U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED OCTOBER 31, 2000

                         Commission file number 0-22607

                            MERCHANTONLINE.COM, INC.
                 ----------------------------------------------
                 (Name of Small Business issuer in its charter)


             Florida                                            84-1233073
(State or Other Jurisdiction of                               (IRS Employer
 Incorporation or Organization)                           Identification Number)

902 Clint Moore Road, Suite 114 Boca Raton, Florida              33487
---------------------------------------------------            ---------
     (Address of Principal Executive Offices)                  (Zip Code)

         Issuer's Telephone Number, Including Area Code: (561) 864-6000
                                                          ---------------

        Securities registered pursuant to Section 12(b) of the Act: None

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

        Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

        Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year: $248,150.

The aggregate market value of the issuer's common stock, $.001 par value, held
by non-affiliates on March 15, 2001 was approximately $19,137,000.

On January 31, 2001, there were 61,232,218 shares of the issuer's common stock
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

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                                TABLE OF CONTENTS
                            FORM 10-KSB ANNUAL REPORT
                            MERCHANTONLINE.COM, INC.

                                                                                      PAGE
PART I

<S>      <C>                                                                            <C>
Item 1.   Description of Business........................................................3
Item 2.   Description of Property.......................................................18
Item 3.   Legal Proceedings.............................................................19
Item 4.   Submission of Matters to a Vote of Security Holders...........................19

PART II

Item 5.   Market for the Registrant's Common Equity and Related Stockholder Matters.....20
Item 6.   Management's Discussion and Analysis of Financial Condition
          and Results of  Operations....................................................21
Item 7.   Financial Statements..........................................................33

Item 8.   Changes in and Disagreements on Accounting and Financial Disclosure ..........33

PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons, Compliance
          with Section 16(a) of the Exchange Act........................................34
Item 10.  Executive Compensation........................................................36
Item 11.  Security Ownership of Certain Beneficial Owners and Management................38
Item 12.  Certain Relationships and Related Transactions................................39

PART IV

Item 13.  Exhibits and Reports of Form 8-K..............................................40

SIGNATURES..............................................................................42
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                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS.

OVERVIEW

        We are a leading developer and provider of real-time e-commerce
transaction services. We offer economical, easy-to-install products and services
to online merchants, issuers, acquirers, channel partners, consumers and
processors. Our products include proprietary real-time credit card processing
programs, a proprietary patented hardware device called PC Pay(R), a proprietary
ATM/debit network for the Internet and a one-time use number. Our products allow
merchants to accept secure transactions over the Internet in a manner that is
consistent with the current payment systems used in brick and mortar retail
sites. Our system supports credit, debit or ACH transactions between companies,
consumers and the government anywhere in the world. We have issued patent
coverage in over 50 countries and patents pending or PCT filings in over 120
countries on our products for both software and hardware. We believe our
combined solution of products and services exceeds the capabilities of all
suppliers of these services in the industry. Our goal is to provide online
merchants with a single vendor that furnishes cost-effective and easy-to-use
products and services needed to allow credit and debit transactions.

OUR HISTORY

        Tarcyn Corporation was incorporated on March 13, 1993 under the laws of
the State of Colorado to engage in any lawful corporate undertaking, including,
but not limited to, selected mergers and acquisitions. Tarcyn had been in the
developmental stage since inception and had no operations prior to the merger
with MerchantOnline. As such, Tarcyn was defined as a "shell" company, whose
sole purpose at the time was to locate and consummate a merger or acquisition
with a private entity.

        Effective February 16, 1999, Tarcyn acquired all of the issued and
outstanding securities of CreditCo Inc. d/b/a MerchantOnline.com, for 31,500,000
shares of "restricted" common stock of Tarcyn to the former CreditCo
shareholders. Subsequent to the acquisition, Tarcyn changed its name to
MerchantOnline.com, Inc., changed its jurisdiction of incorporation from
Colorado to Florida. and changed its fiscal year end from March 31, to October
31, in order to coincide with the fiscal year end of CreditCo.

        In January 2000, we completed the acquisition of Approve.net, formerly
known as ChargeSolutions, which had previously provided much of our technical
support and back office operations, for 4,000,000 shares of our common stock.
The principals of these companies operate our San Diego operations center.

        In April 2000, we completed the acquisition of Web Financial Services,
which had developed our NewCash proprietary ATM/debit network for the Internet,
for 2,500,000 shares of common stock. MerchantOnline also issued 2,900,000
options to the three principal shareholders, who currently work in our Boca
Raton headquarters.

        In May 2000, we completed the acquisition of 90.1% of Innovonics, which
had developed the PC Pay device, for 8,967,487 shares of common stock and
1,032,513 options. Dereck Clark, the founder, president and principal
shareholder of Innovonics since 1991, and one of our directors, owns the
remaining 9.9%. Innovonics is not consolidated for financial reporting purposes
due to the existence of certain minority shareholder rights held by Dereck
Clark, the president of Innovonics. Mr. Clark has sent a letter to
MerchantOnline seeking to unwind the acquisition as provided for in the original
acquisition agreement because MerchantOnline had not met its obligation to
Innovonics to fund $1,440,000 as of March 2001.

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INDUSTRY BACKGROUND

The Rapid Growth of Internet Commerce

        As the Internet has become an increasingly important medium, merchants
and consumers have begun using the Internet to buy and sell goods and services.
The number of Internet users worldwide has grown dramatically and is expected to
grow significantly in the next few years. Increasingly, these Internet users are
becoming online consumers. The phenomenal growth of the Internet is one of the
most significant industry trends affecting information processing today. The
Gartner Group has reported that by 2004, "the Internet will become the
predominant mechanism for conducting business, whether it be
business-to-consumer or business-to-business." As a result, many organizations
are now looking for entirely new solutions that enable distribution of financial
payment information using the Internet.

        E-commerce offers both merchants and consumers numerous benefits:

o   Merchants and consumers can interact 24 hours a day, 7 days a week,
    regardless of their respective locations.
o   Merchants can customize Web site content to match the needs and preferences
    of individual users by personalizing content for users.
o   The online store enables merchants to readily increase the number of
    products and services offered, thereby enhancing the product selection
    available to customers.
o   Online merchants can avoid investments in physical retail locations.
o   Much of the interaction between merchants and consumers can be automated,
    resulting in reduced operating costs.

        These benefits allow merchants to focus on growing their customer base
and to market and sell their products around the world in a cost-effective and
efficient manner. However, online merchants need online processing of these
transactions in ways that are different than bricks and mortar merchants.

        With the advent of the Internet and the explosion of eCommerce, four
overriding themes have been at the forefront:

o   security and privacy
o   a common transaction model for both the real and virtual worlds that is
    global in scope
o   payment systems that provide differentiation for each business segment
o   the need to digitally sign a legal document

        As a result of the staggering growth and security issues, new businesses
with the Internet as their only platform, or existing businesses that want to
utilize the Internet as an additional platform, are dealing with many
incompatible and constantly changing alternatives making fraud more likely and
security more difficult. This is especially true in developing regions, where
transaction controls are less rigorous.

        Various sources have stated that although real world credit card fraud
in the U.S. is relatively low, the Internet world is a completely different
story. Data indicate that fraud and charge backs constitute a much higher
percentage of top line revenues:

        United States        4.5 -26.0%
        Latin America        30 - 40%
        Western Europe       3.5 - 8%
        Eastern Europe       8 - 18%

        Recent events with security issues, such as fraud and identity theft,
have caused Internet users to focus on the security of their systems and their
personal information. This issue will continue to grow as people and businesses
realize that their sensitive transaction data resides on email order forms,
ISPs, web sites, merchant accounts, merchants and other databases. Recent

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activities by the National Automated Clearing House Association, or NACHA, Visa,
MasterCard, the Presidential Council on Security, the U.S. Senate and American
Express have demonstrated their desire to significantly improve the level of
security on the Internet. This has caused many companies to form consortiums
that consist of Internet, existing bricks and mortar and financial institutions.
The consortiums realize that even on the Internet, mass provides competitive
advantage. Until a completely safe system is available that is also a worldwide
standard, we believe that the Internet will not be able to reach its full
potential, especially in the business-to-business "B2B" sector. MerchantOnline
has developed such a standard.

TRANSACTION PROCESSING DEMANDS

        To succeed online, a merchant must attract customers to its Web site and
provide an appealing and easy-to-use environment that encourages customers to
place an order by clicking on the "buy" button. Once the customer places an
order, the merchant must process the order by effectively and efficiently
executing numerous transactions. With the rapid increase in the number of online
merchants and the vast array of products and services becoming available online,
competition among online merchants is increasingly intense. Due to these
competitive pressures, merchants must focus their resources on attracting
customers to their Web sites and providing compelling content to keep customers
in their online stores. However, as a merchant succeeds in these efforts, the
increased number of resulting orders creates another set of complex challenges.
These challenges include:

o   Payment processing. The vast majority of online consumer purchases are
    conducted using credit cards. These credit card transactions are processed
    in real-time to confirm an order while the customer is online. Increasingly,
    merchants are also seeking to process transactions in local currencies
    around the world, where debit is the primary method of payment.

o   Fraud prevention. Because of the anonymity offered by the Internet and the
    speed with which one can make purchases, the opportunity for fraud is
    significant. In e-commerce transactions, because the credit card is not
    present, a merchant is generally held liable by its bank for the full value
    of the transaction in the event of credit card fraud even if a
    pre-authorization was obtained. Online merchants must find ways to combat
    this fraud to avoid losing both the product being sold and the related
    revenue.

        The online merchant must often address these demands while the customer
is waiting online. Information that a traditional retailer can collect during a
period of hours, such as a fraud screen, often must be available to the online
merchant immediately. In addition, the merchant must have an e-commerce system
that scales as the business grows, provides a high level of reliability and
handles peak loads. The merchant's e-commerce system should also integrate
smoothly into its existing business and technology and must support secure,
authenticated messaging.

THE MERCHANTONLINE SOLUTION

        MerchantOnline has developed a complete front-end to back-end
transaction platform designed to become a secure transaction network for the
industry. We offer businesses and financial institutions a fully secure system
for making transactions and provide for a significant reduction in charge backs
and fraud. This platform starts with the PC Pay(R), a patented hardware device
that encrypts sensitive debit/ATM/credit card and PIN data, prior to the data
entering the personal computer. Because we control the process from customer
initiation to funds transfer by the bank, no other suppliers have access to the
data and the consumer's credit card number is not on the merchant's database. We
also offer anonymous surfing, further protecting personal information, a
complete line of merchant account services, website systems, shopping carts,
ATM/debit card programs and loyalty programs for the merchant to use in
developing their Internet and/or bricks and mortar business model.

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        PC PAY

        The PC Pay card-swipe device, similar to those in retail stores and gas
stations, plugs into home and office PCs, and acts as a retail point of sale or
POS terminal for credit, ATM, debit and smart cards. PC Pay has a numeric keypad
for entry of PIN numbers, which also are immediately encrypted using bank ATM
network standards. The PC Pay incorporates patented "next generation" encryption
technology using bank ATM network standards. Unlike other encryption technology
for PCs, card data are encrypted within the secure device before entering a
computer, offering a higher-level of security. With typical eCommerce
software-only encryption systems, data typed on a PC keyboard enter the user's
personal computer not encrypted, and could be retrieved by an intelligent virus
before being encrypted in software running in an infected PC. Recently, the STAR
ATM network has certified the PC Pay for use as an ATM/debit terminal and has
recently approved new rules requiring the use of a hardware device such as the
PC Pay to process ATM debit transactions. We are commencing a pilot project with
the STAR network and Internet merchants to process ATM debit card transactions
using PC Pay.

        PC Pay is capable of reading single and dual tracks on any magnetic
strip card, including driver's licenses, and reading and writing to ISO 7816
compliant smart cards. Using this device provides a card present transaction for
the merchant, potentially reducing their cost per transaction and significantly
reducing charge backs. For the customer, this device provides a high level of
confidence that no one will have access to their sensitive financial
information. When coupled with an anonymous surfing option, the consumer
protects not only their financial information but also protects their
demographic data.

        The PC Pay device utilizes hardware encryption with its keypad to
provide off-line encryption prior to transmission across the Internet. The
encrypted data reaches our processing facility over the Internet, are decrypted
and processed for authorization through our proprietary network. At that point,
approval is given to the merchant for payment. This process supports multiple
merchant account products, shopping cart products and web development tools.
Unique products are offered for the small Internet merchant and the established
larger merchants through our website.

        We expect that the majority of the users of PC Pay will be consumers who
use the device for eCommerce transactions. However, there are many other uses of
PC Pay. For example, the U.S. Park Service has purchased 450 devices and
installed them at the entrance of national parks to collect park admission fees
using credit cards. The National Insurance Administration Company of Jordan has
purchased 400 PC Pay devices and installed them in healthcare providers in
Amman, Jordan. The healthcare provider is able to examine insurance and medical
information for the patient by inserting the provider card and the companion
card presented by the patient at the point of care. Everything from blood type
to benefits status can be viewed, updated and stored on the two smart cards
simultaneously, ensuring accurate records and appropriate care. The cards must
be used at the same time, providing patient control and privacy. A southern
California bank and a card association purchased 1,000 units to develop a
private network for professional businesses.

        Use of the PC Pay provides benefits to the customer, merchant and
issuer:

        Recent surveys indicate that 65% of all transactions are aborted prior
to completion on the Internet. Additionally, approximately 20% of the U.S.
population is either not creditworthy or do not have bank accounts. We are
targeting customers whose end users want to:

o   feel secure that their credit card and other personal information is
    encrypted within the secure PC Pay device before being sent to the PC,
    reducing the security threats posed by hacker programs and viruses;

o   use their bank ATM/debit cards for online purchases;

o   have access to a simple method for making purchases

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o   securely enter their bank account number and PIN for home banking services;

o   reload their smart card with cash from their PC using their credit card,
    debit card,

o   ATM card or bank account;

o   store their digital signature on a PIN-protected smart card;

o   use a smart card for anonymous "pay-as-you-view" payments and micropayments;

o   use a smart card for secure authentication with online merchants for loyalty
    programs;

o   use a smart card for storage of emergency medical and insurance information
    or maybe to quickly access the list of doctors and dentists that participate
    in their insurance program;

o   use a smart card to store their frequent flyer program and travel-related
    information.

The current payment environment places the complete risk for a fraudulent online
transaction on the merchant because the merchant is not able to prove who used
the card for the transaction. We are targeting merchants that want to:

o   increase their online transactions from customers who have been hesitant or
    unwilling to make online purchases due to concerns about the security of
    their credit card and personal information;

o   reduce transaction costs as they move from traditional "card not present"
    keyboard credit card rates to Debit/Bank ATM card rates;

o   have the consumer use their actual card when making the transaction to
    reduce their exposure to fraud and charge backs;

o   process their debit card transactions for less than credit card costs,
    regardless of the dollar amount involved. Because the customer can securely
    enter their debit card PIN into the encrypted PC Pay device PIN pad, the
    merchant benefits from card present and PIN verified transactions;

o   expand their customer base both domestically and internationally by
    accepting ATM/debit cards. The majority of the population outside of the
    U.S. utilizes debit transactions rather than credit transactions;

o   use a complete transaction model by using the PC Pay device and our NewCash
    system to award loyalty points such as frequent flier miles or VIP customer
    benefits

Issuers can also benefit by:

o   placing their logo on the PC Pay devices deployed by them, providing a
    valuable source of customer recognition and advertising;

o   utilizing our PC Pay Agent one time use credit card system for their issued
    base.

NEWCASH

        MerchantOnline offers a software-based, stored-value system that
provides a full line of network access products. These products provide the
merchant a unique opportunity to customize their payment acceptance products to
their business needs, offering all merchants a competitive advantage in their
marketplace. We will be able to issue ATM, debit and affinity cards that cater
to the needs of the merchant and consumer. The consumer will have the ability to
load cash onto the card and use it at any merchant location that accepts
ATM/debit cards: eCommerce or bricks and mortar. The software-based system
provides the merchant with the ability to offer cash off discounts for the user
programmatically. It has been demonstrated that if a consumer goes to a web site
more than a few times, that website becomes a destination. This system will
provide the ability to have anonymous surfing and purchase programs since the
vendor does not receive the card information, further enhancing consumer
security, loyalty and privacy.

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        NewCash(TM) is a form of electronic cash, to be used for securely
purchasing products or content anonymously over the Internet. When a customer
purchases a NewCash Card, they transfer money - $10, $20, $50 - to a digital
card that essentially functions as a real ATM card, accepted by participating
merchants throughout the Internet or in the real world. The issuer can choose to
also give the customer an actual card to use in the bricks and mortar world. The
NewCash Card accepts charges as low as $.01, ideal for micropayment pay-per-view
such as pay-per-click web sites or content-based web sites such as newspapers.

        A NewCash Card can be obtained instantly by completing a simple one-page
online registration form. On the Internet, NewCash cardholders each have a
personal Global Shopping Cart to shop at an unlimited number of websites, and
then pay for the purchases with a single, secure transaction. In the real world,
NewCash cardholders can use the card anywhere a standard ATM card is accepted.
NewCash cardholders can login to the 24-hour customer center at any time to
track purchases and view account status in real time. Customers are not required
to use any special software to use any part of the system, as it works with any
Internet browser, on any computer.

        MerchantOnline will use Merrill Lynch as a depositary for all of the
funds deposited by NewCash card holders.

        The NewCash proprietary product offering encompasses several unique
features that MerchantOnline believes make it the only product of its kind.

o       I-ATM allows the NewCash Card and account to be used for all bank and
        financial services, both online and real world. As an added convenience,
        NewCash cardholders can transfer money to other cardholders with online
        accounts with one click.
o       GLOBAL SHOPPING CART enables the consumer to shop at any NewCash-enabled
        E-commerce sites using one universal cart, and pay for purchases in a
        single transaction.
o       MICROPAYMENTS handles micropayments as low as $0.01, ideal for
        pay-per-view, pay-per-click and content-based web sites.
o       VIRTUAL ESCROW SERVICES provides an independent, trusted third party to
        manage the financial transactions between buyer and seller such as for
        online auctions.
o       CLICK FOR CASH enables a NewCash cardholder to earn money by clicking on
        banner ads or viewing online commercials.
o       AFFINITY PROGRAMS offers every NewCash cardholder immediate and full
        access to merchant-offered perks, including discounts for products and
        services.
o       RESELLER PROGRAM enables merchants to issue ATM/debit cards to their
        sales agents and make payments to them online. NewCash online real-time
        accounting eliminates the need for issuing paper checks.

The following are some of the advantages of NewCash to vendors:

o       Browser-based Vendor Studio adds E-commerce to a vendor's website easily
        in minutes at no charge, with no software to download and no programming
        skills.
o       Eliminates need for credit card processing account and merchant
        application fees.
o       Increases customer purchasing confidence, increasing sales.
o       Real instant and direct payouts of funds.

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o       Enables sale of web-based content such as newspaper articles, games,
        streaming audio/video, along with products.
o       Real-time accounting and E-commerce statistics of the web site at no
        charge.
o       Optional private labeling available.

PC PAY AGENT

        We have developed a technology called PC Pay Agent designed to change
the way consumers transact with merchants on the Internet. This system protects
the consumer from the possibility of a card number being intercepted over the
Internet or stored on merchant databases and protects the merchant from the
liability of storing and protecting sensitive personal and financial data. As a
result, charge backs and fraud will be significantly reduced.

        PC Pay Agent is activated on the consumer's computer when the user
installs a PC Pay swipe terminal. PC Pay Agent populates the merchant's payment
screen with a one-time use card number that routes the encrypted card data to
the appropriate processing center. Our system then decodes the data and sends an
approval code to the merchant. The number is then discarded and may not be used
again. PC Pay Agent provides the major credit card companies the tools they need
to truly protect their credit card numbers from being resident on unsecured
databases and computer systems.

PC PAY AUTHENTICATE

        PC Pay Authenticate is a means of verifying an individual's identity by
using the PC Pay device in combination with any mag strip credit/debit or
drivers license card. When PC Pay Authenticate is installed, and an individual
swipes their credit/debit card thru the PC Pay Swipe Terminal and enters the PIN
number for that card, their identity will be verified to enable special access
to a web site, data base or networks requiring authentication. The PC Pay
Authenticate will authenticate from any PC Pay device or it can be tied to a
special PC Pay device serial number, depending on how it is installed. This
authentication is the same that is used in the banking world with ATM/debit
cards using a PIN number and decoding the information on the back end.

PC PAYMENT

        The PC PayMENT package consists of the PC Pay device, PC Pay Agent, PC
Pay Small Business Software, a credit card merchant account and an online
virtual terminal. The PC PayMENT Solution is easy to implement. The small
business owner simply plugs the PC Pay device into their PC's keyboard, serial
port, or USB port. All the software needed is included on the PC PayMENT
installation CD disk that comes with the PC Pay swipe terminal. After getting
set up with a merchant account, or using their existing one, the small business
owner is ready to start accepting credit card payments in a matter of minutes.

PORTABLE SMART CARD READER

        Innovonics is developing a portable smart card reader product along with
an English bank that uses technology incorporated into the PC Pay device. This
product is similar in size as a traditional bank passbook and allows bank
customers to check balances and otherwise use a bank-issued smart card to
process transactions. A prototype will be delivered by mid-2001.

STRATEGY

        Our objective is to be the leading worldwide provider of real-time
e-commerce transaction services. Key elements of our strategy include the
following:

o       Increase the Number of PC Pay Devices in the Field. We have agreements
        to sell over 1,500,000 devices and are actively engaged in discussions
        with various parties to further increase the distribution of PC Pay

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        devices to users. Possible partners include computer manufacturers,
        banks, brokerage firms, other financial service firms, eCommerce
        merchants and multilevel marketing firms, and distributors and
        independent selling organizations.
o       Market Our Products as the Most Secure Solutions Available. We believe
        that our product is the most secure system available in the marketplace
        and are seeking third-party endorsements of our system. Of most
        importance is the acceptance of our security strategy by major governing
        bodies. The Benton Group has completed a report for the STAR ATM network
        that identifies PC Pay(R) as the best solution for online transaction
        security.
o       Enhance and Extend Our Suite of E-commerce Payment Solutions. We intend
        to build upon our e-commerce payment solutions, such as Newcash and PC
        Pay, to enhance and extend the suite of services we currently offer. By
        continuing to invest resources in our core transaction processing
        engine, we intend to further improve availability, reliability and
        scalability. To supplement our internal development efforts, we will
        consider additional strategic acquisitions or form partnerships to
        acquire complementary technologies and companies.
o       Expand Merchant Customer Base through Increased Marketing. To date, we
        have made significant investments in marketing. We substantially
        increased our sales and marketing expenses in 2000 from 1999 levels and
        plan to continue to do so in 2001. We also intend to increase the size
        of our direct sales force and enter into additional collaborative
        relationships to increase the number of merchants which use or accept
        our technology as well as to increase the number of transaction services
        used by our existing merchants.
o       Offer New Products. In 2000 we acquired Innovonics, Inc., the developer
        of the PC Pay device and Web Financial Services Corporation, the
        developer of NewCash. We also announced our PC Pay Agent one-time use
        number and PC PayMENT small business product. MerchantOnline believes
        that a hardware/software solution including a smart card reader,
        magnetic card reader, a PIN pad, and "point-of-entry" encryption are
        crucial elements for e-commerce to become widely accepted. We are also
        looking to acquire additional products to complete the scope of our
        offerings.
o       Concentrate Resources on Major Customers. We are focusing our short-term
        resources on four major projects: the global filtered ISP with Capital
        Performance International; a strategic relationship with a large German
        bank; the STAR ATM/debit project; and our PC PayMENT small business
        package.
o       Increase International Presence and Operations. We intend to expand the
        availability and brand recognition of our services throughout the world,
        as fraud is a major concern outside the U.S.

STAR PILOT PROJECT

        In February MerchantOnline entered an agreement with Star Systems Inc.,
a division of Concorde EFS, Inc. to conduct a pilot program for Internet debit
payments. An industry rollout, pending successful completion of the pilot, is
planned for after June 2001 when Star's newly adopted e-commerce rules become
effective. Currently, STAR network operating rules do not allow STAR
transactions to be initiated over the Internet. Working with MerchantOnline,
STAR has developed rules and guidelines to support Internet debit transactions.
These rules will affect the 6,500 financial institution members that are members
of the Star network. MerchantOnline is currently recruiting merchants to
participate in the pilot. eFunds Corporation will participate in the pilot as
the provider of the central switch that allows users of the PC Pay card reader
to access all major ATM/debit networks, including STAR.

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GATEWAY ACCOUNT AND PROCESSING SERVICES

        We provide a suite of other e-commerce transaction services for online
merchants that are able to acquire their own bank merchant account and require
only real-time credit card processing. Our services are transparent to the
merchant's customers. We have relationships with banks that allows us to assist
clients in obtaining merchant accounts for a fee. The basic service is real-time
processing of credit card transactions. This is for clients that have or can
obtain credit card merchant bank accounts. MerchantOnline provides a seamless
connection to credit card approval and completes the processing of the
transactions.

        The real-time processing system provides its clients with a wide range
of services. These include obtaining approval of the credit card transaction and
completing fraud checks that relate to the cardholder's physical address, credit
card number, and e-mail address. An electronic mail message then is
automatically sent to the merchant and the customer to confirm the transaction.
The confirmation sent to customers has reduced the charge backs as problems are
identified and resolved immediately.

        Although we offer merchants gateway accounts, this is not our primary
business. Our current merchant base is used as a platform for real world
validation of transactions services and new product development.. The plan
provides for a set-up fee and ongoing monthly service fees. A merchant will also
pay its bank fees for processing transactions. Merchants accepting the PC Pay
device will generally be charged lower rates than those for typed transactions.

        Our software obtains the approval or rejection of the credit card
transaction and performs routines to protect against fraud. The fraud protection
routines include address verification, comparing the credit card to a negative
database, and determining that the individual ordering has a valid email
address. If any problems occur with these checks, the orders are not approved.
For all transactions, both the consumer and the merchant receive electronic
receipts. We also provide merchants with a virtual terminal in which they can
enter transactions not submitted over the Internet. This allows them to use the
system for telephone/fax orders.

STRATEGIC RELATIONSHIPS

        In December 2000, we commenced development of a strategic relationship
with DePfa Bank and DePfa IT Services. We will develop a European infrastructure
with DePfa to process transactions in Europe and to utilize our technology with
DePfa's customers. DePfa has already paid us development fees and we are
negotiating to create a secure credit and debit card system that is capable of
processing European and U.S. payments for consumers and merchants using an
"any-card-anywhere" strategy. The venture is expected to involve both NewCash
and PC Pay sales.

        In July 2000, we entered into an agreement with Cardservice
International Inc., a leading provider of integrated merchant accounts and
payment technology, to utilize and co-market each other's services. Cardservice
will integrate PC Pay with Cardservice International's LinkPoint Secure Payment
Gateway, allowing merchants to accept secure online payments as fully-encrypted,
card-present transactions from consumers using PC Pay. Cardservice processes for
over 55,000 online merchants, all of which will be PC Pay-enabled.
Implementation of this agreement has been delayed by agreement of the parties.

        We also entered into an agreement with ID Certify, a company providing
digital signature-based e-commerce solutions. Under the agreement, which gives
ownership of secured digital signature certificates to consumers, MerchantOnline
and ID Certify will jointly develop a secure, end-to-end system to support the
use of digital signatures using the PC Pay device. Combining smart card
technology with PC Pay's triple DES encryption capabilities enables consumers to
buy products using a number of different payment methods and legally bind
themselves to contracts online with digital signatures. Implementation of
digital signatures with PC Pay assures users that their PINs or passwords cannot
be compromised. The companies will share fees for both payments and signatures.
MerchantOnline is in the process of completing the software drivers for this
project and expects to have it completed by mid-2001.

        ID Certify issues digital certificates, which are secure identity
credentials for use over the Internet, and provides digital signing
applications, or can integrate its identity management products and services

                                       11
<PAGE>

into existing applications, allowing the customer to digitally sign electronic
forms and documents sent over the Internet, intranets, extranets and wireless
networks.

        In September 2000 we entered into a letter of intent with Qode to
deliver a universal, personalized, secure shopping system which links real world
and online shopping behaviors. Focused on delivering the world's most powerful
product search engine and the deepest source of consumer and retailer product
information ever assembled, the Qode Universal Shopping SystemTM is a licensable
solution that allows portals, content and community sites, and consumer service
companies to offer or improve their business customers' commerce solution by
providing a broad range of product promotions and information.

        Qode's Universal Shopping System will offer customers the option to use
the MerchantOnline transaction system including PC Pay for its credit card
commerce solution. MerchantOnline and Qode have entered into a letter of intent
to combine their unique products into a completely secure and easy to use
purchasing system for the Internet. MerchantOnline's PC Pay Agent will provide
the secure front end allowing the user to swipe a transaction with either a
credit card, smart card or ATM/debit card. PC Pay Agent will provide a seamless
interface to MerchantOnline's proprietary transaction network and Qode's
purchasing system. Each PC Pay user will be given their own personal space when
they register PC Pay Agent.

        In February 2001 we entered into an agreement with iLumin Corporation,
the leading provider of infrastructure technology for automating legally binding
business transactions over the Internet, to form a business alliance to create a
unique platform that enables business-to-consumer, business-to-business and
business-to-government parties to perform legally enforceable e-commerce
transactions. By combining MerchantOnline's PC Pay(R) card reader and iLumin's
Digital HandShake Server, this alliance provides secure access to digital
certificates for signatures and authentication for iLumin's system, and allows
the use of digital payment mechanisms such as credit cards, purchasing cards,
smart cards, and PIN-based ATM/debit.

        In March 2001 we entered into an agreement to be a supplier for the
Intel(R) Business Advantage Portal. This B2B e-marketplace provides
MerchantOnline efficient access to approximately 10,000 Intel Product Dealers in
North America. The Intel Business Advantage Portal offers discounts on
components and solutions such as software, hardware, peripherals, Internet
access, and e-commerce services, and displays suppliers' offers in an
e-marketplace.

        We also entered into agreements to distribute PC Pay devices in Greece
and the Philippines.

RECENT SALES AGREEMENTS

        In August 2000, we entered into a five-year license agreement with Trade
Exchange Networks, an online barter exchange network, for a private label
version of our NewCash system. Trade also agreed to purchase at least 45,000 PC
Pay devices in 2001. This project continues to move forward with software
functionality and definitions continuing. Further development will continue once
Trade Exchange receives additional funding.

        In November 2000, we entered into a five-year license agreement with
Prime Domain, Inc. for a NewCash system and to purchase up to 1,500,000 PC Pay
devices in 2001. Prime Domain intends to bundle PC Pay devices with set-top
Internet-ready cable boxes manufactured by multiple manufacturers. Prime Domain
and their customers are currently evaluating several implementation
alternatives. The project is moving forward more slowly than anticipated, and we
expect that Prime Domain will not meet their full year forecast.

        In January 2001, we entered into a ten-year licensing agreement with
Capital Performance International, Inc., IBC Bahamas to utilize the NewCash
system and PC Pay in CPII's websheriff@globalprotector.net(TM) network, which is

                                       12
<PAGE>

expected to be the first global filtered ISP. CPII is starting a new category of
ISP called Global Internet Protector, or GIP, using AT&T's WorldNet global
backbone with anticipated online uplink to the general public in the second
quarter of 2001. CPII expects that the GIP will become the first worldwide
debit-only transactional network.

        All of these agreements provide for an upfront license fee for the
NewCash system and ongoing transaction fees.

        In November 2000, we entered into a two-year agreement with
Nexgen.Commerce, Inc. pursuant to which Nexgen will offer our PC payMENT package
to small businesses in conjunction with the U.S. Small Business Administration.

SALES AND MARKETING

        We believe that our product offering is unique and is not available via
any other method. We market our e-commerce payment solutions directly to
Internet merchants, and virtually every Internet web site that offers e-commerce
is a potential client. There are more than 10 market segments that the complete
product can support. They include:

       AUTHENTICATION               DEBIT/SMART CARD APPLICATIONS
       --------------               -----------------------------
       o eCommerce                  o Loading eCash or discount coupons
       o government projects        o medical/insurance ID
       o home banking/bill pay      o medical alert card
       o commercial POS             o software protection
       o stock trading              o loyalty programs
       o email access control       o private key storage/digital signatures
       o website access control     o student ID card

        Given the magnitude of these potential markets, we are currently
focusing on eCommerce, loyalty programs, ATM/debit and selected B2B
applications. We also intend to find one or more partners to assist in retail
sales of PC Pay devices.

        There are also multiple advertising opportunities that we will pursue,
including placing logos on PC Pay devices and selling advertising on the
computer screens that are used during the course of a transaction.

        Target customers for our e-commerce transaction services include
Internet-centric merchants, including those who have developed custom
transaction processing systems and established retailers that have opened online
stores to supplement their traditional retail models. We reach these merchants
worldwide through a direct sales force as well as through an indirect sales
channel that leverages existing sales and marketing infrastructures developed by
our partners. In addition to our direct and indirect sales efforts, we work with
several strategic partners to promote our e-commerce transaction services. As of
February 28, 2001, we had a total of five persons in sales and marketing and
over 200 resellers throughout the world.

Sales Strategy

        Our products and services are marketed through direct and indirect
channels. We intend to do our direct selling is accomplished in several ways:

        o       our web sites;
        o       banners placed on other web sites such as Yahoo!;
        o       direct sales by our own staff;
        o       affiliate programs;
        o       original equipment manufacturers; and
        o       tradeshows.

                                       13
<PAGE>

        For our indirect sales efforts, we use independent resellers. Reseller
organizations can offer all of our services. These third party sales
organizations are either already involved in marketing credit card merchant
account services or are developers of websites or Internet Service Providers.
Those in the reseller program purchase our services at a discounted rate and
then re-sell them to their clients. They can either use us to bill their
customers for these services or invoice their customers under their own name.

        For resellers, the key element is residual, transaction-based income.
Resellers that manage the entire transactions will receive a per transaction
fee, plus sign-up fees if the reseller uses our suggested retail pricing. Many
resellers actually charge higher prices when the market will bear it. The use of
resellers allows us to leverage our resources to maximize revenues. By working
with companies as resellers who market merchant accounts and web sites to their
customers, we strategically develop an outside sales organization that already
has sound, existing relationships with merchants. These resellers recognize that
income derived from MerchantOnline installation fees and recurring transaction
charges provide them with a significant revenue potential. Most competitors sell
products using a direct sales force.

        We use a variety of marketing activities to increase market awareness of
our services and educate our target audience. In addition to building awareness
of our brand, our marketing activities focus on generating leads for our sales
efforts. To build awareness and attract new merchants we conduct marketing and
partnership programs including advertising, public relations activities,
referral programs, co-branded initiatives, virtual seminars and trade shows.

MERCHANT SUPPORT

        We provide a range of merchant activation and sustaining support
services to ensure a high level of performance and reliability and to enable
merchants to get to market more quickly. We offer two levels of rapid start
implementation and two levels of sustaining support services in addition to
basic account activation: standard support and premier support. All of these
services include transaction reporting, fraud list updating and notification of
scheduled and unscheduled system downtime and self-help merchant support tools
on our Web site. Merchants may select any combination of implementation and/or
sustaining support packages, according to their needs.

        Our service is designed to provide support to merchants during regular
business hours. It provides all of the services of account activation as well as
toll free telephone support from 8 a.m. to 9 p.m., Eastern Time, Monday through
Friday, from our merchant support group with a guaranteed two hour response time
during business hours. Online support is available 24 hours a day, seven days a
week.

TECHNOLOGY

        Our proprietary transaction processing system employs a modular
architecture that was designed to scale rapidly and handle the transaction
processing demands of our merchants across the Internet. This system is composed
of multiple groups of servers and routers acting as a single point of contact
for our merchants' transaction processing requirements. This system utilizes
industry standards to maximize our compatibility with our merchants' e-commerce
systems.

        In September 2000, we acquired the source code for a state of the art
software platform to interface with all of the leading processing platforms. We
will issue an aggregate of 500,000 shares of our common stock, which will be
released as each of up to 15 platforms are certified. We have guaranteed that
the shares issued will have an aggregate value of $5 million on the first
anniversary of the first delivery, which will occur in September 2001. As of
February 28, 2001 we have received six platforms and delivered 225,000 shares.
On March 15, 2001 we received a letter from counsel to the developer stating
that we are in default under this agreement for failure to pay the $44,000 cash

                                       14
<PAGE>

fees due upon the certification of the most recent four platforms and that the
agreement was deemed terminated. The letter requested us to immediately cease
using the software. Since the letter was written, we have orally agreed to
become current by March 31, 2001 and the developer has agreed to forebear until
that date.

        This software would complete our proprietary network from the consumer
to the processors and banks. Access to the software would give us the ability to
customize the delivery of information in any format required by the major
processors. The single largest benefit is to the merchants and consumers who use
cards or merchant accounts that these processors support. As a result, we will
not be limited to attempting to identify only specific merchants or consumers
who can use the system.

DATA CENTERS AND NETWORK ACCESS

Our data center is currently located at leased facilities in San Diego,
California, although we are considering consolidating the operation in Florida.
A data center is a facility containing servers, modem banks, network circuits
and other physical equipment necessary to connect users to the Internet. The
data center has multiple levels of redundant connectivity to the Internet,
back-up power, fire suppression, seismic reinforcement and security surveillance
24 hours a day, 7 days a week. This facility is Visa certified, which is the
strictest processing and security standards in effect today. We use Level 3
Communications as our exclusive network backbone supplier.

        The technology underlying our e-commerce transaction services provides
the following benefits:

o       Scalability. Our services allow merchants to deliver consistent quality
        of service as their transaction volumes grow, and to handle daily and
        seasonal peak periods. As a result, merchants do not have to expand
        these areas of their transaction processing infrastructure as their
        businesses grow.

o       High reliability. Our systems are engineered to provide high
        reliability, and we provide transaction processing and support 24 hours
        a day, 7 days a week.

o       Secure messaging. All communications between the merchant's Web server
        and our system are facilitated by an encrypted protocol that allows for
        digital signature processing, message integrity, and identity
        verification of all communications between the merchant and us.

o       Real-time responses. Because our services enable online merchants to
        process e-commerce transactions in real-time, merchants can improve
        their level of customer satisfaction and reduce their support costs by
        avoiding delayed responses and minimizing the need for follow-up
        communications.

PRODUCT DEVELOPMENT

        Our Florida-based product development team is responsible for the
design, development, testing and release of our core software and services. We
have a well-defined software development methodology that we believe enables us
to deliver services that satisfy real business needs for the global market while
meeting commercial quality expectations. We emphasize quality assurance
throughout our software development lifecycle. We believe that a strong emphasis
placed on analysis, design and rapid prototyping early in the project lifecycle
reduces the number and costs of defects that may be found in later stages. Our
development methodology focuses on delivery of product to a global market,
enabling localization into multiple languages, multi-currency payment
processing, global fraud detection, and local regulatory compliance from a
single code base.

        When appropriate, we utilize third parties to expand the capacity and
technical expertise of our internal product development organization. On
occasion, we have licensed third-party technology that we feel provides the

                                       15
<PAGE>

strongest technical alternative. We believe this approach shortens time-to-
market without compromising our competitive position, product quality or
service.

        Innovonics is concentrating on designing and developing new versions of
the PC Pay device, including development of the ASIC chip and a USB version of
the PC Pay device. Innovonics also develops software interfaces for different
operating systems, including Windows(TM) 95, 98, 2000, NT and Me. Innovonics
develops software interfaces to use the PC Pay device with personal computer
PS/2 port, serial port, and USB port hardware interfaces. Innovonics is
responsible for development of PC Pay test equipment and test software and
develops smart card interface software.

MANUFACTURING

        Innovonics does not have the capacity to manufacture PC Pay devices and
have used contract manufacturers for the devices made to date. For the
foreseeable future, Innovonics intends to continue to use contract manufacturers
for the PC Pay device. Clare Micronix is developing an ASIC chip for the device,
which will simplify the manufacturing process and significantly decrease the
cost per unit. The chip is expected to be completed in late 2001. Innovonics
believes that there are multiple vendors and manufacturers and that we will not
rely on any one source.

INTELLECTUAL PROPERTY

        Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights.

        Innovonics owns the PC Pay intellectual property rights. The PC Pay
technology is patented in the United States, U.S. Patents No. 5,517,569,
5,815,577, and Des. No. 367,472, and over 120 countries under patents pending
and patent cooperation treaties. Additionally, two more related significant
utility patent applications have been filed and two provisional patent
applications have been filed. An additional four patent applications were filed
relating to the Newcash system. Additional international patent applications are
in process. Our first patent expires in 2011 and the others in later years.

        We believe that numerous patent applications relating to the Internet
commerce field have been filed or have been issued as patents. From time to
time, in the ordinary course of business, we become aware of one or more patents
of third parties that we choose to evaluate for a variety of purposes. These
purposes may include determining the general contents of patents, reviewing the
technological developments of their assignees, and determining whether our
technology may overlap. We have not conducted any search to determine whether
any of our services or technology could be alleged to infringe upon any patent
rights of any third party. We cannot assure you that none of our products,
services, and technology infringes any patent of any third party.

        As part of our confidentiality procedures, we generally enter into
non-disclosure agreements with our employees, distributors, and corporate
partners and into license agreements with respect to our software, documentation
and other proprietary information. Despite these precautions, third parties
could reverse engineer, copy or otherwise obtain our technology without
authorization, or develop similar technology independently. While we police the
use of our services and technology through online monitoring and functions
designed into our products, an unauthorized third-party may nevertheless gain
unauthorized access to our services or pirate our software. We are unable to
determine the extent to which piracy of our intellectual property or software
exists. Software piracy is a prevalent problem in our industry. Effective
protection of intellectual property rights may be unavailable or limited in
foreign countries. We cannot assure you that the protection of our proprietary

                                       16
<PAGE>

rights will be adequate or that our competitors will not independently develop
similar technology, duplicate our services or design around any intellectual
property rights we hold.

COMPETITION

        The market for our services is intensely competitive and subject to
rapid technological change. We expect competition to intensify in the future.
The primary source of competition for the PC Pay comes from competing
technologies that attempt to achieve the same results. Potential competitors
include a card sized CD Rom product developed by Internet Money and Safe-Debit,
smart card readers offered by American Express Blue and Mag-Tek and a reader
offered by eConnect which has a device similar to the PC Pay which is not yet
commercially available. We may also face competition from developers of other
systems for e-commerce transaction processing such as Cybersource, Authorizenet,
Clear Commerce, Digital River, Hewlett-Packard/VeriFone, HNC Software, Open
Market, PaylinX, ShopNow.com and Signio. In addition, companies, including
financial services and credit companies such as First Data Corporation, AT&T and
GE Capital, may enter the market for our services. In the future, we also may
compete with large Internet-centric companies that derive a significant portion
of their revenues from e-commerce and may offer, or provide a means for others
to offer, e-commerce transaction services.

        Many of our competitors have longer operating histories, substantially
greater financial, technical, marketing or other resources, or greater name
recognition than we do. Our competitors may be able to respond more quickly than
we can to new or emerging technologies and changes in customer requirements.
Competition could seriously impede our ability to sell additional services on
terms favorable to us. Our current and potential competitors may develop and
market new technologies that render our existing or future services obsolete,
unmarketable or less competitive. Our current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with other e-commerce transaction service providers, thereby increasing the
ability of their services to address the needs of our prospective customers. Our
current and potential competitors may establish or strengthen cooperative
relationships with our current or future channel partners, thereby limiting our
ability to sell services through these channels. Competitive pressures could
reduce our market share or require the reduction of the prices of our services,
either of which could materially and adversely affect our business, results of
operations or financial condition.

        While there are many competitors to our individual products, we believe
that we are the only competitor with a complete integrated package.

        We compete in the processing business on the basis of certain factors,
including:

o       system reliability;
o       product performance;
o       breadth of service offering;
o       ease of implementation;
o       time to market;
o       customer support; and
o       price.

        We believe that we presently compete favorably with respect to each of
these factors. However, the market for our services is still rapidly evolving,
and we may not be able to compete successfully against current and potential
future competitors.

                                       17
<PAGE>

REGULATIONS

        The following regulations can impact our business now or in the future:

        FAIR CREDIT REPORTING ACT. Because our Internet fraud screening system
assesses the probability of fraud in an Internet credit card transaction, we may
be deemed a consumer reporting agency under the Fair Credit Reporting Act. We
are in compliance with the act. Complying with this act requires us to provide
information about personal data stored by us. Failure to comply with this act
could result in claims being made against us by individual consumers and the
Federal Trade Commission.

        EXPORT CONTROL REGULATIONS. Current export control regulations prohibit
the export of strong encryption technology without a license, thereby preventing
us from using stronger encryption technology to protect the security of data
being transmitted to and from Internet merchants outside of the United States.
We have obtained a license to use 168-bit encryption technology with our
international merchants, and have applied for a license to use higher levels of
encryption technology. We cannot be sure that the license to use stronger
encryption technology will be issued. If our application is denied, we will be
unable to use stronger than 168-bit encryption technology with our international
merchants.

        INTERNET TAX FREEDOM ACT. Enacted in October 1998 and effective through
October 2001, the act bars state or local governments from imposing taxes that
would subject buyers and sellers of electronic commerce to taxation in multiple
states. The act also bars state and local governments from imposing taxes on
Internet access through October 2001. When the act expires or if the act is
repealed, Internet access and sales across the Internet may be subject to
additional taxation by state and local governments, thereby discouraging
purchases over the Internet and adversely affecting our business.

        REGULATION E. Any transfer of funds initiated through a terminal or
computer for the purpose of ordering, instructing or authorizing a financial
institution to debit or credit an account is subject to Regulation E. Portions
of Regulation E may apply to our products and services. Much of this regulation
was enacted several years ago and does not specifically apply to our business
and available interpretations may also not give us the necessary guidance. We
will attempt to comply with this regulation or seek interpretative guidance in
conducting our operations.

EMPLOYEES

        As of March 20, 2001 MerchantOnline had 28 full time employees. None of
our employees are represented by a labor union, and we consider employee
relations to be good.

ITEM 2.  DESCRIPTION OF PROPERTY

        We currently occupy the following three facilities:

<TABLE>
<CAPTION>
LOCATION                   USE                 SQUARE FEET   ANNUAL RENT      LEASE EXPIRATION
--------                   ---                 -----------   -----------      ----------------
<S>                        <C>                 <C>           <C>              <C>
Boca Raton, Florida        Principal Offices   6,000         $85,500          1/03
Phoenix, Arizona           Innovonics          5,460         $106,500         1/03
San Diego, California      Operations Center   3,300         $59,500          10/03
</TABLE>

ITEM 3.  LEGAL PROCEEDINGS

        On December 12, 2000, Paul Rice, Trustee for Pagan Lewis Motors, Inc.
Trust, Pagan Lewis Motors, Inc., Jack Pagan, Allan Pagan and Paul Rice filed an
action in the U.S. District Court for the Western District of Tennessee against
MerchantOnline, Tarek Kirschen, Michael Karsch and American Stock Transfer &
Trust Company. The complaint alleges that MerchantOnline breached its agreement
with Pagan Lewis Motors by failing to make the final payment of $124,291 due
under this agreement. In January 2001, the plaintiffs obtained a preliminary
injunction requiring the defendants to take all necessary actions to permit
plaintiffs to sell any restricted MerchantOnline common stock owned by them both

                                       18
<PAGE>

personally and to sell sufficient shares to pay all amounts due. MerchantOnline
does not dispute the $124,291 due under the agreement but intends to contest the
other allegations contained in the complaint. The parties have been engaged in
settlement discussions and MerchantOnline believes that the action will be
settled upon receipt of funding.

        On February 9, 2001, MerchantOnline was served in a case entitled
Elliott, Lane & Associates Inc. vs. MerchantOnline.com, Inc. filed in the
Superior Court of the State of California, San Diego County. The plaintiffs were
issued restricted stock pursuant to a consulting agreement in November 1999 and
claim that MerchantOnline has failed to issue a 144 opinion on a sale.
MerchantOnline intends to contest the allegations on the grounds that the
plaintiffs failed to perform their obligations under the original consulting
agreement.

        MerchantOnline has been notified by Don Hughes, Kim Wilson and Jim
Terhune, former shareholders of ChargeSolutions and Approve.net, that they
intend to file actions against MerchantOnline. Messrs. Hughes and Terhune are
claiming that they are entitled to substantial option grants and other benefits
pursuant to their employment agreements. The board of MerchantOnline requested
the compensation committee review the claims. The committee made recommendation
to the full board, which were rejected by Messrs. Hughes and Terhune.

        Ms. Wilson has claimed that MerchantOnline is preventing her from
selling restricted stock acquired in the Approve.net transaction. MerchantOnline
believes that Ms. Wilson is an affiliate due to her personal relationship with
Mr. Hughes, who is currently an officer and was formerly a director, and is
prohibiting sales by insiders during insider blackout periods in accordance with
company policy.

        On March 13, 2001, Mr. Hughes resigned as a director. In his letter he
stated that he resigned over what he considered to be unethical business
practices by members of the senior management team of MerchantOnline, some
members of the board of directors and the lack of response in his attempts to
ascertain relevant information to adequately protect the interests of the
shareholders and questionable business practices. (MerchantOnline believes that
Mr. Hughes is incorrect, has been provided access to all information that he
requested and that no questionable actions have been taken by member of senior
management). Further, Mr. Hughes has made a series of claims against
MerchantOnline and has threatened to report MerchantOnline to various
authorities for undisclosed violations. Other than back salaries and expenses
owed to him and payroll taxes owed, Mr. Hughes has not substantiated any of his
claims.  Mr. Hughes has not resigned his employment.

        MerchantOnline believes that it has meritorious defenses to all claims
by these persons.

        MerchantOnline is not a party to any other legal proceedings.

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

        None

                                       19
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS

        On May 10, 1999 MerchantOnline's common stock began trading on the OTC
Bulletin Board under the symbol "MRTO". The following table sets forth the high
and low bid prices of MerchantOnline's common stock as reported on the OTC
Bulletin Board for each quarter from May 10, 1999 through October 31, 2000. The
following quotations are over-the-market quotations and, accordingly, reflect
inter-dealer prices, without retail mark-up, markdown or commission and may not
represent actual transactions.

                                                HIGH BID           LOW BID
                                            ------------------ -----------------
FISCAL 1999
May 10, 1999 through July 31, 1999                 $4.25              $.56
August 1, 1999 through October 31, 1999             1.65               .19

FISCAL 2000
November 1, 1999 through January 31, 2000           4.91               .84
February 1, 2000 through April 30, 2000            11.50              4.75
May 1, 2000 through July 31, 2000                   8.75              5.44
August 1, 2000 through October 31, 2000             6.44              3.50

        On March 20, 2001, the closing bid price for the common stock as
reported on The OTC Bulletin Board was $.41. As of February 28, 2001, there were
over 2,000 holders of MerchantOnline's common stock.

DIVIDENDS

        MerchantOnline has not paid any cash dividends on its common stock since
its inception. MerchantOnline presently intends to retain future earnings, if
any, to finance the expansion of its business and does not anticipate that any
cash dividends will be paid in the foreseeable future. Future dividend policy
will depend on MerchantOnline's earnings, capital requirements, expansion plans,
financial condition and other relevant factors.

SALES OF UNREGISTERED SECURITIES

        During the three months ended October 31, 2000, MerchantOnline issued an
aggregate of 314,632 shares of common stock to one accredited investor in a Rule
506 private offering. An additional 125,000 shares were issued to 10 persons
pursuant to a purchase of software. Also, an aggregate of 25,189 shares were
issued to three persons upon exercise of outstanding warrants that were issued
in the Innovonics transaction. All transactions were exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.

                                       20
<PAGE>

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

        The following discussion should be read in conjunction with
MerchantOnline's audited financial statements and notes thereto included herein.
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
MerchantOnline cautions readers regarding certain forward looking statements in
the following discussion and elsewhere in this report and in any other statement
made by, or on the behalf of MerchantOnline, whether or not in future filings
with the Securities and Exchange Commission. Forward looking statements are
statements not based on historical information and which relate to future
operations, strategies, financial results or other developments. Forward looking
statements are necessarily based upon estimates and assumptions that are
inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond MerchantOnline's
control and many of which, with respect to future business decisions, are
subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward looking statements made by, or on behalf of, MerchantOnline.
MerchantOnline disclaims any obligation to update forward looking statements.

        MerchantOnline.com, f/k/a Tarcyn Corporation was incorporated under the
laws of the State of Colorado on March 19, 1993. On February 16, 1999, pursuant
to the terms of an agreement and plan of reorganization, MerchantOnline acquired
all of the issued and outstanding securities of CreditCo, Inc. in exchange for
31,500,000 common shares of MerchantOnline. As a result, MerchantOnline was the
surviving entity. As part of the terms of this transaction, MerchantOnline
amended its articles of incorporation, changing its name to its present name, as
well as reincorporating in the State of Florida.

        MerchantOnline is a developer and provider of a real-time eCommerce
transaction network for the virtual and real world marketplace. MerchantOnline
offers products that support any combination of transactions between companies,
consumers and the government anywhere in the world. Its products include
proprietary real-time credit card processing programs, a proprietary hardware
device called PC Pay(R), and a proprietary ATM/debit network for the Internet.
MerchantOnline believes its network of products exceeds the capabilities of all
suppliers of these services in the industry. Its goal is to provide merchants
with a single vendor that furnishes everything needed to offer transaction
products that allow multiple methods of payments and deal with the various
marketing and business issues facing any company. From affinity programs that
provide "stickiness" to escrow services for buyers and sellers to
consumer-to-consumer payments, MerchantOnline has developed products that
support an ever-changing transaction platform. The PC Pay(R) device offers a low
cost ATM-approved computer peripheral that encrypts sensitive financial data
(via a card swipe) before it enters the computer/Internet. It is capable of
reading and writing to a smart card, and provides a unique gateway for any
system that requires card present authorization: for transactions of funds or
information.

        The following information is intended to highlight developments in
MerchantOnline's operations to present the results of operations, to identify
key trends affecting MerchantOnline's businesses and to identify other factors
affecting MerchantOnline's results of operations for the years ended October 31,
2000 and 1999.

RECENT DEVELOPMENTS

        Subsequent to October 31, 2000, MerchantOnline has had significant cash
flow problems. Accounts payable have increased significantly from approximately
$735,839 at October 31, 2000 to approximately $1.8 million as of March 15, 2001.

        Effective January 31, 2001, MerchantOnline's employee leasing company
effectively terminated all MerchantOnline employees due to MerchantOnline's
inability to fund its payroll and related obligations to the employee leasing

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<PAGE>

company. Approximately $270,000 is owed to the employee leasing company,
including approximately $160,000 of unpaid payroll taxes. MerchantOnline is
currently providing sporadic advances to its employees until such time as the
past due payroll obligations can be met. There is also approximately $200,000 of
unpaid salaries in addition to the funds owed to the employee leasing company.

        In March 2001, James Gitney resigned as executive vice president and
chief operating officer and in February 2001 Angel Rodriguez resigned as vice
president credit/debit card operations. In March 2001, Mr. Gitney gave
MerchantOnline notice that he deemed his employment agreement to be terminated
by him for "good reason", which under the terms of his agreement would require a
payment of $600,000 plus unpaid salary, benefits and expenses of approximately
$60,000. MerchantOnline and Mr. Gitney are negotiating to settle this matter.
Other persons have recently submitted similar letters to cure breaches under
their employment agreements.

        On March 2, 2001, MerchantOnline received a letter from counsel
representing Dereck Clark, the minority shareholder of Innovonics, stating that
MerchantOnline is currently in default of the cash payment obligations in the
aggregate amount of $1,440,000 under the Merger Agreement dated April 24, 2000,
as amended on May 15, 2000 and September 1, 2000. The letter stated that Mr.
Clark, acting in his capacity as representative of the former Innovonics
shareholders, has exercised his right to acquire all of the Innovonics shares
currently held by MerchantOnline in exchange for the return of their
MerchantOnline shares and options received in connection with the Merger
Agreement, plus an amount equal to $2.50 per share for each MerchantOnline share
that is not returned to MerchantOnline. The letter also stated Mr. Clark's
intention to seek legal recourse if MerchantOnline does not transfer the
Innovonics shares amicably. Since the date of the letter, MerchantOnline has
been working with Mr. Clark on various funding alternatives to attempt to
persuade Mr. Clark to withdraw this letter. As of March 20, 2001, Mr. Clark has
not agreed to withdraw the letter but has indicated a continued willingness for
an unspecified period of time to seek an acceptable solution. MerchantOnline
cannot guarantee that Mr. Clark will withdraw his letter or will even continue
discussions.

        As of March 15, 2001, MerchantOnline has not paid $44,000 in cash that
is currently due under an agreement with a third party to acquire source code
for a software platform further described under Item 1-Description of
Business--Technology" above, which has resulted in a default under the
agreement. On March 15, 2001 MerchantOnline received a letter from counsel to
the developer stating that it is in default under this agreement for failure to
pay the $44,000 cash fees due upon the certification of the most recent four
platforms and that the agreement was deemed terminated. The letter requested
MerchantOnline to immediately cease using the software. Since the letter was
written, MerchantOnline has orally agreed to become current by March 31, 2001
and the developer has agreed to forebear until that date. Failure to cure this
default will result in MerchantOnline's inability to use the platform and
ultimately would result in the return of the source code to the third party.

        On March 13, 2001, Don Hughes resigned as a director. In his letter he
stated that he resigned over what he considered to be unethical business
practices by members of the senior management team of MerchantOnline, some
members of the board of directors and the lack of response in his attempts to
ascertain relevant information to adequately protect the interests of the
shareholders and questionable business practices. MerchantOnline believes that
Mr. Hughes is incorrect, has been provided access to all information that he
requested and that no questionable actions have been taken by member of senior
management. Mr. Hughes has not resigned his employment. Further, Mr. Hughes has
made a series of claims against MerchantOnline and has threatened to report
MerchantOnline to various authorities for undisclosed violations. Other than
back salaries and expenses owed to him and payroll taxes owed, Mr. Hughes has
not substantiated any of his claims.

        Approximately 10 employees were terminated and other employees left and
were not replaced, resulting in a net headcount reduction from 45 to 28 over the

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last several months. In addition, management agreed to reduced salaries. These
measures have lowered the monthly cash expenditures by approximately $200,000.
Other cost-cutting options are being studied, including consolidating
MerchantOnline's San Diego processing center in Florida and other headcount
reductions so that cash expenditures over the next few months will be in line
with anticipated cash inflows.

        We have met our capital needs over the last year from the sale of our
common stock and loans of approximately $1.9 million from our chief executive
officer. We are in the process of negotiating additional financing from third
parties. As of March 20, 2001 we have commitments from three existing
shareholders to fund up to an aggregate of $400,000 per month for up to six
months.


RESULTS OF OPERATIONS FOR THE YEARS ENDED OCTOBER 31, 2000 AND 1999

          During the year ended October 31, 2000, MerchantOnline's revenues were
$248,150, compared to $204,080 for the year ended October 31,1999. This increase
of $44,070 was attributable to an increase in customer support fees and set up
fees due to the acquisition of Approve.net and its customer base. Costs of sales
were $72,510 for the year ended October 31, 2000, compared to $111,064 for the
year ended October 31, 1999, a decrease of $38,554, which was attributable to
the elimination of the turnkey sales program. This elimination resulted in lower
commissions and merchant processing fees.

          Operational expenses increased by $12,783,607, from $2,614,510 for the
year ended October 31, 1999 to $15,398,117 for the year ended October 31, 2000.
Amortization of goodwill and identifiable intangibles generated from the three
transactions during the year accounted for $7,645,372 of the increase. The
increase in General and administrative expenses accounted for $3,867,154 of the
increase, which includes approximately $2,178,050 attributable to noncash
compensation resulting from the issuance of stock for services, $846,703 for
legal, accounting and other professional expense, and $875,000 for business
consultants.

          Salaries and wages increased from $410,881 to $2,043,899, an increase
of $1,633,018. The increase related to the addition of approximately 25
employees from the three transactions as well as addition to the corporate
office of 13 employees, which included a chief operating officer, chief
administrative officer and general counsel. Other expense of $850,000 represent
the write-off of capitalized web site development costs. Research and
development costs of $171,229 related to salaries and wages for time incurred
primarily in developing the PC Pay Agent and PC Pay Authenticate products. Sales
and marketing expense decreased by $987,325 due to the $765,000 expense incurred
in 1999 related to the PLM racing and Yahoo advertising agreement. The total
depreciation and amortization expense will be approximately $4.7 million in
future quarters.

          The loss before net income tax benefit of $19,347,636 for the year
ended October 31, 2000 increased by $16,907,308 over the year ended October 31,
1999. The increase resulted primarily from the $12,783,607 increase in costs of
operations and $4,089,429 from the equity in net loss in Innovonics. The
$4,089,429 equity in net loss of Innovonics represents 100% of the net loss of
Innovonics of $748,638 and the amortization of the identifiable intangibles and
goodwill resulting from the difference between MerchantOnline's percentage of
ownership of the net assets and the initial investment in Innovonics.

          The income tax benefit of $1,646,216 represents the reversal of a
portion of the deferred tax liability related to the nondeductible intangible
assets identified in the Web Financial and Innovonics transactions.

        RESULTS OF OPERATIONS FOR INNOVONICS. For the six month period ended
October 31, 2000, Innovonics had net revenues of $172,052, substantially all of
which were from sales of PC Pay devices. Cost of goods sold was $116,373.

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<PAGE>

Research and development expense was $144,000, which related to the development
of technology, general and administrative expense was $266,099 and
compensation expense related to stock options was $313,587.  The net loss was
$748,638.

LIQUIDITY AND CAPITAL RESOURCES

        At October 31, 2000, MerchantOnline had no cash, $17,690 in accounts
receivable and $38,291 in inventory. The Company also had $101,592 of prepaid
expenses and $544,754 of prepaid advertising relating to Pagan Lewis Motors
Inc., or PLM, described below and other current assets of $284,102. Current
liabilities were $3,544,777, of which $611,839 were accounts payable, $536,089
were accrued expenses, $2,035,151 were notes payable to shareholders, $87,460
was deferred revenue and other current liabilities of $274,238 relating
primarily to resale of the PLM advertising. Payables increased substantially
during the period due to the cash flow shortfall during the second half of the
year. As of October 31, 2000, MerchantOnline had negative working capital of
approximately $2,558,000 and negative working capital of $523,197 excluding
notes payable to shareholders.

        In May 1999, MerchantOnline entered into an agreement with PLM to
purchase Internet advertising blocks and to sponsor a car-racing team with
Yahoo!. MerchantOnline was required to make bi-weekly payments but did not have
sufficient cash. In September 1999, an agreement was reached with PLM that this
amount would be paid in 12 monthly installments, starting in September 1999, and
PLM would release the advertising on Yahoo!. MerchantOnline used $55,422 of this
advertising in July 2000. As of October 31, 2000 MerchantOnline owed PLM
approximately $125,000 for the final installment. In December 2000, PLM filed a
lawsuit with respect to this payment. MerchantOnline's rights to the Internet
advertising blocks expire June 1, 2001. MerchantOnline sold approximately
$306,000 of this advertising in May 1999 and has collected approximately
$216,000 of such amount. The $306,000 of sold advertising may not be used by the
buyer until the buyer makes all of its payments and MerchantOnline has
accordingly recorded $215,600 as a liability. since the buyer has filed for
bankruptcy and the amount may have to be repaid.

        During the year ended October 31, 2000, MerchantOnline used $5,365,374
of cash in operating activities. Net cash provided by financing activities was
$7,435,928, consisting of $5,568,896 from stock issued in private placement
and stock subscriptions and $2,217,163 from shareholder loans. The private
placements were at prices ranging from $1.00 per share to $5.00 per share. The
proceeds of these offering were utilized primarily for funding operations.
During the year ended October 31, 2000, MerchantOnline used $2,075,702 for
investing activities, primarily $1,300,000 invested in Innovonics, $604,462
invested in property and equipment, $140,000 for the Web acquisition and $31,060
for the Approve.net acquisition.

        At October 31, 2000, MerchantOnline has approximately $9,015,557 in net
operating loss carry forwards for U.S. federal income tax purposes which start
expiring in 2019.

        In June 2000, MerchantOnline executed a line of credit note with Tarek
Kirschen, MerchantOnline's President, providing for him to lend MerchantOnline
up to $3 million. The note provided for an interest rate of 13.5%, a loan fee of
$35,000 and a maturity date of the earlier of December 31, 2000 or a drawdown
under the Swartz investment agreement. At October 31, 2000, $1,914,151 was
outstanding. In December 2000, Mr. Kirschen agreed to extend the note to June
30, 2001 and lower the interest rate to the prime rate. At February 28, 2001
$1,915,151 was outstanding. Mr. Kirschen does not have any funds available to
further loan MerchantOnline. The line of credit is funded by a personal bank
loan pursuant to which Mr. Kirschen has pledged most of his MerchantOnline
common stock. He is currently in default in making interest payments on the
loan.

        MerchantOnline has an outstanding note payable of $270,000, acquired in
the Web Financial Services acquisition, to Lee Goldstein, vice president and
director. Mr. Goldstein's note accrues interest at the rate of 9% per annum and
is due in full on April 30, 2003. In October 2000, MerchantOnline borrowed in
the form of a note payablefrom Robert Hausman, its chief administrative officer,
$121,000, bearing interest at 9%. The note is payable on demand no later than
March 31, 2001.

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<PAGE>

        In January 2000 MerchantOnline entered into an investment agreement with
Swartz Private Equity LLC to sell up to $35 million of common stock. This
agreement was terminated in December 2000 prior to any shares being issued or
sold. MerchantOnline is required to pay a $200,000 termination fee to Swartz
which it has not yet paid due to the cash shortfall.

        In November 2000, the executive officers agreed to a 10% salary deferral
until sufficient funding was obtained. In December 2000 an additional 10%
deferral was imposed and certain officers have not taken salaries since December
2000. In March 2001, a salary cap of $125,000 was imposed for all officers until
the cash position improves and any increases are subject to board approval. As
discussed under "Recent Developments" above, MerchantOnline may be required to
pay obligations under terminated employment agreements.

        Also as described above under "Recent Developments", MerchantOnline owes
Innovonics $1,440,000 and Dereck Clark, president of Innovonics, has sent a
letter seeking to unwind the acquisition for failure to pay that amount.

        Subsequent to October 31, 2000, MerchantOnline has had significant cash
flow problems. Accounts payable have increased significantly from approximately
$735,839 at October 31, 2000 to approximately $1.8 million as of March 15, 2001.

        Effective January 31, 2001, MerchantOnline's employee leasing company
effectively terminated all MerchantOnline employees due to MerchantOnline's
inability to fund its payroll and related obligations to the employee leasing
company. Approximately $270,000 is owed to the employee leasing company,
including approximately $160,000 of unpaid payroll taxes. MerchantOnline is
currently providing sporadic advances to its employees until such time as the
past due payroll obligations can be met. There is also approximately $200,000 of
unpaid salaries in addition to the funds owed to the employee leasing company.

        As described above under "Recent Developments," in March 2001, James
Gitney gave MerchantOnline notice that he deemed his employment agreement to be
terminated by him for "good reason", which under the terms of his agreement
would require a payment of $600,000 plus unpaid salary, benefits and expenses of
approximately $60,000. MerchantOnline and Mr. Gitney are negotiating to settle
this matter. Other persons have recently submitted similar letters to cure
breaches under their employment agreements.

        As of March 15, 2001, MerchantOnline has not paid $44,000 in cash that
is currently due under an agreement with a third party to acquire source code
for a software platform further described in "Recent Developments" above, which
has resulted in a default under the agreement. On March 15, 2001 MerchantOnline
received a letter from counsel to the developer stating that it is in default
under this agreement for failure to pay the $44,000 cash fees due upon the
certification of the most recent four platforms and that the agreement was
deemed terminated. The letter requested MerchantOnline to immediately cease
using the software. Since the letter was written, MerchantOnline has orally
agreed to become current by March 31, 2001 and the developer has agreed to
forebear until that date. Failure to cure this default will result in
MerchantOnline's inability to use the platform and ultimately would result in
the return of the source code to the third party.

        Subsequent to October 31, 2000, $1,118,565 was raised in private
placements, of which $425,000 was raised in March 2001 at $.25 per share.
MerchantOnline continues to actively seek cash from investors, vendors and
strategic partners. In addition to private placement funds, in 2001, $185,000
was received under NewCash license agreements and additional payments are
expected shortly. Discussions are also ongoing with strategic investors.
Commitments have been received for an aggregate of approximately $400,000 per
month from three existing investors, although there is no guarantee that the
funds will be available when needed.

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<PAGE>

        Based on its existing agreements, MerchantOnline expects to generate
positive cash flows from operations by the end of calendar 2001. However the
cash needs until that time is expected to be approximately $5.0 million. If
MerchantOnline is unable to obtain additional funding on satisfactory terms in
the near future, we will have to modify our business plan, reduce or discontinue
some or all of our operations, seek a buyer for substantially all of our assets
or seek bankruptcy protection. All of these conditions raise substantial doubt
about MerchantOnline's ability to continue as a going concern.

        FACTORS THAT MAY AFFECT FUTURE RESULTS

        You should carefully consider the following risks in evaluating
MerchantOnline. The risks described below are not the only ones that we face.
Additional risks that we do not yet know of or that we currently think are
immaterial may also impair our business operations. Our business, operating
results or financial condition could be materially adversely affected by any of
the following risks. The trading price of our common stock could decline due to
any of these risks, and you may lose all or part of your investment. You should
also refer to the other information set forth in this Report, including our
financial statements and the related notes.

        MerchantOnline cautions readers that certain important factors may
affect MerchantOnline's actual results and could cause those results to differ
significantly from any forward-looking statements made in this report or
otherwise made by or on behalf of MerchantOnline.

WE NEED ADDITIONAL CAPITAL TO CONTINUE OUR OPERATIONS AND MAY NOT BE ABLE TO
OBTAIN IT IN A TIMELY FASHION OR ON SATISFACTORY TERMS.

        We have been operating with limited cash resources and need to obtaine
additional funds to continue our planned operations. Since October 2000, we have
not had sufficient cash to fund our operations and have laid off staff and
increased our payables significantly. We have also not paid approximately
$160,000 in payroll taxes and owe over $300,000 in additional payroll
obligations. If we are unable to obtain additional funding on satisfactory terms
in the near future, we will have to modify our business plan or reduce or
discontinue some or all of our operations. Our short-term and long-term ability
to meet our liquidity requirements and to continue operations will depend on our
ability to:

o       raise additional capital;
o       sell PC Pay devices at a profit; and
o       adjust to competitive and technological advances that may require us to
        modify the design of our products under development.

        We have met our capital needs from the sale of our common stock and
loans of approximately $1.9 million from our chief executive officer. We are in
the process of negotiating additional financing from third parties. As of March
20, 2001 we have commitments from three existing shareholders to fund up to
$400,000 per month for up to six months, although there is no guarantee that the
funds will be available when needed.

IF WE FAIL TO FUND INNOVONICS IN THE NEAR TERM, THEN THE ACQUISITION TRANSACTION
MAY BE UNWOUND.

        Our acquisition agreement for Innovonics required us to place $1.5
million in escrow for Innovonics' working capital within 30 days of closing. In
September 2000 we reached an agreement with Dereck Clark, Innovonics president
and one of our directors, pursuant to which we paid $200,000 and have agreed to
pay an additional $300,000 by September 15, 2000 and $200,000 per month from
October 2000 until April 2001. We have provided only $60,000 in funding for
Innovonics operations since September 1, 2000. As of March 20, 2001 we owed
Innovonics $1,440,000. As a result of the failure to pay, in March 2001, Mr.
Clark sent a letter on behalf of Innovonics shareholders to exercise the rights
under the merger agreement to unwind the transaction. The unwind would involve
MerchantOnline returning the 90.1% of the Innovonics shares that it owns to the

                                       26
<PAGE>

original Innovonics shareholders and these shareholders returning to
MerchantOnline the 10,000,000 shares and options issued in the transaction. As
of March 20, 2001, Mr. Clark has not agreed to withdraw the letter but has
indicated a continued willingness for an unspecified period of time to seek an
acceptable solution. MerchantOnline cannot guarantee that Mr. Clark will
withdraw his letter or will even continue discussions.

WE MAY HAVE TO ISSUE A SIGNIFICANT NUMBER OF SHARES DUE TO ADJUSTMENTS IN THE
INNOVONICS AND WEB FINANCIAL ACQUISITION AGREEMENTS.

        The acquisition agreements with Innovonics and Web Financial each
provide that if on the first anniversary of the acquisition the value of the
shares issued is not at least $25 million, then additional shares will be
issued. Assuming a $.50 price of the common stock, we would be required to issue
an additional 47.5 million shares to the former Web shareholders on April 20,
2001 and 40 million shares to the former Innovonics shareholders on May 15,
2001. We have been negotiating with shareholders of both companies to issue a
far fewer number of shares. The Innovonics shareholders may waive this right if
certain conditions are met and the Web Financial shareholders have been offered
2,000,000 shares to cancel their right if certain conditions are met. Failure to
successfully negotiate with these shareholders will cause significant dilution
to existing shareholders. Further, we only have approximately 25,000,000
additional shares available, so if we were required to issue in excess of that
amount, we would need shareholder approval to amend our articles of
incorporation to authorize additional shares so as to not be in default under
these agreements.

WE ARE A NEW BUSINESS OPERATING IN A DYNAMIC AND TOTALLY NEW MARKET AND HAVE NOT
YET RECOGNIZED SIGNIFICANT REVENUES OR SHOWN A PROFIT.

        We commenced operations in 1998 and we have not yet recognized
significant revenues or operated at a profit. Our limited history and the lack
of history regarding both our PC Pay device and online credit card processing
offers little information on which to base projections of future profitability.
You should consider risks inherent to early-stage businesses and the volatility
of emerging technology. Our viability will depend on our ability to anticipate
changes in e-commerce technology and avoid the pitfalls associated with new
businesses. Ongoing concerns include:

        o   Our ability to implement our sales and marketing strategy.
        o   The need to develop and manage strategic relationships to maximize
            public recognition of our products and services.
        o   The need to maintain a strong management team. Management must be
            decisive to realize our growth strategy but flexible to deal with
            the tactical needs of a company competing in a constantly changing
            market place.
        o   Our ability to attract new customers.
        o   Our ability to implement new technologies. The need to grow and
            maintain our programming and technical staff.
        o   The need to raise additional capital if necessary.

        If we do not succeed in addressing these risks, our business will likely
be adversely affected.

WE MAY CONTINUE TO EXPERIENCE LOSSES, WHICH COULD DECREASE THE VALUE OF OUR
STOCK.

        As of October 31, 2000, we had an accumulated deficit of $20,367,080 and
losses have continued since then. Since we started our business, our revenues
have been small compared to our expenses. Our ability to generate significant
revenue remains uncertain. We expect to continue to incur operating losses at
least through the third quarter of 2001, and perhaps for some time thereafter.
We may never achieve or be able to sustain profitability.

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<PAGE>

OUR QUARTERLY OPERATING RESULTS WILL VARY WIDELY, WHICH MAY AFFECT OUR STOCK
PRICE DUE TO THE EMPHASIS PLACED ON QUARTERLY RESULTS BY MANY INVESTORS.

    Our quarterly operating results have varied and probably will continue to do
so because of circumstances beyond our control, including:

    o   Sales of PC Pay devices and other products could vary significantly from
        quarter to quarter.
    o   Use of PC Pay devices and other services could be seasonal, such as
        increasing near the holidays.
    o   Our setup fees have varied widely as market conditions have driven us to
        deeply discount our services to compete while establishing our market
        share. In some cases, our customers pay one-time fees to acquire our
        payment services. The timing of the recognition of fees varies, which
        contributes to quarterly fluctuations in revenues. In addition, our
        resellers often integrate our services with their e-commerce solutions.
        The realization of these income streams is therefore unpredictable.
    o   Our e-commerce service is relatively new, and the pricing structures and
        timing of revenues is likewise unpredictable.
    o   As part of a long-term strategy of forgoing short-term gains, we may
        make pricing, marketing or licensing decisions that may adversely affect
        our quarterly revenues or increase our costs in the short run.
    o   If cash is available, we intend to increase our operating expenses in
        order to implement additional e-commerce services, including commercial
        roll-out of the PC Pay, end user technical support, advertising, and
        marketing services.
    o   Extraordinary events such as litigation or acquisitions could adversely
        affect our operating results from one reporting period to the next.

    For these reasons, quarterly results will not necessarily be a reliable
indication of future performance. Because of all of the foregoing
considerations, it is likely that our quarterly operating results may
intermittently be below the expectations of market analysts, which may
negatively affect the value of our common stock.

WE FACE INTENSE COMPETITION, WHICH COULD AFFECT OUR REVENUES AND MARKETS

        We face intense competition from companies offering both software and
hardware solutions in our markets. Some of these solutions are more appealing to
certain potential customers than our product. Further, some potential customers
may be investors in these entities, which may decrease the likelihood that these
companies will become our customers. Some market analysts believe that a
software solution is more desirable than a hardware solution such as the PC Pay
device.

        We have identified at least ten companies, many of which are still
relatively small, that provide real-time credit card processing on the Internet.
Currently, there are no providers of this service that are dominating leaders in
the market. Large organizations that are technology- or banking-based are
entering the industry, most of which offer credit card processing as the core
service. Many offer related products typically by partnering with other
companies to provide services that the credit card processor does not provide
in-house. We expect competition to intensify, as the viability of Internet
business becomes more apparent to the buying public.

        Most of our competitors have operating histories, name recognition,
installed customer bases, financial resources, technical resources, and
marketing resources that exceed ours. Furthermore, many of our potential
competitors have established distribution channels that they will undoubtedly
use to bundle competing products. If these competitors bundle competing products
for their customers, it could adversely affect our ability to market our
services.

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<PAGE>

        Competition could very well compel us to reduce prices. Profitability
could thus only be maintained as a result of an increase in volume or a
reduction of operating costs, which may not be feasible.

WE COULD BE HELD RESPONSIBLE FOR UNAUTHORIZED CREDIT CARD CLAIMS AND BE LIABLE
FOR UNAUTHORIZED PAYMENTS.

        It is possible that we could be held responsible for claims that
payments presented using our products are not authorized by the holder of the
account on which they are drawn. If we were found responsible for unauthorized
payments we could be liable for the amount of the unauthorized payment as well
as other indirect or consequential damages, such as overdraft charges or damage
to the account holders' credit rating. Any findings of such liability could also
significantly impact our marketing of these products and could cause our
business to suffer.

TO BE SUCCESSFUL, WE NEED FOR OUR PC PAY DEVICE TO BE ACCEPTED BY THE MARKET.

        Broad acceptance of our products is critical to our success because a
majority of our revenues for the next year to 18 months are expected to be
derived from PC Pay product sales. One impediment to widespread acceptance of
the PC Pay device is that standards for hardware, data transmission, and user
interfaces are still emerging. Until one or more standards emerge, our
development plans must be contingent on a multiplicity of possible standards.
Our technologies have not been accepted as standard. To be successful, we must
obtain widespread acceptance of our technologies, or modify our products and
services to meet whatever industry standards do ultimately develop. It is not
certain that we will be able to do either. Further if the unwind occurs, we may
not have the right or ability to market PC Pay devices.

IF WE EXPERIENCE FAILURES IN OUR PAYMENT PROCESSING SYSTEM, OUR CUSTOMERS WILL
BE INTERRUPTED, WHICH WOULD HARM OUR BUSINESS AND REPUTATION.

        Our business systems depend on the smooth operation of computer systems
that may be affected by circumstances beyond our control. Events that could
cause system interruptions include:

        o       Fire
        o       Earthquake
        o       Hurricane
        o       Power loss
        o       Telecommunications failure
        o       Unauthorized entry or other events
        o       Threats by hackers or disgruntled employees

        Our operations center in California provides support for our services.
We do not yet have a backup site, and if this site should cease operations
because of a power outage, fire, or natural disaster, then we would not be able
to process transactions. Finally, although we back up data as a matter of
course, and take other measures to protect against loss, there is still some
risk of such losses. A system outage or data loss could adversely affect our
business.

        Despite the security measures we maintain, our systems may be vulnerable
to computer viruses, hackers, rogue employees or similar sources of disruption.
Any interruptions in our operations could have a material adverse effect on our
business. Any problem of this nature could result in significant liability to
customers or financial institutions and may deter potential customers from using
our services. We attempt to limit this sort of liability through back-up
systems, contractual provisions and insurance. However, we cannot assure you
that these contractual limitations would be enforceable, or that our insurance
coverage would be adequate to cover any liabilities we might sustain.

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<PAGE>

OUR RESULTS MAY SUFFER IF WE ARE UNABLE TO ATTRACT AND RETAIN QUALIFIED
MANAGEMENT AND TECHNICAL PERSONNEL.

        Our performance is dependent on the performance of our executive
officers and key employees. We need to attract, retain and motivate high quality
personnel, both management and technical. We have recently lost some management
personnel due to funding problems. The loss of the services of any of our key
employees, particularly our founder and chief executive officer Tarek Kirschen,
and Dereck Clark, president of our Innovonics subsidiary, could have a material
adverse effect on us. Our future success also depends on our continuing ability
to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for these employees is intense and increasing.
We may not be able to attract, assimilate or retain qualified technical and
managerial personnel in the future, and the failure of us to do so would have a
material adverse effect on our business.

MOST OF OUR PROCESSING AGREEMENTS ARE SHORT TERM AND WE CAN LOSE CLIENTS AND
REVENUES.

        Our standard customer agreements are short-term and can be terminated
without cause by either party. We expect that there will be terminations and
non-renewals from time to time and that we may not be able to replace all of
these clients. Our financial performance could be damaged by a significant
number of terminations or non-renewals.

WE WILL HAVE SIGNIFICANT DEPRECIATION AND AMORTIZATION CHARGES IN FUTURE PERIODS
THAT WILL AFFECT OUR OPERATING RESULTS.

        As a result of our three recent acquisitions, we will have a non-cash
depreciation and amortization charge of at least $4.7 million per quarter for
the next few years. This charge may have the result of eliminating any operating
income that we may have during such periods.

WE MAY NOT BE ABLE TO PROTECT OUR PATENTS AND PROPRIETARY TECHNOLOGY, WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS IF COMPETITORS USE OUR
TECHNOLOGY.

        Our ability to compete effectively in the e-commerce industry may depend
on our success in developing and marketing our products and services and/or
acquiring other suitable e-commerce businesses and protecting their proprietary
technology, both in the United States and abroad. The patent positions of
technology companies generally involve complex legal and factual questions.
There can be no assurance that any patent that we apply for will be issued, or
that any patents issued will not be challenged, invalidated, or circumvented, or
that the rights granted thereunder will provide any competitive advantage. We
may incur substantial costs in defending any patent or license infringement
suits or in asserting any patent or license rights, including those granted by
third parties, the expenditure of which we might not be able to afford.

        We have been issued a number of U.S. patents and have filed additional
U.S. patent applications and various foreign patent applications relating to our
PC Pay device. We expect to apply for additional U.S. and foreign patents in the
future. The issuance of a patent is not conclusive as to its validity or as to
the enforceable scope of the claims of the patent. We cannot assure you that:

        o   our patents or any future patents will prevent other companies from
            developing similar or functionally equivalent products or from
            successfully challenging the validity of our patents;
        o   any of our future processes or products will be patentable;
        o   any pending or additional patents will be issued in any or all
            appropriate jurisdictions;
        o   our processes or products will not infringe upon the patents of
            third parties; or
        o   we will have the resources to defend against charges of patent
            infringement by third parties or to protect our own patent rights
            against infringement by third parties.

                                       30
<PAGE>

        We could be materially adversely affected if we fail to avoid
infringement of the patent or proprietary rights of others or to protect our
patent rights.

        We also rely on trade secrets and proprietary knowledge, which we
generally seek to protect by confidentiality and non-disclosure agreements with
employees, consultants and licensees. We cannot assure that these agreements
will not be breached, that we will have adequate remedies for any breach or that
our trade secrets will not otherwise become known by competitors.

        Although we have and will continue to enter into confidentiality and
invention agreements with our employees and consultants, there can be no
assurance that such agreements will be honored or that we will be able to
adequately protect our rights to our non-patented trade secrets and know-how.
Moreover, there can be no assurance that other individuals or entities will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets and know-how. In
addition, we may be required to obtain licenses to patents or other proprietary
rights from third parties. There can be no assurance that any licenses required
under any patents or proprietary rights would be made available on acceptable
terms, if at all. If we do not obtain required licenses, we could encounter
delays in product development or find that the development, manufacture, or sale
of products requiring such licenses could be foreclosed.

WE ARE DEPENDENT ON THE ACCEPTANCE BY INTERNET USERS OF ONLINE PAYMENTS IN
E-COMMERCE.

        Use of the Internet by businesses and consumers as a medium for commerce
is at an early stage of development. Various methods of online payments have
developed more slowly. E-commerce is a relatively recent development. We cannot
be certain that acceptance and use of the Internet will continue to develop or
that a sufficiently broad base of merchants and consumers will adopt, and
continue to use, the Internet to exchange goods and services. Assuming
e-commerce continues to grow, for us to be successful, merchants and consumers,
need to become comfortable with various payment systems that are available.

WE MAY NOT BE ABLE TO PROTECT OUR TRADENAMES AND DOMAIN NAMES AGAINST ALL
INFRINGERS, WHICH COULD DECREASE THE VALUE OF OUR BRAND NAME AND PROPRIETARY
RIGHTS.

        We currently hold the Internet domain name "merchantonline.com" as well
as various other related names and we use "MerchantOnline" as a tradename.
Domain names generally are regulated by Internet regulatory bodies and are
subject to change and may be superseded, in some cases, by the laws, rules and
regulations governing the registration of tradenames and trademarks with the
United States Patent and Trademark Office and certain other common law rights.
In the event the domain registrars are changed, new ones are created or we are
deemed to be infringing upon another's tradename or trademark, we could be
unable to prevent third parties from acquiring or using, as the case may be, our
domain name, tradenames or trademarks, which could adversely affect our brand
name and other proprietary rights.

OUR LIMITED MARKETING AND SALES RESOURCES COULD PREVENT US FROM EFFECTIVELY
MARKETING OUR PRODUCTS AND SERVICES

        We have limited internal marketing and sales resources and personnel. In
order to market our products and services, we will have to develop a marketing
and sales force with technical expertise and distribution capability or
outsource these duties to independent contractors. There can be no assurance
that we will be able to recruit and retain skilled sales, marketing, service or
support personnel, that agreements with distributors will be available on terms
commercially reasonable to us, or at all, or that our marketing and sales
efforts will be successful. Failure to successfully establish a marketing and
sales organization, whether directly or through third parties, would have a
material adverse effect on our business, financial condition, cash flows, and
results of operations. To the extent that we arrange with third parties to

                                       31
<PAGE>

market our products or services, the success of such products and services may
depend on the efforts of such third parties. There can be no assurance that any
of our proposed marketing schedules or plans can or will be met.

A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK MAY BE SOLD IN THE FUTURE,
WHICH COULD AFFECT THE MARKET PRICE

        Of the 62,932,218 shares of our common stock currently issued and
outstanding, approximately 53 million shares are "restricted securities" as that
term is defined under the Securities Act and may only be sold pursuant to an
effective registration statement under the Securities Act or in compliance with
Rule 144 under the Securities Act or other exemption from registration. Our
chief executive officer and largest shareholder has a bank loan pursuant to
which he has pledged assets that include most of his MerchantOnline common
stock. He has lent approximately $1.9 million proceeds from the loan to us. He
is currently in default in making interest payments on the loan. As a result of
the default on the loan, the lender is able to sell the shares into the market
although it has not done so and has indicated a willingness to negotiate a
revised payment schedule. Future sales of shares of common stock by existing
shareholders or by this lender under Rule 144 could materially adversely affect
the market price of our common stock. We cannot predict the effect, if any, that
market sales of common stock or the availability of such shares for future sale
will have on the market price of the common stock prevailing from time to time.

THE ANTI-TAKEOVER PROVISIONS OF OUR CHARTER DOCUMENTS AND FLORIDA LAW COULD
ADVERSELY AFFECT SHAREHOLDERS IF A THIRD PARTY THREATENS A TAKEOVER.

        Our articles of incorporation authorize 25,000,000 shares of preferred
stock, none of which are issued and outstanding. As provided in our articles of
incorporation, preferred stock may be issued by our board of directors from time
to time without any action of the shareholders. The board of directors is
empowered, without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely affect the
voting power or the right of the holders of our common stock. The preferred
stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control. Although we have no
present intention to issue any preferred stock, there can be no assurance that
we will not do so in the future.

        Certain provisions of our articles of incorporation and bylaws may have
anti-takeover effects and may delay, defer or prevent a takeover attempt of
MerchantOnline. In addition, Florida has enacted legislation that may deter or
hinder takeovers of Florida corporations. The Florida Control Share Act
generally provides that shares acquired in excess of certain specified
thresholds will not have any voting rights unless such voting rights are
approved by a majority of the corporation's disinterested shareholders. The
Florida Affiliated Transactions Act generally requires supermajority approval by
disinterested shareholders of certain specified transactions between a public
corporation and holders of more than 10% of the outstanding voting shares of the
corporation or their affiliates.

OUR COMMON STOCK IS TRADED ON THE OTC BULLETIN BOARD, WHICH IS HIGHLY VOLATILE
AND PRECLUDES CERTAIN INVESTORS FROM PURCHASING OUR SHARES.

        Our common stock is currently traded on the OTC Bulletin Board and is
not listed for trading on an exchange or Nasdaq. An issuer must meet certain
quantitative criteria relating to its total assets, its capital and the trading
prices of its securities to be included on an exchange or Nasdaq. In August 2000
we applied for listing on the American Stock Exchange. Due to market conditions,
in March 2001 we withdrew our application, although we intend to reapply when
our stock price is higher. We cannot guarantee you that we will ever by listed.
As a result, you may find it more difficult to dispose of, or to obtain adequate
quotations as to, the prices of the common stock.

                                       32
<PAGE>

THE VOLATILITY OF OUR STOCK PRICE COULD AFFECT THE VALUE OF YOUR INVESTMENT IN
OUR STOCK

        The market prices for securities of companies engaged in Internet
development activities have been and historically are highly volatile. The
trading price of our common stock has been, and in the future is expected to be,
volatile and we expect to experience further market fluctuations as a result of
a number of factors.

        The market price of our common stock may be impacted by:

o       announcements of technological innovations or new products by us or our
        competitors;
o       delays in the introduction of our products;
o       developments or disputes concerning patent or proprietary rights;
o       publicity regarding products under development by us or our competitors;
o       regulatory developments in both the U.S. and foreign countries;
o       privacy concerns;
o       the timing of sales of common stock by selling shareholders;
o       economic and other external factors;
o       period-to-period fluctuations in financial results;
o       the volatility of the market price for our common stock; and
o       reported losses.

        Our common stock also could be subject to fluctuations in response to
the above and other more specific factors. The market prices of equity
securities of technology companies generally and Internet-related companies in
particular, the business in which we operate, is characterized by highly
volatile stock prices.

MANAGEMENT HAS THE ABILITY TO CONTROL OUR AFFAIRS AND OPERATIONS BECAUSE THROUGH
OWNERSHIP OF OUR COMMON STOCK.

        Our directors, officers and principal shareholders currently own
approximately 61% of the outstanding common stock. Management has the ability to
control our affairs and operations.

ITEM 7.  FINANCIAL STATEMENTS

        The Financial Statements are located after the signature page.

        Also included are financial statements of Innovonics for the period from
May 15, 2000 to October 31, 2000, as Innovonics has been accounted for on the
equity method.

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

None

                                       33
<PAGE>

PART III

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

        The following table sets forth the names, ages and positions held for
MerchantOnline's directors, executive officers and significant employees.

<TABLE>
<CAPTION>
NAME                      AGE    POSITION

<S>                       <C>    <C>
Tarek S. Kirschen         39     Chairman of the Board, Chief Executive Officer and
                                 President
Robert L. Hausman         45     Vice President and Chief Administrative Officer
Michael D. Karsch         40     Vice President, General Counsel and Secretary
Lee Goldstein             63     Vice President  and Director
Dereck Clark              42     Director and President of Innovonics, Inc.
Robert Hildreth           66     Director
Scott Dueweke             36     Vice President Strategic Development
Jeffrey L. Ice            38     Chief Technology Officer--East Coast Operations
Jim Terhune               32     Vice President IT and Development-West Cost
                                 Operations
</TABLE>

--------------------

        TAREK S. KIRSCHEN has been President and Chief Executive Officer since
February 1999. Previously, and since its inception in November 1997, he was
founder and served as President and CEO of CreditCo, Inc., MerchantOnline's
predecessor company. Mr. Kirschen is an entrepreneur with experience in
marketing and management of technology-based companies. From May 1997 through
November 1997, Mr. Kirschen was employed as President of Worldnetcard, Inc., Ft.
Lauderdale, Florida, a company which issued secure credit cards over the
Internet. From January 1997 through April 1997, Mr. Kirschen was self-employed
as a consultant to Net-Tel, Inc., Ft. Lauderdale, Florida, a long distance
telephone reseller. From February 1993 through December 1996, Mr. Kirschen held
a marketing position with Worldtel Saver, Inc., Miami, Florida, a company, which
sold pre-paid telephone calling cards.

        ROBERT L. HAUSMAN has been Chief Administrative Officer since March 2000
and acting Chief Financial Officer since January 2001. From 1997 to December
1999, he was president of American Risk Management Group, Inc., formerly known
as Coventry Industries Corp., a public company engaged in the fire protection
distribution and supply and other businesses. He started the fire protection
distribution company, Federal Supply, in 1994 and was president until its
acquisition by American Risk in 1997. From 1978 to 1994; Mr. Hausman was a
principal in a specialty textile manufacturing company in New York.

        MICHAEL D. KARSCH has been Vice President, General Counsel and Secretary
since June 2000. He has 15 years experience representing public companies. From
June 1998 to June 2000, he was affiliated with the law firm of Broad and Cassel
in Miami and Boca Raton, Florida, as partner and counsel. From May 1997 to May
1998 he was a partner in the law firm of Bernstein and Wasserman and from June
1996 to March 1997 he was Executive Vice President of US Diagnostic, Inc., a
public company owning and operating diagnostic imaging centers. From 1990 to
1996 he was affiliated with the law firm of Bachner, Tally, Polevoy & Misher in
New York, as a partner and associate. From 1986 to 1990 he was an associate at
Skadden, Arps, Slate, Meagher & Flom in New York.

        LEE GOLDSTEIN has been a director and Vice President of Business
Development since April 2000. Mr. Goldstein was formerly president of Web
Financial Services, which MerchantOnline acquired in April 2000, since its
founding in 1999. He was President and CEO of Virginia Design Packaging from1984
to 1997, a major manufacturer, printer and distributor of injection molded
plastic packaging. Mr. Goldstein was also a member of the board for the Society

                                       34
<PAGE>

of Plastic Industries, which developed ISO plastic standards and national
recycling symbols for plastics including packaging.

        DERECK B. CLARK has been a director since May 2000 when MerchantOnline
acquired Innovonics. He is the co-founder and has been president of Innovonics
since 1991. For over seven years Mr. Clark worked at Honeywell in Phoenix, where
he was the systems lead engineer directing Honeywell engineers and Chengdu Aero
Instrument Corporation engineers from Chengdu, China during the joint
development of the MD-90 Central Air Data Computer. He helped define and develop
the flight management system for the Airbus A-320 and vertical guidance system
for five corporate jets, including the Gulfstream G-IV. He also worked for
United Airlines for over four years in the United Airlines' engineering
department. He served in the United States Air Force and has four college
degrees.

        ROBERT HILDRETH, JR., has been a director since March 2000. He has been
President of Hildreth Associates, a consulting firm since 1988, and was formerly
the International Director of the law firm of LeBouef, Lamb, Leiby & McRae in
1992 to 1993, a Senior Utility Advisor to Goldman Sachs & Co. in 1990 to 1992, a
Managing Director of Investment Banking for Merrill Lynch and a Director of
Merrill Lynch International Bank in London from 1963 to 1988. Mr. Hildreth is
also the chairman of the board of Intraco Systems, Inc., a provider of
application service provider and integrator of speech recognition based products
and services.

Significant Employees

        SCOTT DUEWEKE has been Vice President of Strategic Development since May
2000. After graduating from college in 1986, Scott was appointed by President
Reagan to the U.S. Agency for International Development at the U.S. Department
of State. He then went on to work for Owens Online from 1989 to 1992 and
Lexis/Nexis from 1992 to 1994 before joining NaBANCO/First Data in 1994 in the
field of secure ecommerce payments. Mr. Dueweke joined IBM in 1996 as Marketing
Manager for the Electronic Payments and Certification Group of the Internet
Division. There he worked with companies around the world in the area of secure
internet payments and the use of digital certificates. Scott joined Cardservice
International in June 1999 and focused on creating programs and partnerships to
meet the secure payments needs of the small and medium businesses community.
Chief among his accomplishments there was the creation and branding of the
NanoMerchant offering which is reshaping the payments world through its use of
transactional pricing and through allowing any individual to accept credit cards
as payment.

        JEFFREY L. ICE has been Chief Technology Officer--East Coast Operations
since April 2000 when MerchantOnline acquired Web Financial Services. Mr. Ice
was a founder and vice president research and development of Web Financial
Services since February 1999 and was head of research and development of Pipe
Dream, Inc., a company engaged in broadcasting over the Internet, from 1995
through 1999. From 1994 to 1996, Mr. Ice worked for International Business
Machines Corporation and was in charge of converting IBM's voice recognition
products to Windows 95 and NT. From 1982 to 1994 he was employed by StreetWise
Systems, Inc. developing premium finance software for loan institutions.

        JAMES A. TERHUNE has been Vice President of IT and Development since
January 2000 when MerchantOnline acquired Approve.net. Prior to joining
MerchantOnline, from 1998 to 1999, Mr. Terhune was one of the principal
developers of Approve.net, ChargeSolutions.com, and the developer of CS-VPOS
Payment Processing Software currently used by MerchantOnline. From November 1994
to May 1998, he was systems and network engineer for Right Connection from
1995-1999, a San Diego California based e-commerce company. Mr. Terhune is a
highly trained computer programmer and the creator of the Internet Point of Sale
System or IPOSS payment processing system used by many Internet processing
centers.

                                       35
<PAGE>

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

        To MerchantOnline's knowledge, based solely on a review of the copies of
such reports furnished to MerchantOnline and on representations that no other
reports were required, a Form 3 for Don Hughes was not timely filed during
fiscal 2000 as required under Section 16(a) of the Securities Exchange Act of
1934.

RESIGNATION OF DIRECTORS

        On March 13, 2001, Don Hughes resigned as a director. In his letter he
stated that he resigned over what he considered to be unethical business
practices by members of the senior management team of MerchantOnline, some
members of the board of directors and the lack of response in his attempts to
ascertain relevant information to adequately protect the interests of the
shareholders and questionable business practices. MerchantOnline believes that
Mr. Hughes is incorrect, has been provided access to all information that he
requested and that no questionable actions have been taken by member of senior
management. Mr. Hughes has not resigned his employment.

        Further, Mr. Hughes has made a series of claims against MerchantOnline
and has threatened to report MerchantOnline to various authorities for
undisclosed violations. Other than back salaries and expenses owed to him and
payroll taxes owed, Mr. Hughes has not substantiated any of his claims. See Item
3--Legal Proceedings.

        On March 12, 2001, James Gitney resigned when he terminated his
employment agreement. On March 19, 2001, Susan Tedesco and Jim Degracia resigned
as directors. They did not state any disagreements as the reasons for their
resignations.

ITEM 10.  EXECUTIVE COMPENSATION

        The following table summarizes all compensation accrued by
MerchantOnline in each of the last three fiscal years for MerchantOnline's chief
executive officer and each other executive officer serving as such whose annual
compensation exceeded $100,000. Directors of MerchantOnline do not receive cash
compensation for serving in such capacity.

                                                               Long-Term
                                                               Compensation
                           Annual Compensation                 Securities
Name and                   -------------------   Other Annual  Underlying
Principal Position  Year   Salary($)   Bonus     Compensation  Options/SARs (#)
------------------  ----   ---------   -----     ------------ -----------------

Tarek Kirschen      2000   228,333     -            9,757         3,000,000
President and CEO   1999   92,912                   6,600                 -
                    1998   52,000      -            6,600                 -

EMPLOYMENT AGREEMENTS

        During fiscal 2000, we entered into employment agreements with several
of our executive officers.

        In February 2000, MerchantOnline and James Gitney entered into a
three-year employment agreement. The agreement provided for a base salary of
$125,000 until June 30, 2000, $150,000 until December 31, 2000 and $200,000 for
the remainder of the term, periodic bonuses and the granting of 800,000 options
to purchase common stock and vest over the three-year term. The agreement
provides for additional payments upon a change of control or termination without
cause or a termination by Mr. Gitney for "good reason". In February 2001 Mr.
Gitney delivered notice that he considered his agreement to be in default for
failure to pay salary and other items since December. In March 2001 he gave

                                       36
<PAGE>

further notice that he deemed the agreement terminated by him for "good reason"
Mr. Gitney is continuing to work with MerchantOnline in a limited capacity and
is negotiating a severance arrangement.

        In March 2000, MerchantOnline and Robert Hausman entered into a
three-year employment agreement. The original agreement provided for a base
salary of $125,000 until June 30, 2000, $150,000 until December 31, 2000 and
$200,000 for the remainder of the term, periodic bonuses and the granting of
200,000 options to purchase common stock and vest over the three-year term. In
March 2001 the base salary was reduced to $125,000. The agreement provides for
additional payments upon a change of control or termination without cause or a
termination by Mr. Hausman for "good reason". This agreement replaced a
consulting agreement under which Mr. Hausman was previously providing services.

        In April 2000, MerchantOnline, Thomas Walker and Tatum CFO Partners LLP
entered into a three year agreement. The monthly fee was $10,500, of which
$8,750 was paid to Mr. Walker and the remainder to Tatum. Mr. Walker and Tatum
were granted an aggregate of 600,000 options, which vest over three years. The
agreement was terminated effective December 31, 2000. An aggregate of 10,000
options with an exercise price of $.01 were issued to cover accrued salary and
fees and 158,333 options have vested.

        In June 2000, MerchantOnline and Michael Karsch entered into a
three-year employment agreement. The original agreement provided for a base
salary of $150,000, periodic bonuses and the granting of 800,000 options to
purchase common stock and vest over the three-year term. In March 2001 the base
salary was reduced to $125,000. The agreement provides for additional payments
upon a change of control or termination without cause or a termination by Mr.
Karsch for "good reason".

        Effective on the May 2000 closing of the Innovonics transaction,
MerchantOnline, Innovonics and Dereck Clark entered into a five-year employment
agreement pursuant to which Mr. Clark serves as president and chief executive
officer of Innovonics. The agreement provides for a base salary of $175,000,
periodic bonuses and the granting of 2,000,000 options to purchase common stock,
of which 500,000 vested upon execution of the agreement and the remainder vest
over the three-year term. In March 2001 the base salary was reduced to $125,000.
The agreement provides for additional payments upon a change of control or
termination without cause or a termination by Mr. Clark for "good reason".

        In November 2000, Mr. Kirschen and, the above MerchantOnline executive
officers and other management personnel agreed to a 10% salary deferral until
sufficient funding was obtained. In December 2000 an additional 10% deferral was
imposed and certain officers have not been paid a salary since December 2000. In
December Mr. Clark commenced a 20% salary deferral and in February 2001, Mr.
Clark lowered his salary to $125,000 but is currently being paid $1,000 per
month deferring the balance due. In March 2001, Messrs. Kirschen, Hausman and
Karsch amended their agreements to provide for a base salary of $125,000,
subject to review in September 2001 and adjusted upward at least to the amount
set forth in the original agreement if MerchantOnline is properly funded and is
meeting revenue expectations set forth in the business plan. Also, several
officers other than Mr. Gitney have sent letters claiming defaults under their
employment agreements.

                                       37
<PAGE>

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth certain information regarding the
beneficial ownership of the common stock as of March 15, 2001 based on
information provided by each person. Except as otherwise indicated, these
persons have sole voting and investment power with respect to all shares of
common stock listed, which include shares of common stock that such persons have
the right to acquire a beneficial interest within 60 days from the date of this
report.

                                                        BENEFICIAL OWNERSHIP
                    NAME                              SHARES           PERCENT

DIRECTORS AND EXECUTIVE OFFICERS

Tarek S. Kirschen                                   21,100,000 (1)        31.6
Robert L. Hausman                                      948,240 (2)         1.5
Michael D. Karsch                                    1,100,000 (3)         1.7
Lee Goldstein                                        1,605,792 (4)         2.5
Dereck Clark                                         7,384,354 (5)        11.3
Robert Hildreth, Jr.                                   200,000 (6)           *

All directors and executive officers
    as a group (7 persons)                          32,338,386 (7)        45.6

5% OR GREATER HOLDERS

Steven Landau                                            9,450,000        15.0

---------------------
 *Less than 1%

(1)     Includes 17,900,000 shares of common stock owned directly, 200,000 owned
        by a family trust and 3,000,000 shares issuable upon the exercise of
        stock options.
(2)(2)  Includes 148,240 shares and 800,000 shares of common stock issuable
        upon the exercise of stock options.
(3)     Includes 100,000 shares and 1,000,000 shares of common stock issuable
        upon the exercise of stock options.
(4)     Includes 269,750 shares owned by Mr. Goldstein, 273,542 shares held by
        Mr. Goldstein's wife, 162,500 shares held by a family trust and 900,000
        shares issuable upon the exercise of stock options.
(5)     Includes 2,398,417 shares held in a family trust in which Mr. Clark and
        his wife are trustees, 2,000,000 shares in family limited partnerships,
        488,713 shares held jointly by Mr. Clark and his wife, 497,224 shares
        held by a corporation of which Mr. Clark is a principal stockholder and
        president and 2,000,000 shares of common stock issuable upon exercise of
        stock options.
(6)     Includes 200,000 shares of common stock issuable upon the exercise of
        the stock options.
(7)     Includes 23,238,386 shares and 7,900,000 shares of common stock
        issuable upon the exercise of stock options.

                                       38
<PAGE>

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Prior to the merger with MerchantOnline, CreditCo had three
shareholders. Tarek Kirschen owned 60% of the outstanding shares. Doug Blanz
owned 35%, and Kenneth Merkt owned 5%. In a private transaction, Stephen Landau,
who at the time was the father in law of Tarek Kirschen, acquired a 30% interest
in CreditCo from Doug Blanz, who retained a 5% interest in CreditCo.

        In June 2000, MerchantOnline executed a note with Tarek Kirschen,
MerchantOnline's President, providing for him to lend MerchantOnline up to $3
million. The note provided for an interest rate of 13.5%, a loan fee of $35,000
and a maturity date of the earlier of December 31, 2000 or a drawdown under the
Swartz Investment Agreement. At October 31, 2000, $1,914,151 was outstanding. In
December 2000, Mr. Kirschen agreed to extend the note to June 30, 2001 and lower
the interest rate to the prime rate. At February 28, 2001, $1,914,151 was
outstanding, including interest of $55,895.

                                       39
<PAGE>

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

(a)     EXHIBITS

2.4     Agreement and Plan of Reorganization between MerchantOnline and
        Creditco, Inc. are hereby incorporated by reference to the Report on
        Form 8-K as filed with the Securities and Exchange Commission on
        February 24, 1999.
2.5     Merger Agreement dated as of November 30, 1999, by and among
        Approve.net, Inc., a California corporation, Kim Wilson, Jim Terhune and
        Vince Mazziotti and MerchantOnline.com, Inc., incorporated by reference
        to the Form 8-K filed January 19, 2000
2.6     Agreement and Plan of Reorganization dated as of April 3, 2000, by and
        among MerchantOnline.com, Inc., Web Financial Services Corporation and
        WFS Acquisition Corp. incorporated by reference to the Form 8-K filed
        May 5, 2000
2.7     Agreement and Plan of Reorganization dated as of April 24, 2000, by and
        among MerchantOnline.com, Inc., Innovonics, Inc. and Innovonics
        Acquisition Corp. incorporated by reference to the Form 8-K filed May
        30, 2000
2.7.1   Amendment dated May 15, 2000 to Agreement and Plan of Reorganization
        dated as of April 24, 2000, by and among MerchantOnline.com, Inc.,
        Innovonics, Inc. and Innovonics Acquisition Corp. incorporated by
        reference to the Form 8-K filed May 30, 2000
2.8     Amendment No. 2 to Agreement and Plan of Reorganization dated as of
        April 24, 2000, by and among MerchantOnline.com, Inc., Innovonics, Inc.
        and Innovonics Acquisition Corp incorporated by reference to the Form
        S-3 filed September 11, 2000
3.1     Articles of Incorporation and Amendments thereto are hereby incorporated
        By reference to the report filed by Tarcyn Corp. on Form 10-SB with the
        Securities and Exchange Commission on May 27, 1997.
3.2     Bylaws are hereby incorporated by reference to the report filed by
        Tarcyn Corp. on Form 10SB12G with the Securities and Exchange Commission
        on May 27, 1997.
3.3     Articles of Incorporation reincorporating MerchantOnline.com in the
        State of Florida are hereby incorporated by reference to the Report on
        Form 8-K as filed with the Securities and Exchange Commission on
        February 24, 1999.
3.4     Certificate of Designation for Series A Preferred Stock incorporated by
        reference to the Report on Form 8-K as filed with the Securities and
        Exchange Commission on October 19, 1999.
10.1    Consulting Agreement with SBZ Investments, incorporated by reference to
        the Form S-8 filed December 23, 1999
10.2    Employment Agreement between Don Hughes and MerchantOnline.com, Inc.
        dated August 1, 1999, incorporated by reference to the Form 8-K filed
        January 19, 2000
10.3    Employment Agreement between Jim Terhune and MerchantOnline.com, Inc.
        dated August 1, 1999, incorporated by reference to the Form 8-K filed
        January 19, 2000
10.4    Employment Agreement between Vince Mazziotti and MerchantOnline.com,
        Inc. dated February 1, 2000, incorporated by reference to the Form 8-K
        filed January 19, 2000
10.5    Employment Agreement between Tarek Kirschen and MerchantOnline.com dated
        December 3, 1999 incorporated by reference to the Annual Report on Form
        10-K for the year ended October 31, 1999.
10.6    Investment Agreement dated January 5, 2000 between Swartz Private Equity
        LLC and MerchantOnline.com. incorporated by reference to the Annual
        Report on Form 10-K for the year ended October 31, 1999
10.7    Registration Rights Agreement dated January 5, 2000 between Swartz
        Private Equity LLC and MerchantOnline.com. incorporated by reference to
        the Annual Report on Form 10-K for the year ended October 31, 1999
10.8    Form of Swartz Private Equity LLC Warrant incorporated by reference to
        the Annual Report on Form 10-K for the year ended October 31, 1999
10.9    Consulting Agreement dated December 1, 1999 between MerchantOnline.com
        and Robert Hausman incorporated by reference to the Annual Report on
        Form 10-K for the year ended October 31, 1999

                                       40
<PAGE>

10.10   Employment Agreement dated May 15, 2000 among MerchantOnline.com, Inc.,
        Innovonics, Inc. and Dereck Clark incorporated by reference to the Form
        8-K filed May 30, 2000
10.11   Employment Agreement between the Company and James Gitney incorporated
        by reference to the Quarterly Report on Form 10-QSB for the three months
        ended July 31, 2000
10.12   Employment Agreement between the Company and Thomas Walker incorporated
        by reference to the Quarterly Report on Form 10-QSB for the three months
        ended July 31, 2000
10.13   Employment Agreement between the Company and Michael Karsch incorporated
        by reference to the Quarterly Report on Form 10-QSB for the three months
        ended July 31, 2000
10.14   2000 Equity Incentive Plan incorporated by reference to Amendment No. 1
        to the Registration Statement on Form S-3 filed November 14, 2000.
10.15   Employment Agreement dated March 1, 2000 between the Company and Robert
        Hausman
17.1    Letter of Resignation dated March 13, 2001 from Don Hughes as a
        director.

(b)   REPORTS ON FORM 8-K

        During the three months ended October 31, 2000, MerchantOnline filed
amended Reports on Form 8-K with the Securities and Exchange Commission on
August 3, 2000 and August 29, 2000

                                       41
<PAGE>

                                   SIGNATURES

        In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has caused its Annual Report on Form 10-KSB to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       MERCHANTONLINE.COM, INC.

Date:  March 21, 2001                  By: /s/ Tarek Kirschen
                                           -------------------------------------
                                           Tarek Kirschen, President

        In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE                                TITLE                                 DATE
--------------------------------------   ------------------------------------- ----------------------
<S>                                      <C>                                   <C>
/s/ Tarek Kirschen                       Chairman of the Board, President and  March 21, 2001
--------------------------------------   Chief Executive Officer
Tarek S. Kirschen


/s/ Robert L. Hausman                    Vice President and Chief              March 21, 2001
--------------------------------------   Administrative Officer (Acting
Robert L. Hausman                        Principal Financial and Accounting
                                         Officer)


                                         Director
--------------------------------------
Dereck Clark


/s/ Lee Goldstein                        Director                              March 21, 2001
--------------------------------------
Lee Goldstein


/s/ Bob Hildreth, Jr.                    Director                              March 21, 2001
--------------------------------------
Bob Hildreth, Jr.
</TABLE>

                                       42
<PAGE>

                          Index to Financial Statements

MerchantOnline.Com, Inc.

Consolidated Report of Independent Certified Public Accountants..............F-2

Consolidated Balance Sheet...................................................F-3

Consolidated Statements of Operations........................................F-4

Consolidated Statements of Shareholders' Equity..............................F-5

Consolidated Statements of Cash Flows........................................F-6

Innovonics, Inc.

Report of Independent Certified Public Accountants .........................F-23

Balance Sheet ..............................................................F-24

Statement of Operation .....................................................F-25

Statement of Shareholders' Equity ..........................................F-26

Statement of Cash Flows ....................................................F-27


                                       F-1
<PAGE>

Report of Independent Certified Public Accountants

Board of Directors and Shareholders
MerchantOnline.com, Inc.

We have audited the accompanying consolidated balance sheet of
MerchantOnline.com, Inc. and its subsidiaries as of October 31, 2000 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the two years in the period ended October 31, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of
MerchantOnline.com, Inc. and its subsidiaries at October 31, 2000, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended October 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming
MerchantOnline.com, Inc. will continue as a going concern. As more fully
described in Note 2, the Company has incurred recurring operating losses since
inception, had negative cash flow from operations of approximately $5,365,000
for the year ended October 31, 2000 and has negative working capital at October
31, 2000 of approximately $2,558,000. In addition, the Company is in default of
the cash payment obligations in the aggregate amount of $1,440,000 under the
Merger Agreement with its unconsolidated 90.1% owned subsidiary, Innovonics,
Inc., and the former shareholders of Innovonics, Inc. have exercised their right
under the Merger Agreement to effectively unwind the Company's acquisition of
Innovonics, Inc. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.



West Palm Beach, Florida                         /s/ ERNST & YOUNG LLP
March 9, 2001, except for the fifth
and sixth paragraphs of Note 16, as to
which the dates are March 13, 2001 and
March 15, 2001, respectively

                                      F-2
<PAGE>

                            MERCHANTONLINE.COM, INC.

                           CONSOLIDATED BALANCE SHEET

                                OCTOBER 31, 2000
<TABLE>
<CAPTION>
<S>                                                                   <C>
ASSETS
Current assets:
    Cash                                                              $         --
    Accounts receivable                                                     17,690
    Inventory                                                               38,291
    Prepaid advertising                                                    544,754
    Prepaid expenses                                                       101,592
    Other current assets                                                   284,102
                                                                      ------------
Total current assets                                                       699,398

Property and equipment, net                                              1,993,691
Investment in and advances to Innovonics                                30,326,144
Intangible assets, net                                                  29,093,356
Other assets                                                                33,743
                                                                      ------------
Total assets                                                          $ 62,433,363
                                                                      ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                                   $    611,839
   Accrued expenses                                                        536,089
   Other current liabilities                                               274,238
   Notes payable to shareholders                                         2,035,151
   Deferred revenue                                                         87,460
                                                                      ------------
Total current liabilities                                                3,544,777

Note payable to shareholder                                                270,000
Deferred rent                                                               25,610
Other liabilities                                                          114,620
Deferred tax liability                                                  10,912,420

Commitments and contingencies

Shareholders' equity:
   Preferred stock, $0.01 par value - 25,000,000 shares authorized,
      no shares issued and
outstanding                                                                     --
   Common stock, $0.001 par value - 100,000,000 shares authorized,
      60,562,145 shares issued and outstanding                              60,562
   Additional paid-in capital                                           67,872,454
   Accumulated deficit                                                 (20,367,080)
                                                                      ------------
Total shareholders' equity                                              47,565,936
                                                                      ------------
Total liabilities and shareholders' equity                            $ 62,433,363
                                                                      ============
</TABLE>

SEE ACCOMPANYING NOTES.

                                       F-3
<PAGE>

                            MERCHANTONLINE.COM, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS


                                                           OCTOBER 31,
                                                 ------------------------------
                                                     2000              1999
                                                 ------------      ------------
Revenues, net                                    $    248,150      $    204,080

Costs and expenses:
   Costs of revenues                                   72,510           111,064
   Sales and marketing                                309,449         1,296,774
   General and administrative                       4,177,296           310,142
   Research and development                           171,229                --
   Salaries and wages                               2,043,899           410,881
   Amortization of intangibles                      7,645,372                --
   Depreciation and other amortization                128,362            30,649
   Other expenses                                     850,000           455,000
                                                 ------------      ------------
Total costs and expenses                           15,398,117         2,614,510

                                                 ------------      ------------
Loss from operations                              (15,149,967)       (2,410,430)

Other income (expense):
   Interest expense                                  (111,686)          (29,924)
   Interest income                                      3,446                26
   Equity in net loss of Innovonics                (4,089,429)               --
                                                 ------------      ------------

Loss before income tax benefit                    (19,347,636)       (2,440,328)

Income tax benefit                                  1,646,216                --

                                                 ============      ============
Net loss                                         $(17,701,420)     $ (2,440,328)
                                                 ============      ============

Basic and diluted loss per share                 $       (.34)     $       (.07)
                                                 ============      ============

Weighted average shares outstanding                52,528,785        36,446,498
                                                 ============      ============

SEE ACCOMPANYING NOTES.

                                       F-4
<PAGE>

                            MERCHANTONLINE.COM, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                                Common Stock            Additional                                        Total
                                         ---------------------------     Paid-In       Subscriptions    Accumulated    Shareholders'
                                            Shares         Amount        Capital        Receivable        Deficit         Equity
                                         ------------   ------------   ------------    ------------    ------------    ------------
<S>                                        <C>          <C>            <C>             <C>             <C>             <C>
Balance at October 31,1998                 31,500,000   $     31,500   $     18,500    $         --    $   (225,332)   $   (175,332)
   Issuance of stock in reverse merger      3,500,000          3,500         (3,500)             --              --              --
   Issuance of stock in a $.50 private
      placement                                50,000             50         24,950              --              --          25,000
   Issuance of stock in settlement
     of advertising obligation              1,000,000          1,000        434,000              --              --         435,000
   Issuance of stock in exchange
      for consulting services               3,000,000          3,000      1,317,000              --              --       1,320,000
   Issuance of stock for web site
     development                            2,000,000          2,000        848,000              --              --         850,000
   Issuance of stock in $1 private
     placement                              1,000,000          1,000        999,000        (675,000)             --         325,000
   Stock options granted for employees             --             --         53,300              --              --          53,300
   Stock options granted to
     non-employees                                 --             --        425,000              --              --         425,000
   Net loss                                        --             --             --              --      (2,440,328)     (2,440,328)
                                         ------------   ------------   ------------    ------------    ------------    ------------
Balance at October 31,1999                 42,050,000   $     42,050   $  4,116,250    $   (675,000)   $ (2,665,660)   $    817,640

   Proceeds from subscriptions
      receivable                                   --             --             --         675,000              --         675,000
   Issuance of stock in $5 private
      placement                               735,000            735      2,824,265              --              --       2,825,000
   Issuance of stock in $1 private
      placement                             1,125,000          1,125      1,123,875              --              --       1,125,000
   Issuance of stock in $3 private
      placement                               314,632            315        943,581              --              --         943,896
   Issuance of stock for acquisitions      15,538,988         15,539     54,251,620              --              --      54,267,159
   Issuance of stock for software             125,000            125      1,249,875                                       1,250,000
   Issuance of stock in settlements of
      loan obligations                        402,240            402        242,265              --              --         242,667
   Issuance of stock for warrant
      conversions                             271,285            271         19,422              --              --          19,693
   Stock options granted to
      non-employees                                --             --        705,550              --              --         705,550
   Stock warrants and options issued to
      Innovonics employees and                     --             --      2,395,751              --              --       2,395,751
      consultants
   Net loss                                        --             --             --              --     (17,701,420)    (17,701,420)
                                         ------------   ------------   ------------    ------------    ------------    ------------
Balance at October 31, 2000                60,562,145   $     60,562   $ 67,872,454    $         --    $(20,367,080)   $ 47,565,936
                                         ============   ============   ============    ============    ============    ============
</TABLE>

                                       F-5
<PAGE>

                            MERCHANTONLINE.COM, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                                  OCTOBER 31,
                                                                         ----------------------------
                                                                             2000            1999
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
OPERATING ACTIVITIES
Net loss                                                                 $(17,701,420)   $ (2,440,328)
Adjustments to reconcile net loss to net cash
   used in operating activities:
     Depreciation and other amortization                                      128,362          30,649
     Amortization of intangibles                                            7,645,372              --
     Issuance of stock, stock options and warrants for services             2,178,050         760,800
     Equity in net loss of Innovonics                                       4,089,429              --
     Write off of web site development costs                                  850,000              --
     Changes in operating assets and liabilities, net of acquisitions:
       Accounts receivable                                                     11,525          12,362
       Inventory                                                              (38,291)             --
       Prepaid advertising                                                   (481,004)        (63,750)
       Prepaid expenses                                                      (101,592)             --
       Other current assets                                                  (284,102)
       Other assets                                                           (16,445)         (2,704)
       Accounts payable                                                       402,200         135,764
       Accrued expenses and other                                            (503,348)        797,279
       Other current liabilities                                              (10,964)             --
       Deferred revenue                                                        87,460              --
       Deferred tax liability                                              (1,646,216)             --
       Deferred rent                                                           25,610              --
       Other liabilities                                                           --         211,041
                                                                         ------------    ------------
Net cash used in operating activities                                       5,365,374        (558,887)

INVESTING ACTIVITIES
Purchases of property and equipment                                          (604,642)        (23,998)
Cash paid for Approve.net acquisition                                         (31,060)             --
Cash paid for Web Financial acquisition                                      (140,000)             --
Advances to Innovonics                                                     (1,300,000)             --
                                                                         ------------    ------------
Net cash used in investing activities                                      (2,075,702)        (23,998)

FINANCING ACTIVITIES
Proceeds from note payable                                                         --         295,000
Proceeds from warrant conversions                                              19,693              --
Advance to shareholder                                                         (3,252)             --
Proceeds from subscriptions receivable                                        675,000              --
Proceeds from stock issued in private placements                            4,893,896         350,000
Borrowings from shareholders                                                2,217,163              --
Payments on notes payable to shareholder                                     (211,572)        (29,466)
Payments on notes payable                                                    (155,000)        (30,000)
                                                                         ------------    ------------
Net cash provided by financing activities                                   7,435,928         585,534

                                                                         ------------    ------------
Net (decrease) increase in cash
                                                                               (5,148)          2,649
Cash at beginning of the year                                                   5,148           2,499
                                                                         ------------    ------------
Cash at end of the year                                                  $         --    $      5,148
                                                                         ============    ============
</TABLE>

                                       F-6
<PAGE>

<TABLE>
<CAPTION>
                                                                                  OCTOBER 31,
                                                                         ----------------------------
                                                                             2000            1999
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest                                                   $     66,672    $      3,503

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Issuance of common stock for development of web site                     $         --    $    850,000
Issuance of common stock for prepaid consulting services                 $         --    $  1,515,000
Purchase of software through financing arrangement                       $    114,620              --
Issuance of common stock for software purchase                           $  1,250,000              --
Issuance of common stock for settlements of loan obligations             $    242,667              --
Issuance of common stock in Approve.net acquisition                      $  6,660,001              --
Issuance of common stock in Web Financial acquisition                    $ 25,165,938              --
Issuance of common stock in Innovonics acquisition                       $ 22,441,220              --
Issuance of  stock options and warrants to Innovonics employees
    and consultants                                                      $  2,395,751              --
</TABLE>

SEE ACCOMPANYING NOTES.

                                       F-7
<PAGE>

                            MERCHANTONLINE.COM, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           YEAR ENDED OCTOBER 31, 2000


1.  NATURE OF BUSINESS

MerchantOnline.com, Inc. (MerchantOnline) and its subsidiaries (the Company)
provide real time processing of eCommerce transactions by hosting a server that
allows eBusinesses to execute transactions such as online processing of credit
cards over the Internet. The Company charges initial set-up fees and monthly
fees for these services. Innovonics, Inc. a 90.1% owned subsidiary, sells the PC
Pay, a patented hardware device that encrypts sensitive debit/ATM/credit card
and PIN data, prior to data entering a personal computer.

During the fiscal year, MerchantOnline acquired Approve.net, Inc. (Approve.net),
Web Financial Services Corporation (Web Financial) and Innovonics, Inc.
(Innovonics)(see Notes 4 and 5).

2.  MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY

The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has a limited operating history
and has sustained losses since inception and generated minimal revenue. In
addition, the Company has negative cash flow from operations of approximately
$5,365,000 during the year ended October 31, 2000 and had negative working
capital of approximately $2,558,000 at October 31, 2000.

Since October 31, 2000, accounts payable have increased significantly, from
$735,839 to approximately $1.8 million as of March 15, 2001, including $160,000
of unpaid payroll taxes and over $200,000 of unpaid salaries.

Effective January 31, 2001, MerchantOnline's employee leasing company
effectively terminated all MerchantOnline employees due to MerchantOnline's
inability to fund its payroll and related obligations to the employee leasing
company. Approximately $270,000 is owed to the employee leasing company,
including unpaid payroll taxes. MerchantOnline is currently providing sporadic
advances to its employees until such time as the past due payroll obligations
can be met.

On March 9, 2001, James Gitney resigned as executive vice president and chief
operating officer and in February 2001 Angel Rodriguez resigned as vice
president credit/debit card operations. On March 9, 2001, Mr. Gitney gave
MerchantOnline notice that he deemed his employment agreement to be terminated
by him for "good reason", which under the terms of his agreement would require a
payment of $600,000 plus unpaid salary, benefits and expenses of approximately
$60,000. MerchantOnline and Mr. Gitney are negotiating to settle this matter.

On March 2, 2001, MerchantOnline received a letter from counsel representing
Dereck Clark, the minority shareholder of Innovonics, stating that
MerchantOnline is currently in default of the cash payment obligations in the
aggregate amount of $1,440,000 under the Merger Agreement dated April 24, 2000,
as amended on May 15, 2000 and September 1, 2000. The letter stated that Mr.
Clark, acting in his capacity as representative of the former Innovonics
shareholders, has exercised his right to acquire all of the Innovonics shares
currently held by MerchantOnline in exchange for the return of their
MerchantOnline shares and options received in connection with the Merger
Agreement, plus an amount equal to $2.50 per share for each MerchantOnline share
that is not returned to MerchantOnline. The letter also stated Mr. Clark's
intention to seek legal recourse if MerchantOnline does not transfer the
Innovonics shares amicably. Since the date of the letter, MerchantOnline has
been working with Mr. Clark on various funding alternatives with the intent to
have Mr. Clark withdraw this letter. As of March 20, 2001, Mr. Clark has not
agreed to withdraw the letter but has indicated a continued willingness for an
unspecified period of time to seek an acceptable solution. MerchantOnline cannot
guarantee that Mr. Clark will withdraw his letter or will even continue
discussions.

As more fully described in Note 16, the Company has not paid $44,000 in cash
that is currently due under an agreement with a third party to acquire source
code for software platforms, which has resulted in a default of the

                                       F-8
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY (continued)

agreement. Failure to cure this default will result in the Company's inability
to use the platforms and ultimately would result in the return of the source
code to the third party.

Approximately 10 employees were terminated and other employees left and were not
replaced, resulting in a net headcount reduction from 45 to 28 over the last
several months. In addition, management agreed to reduced salaries. These
measures have lowered the monthly cash expenditures by approximately $200,000.
Other cost-cutting options are being studied, including consolidating
MerchantOnline's San Diego processing center in Florida, and other headcount
reductions so that cash expenditures over the next few months will be in line
with anticipated cash inflows.

MerchantOnline continues to actively seek cash from investors, vendors and
strategic partners. Subsequent to October 31, 2000, $1,118,565 was raised in
private placements, of which $425,000 was raised in February and March 2001 at
$.25 per share, mostly from existing shareholders. In 2001, $185,000 was
received under NewCash license agreements and additional payments are expected
shortly. Discussions are also ongoing with strategic investors. Commitments have
been received for approximately an aggregate of $300,000 per month from two
investors, although there is no guarantee that the funds will be available when
needed.

Based on its existing agreements, MerchantOnline expects to generate positive
cash flows from operations by the end of calendar 2001. However the cash needs
until that time is expected to be approximately $5.0 million. If MerchantOnline
is unable to obtain additional funding on satisfactory terms in the near future,
the Company will have to modify its business plan, reduce or discontinue some or
all of its operations, seek a buyer for substantially all of its assets or seek
bankruptcy protection.

There is substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments to reflect the
possible effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
MerchantOnline and its wholly-owned subsidiary, Web Financial. Innovonics, which
is 90.1% owned, is accounted for using the equity method (see Note 5). All
significant intercompany accounts and transactions have been eliminated. The
Company is recording 100% of the net loss of Innovonics in its results of
operations, since the minority shareholder is not required to fund his share of
the net loss.

ACCOUNTS RECEIVABLE

Substantially all of the Company's accounts receivable are due from internet
processing gateway customers. Collateral is not required.

INVENTORIES

Inventories consist of PC Pay devices and are stated at the lower of first-in,
first-out (FIFO) cost or market. Inventory at October 31, 2000 consists of
finished goods.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the shorter of the useful life or the
lease term, which is three years.

                                       F-9
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

PROPERTY AND EQUIPMENT (continued)

In March 1998, the AICPA issued Statement of Position (SOP) 98-1, Accounting for
the Costs of Computer Software Developed for or Obtained for Internal Use. The
SOP requires capitalization of certain costs incurred in connection with
developing or obtaining internal use software. During 1999, the Company
capitalized $850,000 of web site development costs pursuant to this SOP, which
was classified as property and equipment. During 2000, the Company wrote off the
unamortized balance of these web site costs.

LONG-LIVED ASSETS

The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, which requires impairment losses to be
recognized on long-lived assets when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those amounts are less
than the assets' carrying amount. Any write-downs are treated as permanent
reductions in the carrying amount of the assets and are determined based on fair
value of the assets. The Company, based on current circumstances, does not
believe that any long-lived assets are impaired as of October 31, 2000, other
than the website development costs noted above.

INTANGIBLE ASSETS

Goodwill and other intangible assets are being amortized using the straight-line
method over periods ranging from three to five years. Goodwill and other
intangible assets are periodically reviewed to determine if any impairment
exists based upon projected undiscounted net cash flows of the related goodwill
and other intangible assets. The Company, based on current circumstances, does
not believe that any goodwill and other intangible assets are impaired as of
October 31, 2000.

REVENUE RECOGNITION

Revenues from set-up fees are deferred and recognized on a straight-line basis
over a twelve-month period. Revenues from monthly processing fees, transaction
fees and commissions are recorded when earned.

The Company executed a long term licensing agreement for a customer to use its
software. The Company received an upfront software development fee of $75,000
prior to October 31, 2000. The licensing fee will be recognized as earned. Upon
completion and delivery of the software interface, the upfront fee will be
recognized on a straight-line basis over the term of the agreement.

ADVERTISING EXPENSE

The Company accounts for its advertising expense in accordance with SOP 93-7,
Reporting on Advertising Costs, which requires advertising costs to be expensed
as incurred or at the time of first showing. Advertising costs for the years
ended October 31, 2000 and 1999 were approximately $157,000 and $833,000,
respectively.

Prepaid advertising relates to available Internet advertising blocks, which have
been prepaid by the Company.

LOSS PER SHARE

The Company computes loss per share pursuant to SFAS No. 128, Earnings Per
Share. Basic loss per share is calculated based on the weighted average shares
outstanding during the period. Potential common shares relating to outstanding
options and warrants have not been included in the computation of diluted loss
per share as their effect is anti-dilutive for all periods presented.

                                      F-10
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

STOCK-BASED COMPENSATION

SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value
method of accounting for issuance of stock options and other equity investments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period. Pursuant to SFAS No. 123, companies are
encouraged, but not required, to adopt the fair value method of accounting for
employee stock-based transactions. Companies are also permitted to continue to
account for such transactions under Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees and related interpretations,
but are required to disclose in a note to the financial statements pro forma net
income (loss) amounts as if the Company had applied the new method of
accounting.

The Company accounts for employee stock-based compensation under APB No. 25 and
has complied with the disclosure requirements of SFAS No. 123.

INCOME TAXES

Deferred income tax assets and liabilities are determined based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. A valuation allowance is recorded when it
is more likely than not that some portion or all of a deferred tax asset will
not be realized.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments of accounts receivable, accounts payable,
accrued expenses and notes payable approximate fair value.

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 amounts reported in the financial statements and accompanying notes.
Management believes that the estimates utilized in preparing its consolidated
financial statements are reasonable and prudent; however, actual results could
differ from these estimates.

RECLASSIFICATION

Certain amounts in the prior year's financial statements have been reclassified
to conform with the current year's presentation.

4.  ACQUISITIONS

Business combinations, which have been accounted for under the purchase method
of accounting, include the results of operations of the acquired businesses from
the dates of acquisition. Net assets of the companies acquired are recorded at
their fair value at the dates of acquisitions.

On January 7, 2000, the Company issued 4,000,000 shares of its common stock in a
merger in which it acquired all of the outstanding shares of Approve.net and
paid net cash of $31,060. Approve.net's primary business was to provide charge
card processing solutions to Internet merchants by hosting servers that allow
businesses to execute transactions such as online processing of credit cards.
The shares issued in the acquisition were valued at $1.665 per share, as
determined by an independent appraiser. The purchase price has been allocated to
fixed assets of $61,425 and goodwill of $6,629,636, which are included on the
accompanying balance sheet. The goodwill is being amortized on a straight line
basis over a three-year period.

                                      F-11
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


4.  ACQUISITIONS (continued)

On April 19, 2000, the Company issued 2,500,000 shares of its common stock in a
reverse triangular merger with Web Financial. The Company agreed to issue
additional shares to Web Financial if on the first anniversary date of the
transaction, the fair value of the shares issued in the merger, as determined by
the trading price of the stock for a specific period of time, is less than
$25,000,000. Web Financial has pending patents on internally developed software
programs to provide charge card processing solutions through secure ATM/debit
cards to online consumers. In addition, the Company issued 62,500 shares of
common stock to two non-employees in exchange for certain consulting services
related to the Web Financial Services Corporation acquisition. The value of the
services was determined based on the fair value of the common shares or $1.49,
as determined by an independent appraiser, at the date of the transactions and
was included in the purchase price.

The purchase price ($25,882,053) consisted of $420,000 paid to the shareholders
of Web Financial to satisfy liabilities, of which $140,000 was paid in
connection with the closing, the fair value of the shares issued, as determined
by an independent appraiser, adjusted by the guarantee on the share price
($25,165,938), and assumption of a note payable and other liabilities of
$296,115. In accordance with SFAS No. 109, Accounting for Income Taxes, a
deferred tax liability of $4,280,036 was established relating to acquired
identifiable intangible assets resulting in a corresponding increase in
goodwill. The purchase price has been allocated to fixed assets and deposits
($52,997), trademarks ($474,000) and technology ($10,900,000) based on an
independent valuation. The purchase price in excess of the identifiable
intangibles has been allocated to goodwill ($18,735,092). The Company amortizes
the trademarks on a straight line basis over five years. The technology and
goodwill are being amortized on a straight line basis over three years.

The following unaudited pro forma financial information reflects the results of
operations for the twelve-month periods ended October 31, 2000 and October 31,
1999, as if the acquisitions had occurred at the beginning of the respective
periods presented. This unaudited pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the results of
operations in future periods or results that would have been achieved had the
Company, Approve.net and Web Financial been consolidated during the specified
periods.


                                                  Twelve Months Ended

                                          October 31, 2000     October 31, 1999
                                          ----------------     ----------------
               Net revenues                 $    275,019         $    283,279
               Loss from operations          (17,892,372)         (14,006,652)
               Net loss                      (21,981,800)         (14,006,652)
               Net loss per share           $       (.40)        $       (.33)


5.  INVESTMENT IN AND ADVANCES TO INNOVONICS

On May 15, 2000, the Company issued 8,976,488 shares of common stock for 90.1%
of the outstanding shares and issued stock options and warrants to purchase
1,023,512 shares of common stock in exchange for all of the outstanding stock
options and warrants of Innovonics in a reverse triangular merger with
Innovonics. Additionally, the Company agreed to issue additional shares to
former shareholders of Innovonics if on the first anniversary date of the
transaction, the fair value of the shares issued in the Merger, as determined by
the trading price of the stock for a specific period of time, is less than
$25,000,000.

The acquisition agreement with Innovonics required the Company to place $1.5
million in an escrow account within thirty days following the closing date to
fund Innovonics' working capital over the next twelve months. The Company failed
to meet this obligation. As a result, in September 2000, an amendment to the
agreement was executed with Innovonics' president, who is also one of the
21mpany's directors, pursuant to which $200,000 was to be paid by September 1,
$300,000 by September 15, and the balance to be paid in monthly installments
through April 1, 2001. The Company made the initial payment of $200,000 on
August

                                      F-12
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.  INVESTMENT IN AND ADVANCES TO INNOVONICS (continued)

31, 2000 and defaulted on the second payment. At October 31, 2000, the Company
owed $500,000 under this obligation.

The acquisition agreement also gives the Innovonics president and his wife, who
own 9.9% of Innovonics outstanding common shares, the right to put these shares
to the Company for stock or cash until May 2003. The former Innovonics
shareholders also have the right to unwind the acquisition if the Company files
bankruptcy, ceases operations, has its stock delisted or there is an event which
materially adversely affects Innovonics or the Company and which would
significantly adversely affect Innovonics' business, or certain covenants
contained in the agreement are not complied with, including the funding
described above.

These covenants include: maintaining the operations as a separate entity in
Phoenix, Arizona, with all transactions between the Company and Innovonics
subject to the approval of the minority shareholder; the minority shareholder
shall be the president/CEO; the minority shareholder shall approve the officers
and directors of Innovonics at the date of the transaction; and the operations
of Innovonics shall be conducted in accordance with its business plan as of the
date of closing. Generally, these covenants are effective for a two-year period
from the date of the transaction.

The Company determined that a certain covenant may effectively provide the
minority shareholder with a substantive participating right as defined in
Emerging Issues Task Force (EITF) 96-16, Investors Accounting For An Investee
When the Investor Has a Majority of the Voting Interests, But the Minority
Shareholders Have Certain Approval or Veto Rights, thereby calling into question
whether control rests with the Company. As such, in accordance with EITF 96-16,
consolidation of Innovonics is precluded from the date of the acquisition until
May 15, 2002, the date on which the covenant that effectively provides the
minority shareholder with a substantive participating right expires.
Accordingly, the transaction was recorded under the equity method in accordance
with APB No. 18, The Equity Method of Accounting for Investments in Common
Stock.

The Company determined the initial investment in Innovonics to be $24,836,971,
which consisted of the fair value of the issued common stock, adjusted by the
guarantee of the future stock price ($22,441,220), and the fair value of stock
options and warrants issued to employees and non-employees ($2,395,751). In
accordance with SFAS No. 109, a deferred tax liability of $8,278,600 was
established relating to the portion of the initial investment that related to
acquired intangible assets, resulting in a corresponding increase in the initial
investment. The initial investment exceeded the carrying amount of the
underlying equity of Innovonics by $33,115,571, which has been allocated to
trademarks of ($5,300,000) and technology ($16,700,000) based on an independent
valuation. The initial investment in excess of the identifiable intangibles has
been allocated to goodwill ($11,115,571). The trademark, technology and goodwill
are being amortized on a straight line basis over five years. The entire net
loss of Innovonics from the date of the transaction through October 31, 2000 has
been recorded as a reduction of the Investment in and advances to Innovonics
because the minority shareholder is not required to fund future operational
losses. At October 31, 2000, the Company had paid $284,102 to Innovonics as a
deposit towards the purchase of PCPay devices.

The investment in and advances to Innovonics at October 31, 2000 consisted of
the following:

<TABLE>
<CAPTION>
<S>                                                                              <C>
        Initial investment in Innovonics                                         $    33,115,571
        Capital contributions to Innovonics                                            1,300,000
        100% of Innovonics' net loss                               (748,638)
        Amortization of intangibles                              (2,200,000)
        Amortization of goodwill                                 (1,140,791)
                                                            ---------------
        Equity in net loss of Innovonics                                              (4,089,429)
                                                                                  --------------
        Total investment in and advances to Innovonics                            $   30,326,142
                                                                                  ==============
</TABLE>


Following is the financial position and results of operations of Innovonics as
of October 31, 2000 and for the period from May 15, 2000 through October 31,
2000:

                                      F-13
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


5.  INVESTMENT IN AND ADVANCES TO INNOVONICS (continued)

                Current assets                              $       644,963
                Property and equipment, net                          46,157
                                                            ---------------
                Total assets                                $       691,120
                                                            ===============

                Current liabilities                         $       480,830
                Shareholders' equity                                210,290
                                                            ---------------
                Total liabilities and shareholders' equity  $       691,120
                                                            ===============


                  Revenues                               $   172,052

                  Cost of goods sold                         116,373
                  Research and development                   144,000
                  General and administrative and other       660,317
                                                         -----------

                  Net loss                               $   748,638
                                                         ===========


On March 2, 2001, the minority shareholder exercised the right on behalf of the
other original shareholders of Innovonics to unwind the transaction due to a
default in cash payment obligations under the aforementioned September 2000
amendment to the agreement (see Note 2). As of March 1, 2001, the Company owes
Innovonics $1,440,000.

6.  PROPERTY AND EQUIPMENT

Property and equipment consists of the following at October 31, 2000:

                                           USEFUL LIVES
                                              (YEARS)
        Furniture and fixtures                   5               $   244,312
        Computer hardware and software           3                 1,879,114
        Leasehold improvements                   3                    59,377
        Website development                      3                    15,140
                                                                 -----------
        Property and equipment                                   $ 2,197,943
                                                                 -----------
        Less accumulated depreciation and other
           amortization                                             (204,252)
                                                                 -----------
        Property and equipment, net                              $ 1,993,691
                                                                 ===========

On September 20, 2000, the Company entered into an agreement with a third party
to acquire the source code for a software platform to interface with leading
processing platforms. At closing, 125,000 shares of common stock were issued,
and an aggregate of 375,000 shares of common stock were placed in escrow, and
will be released as each of up to 13 additional platforms are certified. The
Company guaranteed that the shares issued will have an aggregate value of $5
million on the first anniversary of the first delivery. If the share price does
not meet the guarantee on the anniversary date, the Company will be required to
issue additional shares. As of October 31, 2000, the Company paid $63,185
related to costs to acquire the first two platforms and has valued the related
stock issuance at $1,250,000. These costs are included in computer hardware and
software. The software will be amortized over the expected remaining usage
period which will not exceed three years. Subsequent to October 31, 2000, the
Company received four of the 13 additional software platforms and issued 100,000
shares in connection with the agreements (see Note 16).

                                      F-14
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


7.  INTANGIBLE ASSETS

Intangible assets consist of the following at October 31, 2000:

                                   Useful Lives
                                      (Years)
Trademarks                               5          $   474,000
Acquired technology                     3-5          10,900,000
Goodwill                                3-5          25,364,728
                                                    -----------
                                                     36,738,728
Less accumulated
   amortization                                      (7,645,372)
                                                    -----------
Intangible assets, net                              $29,093,356
                                                    ===========

8.  PREPAID ADVERTISING

In May 1999, the Company entered into an agreement with an unrelated party that
provided for the Company to receive advertising in the form of sponsorship of a
car-racing team and certain Internet advertising blocks for a $1,530,000 fee,
which was payable in bi-weekly installments beginning June 10, 1999. The Company
allocated $765,000 of the fee to the sponsorship and expensed this amount during
fiscal 1999 over the term of the sponsorship season and the remainder to the
internet advertising blocks. The advertising blocks become available to the
Company as the payments are made under the obligation.

The Company did not make the payments as provided in the agreement and entered
into a workout agreement on September 8, 1999 in order to preserve its rights to
the Internet blocks and settle its remaining obligation under the agreement. The
settlement provided for the Company to: (1) pay $20,000 in cash, (2) issue
1,000,000 shares of the Company's common stock to the car-racing team and, (3)
make monthly payments of approximately $127,500 for twelve consecutive months
beginning on the September 1, 1999. In addition, the executive officer of the
Company was required to place 500,000 of his shares of the Company's common
stock in escrow as collateral for the monthly payments. The fair value of the
shares issued in settlement on September 8, 1999 was determined by management to
be $435,000 and was recorded in other expenses in the October 31, 1999 statement
of operations. The Company defaulted on this work agreement in August 2000 and
did not make the required payment.

As of October 31, 2000 the Company had one monthly payment outstanding related
to this obligation of approximately $124,000, which is included in accrued
expenses, and prepaid advertising of $544,754. The rights to the Internet
advertising blocks expire June 1, 2001. In December 2000, the unrelated party
filed a lawsuit against the Company for the balance owed and to exercise the
right to sell the shares in the market. At October 31, 2000, the portion of
internet advertising not yet available of approximately ($62,000) has been
netted against the liability of approximately ($124,000).

On May 21, 1999, the Company entered into an agreement to sell approximately
$306,000 of the aforementioned Internet advertising blocks to an unrelated
party. As of October 31, 2000, the Company had collected approximately $216,000
pursuant to this agreement and has recorded this amount in other current
liabilities in the accompanying balance sheet. If the remaining amount is not
received by June 1, 2001, the date of expiration for the prepaid advertising
blocks, the unrelated party will forego the right to use such advertising.

9.  NOTES PAYABLE TO SHAREHOLDER

The Company has a $3,000,000 line-of-credit from its chief executive officer
(CEO) and largest shareholder. The line-of-credit is funded by a personal bank
loan pursuant to which the CEO has pledged assets that include most of his
MerchantOnline common stock. He is currently in default in making interest
payments on the loan. As a result of the default on the loan, the lender is able
to sell the shares into the market although it has not done so and has indicated
a willingness to negotiate a revised payment schedule. Additionally, the CEO
does not have the funds to allow the Company to further draw down from the
line-of-credit.

                                      F-15
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


9.  NOTES PAYABLE TO SHAREHOLDER (continued)

As of October 31, 2000, the Company has borrowed $1,914,151 from the
line-of-credit. The note bears interest at 13.5% annually and the principal was
due on December 31, 2000. The note was modified on December 31, 2000 to extend
the maturity date to the earlier of June 30, 2001 or such date that the Company
has sufficient cash flow in excess of that needed for operations. The interest
rate was reduced to prime rate. Interest payments shall be paid monthly
beginning January 1, 2001.

The Company has a note payable to one of its directors of $270,000, bearing
interest at 9%. The note is due in full in April 2003.

The Company has a note payable to its chief administrative officer of $121,000,
bearing interest at 9%. The note is payable on demand no later than March 31,
2001.

Interest expense incurred on the aforementioned notes was approximately $103,000
for the year ended October 31, 2000.

10. OTHER FINANCING ARRANGEMENTS

On June 27, 2000, the Company entered into a financing agreement in the amount
of $105,548 for their annual Directors and Officers insurance policy. The note
is payable over nine months with an interest rate of 9.35%. Interest expense for
the period ended October 31, 2000 is $1,846. The balance owed of $58,638 at
October 31, 2000 is included in other current liabilities on the accompanying
consolidated balance sheet.

On October 26, 2000, the Company entered into a financing agreement for $114,620
related to the purchase of software. The note is payable over thirty-six months
with an interest rate of 10.85%.

11. INCOME TAXES

For the year ended October 31, 2000, the Company recognized an income tax
benefit representing the reversal of a portion of its deferred tax liability in
an amount that is equivalent to the amortization of nondeductible identifiable
intangible assets that were acquired during fiscal 2000. The Company did not
record a provision (benefit) for income taxes for the year ending October 31,
1999.

The significant components of the Company's net deferred income taxes as of
October 31, 2000 are as follows:


                  Deferred tax assets:
                   Nonqualified stock options                $    275,836
                   Accrued vacation                                   524
                   Contribution carryover                           3,336
                   Amortization                                    42,572
                   Accrued expenses                                71,573
                   Net operating loss carry forwards
                                                                3,392,554
                                                             ------------
                                                                3,786,395
                   Less valuation allowance                    (3,763,517)
                                                             ------------
                   Total deferred tax assets                       22,878
                  Deferred tax liabilities:
                   Fixed assets - depreciation                    (22,878)
                   Intangible assets - Web Financial           (3,461,680)
                   Intangible assets - Innovonics              (7,450,740)
                                                             ------------
                  Total deferred tax liabilities              (10,935,298)
                                                             ------------
                   Net deferred income taxes                 $(10,912,420)
                                                             ============

                                      F-16
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


11. INCOME TAXES (continued)

The differences between the effect of applying the federal statutory income tax
rate and the effective income tax rate are summarized below:

                                                             October 31
                                                     --------------------------
                                                         2000           1999
                                                     ------------   -----------
      Tax at federal statutory rates                   (34.00)%       (34.00)%
      State income taxes, net of federal benefit        (2.24)%        (3.52)%
      Nondeductible items                               14.38%          1.02%
      Change in valuation allowance                     14.40%         36.50%
      Other                                             (1.05)%           --%
                                                     ------------   -----------
                                                        (8.51)%           --%
                                                     ============   ===========


SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence both positive and negative, management has
determined that a $ 3,763,517 valuation allowance at October 31, 2000 is
necessary to reduce the deferred tax assets to the amount that will more than
likely be realized. The change in the valuation allowance for the year ended
October 31, 2000 was an increase of approximately $2,787,140 resulting primarily
from net operating losses generated during the period.

At October 31, 2000, the Company has approximately $9,015,557 in net operating
loss carry forwards for U.S. federal income tax purposes which start expiring in
2019.

It is anticipated that the Company's unconsolidated subsidiary, Innovonics, will
file a separate income tax return.

12. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases office space in its three locations of operations. The lease
terms range from 34-39 months. Certain of these leases contain stated escalation
clauses.

The Company recognizes rental expense from leases with scheduled rent increases
on a straight-line basis. During the year ended October 31, 2000, the Company
recognized rent expense in excess of amounts paid of approximately $42,000. Rent
expense for the years ended October 31, 2000 and 1999 were $115,943 and $57,240,
respectively.

At October 31, 2000, minimum future rental payments under long-term
noncancelable operating leases are as follows:


                                           2001      $    244,187
                                           2002           255,955
                                           2003           153,525
                                                     ------------
                                                     $    653,667
                                                     ============

CONTINGENCIES

In December 2000, a lawsuit was filed by an unrelated third party against the
Company and two of its officers claiming that the Company has breached the
sponsorship agreement by not making the final payment (see Note 8) and that the
Company has inhibited the sale of the Company's common stock held by the
plaintiffs. The plaintiffs have been granted a preliminary injunction requiring
the Company to cooperate with any sale. The Company is in the process of
negotiating a settlement of this matter.

                                      F-17
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


12. COMMITMENTS AND CONTINGENCIES (continued)

On February 9, 2001, the Company was served in a case entitled Elliott, Lane &
Associates Inc. vs. MerchantOnline.com, Inc. filed in the Superior Court of the
State of California, San Diego County. The plaintiffs were issued restricted
stock pursuant to a consulting agreement in November 1999 and claim that the
Company has failed to issue a 144 opinion on a sale. The Company intends to
contest the allegations on the grounds that the plaintiffs failed to perform
their obligations under the original consulting agreement.

The acquisition agreements with Innovonics and Web Financial each provide that
if on the first anniversary of the acquisition the value of the shares issued is
not at least $25 million, then additional shares will be issued. Based on a
price of $.50 per share of the common stock, the Company would be required to
issue approximately 47.5 million additional shares to the former Web
shareholders on April 20, 2001, and approximately 40 million additional shares
to the former Innovonics shareholders on May 15, 2001. The Company has only
approximately 25,000,000 additional shares available, and would need shareholder
approval to amend our articles of incorporation to authorize additional shares
so as to not be in default under these agreements. The Company has been
negotiating with shareholders of both companies to issue a far fewer number of
shares. Failure to successfully negotiate with these shareholders will cause
significant dilution to existing shareholders.

As more fully described in Note 16, a director of the Company resigned and made
certain allegations regarding the Company's business practices.

There can be no assurance that the outcome of matters described above , as well
as, other claims and/or potential claims described elsewhere in the notes to the
financial statements will not have a material adverse effect on the Company's
financial position or its results of operations. Management is unable to
estimate the amount of loss, if any, that may result from the outcome of these
uncertainties.

13. STOCK OPTIONS

On February 21, 2000, the Company adopted its 2000 Equity Incentive Plan (the
"Plan"), which provides for granting of incentive and nonqualified options to
employees, consultants and directors of the Company. The Plan is administered
and interpreted under Section 422 of the Tax Code. The maximum number of shares
of common stock issued or subject to awards granted is 10,000,000 shares. As of
October 31, 2000, the Company had 8,092,800 outstanding options under the Plan.

Options granted under the Plan are generally for periods not to exceed ten years
and are granted at prices not less than 100% of the fair market value as
determined by the quoted market price on the date of grant. Incentive stock
options granted to shareholders who own greater than 10% of the outstanding
stock are for periods not to exceed five years and must be issued at prices not
less than 110% of the fair market value of the stock on the date of grant.

During the twelve-month period ended October 31, 2000, the Company granted stock
options under the Plan for the purchase of 8,207,800 shares of common stock to
employees as well as three directors, at exercise prices ranging from $2.75 to
$7.00 per share (115,000 of which are no longer outstanding due to
terminations). During this period, the Company also granted options prior to the
adoption of the Plan for the purchase of 5,600,000 shares of common stock to
employees, at exercise prices ranging from $.94 to $2.00, all of which were
outstanding at October 31, 2000. For the majority of grants, the exercise prices
were equal to or in excess of the market values at the dates of grant and
accordingly, no compensation expense was recognized.

There were three employee grants for which a total of $378,000 of compensation
expense was computed using the Black Scholes method and the fair value as
determined by an independent appraiser. As of October 31, 2000, $297,500 was
recognized as compensation expense and $80,500 is being deferred over 49 months,
the remaining vesting period.

                                      F-18
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


13. STOCK OPTIONS (continued)

The Company also issued 10,000 stock options to a non-employee on July 12, 2000
for services rendered. In accordance with SFAS No. 123, the Company valued the
stock options and recorded the related expense on the date of grant for the fair
value of the services rendered, which was $10,000.

In connection with the Innovonics acquisition, 1,023,511 stock options were
issued in exchange for all outstanding options and warrant of Innovonics
employees and consultants (30,210 of which were exercised and 24,861 of which
expired).

Pro forma information regarding net loss is required by SFAS No. 123 and has
been determined as if the Company has accounted for its employee stock options
under the fair value method of that statement. The fair value of outstanding
options was estimated at the date of grant using the Black Scholes method with
the following assumptions: expected volatility of 148% to 203%, risk-free
interest rate of 6.27% to 6.62%, no expected dividends; and the expected life of
the options ranged from three to five years.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the respective vesting period of each option. The
Company's pro forma information follows (in thousands except for earnings per
share information):


                                                        2000         1999
                                                      --------     --------
        Pro forma net loss                            $ 21,773     $  2,503
                                                      ========     ========
        Pro forma loss per common share:
           Basic and diluted                          $   (.41)    $   (.07)
                                                      ========     ========

A summary of the Company's stock option activity and related information is as
follows:
<TABLE>
<CAPTION>

                                                                Fiscal year ended October 31,
                                                   ----------------------------------------------------
                                                             2000                        1999
                                                   ------------------------    ------------------------
                                                                  Weighted-                   Weighted-
                                                                  average                     average
                                                   Number of      exercise     Number of      exercise
                                                    options        price        options         price
                                                   ----------    ----------    ----------    ----------
<S>                                                <C>           <C>           <C>           <C>
           Outstanding at beginning of year         1,260,000    $     0.25            --    $       --
           Granted                                 14,831,311          3.05     1,260,000          0.25
           Expired                                    (24,861)
           Forfeited                                 (115,000)         5.12            --            --
           Exercised                                  (30,210)         0.65            --            --
                                                   ----------    ----------    ----------    ----------
           Outstanding at end of year              15,921,240          2.80     1,260,000          0.25
                                                   ==========    ==========    ==========    ==========
           Exercisable end of year                  4,788,439          1.79     1,260,000          0.25
                                                   ==========    ==========    ==========    ==========
           Average fair value of options
           granted during the year                               $     1.83                  $     0.91
                                                                 ==========                  ==========
</TABLE>

The average remaining contractual life of options outstanding at October 31,
2000 was 5 years.

14. COMMON STOCK

On May 8, 2000, the Company effected a two-for-one stock split to stockholders
of record as of May 1, 2000. This stock split has been reflected in the
financial statements and footnote disclosures for all periods presented.

In September 1999, the Company commenced a private offering for $1 per share,
for which 1,125,000 shares were issued and an aggregate of $1,125,000 was raised
during the twelve-month period ending October 31, 2000.

                                      F-19

<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


14. COMMON STOCK (continued)

A second private offering for $5 per share commenced in March 2000, for which
735,000 shares were issued and an aggregate of $2,825,000 was raised.

The Company commenced a third private offering for $3 per share in August 2000,
for which 314,632 shares were issued and an aggregate of $943,896 was raised
through October 31, 2000. Subsequent to year end, $1,118,565 has been received
for the issuance of 2,393,565 shares of common stock in private offerings.

In November 1999, the Company issued 402,240 shares of common stock in
settlement of approximately $243,000 of outstanding notes payable and related
accrued interest.

The Company received an aggregate of $19,693 and issued 30,210 shares of common
stock for the exercise of 30,210 warrants issued in the Innovonics acquisition.

At October 31, 2000, the Company had 16,936,238 shares of common stock reserved
for issuance for outstanding stock options and warrants.

15. STOCK WARRANTS

On November 30, 1999, the Company entered into a six-month service agreement
with an unrelated party. In connection therewith, the Company issued three
warrants to purchase 100,000 shares each of common stock at $1.125, $1.375 and
$1.625, respectively, per share. The Company has accounted for the warrants
under FAS 123 using the Black Scholes method and determined that the weighted
average fair value of the warrants was $1.05. The assumptions used in the Black
Scholes model were: annual dividends of $0.00, expected volatility of 233%,
risk-free interest rate of 6.35%, and expected life of four years for all
grants. The term of the warrants was four years from the date of issuance. The
charge to expense will be recognized ratably over the life of the agreement. The
Company recognized $316,000 of expenses related to this agreement. On June 28,
2000, all of the warrants were converted into 241,075 shares of common stock in
a non-cash transaction.

During December 1999, the Company delivered a warrant to Swartz Private Equity,
LLC (Swartz) to purchase 980,000 shares of common stock at a price of $.965 per
share in connection with an investment agreement. The Company accounted for the
warrant under FAS 123 using the Black Scholes method and determined the fair
value of the warrant was $2.28. The assumptions under the Black Scholes model
were: annual dividends of $0.00, expected volatility of 215%, risk free rate of
6.46% and expected life of four years for the grant. The warrants have a reset
provision whereby the price of the shares will be reset to the market price of
the common stock if such price is less than the then exercise price every six
months if the warrants are not exercised. The term of the warrant is five years.
The Company has accounted for these warrants as a cost of the equity. In
December 2000, the Company terminated the investment agreement with Swartz.
Pursuant to the terms of the agreement, Swartz will retain ownership of 660,000
vested commitment warrants and the Company must pay a termination fee of
$200,000. Concurrent with the Swartz termination, the Company also withdrew the
Form S-3 registration statement filed with the Securities and Exchange
Commission. There were no put rights or draws on the equity line.

In April 2000, the Company issued a warrant to purchase 120,000 shares of common
stock with an exercise price of $4.75, to a third party who provided services to
the Company. The Company accounted for the warrant under FAS 123 using the Black
Scholes method and determined that the fair value of the warrant was $1.39. The
assumptions under the Black Scholes model were: annual dividends of $0.00,
expected volatility of 203%, risk free rate of 5.39% and expected life of four
years for the grant. The term of the warrant is four years from the date of
issuance. The Company had been amortizing the consulting expense of $302,200
ratably over the four-year vesting period. On December 3,

                                      F-20
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


15. STOCK WARRANTS (continued)

2000, both parties agreed to terminate the contract and vest the warrant pro
rata through the termination date. As of October 31, 2000, the Company has
recorded $27,800 in consulting expense related to this agreement.

On July 12, 2000, the Company issued a warrant to purchase 25,000 shares of
common stock at $6.375 per share to a third party consultant. . The Company has
accounted for the warrant under FAS 123 using the Black Scholes method and
determined that the fair values of the warrant was $1.13. The assumptions under
the Black Scholes model were: annual dividends of $0.00, expected volatility of
148%, risk free rate of 6.34% and expected life of three years for the grant.

On September 30, 2000 the Company issued a warrant to purchase 50,000 shares of
common stock at $3.875 per share to the same consultant. The Company has
accounted for the warrant under FAS 123 using the Black Scholes method and
determined that the fair values of the warrant was $.52. The assumptions under
the Black Scholes model were: annual dividends of $0.00, expected volatility of
123%, risk free rate of 6.22% and expected life of three years for the grant.
The term of the warrants is three years. The charges to expense were recognized
immediately, as the services have been completed. The Company recognized $54,250
of expense related to the two warrants.

16. SUBSEQUENT EVENTS

In November 2000, the Company entered into a five-year agreement with Prime
Domain, Inc. to license the NewCash system and to purchase up to 1,500,000 PC
Pay devices in 2001. Prime Domain intends to bundle PC Pay devices with set-top
Internet-ready cable boxes manufactured by multiple manufacturers.

In November 2000, the Company executed a stock agreement and a reseller
agreement with Nexgen Commerce, Inc. to jointly develop business opportunities
through various projects. The Company issued 20,000 shares of stock and will
deliver 1,000 PC Pay (R) devices in exchange for 1% of the outstanding common
stock of Nexgen. The value of the shares was determined based on the fair value
of the common shares or $.81, as determined by an independent appraisal, at the
date of the transaction.

In January 2001, the Company entered into a ten-year licensing agreement with
Capital Performance International, Inc., IBC Bahamas (CPII) to utilize the
NewCash system and PC Pay in CPII's WebSheriff@GLOBALPROTECTOR.NET network. The
network is a global filtered Internet Service Provider, which will utilize
AT&T's Worldnet's global backbone. An initial order of 1,000 PC Pay devices was
placed related to this contract.

In March 2001, James Gitney resigned as executive vice president and chief
operating officer and in February 2001 Angel Rodriguez resigned as vice
president credit/debit card operations. In March 2001, Mr. Gitney gave
MerchantOnline notice that he deemed his employment agreement to be terminated
by him for "good reason", which under the terms of his agreement would require a
payment of $600,000 plus unpaid salary, benefits and expenses of approximately
$60,000. MerchantOnline and Mr. Gitney are negotiating to settle this matter.

On March 13, 2001, Mr. Hughes resigned as a director. In his letter he stated
that he resigned over what he considered to be unethical business practices by
members of the senior management team of MerchantOnline, some members of the
board of directors and the lack of response in his attempts to ascertain
relevant information to adequately protect the interests of the shareholders and
questionable business practices. MerchantOnline believes that Mr. Hughes is
incorrect, has been provided access to all information that he requested and
that no questionable actions have been taken by member of senior management. Mr.
Hughes has not resigned his employment. Further, Mr. Hughes has made a series of
claims against MerchantOnline and has threatened to report MerchantOnline to
various authorities for undisclosed violations. Other than back salaries and
expenses owed to him and payroll taxes owed, MerchantOnline believes that Mr.
Hughes has not substantiated any of his claims.

As of March 15, 2001, MerchantOnline has not paid $44,000 in cash that is
currently due under the agreement with a third party to acquire source code for
software platforms further described in Note 6 above, which has resulted in a
default under the agreement. On March 15, 2001, MerchantOnline received a letter
from counsel to the developer

                                      F-21
<PAGE>

                            MERCHANTONLINE.COM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


16. SUBSEQUENT EVENTS (continued)

stating that it is in default under this agreement for failure to pay the
$44,000 cash fees due upon the certification of the most recent four platforms
and that the agreement was deemed terminated. The letter requested
MerchantOnline to immediately cease using the software. Since the letter was
written, MerchantOnline has orally agreed to become current by March 31, 2001
and the developer has agreed to forebear until that date. Failure to cure this
default will result in MerchantOnline's inability to use the platforms and
ultimately would result in the return of the source code to the third party.

                                      F-22
<PAGE>

Report of Independent Certified Public Accountants

Board of Directors and Shareholders
Innovonics, Inc.

We have audited the accompanying balance sheet of Innovonics, Inc. as of October
31, 2000 and the related statements of operations, shareholders' equity and cash
flows for the period from May 15, 2000 to October 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Innovonics, Inc. at October 31,
2000 and the results of its operations and its cash flows for the period from
May 15, 2000 to October 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that
Innovonics, Inc. will continue as a going concern. As more fully described in
Note 2, Innovonics, Inc. is a 90.1% owned subsidiary of MerchantOnline.com, Inc.
On a consolidated basis, MerchantOnline.com, Inc. reported a net loss of
$17,701,420 for 2000 and has a working capital deficiency. These conditions
raise substantial doubt about MerchantOnline.com, Inc.'s ability to continue as
a going concern. Because of the aforementioned conditions relating to
MerchantOnline.com, Inc., and the uncertainties surrounding its plans to address
its liquidity problems, MerchantOnline.com, Inc.'s actions could have a
substantial effect on the Company's assets; therefore, there is also substantial
doubt about whether Innovonics, Inc. will continue as a going concern. The 2000
financial statements of Innovonics, Inc. do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.

West Palm Beach, Florida                        /s/ ERNST & YOUNG LLP
March 9, 2001

                                      F-23
<PAGE>

                                INNOVONICS, INC.

                                  BALANCE SHEET

                                                                OCTOBER 31, 2000
                                                                ---------------
ASSETS
Current assets:
   Cash                                                         $       471,550
   Inventory                                                            164,563
   Other current assets                                                   8,850
                                                                ---------------
Total current assets                                                    644,963

Property and equipment, net                                              46,157
                                                                ---------------
Total assets                                                    $       691,120
                                                                ===============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                             $        80,050
   Accrued expenses                                                      87,638
   Deferred revenue                                                     313,142
                                                                ---------------
Total current liabilities                                               480,830

Commitments

Shareholders' equity:
   Common stock, no par value - 10,000,000 shares
      authorized, 1,998,689 issued and outstanding              $            --
   Additional paid-in capital                                         2,446,572
   Capital contributions - MerchantOnline.com, Inc.                   1,691,614
   Deferred compensation                                                (78,027)
   Accumulated deficit                                               (3,849,869)
                                                                ---------------
Total shareholders' equity                                              210,290
                                                                ---------------
Total liabilities and shareholders' equity                      $       691,120
                                                                ===============

SEE ACCOMPANYING NOTES.

                                      F-24
<PAGE>
                                INNOVONICS, INC.

                             STATEMENT OF OPERATIONS

                        FOR THE PERIOD FROM MAY 15, 2000
                               TO OCTOBER 31, 2000


                                 Revenues, net                  $       172,052

Costs and expenses:
   Cost of goods sold                                                   116,373
   General and administrative                                           343,526
   Compensation expense related to stock options                        313,587
   Research and development                                             144,000
   Depreciation and amortization                                          6,049
                                                                ---------------
Total expenses                                                          923,535

Operating loss                                                         (751,483)

Other income (expense):
   Interest expense                                                      (2,926)
   Interest income                                                        5,771
                                                                ---------------

Net loss                                                        $      (748,638)
                                                                ===============

SEE ACCOMPANYING NOTES.

                                      F-25
<PAGE>

                        STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                                           ADDITIONAL                                                  TOTAL
                                                            PAID-IN       CAPITAL       DEFERRED     ACCUMULATED    SHAREHOLDERS'
                                              SHARES        CAPITAL     CONTRIBUTION  COMPENSATION     DEFICIT         EQUITY
                                            -----------   -----------   -----------   -----------    -----------    -----------
<S>                                           <C>         <C>           <C>           <C>            <C>            <C>
Balance at May 15, 2000                       1,998,689   $ 2,446,572   $        --   $        --    $(3,101,231)   $  (654,659)

Exchange of stock options and warrants to
  employees and consultants with those of
  parent company                                     --            --       391,614      (106,723)            --        284,891
Capital contribution by parent company               --            --     1,300,000            --             --      1,300,000
Recognition of deferred compensation                 --            --            --        28,696                        28,696
Net loss                                             --            --            --            --       (748,638)      (748,638)
                                            -----------   -----------   -----------   -----------    -----------    -----------
Balance at October 31, 2000                   1,998,689   $ 2,446,572   $ 1,691,614   $   (78,027)   $(3,849,869)   $   210,290
                                            ===========   ===========   ===========   ===========    ===========    ===========
</TABLE>

SEE ACCOMPANYING NOTES.

                                      F-26
<PAGE>

                                INNOVONICS, INC.

                            STATEMENTS OF CASH FLOWS

              FOR THE PERIOD FROM MAY 15, 2000 TO OCTOBER 31, 2000


                                                                   ------------
OPERATING ACTIVITIES
Net loss                                                           $   (748,638)
Adjustments to reconcile net loss to net cash
  used in operating activities:
     Depreciation and amortization                                        6,049
     Capital contribution of stock options from parent company          313,587
     Changes in operating assets and liabilities:
       Accounts receivable                                               (2,580)
       Inventory                                                       (136,923)
       Other assets                                                      (6,270)
       Accounts payable                                                 (22,486)
       Accrued expenses                                                  87,638
       Accrued compensation                                            (429,383)
       Deferred revenue                                                 179,352
       Other liabilities                                                (50,000)
                                                                   ------------
Net cash used in operating activities                                  (809,654)

INVESTING ACTIVITIES
Purchases of property and equipment                                     (43,586)
                                                                   ------------
Net cash used in investing activities                                   (43,586)

FINANCING ACTIVITIES
Proceeds from MerchantOnline capital contribution                     1,300,000
Payments on notes payable to shareholders                                (7,050)
                                                                   ------------
Net cash provided by financing activities                             1,292,950
                                                                   ------------
Net increase in cash                                                    439,710
Cash at beginning of the period                                          31,840
                                                                   ------------
Cash at end of the period                                          $    471,550
                                                                   ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest and other finance charges                   $      2,926


SEE ACCOMPANYING NOTES.

                                      F-27
<PAGE>

                                INNOVONICS, INC.

                          NOTES TO FINANCIAL STATEMENTS

                                OCTOBER 31, 2000


1.  NATURE OF BUSINESS

Innovonics, Inc. (the Company) was incorporated on February 16, 1991 under the
laws of the State of Arizona for the primary purpose of developing and marketing
the PC Pay (R) security products which facilitate secure credit, debit, and
smart card transactions over the Internet for all consumers. Innovonics, Inc. is
a 90.1% owned subsidiary of MerchantOnline.com, Inc. (MOL or the "parent") (see
Note 7).

2.  MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY

The Company's financial statements have been prepared assuming that the Company
will continue as a going concern. On a consolidated basis, MOL reported a net
loss of $17,701,420 for 2000 and has a working capital deficiency. These
conditions raise substantial doubt about MOL's ability to continue as a going
concern. Because of the aforementioned conditions relating to MOL, and the
uncertainties surrounding its plans to address its liquidity problems, MOL's
actions could have a substantial effect on the Company's assets; therefore,
there is also substantial doubt about whether Innovonics, Inc. will continue as
a going concern. Additionally, the Company sustained operating losses of
$748,638 for the period from May 15, 2000 to October 31, 2000 and has an
accumulated deficit of $3,849,869 as of October 31, 2000. As a result, the
financial statements do not include any adjustments to reflect the possible
effects on the recoverability and classification of liabilities.

3.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

INVENTORIES

Inventories consist of PC Pay devices and related parts and are stated at the
lower of first-in, first-out (FIFO) cost or market.

Inventories at October 31, 2000 consist of the following:


               Raw materials                         $     61,628
               Work-in-process                             10,703
               Finished goods                              92,232
                                                     ------------
               Total Inventories                     $    164,563
                                                     ============


PROPERTY AND EQUIPMENT

Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets.

STOCK BASED COMPENSATION

SFAS No. 123, Accounting for Stock-Based Compensation, defines a fair value
method of accounting for issuance of stock options and other equity investments.
Under the fair value method, compensation cost is

                                      F-28
<PAGE>

                                INNOVONICS, INC.

                          NOTES TO FINANCIAL STATEMENTS


4.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

STOCK BASED COMPENSATION (continued)

measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to SFAS No. 123, companies are encouraged, but not required, to adopt
the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, but are required to disclose in a note to the financial statements
pro forma net income amounts as if the Company had applied the new method of
accounting.

The Company accounts for employee stock-based compensation under APB No. 25 and
has complied with the disclosure requirements of SFAS No. 123.

INCOME TAXES

Deferred income tax assets and liabilities are determined based upon differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. A valuation allowance is recorded when it
is more likely than not that some portion or all of a deferred tax asset will
not be realized.

REVENUE RECOGNITION

Revenues from the sale of services or products is recognized as services are
rendered or title and risk of loss to products transfers to the buyer, which is
generally upon shipment.

At October 31, 2000, the Company had $313,142 in deferred revenue related to the
prepayment of PC Pay devices, of which $284,102 was prepaid by MOL toward a
purchase order.

ADVERTISING

The Company expenses the cost of advertising as incurred. Advertising expense
was $2,800 for the period from May 15, 2000 through October 31, 2000.

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 amounts reported in the financial statements and accompanying notes.
Management believes that the estimates utilized in preparing its financial
statements are reasonable and prudent; however, actual results could differ from
these estimates.

4.  PROPERTY AND EQUIPMENT

Property and equipment consists of the following at October 31, 2000:

                                                     USEFUL LIVES
                                                       (YEARS)
        Furniture and fixtures                            5          $   10,428
        Computer hardware and software                    3              71,008
                                                                     ----------
        Property and equipment                                       $   81,436
        Less accumulated depreciation and amortization                  (35,279)
                                                                     ----------
        Property and equipment, net                                  $   46,157
                                                                     ==========

                                      F-29
<PAGE>
                                INNOVONICS, INC.

                          NOTES TO FINANCIAL STATEMENTS


5.  REVOLVING CREDIT ARRANGEMENTS

The Company has several unsecured revolving credit arrangements with various
institutions. These arrangements bear interest at rates ranging from 12.25% to
29.87%. The Company incurred and paid financing charges of $2,926 during the
period from May 15, 2000 to October 31, 2000.

6.  INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes at October 31, 2000 are as follows:

        Deferred tax assets:
         Accrued vacation                                  $   16,652
         Interest payable                                         730
         Deferred revenue                                      10,928
         Net operating loss carry forwards                    798,118
                                                           ----------

                                                              826,428
         Less valuation allowance                            (820,780)
                                                           ----------
         Total deferred tax assets                              5,648
        Deferred tax liabilities:
         Fixed assets - depreciation                           (5,479)
         Gain/loss on disposition of assets                      (169)
                                                           ----------
                                                               (5,648)
                                                           ----------
         Net deferred income taxes                         $       --
                                                           ==========

SFAS No. 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $820,780 valuation allowance at October 31, 2000 is necessary
to reduce the deferred tax assets to the amount that will more likely than not
be realized. The change in the valuation allowance for the current period is
$333,175. At October 31, 2000, the Company has available net operating loss
carryforwards of $2,120,960, which start expiring in 2017.

The differences between the effect of applying the federal statutory income tax
rate and the effective income tax rate for the period from May 15, 2000 through
October 31, 2000 are summarized below:


      Tax at federal statutory rates                      (34.00)%
      State income taxes, net of federal benefit           (5.64)%
      Nondeductible items                                   0.04%
      Change in valuation allowance                        44.50%
      Other                                                (4.90)%
                                                       ---------
                                                              --%
                                                       =========

It is anticipated that the Company and its parent will file separate tax
returns.

7.  ACQUISITION BY MERCHANTONLINE.COM, INC.

On May 15, 2000, MOL issued 8,976,488 shares of its common stock for 90.1% of
the outstanding shares and issued stock options and warrants to purchase
1,023,512 shares of common stock in exchange for all of the outstanding stock
options and warrants of the Company in a reverse triangular merger.
Additionally, MOL

                                      F-30
<PAGE>
                                INNOVONICS, INC.

                          NOTES TO FINANCIAL STATEMENTS


7.  ACQUISITION BY MERCHANTONLINE.COM, INC (continued)

agreed to issue additional shares to former shareholders of the Company if on
the first anniversary date of the transaction, the fair value of the shares
issued in the Merger, as determined by the trading price of the stock for a
specific period of time, is less than $25,000,000. At the date of the
transaction, MOL issued options and warrants to consultants and non-employees in
replacement of options and warrants issued by the Company. In connection
therewith, the fair value of the options and warrants of the Company at the date
of the transaction is included in the initial investment in the Company. The
difference between the fair value of the Company's options and MOL's options of
$284,891 is recorded as compensation expense in the Company's financial
statements.

MOL also issued replacement options to the employees of the Company. The deemed
fair value of the options was computed using the Black Scholes model at the date
of acquisition. The compensation recorded relates to the employees of the
Company who had unvested options at the date of the conversion to MOL's options
and still required future services before becoming fully vested. The
compensation expense was determined in accordance with APB 25, as interpreted by
Interpretation No. 44, by computing the intrinsic value of the converted options
at the conversion date that related to future services. The compensation expense
of $106,723 was deferred over the remaining vesting period. The Company recorded
$28,696 of compensation expense related to the amount of the unvested portion
that vested from the date of the transaction through October 31, 2000.

The acquisition agreement required MOL to place $1.5 million in an escrow
account within thirty days following the closing date to fund the Company's
working capital over the next twelve months. In September 2000 an amendment to
the agreement was executed with the Company's president, who is also one of
MOL's directors, pursuant to which $200,000 was to be paid September 1, $300,000
by September 15, and the balance to be paid in monthly installments through
April 1, 2001. MOL made the initial payment of $200,000 and defaulted on the
second payment. As of October 31, 2000, MOL owed $500,000 to the Company under
this obligation.

The acquisition agreement also gives the Company's president and his wife, who
own 9.9% of the Company's outstanding common shares, the right to put these
shares to MOL for stock or cash until May 2003. The former Innovonics
shareholders also have the right to unwind the acquisition if MOL files
bankruptcy, ceases operations, has its stock delisted or there is an event which
materially adversely affects the Company or MOL and which would significantly
adversely affect the Company's business, or certain covenants contained in the
agreement are not complied with, including the funding described above.

These covenants include: maintaining the operations as a separate entity in
Phoenix, Arizona, with all transactions between the Company and MOL subject to
the approval of the minority shareholder; the minority shareholder shall be the
president/CEO; the minority shareholder shall approve the officers and directors
of the Company at the date of the transaction; and the operations of the Company
shall be conducted in accordance with its business plan as of the date of
closing. Generally, these covenants are effective for a two-year period from the
date of the transaction.

On March 2, 2001, counsel representing the Company's president sent a letter on
behalf of the Company's former shareholders, stating that MOL is currently in
default of the cash payment obligations in the aggregate amount of $1,440,000
under the Merger Agreement dated April 24, 2000, as amended on May 15, 2000 and
September 1, 2000. The letter stated that the Company's president, acting in his
capacity as representative of the former Innovonics shareholders, has exercised
his right to acquire all of the Innovonics shares currently held by MOL in
exchange for the return of their MOL shares and options received in connection
with the Merger Agreement, plus an amount equal to $2.50 per share for each MOL
share that is not returned to MOL. The letter also stated the president's
intention to seek legal recourse if MOL does not transfer the Innovonics shares
amicably. Since the date of the letter, MOL has been working with the president
on various funding alternatives with the intent to have the president withdraw

                                      F-31
<PAGE>

                                INNOVONICS, INC.

                          NOTES TO FINANCIAL STATEMENTS


7.  ACQUISITION BY MERCHANTONLINE.COM, INC  (continued)

this letter. As of March 9, 2001, the president has not agreed to withdraw the
letter but has indicated a continued willingness for an unspecified period of
time to seek an acceptable solution.

8.  MAJOR CUSTOMERS

For the period from May 15, 2000 to October 31, 2000, the Company had one major
customer that represented 58% of total sales. Sales to MOL represent
approximately 25% of total sales.

9.  COMMITMENTS

The Company leases its office space under a month-to-month agreement that is
subject to termination with a 30-day prior written notice by either party.
Rental expense amounted to approximately $4,753 for the period from May 15, 2000
to October 31, 2000.

The Company enters into commitments with third parties to construct certain
parts of its products. At October 31, 2000, the Company was committed to
purchase inventory totaling approximately $227,000.

The Company has contracted a third party to perform research and development.
For the period from May 15, 2000 through October 31, 2000, the Company expensed
$144,000 and is obligated to pay $115,000 for additional development work.

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