12,963            5,882             2,561
                                                       ------------     ------------      ------------

              Total Revenues                           $  5,421,945     $ 12,484,124      $  9,053,424
                                                       ------------     ------------      ------------

Costs and Expenses
------------------
     Farm                                              $  1,314,137     $  1,117,619      $  1,148,804
     Horses                                               2,083,321        9,459,150         7,000,000
     Marketing and Sales                                    118,287           71,918           114,219
     General and Administrative                             595,518          456,232           407,778
     Depreciation                                            68,276           57,814            55,308
     Interest Expense                                        71,763           54,260            65,842
     Consulting Fees - Business Acquisitions                338,000          987,687               ---
                                                       ------------     ------------      ------------

              Total Costs and Expenses                 $  4,589,302     $ 12,204,680      $  8,791,951
                                                       ------------     ------------      ------------

Income Before
   Provision for Taxes                                 $    832,643     $    279,444      $    261,473

Provision for Taxes                                         249,793          510,000            88,883
                                                       ------------     ------------      ------------

Income (Loss) from
   Continuing Operations                               $    582,850     $   (230,556)     $    172,590

Income from Discontinued
------------------------
 Operations (Net of Income Taxes)                               ---          145,502           142,947
 --------------------------------                      ------------     ------------      ------------

Net Income (Loss)                                      $    582,850     $    (85,054)     $    315,537
                                                       ============     ============      ============
</TABLE>


The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.


                                      - 29 -

<PAGE>   30


                          Mercristo Developments, Inc.
                            (A Delaware Corporation)
                            Ottawa, Ontario - Canada


                      Consolidated Statements of Operations
                      -------------------------------------
               For the Years Ended January 31, 1998, 1997 and 1996
               ---------------------------------------------------
                  (All Expressed in Terms of Canadian Dollars)
                  --------------------------------------------


<TABLE>
<CAPTION>
                                                    1998          1997           1996    
                                                  ---------     ---------      --------- 
                                                                                         
<S>                                               <C>           <C>            <C>       
Income (Loss) per                                                                        
  Common Share:                                                                          
                                                                                         
Continuing Operations                             $     .035     $   (.014)     $    .020 
                                                                                         
Discontinued Operations                                  ---          .009           .016 
                                                  ----------     ---------      --------- 
                                                                                         
     Net Income (Loss)                            $     .035     $   (.005)     $    .036 
                                                  ==========     =========      ========= 
                                                                                         
Weighted Average Number                                                                  
of Common Shares Outstanding                      16,714,820    16,560,519      8,654,719 
                                                  ==========    ==========      ========= 
</TABLE>







  The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.



                                      - 30 -
<PAGE>   31


                          Mercristo Developments, Inc.
                            (A Delaware Corporation)
                            Ottawa, Ontario - Canada

                      Consolidated Statements of Cash Flows
                      -------------------------------------
               For the Years Ended January 31, 1998, 1997 and 1996
               ---------------------------------------------------
                  (All Expressed in Terms of Canadian Dollars)
                  --------------------------------------------

<TABLE>
<CAPTION>
                                                                 1998             1997             1996
                                                             -----------      -----------      -----------
<S>                                                          <C>              <C>              <C>        
Operating Activities
--------------------
   Net Income (Loss) for the Period                          $   582,850      $   (85,054)     $   315,537
   Non-Cash Adjustments:
     Depreciation/Amortization                                    68,276           57,814           55,308
     Deferred Revenue                                           (704,278)      (1,117,459)        (649,444)
     Deferred Income Taxes                                       184,600          510,000           73,000
     Stock Issued for Compensation for Services                  338,000          987,687              ---
    Other                                                            ---            4,240            4,090
   Changes:
     Accounts Receivable                                      (1,036,739)      (1,796,019)         722,932
     Inventory                                                   864,746         (287,246)          12,000
     Prepaid Expenses                                              9,000           (3,000)          (3,000)
     Accounts Payable                                            (49,659)         431,066         (348,931)
     Income Taxes Payable                                         82,000          (24,456)         (16,544)
     Discontinued Operations -
      Non - Cash Adjustments and Working Capital Changes             ---         (349,809)         (17,350)
                                                             -----------      -----------      -----------

        Net Cash Flows from Operating Activities             $   338,796      $(1,672,236)     $   147,598
                                                             -----------      -----------      -----------

Investing Activities
--------------------
   Acquisition of Fixed Assets                               $  (666,981)     $  (165,212)     $  (415,458)
   Due from Partnership                                         (716,197)       1,723,612          584,914
   Due to/from Related Companies                                 637,701              ---              ---
   Investing Activities of Discontinued Operations                   ---           (2,155)             235
                                                             -----------      -----------      -----------

        Net Cash Flows from Investing Activities             $  (745,477)     $ 1,556,245      $   169,691
                                                             -----------      -----------      -----------

Financing Activities
--------------------
   Dividends                                                         ---      $  (113,000)     $   (14,000)
   Increase in Long-Term Debt                                    439,138          170,000              ---
   Decrease in Long-Term Debt                                    (71,007)        (110,155)         (33,360)
   Financing Activities of Discontinued Operations                   ---          (18,809)        (176,700)
                                                             -----------      -----------      -----------

        Net Cash Flows from Financing Activities             $   368,131      $   (71,964)     $  (224,060)
                                                             -----------      -----------      -----------

Increase (Decrease) in Cash and Cash Equivalents             $   (38,550)     $  (187,955)     $    93,229

Cash and Cash Equivalents - Beginning of Period                   53,162          241,117          147,888
                                                             -----------      -----------      -----------

Cash and Cash Equivalents - End of Period                    $    14,612      $    53,162      $   241,117
                                                             ===========      ===========      ===========
</TABLE>

  The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.

                                      - 31 -
<PAGE>   32

                          MERCRISTO DEVELOPMENTS, INC.
                            (A Delaware Corporation)
                            Ottawa, Ontario - Canada

                CONSOLIDATED STATEMENTS OF CASH FLOW - CONTINUED



Schedule of Non-Cash Investing and Financing Activities


<TABLE>
<CAPTION>
                                                         Year Ended 
                                                       January 31, 1997
                                                       ---------------

<S>                                                    <C>            
Spin Off to Shareholder:
------------------------
Cash and Cash Equivalents                              $       134,215
Accounts Receivable                                             54,854
Loans Receivable                                             1,142,962
Other Current Assets                                            21,518
Property and Equipment                                       1,321,333
Accounts Payable                                               (63,960)
Other Current Liabilities                                      (16,440)
Long Term Debt                                              (1,529,999)
                                                       ---------------

Total                                                  $     1,064,483
Due from Related Companies                                    (848,444)
                                                       ---------------

Net Distribution                                       $       216,039
                                                       ===============
</TABLE>


   The accompanying notes are an integral part of this financial statement and
should be read in conjunction therewith.


                                      - 32 -
<PAGE>   33


MERCRISTO DEVELOPMENTS, INC.

                            (A Delaware Corporation)
                            Ottawa, Ontario - Canada

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  (all expressed in terms of Canadian dollars)


Note A - Summary of Transaction
-------------------------------

            The consolidated financial statements for all periods presented
        reflect the Plan of Reorganization, which was effected as of January 31,
        1997, pursuant to which Egyptian Arabians Inc. (including directly and
        indirectly its wholly-owned subsidiaries 622291 Ontario Ltd. and Edwards
        Arabians Inc.) became a wholly-owned subsidiary of the Company. The
        business combination was accounted for as a recapitalization.

            Factors that affect the comparability of financial data from year to
        year and for comparable interim periods include timing of the foaling
        season, demand for investment limited partnerships, unusual horse
        mortality and illness rates and non-recurring marketing expenses.

            All references to the "Company" herein include Mercristo
        Developments, Inc., Egyptian Arabians Inc., and its direct and indirect,
        wholly-owned subsidiaries 622291 Ontario Ltd. and Edwards Arabians Inc.,
        individually or collectively.


Note B - Nature of Operations and Summary of Significant Accounting Policies
----------------------------------------------------------------------------

        Mercristo Developments, Inc.
        ----------------------------

            The Company was formed on January 4, 1996 as MAC Systems Inc. under
        the laws of the State of Delaware and began investigating the potential
        acquisition of another company doing business in the Internet service
        business. In February 1996, the Company acquired in exchange for
        6,000,000 shares of its common stock, ComputerLink Online Inc., a
        private Canadian corporation providing Internet access, software, and
        World Wide Web services. In March 1996, the Company changed its name to
        Internet @ IDirect.com Inc. In June 1996, the Company acquired in
        exchange for 1,000,000 shares of its common stock Tucows Ltd., a
        provider of World Wide Web services. The acquisitions were rescinded on
        January 15, 1997. As a result of the rescission of these transactions,
        the Company had no operations and no operating assets as of January 31,
        1997. The Company changed its name to Mercristo Developments, Inc. on
        February 10, 1997. In April 1997, the Company increased its authorized
        shares of Common Stock from 20,000,000 shares to 100,000,000 shares.



                                      - 33 -
<PAGE>   34


        622291 Ontario Ltd.
        -------------------
            622291 Ontario Ltd. is a private Canadian corporation with
        diversified financial investment and operational interests located in
        Ottawa, Ontario, Canada. Effective January 31, 1997, a reorganization
        was effected pursuant to which all operations of 622291 other than the
        Blue Moon Farms breeding and care operations and its wholly-owned
        subsidiary, Edwards Arabians Inc., were spun off from 622291 and 622291
        became a wholly-owned subsidiary of a newly formed Canadian corporation
        named Egyptians Arabians Inc. Egyptian Arabians Inc. is a holding
        company with no assets or operations. Simultaneous with that
        transaction, Egyptian Arabians Inc. (including directly and indirectly
        its wholly-owned subsidiaries, 622291 and Edwards Arabians) became a
        wholly-owned subsidiary of the Company. That transaction has been
        accounted for as a recapitalization, resulting in the historical
        operations of 622291 being treated as the historical operations of the
        Company. The reorganized company is primarily involved in the breeding
        and care of Straight Egyptian Arabian horses. Accordingly, the
        accompanying historical financial statements of 622291 Ontario Ltd. have
        been restated to reflect the financial position, results of operations
        and cash flows for all years presented as if the reorganization had
        occurred at the beginning of the earliest period presented. The spun off
        operations have been reflected as discontinued operations in the
        consolidated financial statements. All significant intercompany
        transactions have been eliminated.

        Segment Data, Geographic Information and Significant Customers
        --------------------------------------------------------------
            The Company operates in one industry segment and generates revenues
        primarily in Canada. During the year ended January 31, 1998,
        approximately 8% of the sales of horses were to investment partnerships
        and 92% to other breeders and individuals. For the years ended January
        31, 1997 and 1996 approximately 50% of the sales of horses were to
        investment partnerships and 50% to other breeders and individuals. For
        the year ended January 31, 1998, approximately 97% of the revenues from
        care and breeding of horses are from investment partnerships and 3% are
        from individuals. For the years ended January 31, 1997 and 1996,
        approximately 98% of the revenues from care and breeding of horses are
        from investment partnerships and 2% from individuals. The Company has
        been purchasing and selling the majority of its horses from and to a
        non-related horse farm. However, the economic dependence on the use of
        this horse farm has been lessening since the Company has begun
        purchasing and selling horses to other non-related horse farms.

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

        Concentrations of Credit Risk
        -----------------------------
            Financial instruments, which potentially expose the Company to
        significant concentrations of credit risk, consist principally of bank
        deposits and accounts receivable. Cash is placed primarily in high
        quality short-term interest bearing financial instruments. The company
        performs ongoing credit evaluations of its customers' financial
        condition and the accounts receivable are secured by the horses.


                                      - 34 -
<PAGE>   35



        Cash and Cash Equivalents
        -------------------------
            Cash and cash equivalents include all highly liquid investments
        purchased with an original maturity of three months or less.

        Receivables
        -----------
            Receivables from horse sales and breeding and care services are
        based on contracted prices. The Company performs ongoing credit
        evaluation of its customers' financial condition and evaluates the
        collectibility of all receivables maintained. Amounts considered
        uncollectible are written off when such determination is made and an
        allowance for accounts doubtful of collection is maintained based upon
        the expected collectibility. The Company measures its estimates of
        impaired loans in accordance with the provisions of Statement of
        Financial Accounting Standards No. 118 - Accounting by Creditors for
        Impairment of a Loan - Income, Recognition and Disclosures. Interest
        income on impaired loans is recognized only when payment is received.
        The Company had no impaired loans.

        Inventories
        -----------
            Horse inventories are stated at the lower of cost (specific
        identification) or market. Costs of raised horses include proportionate
        costs of breeding plus the costs of maintenance to maturity. Purchased
        horses are carried at purchase cost plus costs of maintenance to
        maturity.

        Property, Equipment and Depreciation
        ------------------------------------
            Property and equipment are stated at cost, less accumulated
        depreciation computed on the declining balance method over the estimated
        useful lives as follows:

<TABLE>
<S>                                                    <C>     
                      Buildings                        25 Years
                      Machinery and Equipment          5 Years
                      Automobiles and Trucks           3 - 5 Years
                      Furniture and Fixtures           5 Years
</TABLE>

            Renewals and improvements are charged to property accounts. Costs of
        maintenance and repairs that do not improve or extend asset lives are
        charged to expense. The cost of property and equipment retired or
        otherwise disposed of and the related accumulated depreciation are
        removed from the accounts.

        Long-Lived Assets
        -----------------
            Long-lived assets to be held and used are reviewed for impairment
        whenever events or changes in circumstances indicate that the related
        carrying amount may not be recoverable. In performing the review for
        recoverability, the Company estimates the future cash flows expected to
        result from the use of the asset and its eventual disposition in
        determining its fair value. When required, impairment losses on assets
        to be held and used are recognized based on the difference between the
        fair value and the carrying amount of the asset and long-lived assets to
        be disposed of are reported at the lower of carrying amount or fair
        value less cost to sell.


                                      - 35 -
<PAGE>   36


        Revenue Recognition
        -------------------
            The Company recognizes revenues from the sale of horses to
        investment partnerships, other breeders, and individuals at the time of
        delivery. The vast majority of the sales of horses are made for cash
        under normal credit terms. Revenues from board and care, breeding, and
        management of horses are recognized as the services are rendered. Board
        and care and management fees are generally paid in advance. Many of the
        investment partnerships pay for these services through the use of
        installment obligations with the Company. Interest rates ranging from
        8.5% to 10.5% are charged to the partnerships. The Company evaluates the
        holdings of a given investment partnership, focusing on the number of
        horses and the mix of colts to fillies, in order to support and maintain
        the investment value of those partnerships. The Company will often take
        fillies or mares from its existing inventory and exchange them for colts
        owned by the various investment partnerships. Fillies and mares are much
        more valuable than colts, and the cost differential (cost approximates
        market value) between the fillies and mares surrendered by the Company
        and the colts received in exchange is expensed as part of the cost of
        horses sold. Total replacement costs reflected in cost of sales were
        $570,000, $710,000 and $458,000 for the years ended January 31, 1998,
        1997 and 1996, respectively.

        Deferred Revenues
        -----------------
            Deferred revenues represent amounts received in advance primarily
        from investment partnerships for horse care services such as boarding,
        feeding and breeding to be rendered over several years (generally one to
        three years depending on the partnership). The deferred revenues are
        recognized as earned and included in income as the services are
        rendered.

            During 1997, an unrelated horse farm purchased for $1,500,000 the
        rights to all of the colts delivered at the Company's Blue Moon Farm
        facilities for the period November 1, 1997 through July 31, 1998.
        Approximately $1,000,000 of revenue has been deferred as of January 31,
        1998. The deferred revenue will be amortized monthly over the remainder
        of the foaling season in the 1998 Operating Year.

        Income Taxes
        ------------
            The Company accounts for income taxes using the asset and liability
        approach which requires recognition of deferred tax liabilities and
        assets for the expected future tax consequences of temporary differences
        between the carrying amounts and the tax basis of such assets and
        liabilities. This method utilizes enacted statutory tax rates in effect
        for the year in which the temporary differences are expected to reverse
        and gives immediate effect to changes in income tax rates upon
        enactment. Deferred tax assets are recognized, net of any valuation
        allowance, for temporary differences and net operating loss and tax
        credit carry-forwards. Deferred income tax expense represents the change
        in net deferred asset and liability balances.



                                      - 36 -
<PAGE>   37


Note C - Discontinued Operations
--------------------------------
            Effective January 31, 1997, pursuant to the terms and conditions of
        an Agreement and Plan of Reorganization, the operations of 622291
        Ontario Ltd. other than the Blue Moons Farm horse breeding and care
        operations were spun off from the Company. The spun off operations
        included Edwards Securities Inc., Argyle Insurance Brokers Inc., and
        938918 Ontario Ltd. and are reflected as discontinued operations in the
        Company's consolidated financial statements.

        A summary of discontinued operations for the years ended January 31,
        1997 and 1996 is as follows:

<TABLE>
<CAPTION>
                                                                     Year Ended January 31,
                                                                    1997                1996
                                                                ----------          ----------

<S>                                                             <C>                 <C>       
                      Total Revenues                            $1,223,678          $  905,623

                      Operating Expenses                         1,075,381             720,580
                                                                ----------          ----------

                      Income Before Income Taxes                $  148,297          $  185,043

                      Provision for Income Taxes                     2,795              42,096
                                                                ----------          ----------

                      Net Income from Discontinued              $  145,502          $  142,947
                      Operations
                                                                ==========          ==========
</TABLE>


Note D - Accounts Receivable
----------------------------

        Accounts receivable consisted of the following at January 31, 1998 and
        1997:

<TABLE>
<CAPTION>
                                                                              1998                1997
                                                                        ----------          ----------

<S>                                                                     <C>                 <C>       
                      Due from Investors                                $  208,153          $1,180,014
                      Partnerships                                       3,499,402           2,360,354
                      Horses                                             3,815,142           1,840,400
                      Breeding                                                 ---             388,993
                                                                        ----------          ----------

                           Total Accounts Receivable                    $7,522,697          $5,769,761

                      Less: Amounts - Due Within One Year                4,805,590           3,768,851
                      ----                                              ----------          ----------

                      Amounts - Due After One Year                      $2,717,107          $2,000,910
                                                                        ==========          ==========
</TABLE>


                                      - 37 -
<PAGE>   38



            The amounts due from the investment partnerships represent secondary
        financing supplied by Edwards Arabians Inc. to allow the partnerships to
        prepay board and care for those horses in exchange for an installment
        obligation. Deferred revenues are amortized monthly as the services are
        rendered over a period of one to three years depending on the
        partnership but are repaid with proceeds from the sale of offspring. The
        loans are collateralized by the horses purchased by the partnerships.
        Interest rates ranging from 8.5% to 10.5% are charged to the
        partnerships. There are no fixed terms of repayment. The amounts owed by
        the partnerships will be repaid as the investment partnerships sell
        horses and will be fully collected by the date all of their horses have
        been sold and the assets of the partnerships are rolled over into
        corporations. The anticipated wind-up dates vary between partnerships
        but are generally one to three years.


Note E - Due From Related Companies and Related Party Transactions
------------------------------------------------------------------
            The amounts due from related companies represent advances that
        622291 made to Resi Corp. to underwrite operating cash flow shortfalls
        of Resi. These amounts bear interest at Canadian prime and, although
        there is no set repayment schedule, all unpaid principal and interest
        will be due and payable on January 31, 2002.

            The Company's primary source of revenue is the sale of Straight
        Egyptian Arabian horses to and the breeding and care services rendered
        to various limited partnerships offered by Edwards Securities Inc. which
        acts as general partner of those limited partnerships. Edwards
        Securities Inc. is owned by Resi Corp., which is 100% owned by David G.
        Edwards, the Company's President and Chief Executive Officer. Resi
        Corp., together with David G. Edwards, owns 52% of the Company's issued
        and outstanding shares of Common Stock.

            The Company purchases its insurance through Argyle Insurance Brokers
        ("Argyle"), one of the companies owned by Resi Corp. Insurance premiums
        paid by the Company to the insurance companies represented by Argyle
        were $72,000, $110,000 and $65,000 for the years ended January 31, 1998,
        1997 and 1996, respectively. Argyle received commissions on the sale of
        commercial insurance from the unrelated insurance companies.


                                      - 38 -
<PAGE>   39


Note F - Property and Equipment
-------------------------------

        Property and equipment consisted of the following at January 31, 1998
        and 1997:

<TABLE>
<CAPTION>
                                                                           1998                1997
                                                                        ----------          ----------

<S>                                                                     <C>                 <C>       
                      Farmland and Buildings                            $1,583,702          $1,470,944
                      Office Building and Equipment                        553,359                 ---
                      Machinery and Equipment                               84,559              83,696
                      Automobiles and Trucks                                 3,874               3,874
                      Furniture and Fixtures                                 7,785               7,785
                                                                        ----------          ----------

                          Total Property and Equipment                  $2,233,279          $1,566,299

                      Less: Amounts - Accumulated Depreciation             279,238             210,963
                      ----                                              ----------          ----------

                          Net Property and Equipment                    $1,954,041          $1,355,336
                                                                        ==========          ==========
</TABLE>

            Depreciation expense for the years ended January 31, 1998, 1997 and
        1996 was $68,276, $57,814 and $55,308, respectively.


Note G - Accounts Payable and Accrued Expenses
----------------------------------------------
            Accounts payable and accrued expenses consisted of the following at
        January 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                                     1998                1997
                                                                               ----------          ----------

<S>                                                                            <C>                 <C>       
                      Horses                                                   $3,845,612          $4,011,686
                      Other                                                       172,655              56,240
                                                                               ----------          ----------

                          Total Accounts Payable and Accrued Expenses          $4,018,267          $4,067,926
                                                                               ==========          ==========
</TABLE>



                                      - 39 -
<PAGE>   40



Note H - Long Term Debt
-----------------------
            Long term debt consisted of the following at January 31, 1998 and
            1997:

<TABLE>
<CAPTION>
                                                                                            1998              1997           
                                                                                          --------          --------         
<S>                                                                                       <C>               <C>              
                      Mortgage payable on farmland and buildings,                                                            
                      bearing interest at 0.20% above the Canadian                                                           
                      FBDB's floating base rate (7.45% at January                         $430,025          $480,125         
                      31, 1998), with monthly principal payments                                                             
                      of $4,175 plus interest, expiring in 2006                                                              
                                                                                                                             
                      First mortgage payable on office building,                                                             
                      bearing interest at 7.80% with monthly                               333,231               ---         
                      principal and interest of $4,366, expiring                                                             
                      in 2006                                                                                                
                                                                                                                             
                      Second mortgage payable on office building,                                                            
                      bearing interest at 12.00% with monthly                                                                
                      interest payments only                                                85,000               ---         
                                                                                          --------          --------          
                          Total                                                            848,256           480,125
                      Less: Current Portion                                                 77,847            50,100
                      ----                                                                --------          --------          

                          Long Term Portion                                               $770,409          $430,025
                                                                                          ========          ========
</TABLE>


            As of January 31, 1998, the aggregate maturities of long term debt
            are as follows:

<TABLE>
<S>                      <C>                                                    <C>         
                         1999                                                   $     77,847
                         2000                                                         80,053
                         2001                                                         82,436
                         2002                                                         85,007
                         2003                                                         87,783
                         Thereafter                                                  357,283
                                                                                ------------

                              Total                                             $    770,409
                                                                                ============
</TABLE>



Note I - Income Taxes
---------------------

            The provision for income taxes from continuing operations for the
        years ended January 31, 1998, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                              1998              1997              1996
                                                            --------          --------          --------

<S>                                                         <C>               <C>               <C>     
                      Current income taxes payable
                      Federal                               $    ---          $    ---          $    ---
                      State                                      ---               ---               ---
                      Canadian                                65,193               ---            15,883
                                                            --------          --------          --------

                          Total Current Provision           $ 65,193          $    ---          $ 15,883

                      Deferred provision
                      Canadian                               184,600           510,000            73,000
                                                            --------          --------          --------

                          Total Provision                   $249,793          $510,000          $ 88,883
                                                            ========          ========          ========
</TABLE>


                                      - 40 -
<PAGE>   41



            The provision for deferred income taxes from continuing operations
        for the years ended January 31, 1998, 1997 and 1996 were as follows:

<TABLE>
<CAPTION>
                                                               1998                1997                1996
                                                            ---------           ---------           ---------

<S>                                                         <C>                 <C>                 <C>      
                      Revenue Recognition Methods           $ 548,490           $ 257,853           $ 151,091
                      Inventory Items                        (328,603)            109,154              (2,399)
                      Payable and Accrued Items               (18,870)            163,804             (69,786)
                      Other                                   (16,417)            (20,811)             (5,906)
                                                            ---------           ---------           ---------

                          Total Deferred Provision          $ 184,600           $ 510,000           $  73,000
                                                            =========           =========           =========
</TABLE>


            The provisions for income taxes from continuing operations differ
        from those computed using statutory tax rates as follows:

<TABLE>
<CAPTION>
                                                              1998              1997              1996
                                                             ------            ------            ------

<S>                                                          <C>               <C>               <C>  
                      Statutory Tax Rate                       44.6%             44.6%             44.6%
                      Nondeductible Consulting Fees             ---             142.4%              ---
                      Effect of Tax Brackets                  (13.0%)            (4.7%)           (11.2%)
                      Nondeductible and Other                  (1.6%)              .2%               .1%
                                                             ------            ------            ------

                          Total Provision for Taxes            30.0%            182.5%             33.5%
                                                             ======            ======            ======
</TABLE>


            The effective tax rates for discontinued operations were (1.9%),
        (22.7%), and (20.1%) for the years ended January 31, 1997, 1996 and
        1995, respectively. Differences between income taxes calculated at the
        statutory rate and the resulting tax rate were due primarily to the
        utilization of operating loss carryforwards.

            The Company's net deferred income tax liability as of January 31,
        1998 and 1997 consists of the following:

<TABLE>
<CAPTION>
                                                                         1998                  1997
                                                                     -----------           -----------

<S>                                                                  <C>                   <C>        
                      Deferred Tax Liabilities
                        Revenue Recognition Methods                  $ 2,350,490           $ 2,006,712
                        Inventory Items                                   24,200               370,100
                      Deferred Tax Assets
                        Payable and Accrued Items and Other           (1,359,090)           (1,545,812)
                                                                     -----------           -----------
                          Net Deferred Tax Liability                 $ 1,015,600           $   831,000
                                                                     ===========           ===========
</TABLE>



                                      - 41 -
<PAGE>   42


Note J - Stock Compensation
---------------------------
            During the year ended January 31, 1998 the Company incurred
        consulting fees in connection with prospective acquisition. The Company
        compensated the consultants through the issuance of common shares of the
        Company. The fair value of the services rendered was $338,000 and was
        charged against operations. The Company issued 1,280,000 shares of
        common stock on December 18, 1997 valued at approximately $.2640 per
        share (the market bid price) and reflected the full value of the
        services received as paid in capital.

            The Company incurred consulting fees in connection with the failed
        acquisition of ComputerLink Online and Tucows during the year ended
        January 31, 1997. The Company compensated the consultants through the
        issuance of common shares of the Company. The fair value of the services
        rendered was $987,687 and was charged against operations. The Company
        issued 3,665,800 shares valued at an agreed upon price of approximately
        $.27 per share and reflected the full value of the services received as
        paid in capital.

Note L - Other Matters
----------------------
            The Canadian income tax authorities are presently reviewing the
        farming tax status and associated investment losses for some of the
        individuals in limited investment partnerships that previously purchased
        horses from the company. Denial of some of these losses by the tax
        authorities might make investing in the limited partnership less
        attractive and could adversely impact the demand for the company's
        horses. The sale of horses has been limited during the year ended
        January 31, 1998 pending the outcome of the Revenue Canada review.
        Should an adverse condition result from this, management would work
        vigorously to restructure the limited partnerships in accordance with
        any revisions to the tax code and/or would seek other sources for the
        sale of its horses.

            The Canadian sales tax authorities are currently reviewing certain
        input tax credits claimed by some of the investment limited partnerships
        and the corporations that acquired partnership assets in roll-up
        transactions which allowed the Company to offset the sales tax it
        collected against the sales tax paid by those entities. Management is of
        the opinion that the outcome of this review is presently not
        determinable. However, if an adverse decision is rendered, there would
        be no economic impact on the Company's financial position, since any
        liability is that of the investment limited partnerships and
        corporations.


                                      - 42 -
<PAGE>   43
Note M - Recently Issued Accounting Standards
---------------------------------------------

        SFAS No. 130
        ------------
            In June 1997, the Financial Accounting Standards Board ("FASB")
        issued Statement of Financial Accounting Standard No. 130, "Reporting
        Comprehensive Income", which is applicable to the Company effective
        February 1, 1998. This Statement establishes standards for the reporting
        and display of comprehensive income and its components (revenues,
        expenses, gains and losses) in a full set of general purpose financial
        statements. Comprehensive income is defined as the change in the equity
        of a business enterprise during a period from transactions and other
        events and circumstances from non-owner sources. It includes all changes
        in equity during a period (from net income and other sources) except
        those resulting from investments by owners and distributions to owners.
        Management believes that the adoption of this Statement will not have a
        material effect on the Company's consolidated results of operations or
        financial position.

        SFAS No. 131
        ------------
            In June 1997, the FASB issued Statement of Financial Accounting
        Standard No. 131, "Disclosures about Segments of an Enterprise and
        Related Information", which is applicable to the Company effective
        February 1, 1998. This Statement requires that a public business
        enterprise report financial and descriptive information about its
        reportable operating segments. Operating segments are components of an
        enterprise about which separate financial information is available that
        is evaluated regularly by the chief financial decision maker in deciding
        how to allocate resources and in assessing performance. The Statement
        requires disclosure of a measure of segment profit or loss, certain
        specific revenue and expense items, and segment assets. It requires
        reconciliations of total segment revenues, total segment profit or loss,
        total segment assets, and other amounts disclosed for segments to
        corresponding amounts in the enterprise's general purpose financial
        statements. It requires that all public business enterprises report
        information about the revenues derived from the enterprise's products or
        services, about the countries in which the enterprise earns revenues and
        holds assets, and about major customers regardless of whether that
        information is used in making operating decisions. Management believes
        that the adoption of this Statement will not have a material effect on
        the Company's consolidated results of operations or financial position.


                                      - 43 -
<PAGE>   44


                          MERCRISTO DEVELOPMENTS, INC.
                            (A Delaware Corporation)
                           Ottawa, Ontario --- Canada

                      QUARTERLY FINANCIAL DATA - UNAUDITED
                  (all expressed in terms of Canadian dollars)



<TABLE>
<CAPTION>
                                                                       Year Ended January 31, 1998
                                              ---------------------------------------------------------------------------
                                                  4th Q                3rd Q                2nd Q                1st Q
                                                  -----                -----                -----                -----

<S>                                           <C>                   <C>                  <C>                  <C>         
         Sales of Horses                      $ 1,884,025           $    23,150          $   133,850          $   285,000
                                              ===========           ===========          ===========          ===========

         Total Revenues                       $ 2,546,721           $   875,864          $ 1,142,981          $   856,379

         Costs and Expenses                     1,712,669               574,802            1,123,370            1,178,461
                                              -----------           -----------          -----------          -----------

         Income (Loss) before Taxes           $   834,052           $   301,062          $    19,611          $  (322,082)

         Provision for Income Taxes               250,357               120,425                7,844             (128,833)
                                              -----------           -----------          -----------          -----------

         Income (Loss) from Continuing
          Operations                          $   583,695           $   180,637          $    11,767          $  (193,249)
                                              ===========           ===========          ===========          ===========

         Income (Loss) per Common Share
          from Continuing Operations          $      .035           $      .011          $      .001          $     (.012)
                                              ===========           ===========          ===========          ===========


<CAPTION>
                                                                       Year Ended January 31, 1997
                                              ---------------------------------------------------------------------------
                                                  4th Q                3rd Q                2nd Q                1st Q
                                                  -----                -----                -----                -----

<S>                                           <C>                   <C>                  <C>                  <C>         
         Sales of Horses                      $ 4,631,500           $ 2,133,500          $   953,500          $ 1,972,000
                                              ===========           ===========          ===========          ===========

         Total Revenues                       $ 5,270,808           $ 3,113,544          $ 1,458,261          $ 2,641,511

         Costs and Expenses                     5,341,162             2,694,780            1,454,129            2,714,609
                                              -----------           -----------          -----------          -----------

         Income (Loss) before Taxes           $   (70,354)          $   418,764          $     4,132          $   (73,098)

         Provision for Income Taxes           (a )370,080               167,506                1,653              (29,239)
                                              -----------           -----------          -----------          -----------

         Income (Loss) from Continuing
          Operations                          $  (440,434)          $   251,258          $     2,479          $   (43,859)
                                              ===========           ===========          ===========          ===========

         Income (Loss) per Common Share
          from Continuing Operations          $     (.038)          $      .029          $       ---          $     (.005)
                                              ===========           ===========          ===========          ===========

<FN>
        (a) Includes provision for taxes on non-deductible expenses incurred in
            connection with failed acquisition of ComputerLink Online and
            Tucows.
</FN>
</TABLE>



                                     - 44 -
<PAGE>   45
ITEM 9.        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
               FINANCIAL DISCLOSURE.

        None.

                                    PART III

ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this item is incorporated herein by
reference to the Company's proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company to be held on July 22, 1998 under
"Election of Directors", which proxy statement will be filed within 120 days
after the end of the Company's fiscal year.

ITEM 11.       EXECUTIVE COMPENSATION

        The information required by this item is incorporated herein by
reference to the Company's proxy statement to be issued in connection with the
Annual Meeting of the Stockholders of the Company to be held on July 22, 1998
under "Executive Compensation", which proxy statement will be filed within 120
days after the end of the Company's fiscal year.

ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated herein by
reference to the Company's proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company to be held on July 22, 1998 under
"Security Ownership of Certain Beneficial Owners and Management", which proxy
statement will be filed within 120 days after the end of the Company's fiscal
year.

ITEM 13.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated herein by
reference to the Company's proxy statement to be issued in connection with the
Annual Meeting of Stockholders of the Company to be held on July 22, 1998 under
"Certain Transactions", which proxy statement will be filed within 120 days
after the end of the Company's fiscal year.

                                   PART IV

ITEM 14.       EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

(1)  Financial Statements

        The financial statements filed as part of this report are included in
the response to Item 8 of Part III of this Annual Report on Form 10-K.

(2)  Financial Statement Schedules

        There were no financial statement schedules required to be filed because
they are not applicable or the required information is shown in the consolidated
financial statements or notes thereto.

(3)  Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO.           DESCRIPTION
-----------           -----------


<C>     <S>                                                        
*2.1    Agreement and Plan of Reorganization by and among Mercristo Developments, Inc., Egyptian
        Arabians Inc. and Resi Corp.

*2.2    Agreements relating to the Reorganization of 622291 Ontario Limited

*3.1    Restated Certificate of Incorporation

*3.2    Amended and Restated By-laws

*10.1   Mortgage from E.S.I. Holdings Limited to Michael Nurse

*10.2   Mortgage from E.S.I. Holdings Limited to Sun Life Trust Company
</TABLE>


                                     - 45 -
<PAGE>   46


<TABLE>
<C>       <S>                                                                  
*10.3     Loan Agreement from 622291 Ontario Limited to Business Development Bank of Canada        
                                                                                                   
*10.4     Lease between Peter Vanderkloet and Edwards Arabians Inc.                                
                                                                                                   
*10.4.1   Addendum to Lease between Peter Vanderkloet and Edwards Arabians Inc.                    
                                                                                                   
11        Statement re Computation of Per Share Earnings (Contained in the
          Financial Statements under Item 8)                                           
                                                                                                   
*21       Subsidiaries of Mercristo Developments, Inc.                                             
                                                                                                   
23        Consent of Rotenberg & Co. LLP (Not Applicable)                                                           
                                                                                                   
27        Financial Data Schedule                                                                  


---------

<FN>
*       Incorporated by reference to the Company's Registration Statement on Form 10, Registration
        No. 0-22541.
</FN>
</TABLE>


                                     - 46 -
<PAGE>   47

(4)  Reports on Form 8-K

        During the last quarter of the fiscal year ended January 31, 1998, the
Registrant did not file a Current Report on Form 8-K.



                                     - 47 -
<PAGE>   48

                                   SIGNATURES

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

Date:  April 28, 1998                  MERCRISTO DEVELOPMENTS, INC.


                                       By:  /s/ David G. Edwards
                                          ---------------------------------
                                            David G. Edwards
                                            Chief Executive Officer and
                                            Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed 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/ David G. Edwards                 Chairman of the Board, Chief                April 28, 1998
-----------------------------------  Executive Officer and Chief 
David G. Edwards                     Financial Officer           
                                     


/s/ P. Edwards                       Director                                    April 28, 1998
-----------------------------------
Patricia L. Edwards


/s/ Kenneth A. Edwards               Director                                    April 28, 1998
-----------------------------------
Kenneth A. Edwards
</TABLE>



                                     - 48 -