<TABLE>
<CAPTION>
                          PACEL CORP. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS



                                     ASSETS
                                                                      UNAUDITED      AUDITED
                                                                    September 30,  December 31,
                                                                       2001           2000
                                                                    -------------  ------------

Current assets:
<S>                                                                 <C>            <C>
   Cash and cash equivalents                                        $   175,247    $    36,356
   Accounts receivable, net of allowance for doubtful accounts          356,055          9,883
      of $7,647 and $5,155 respectively
   Inventory                                                             64,347         17,213
   Other receivables                                                     55,249         64,760
   Prepaid expenses                                                      19,038          2,469
                                                                    -----------    -----------
      Total current assets                                              669,936        130,681
                                                                    -----------    -----------

Property and equipment, net of accumulated depreciation
      of $84,489 and $65,531 respectively                               139,290        141,882
                                                                    -----------    -----------

Non-current assets:
     Note receivable                                                     71,000         71,000
     Goodwill                                                           541,499          8,106
     Security deposits                                                   11,880          9,089
                                                                    -----------    -----------
        Total non-current assets                                        624,379         88,195
                                                                    -----------    -----------
      Total assets                                                  $ 1,433,605    $   360,758
                                                                    ===========    ===========


LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
   Accounts payable                                                 $ 1,197,563    $   491,926
   Accrued expenses                                                      89,358         73,071
   Loans payable officers-Stockholders                                  206,325         62,741
   Notes payable convertible debenture                                1,331,440        531,389
   Notes payable bank                                                    50,000         50,000
   Other payables                                                       267,798              0
                                                                    -----------    -----------
      Total current liabilities                                       3,142,484      1,209,127
                                                                    -----------    -----------
Long term liabilities:
   Equipment leases                                                      98,582           --
                                                                    -----------    -----------
       Total long term liabilities                                       98,582           --

       Total liabilities                                              3,241,066      1,209,127
Minority interest
Commitments:

Stockholders' equity (deficit)
   Preferred stock, no par value,
     no liquidation value, 5,000,000 shares
     authorized, issued 1,000,000 shares
     1997 class A convertible preferred stock                            11,320         11,320
   Common stock - no par value,
     150,000,000 shares authorized in  2001 and 2000,
     respectively.  120,670,772 and 39,348,486 shares outstanding
     in 2001 and 2000, respectively                                   5,984,325      5,155,914
   Cumulative currency translation adjustment                           (15,738)       (10,833)
       Deficit                                                       (7,787,368)    (6,004,770)
   Total stockholders' equity  (deficit)                             (1,807,461)      (848,369)
                                                                    -----------    -----------

   Total liabilities and stockholders' equity                       $ 1,433,605    $   360,758
                                                                    ===========    ===========
</TABLE>


          See accompanying notes to consolidated financial statements


<PAGE>


<TABLE>
<CAPTION>
                          PACEL CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)




                                           NINE MONTHS    NINE MONTHS   THREE MONTHS    THREE MONTHS
                                           -----------    -----------   ------------    ------------
                                             ENDED          ENDED          ENDED           ENDED
                                             -----          -----          -----           -----
                                          SEPTEMBER 30,   SEPTEMBER 30,  SEPTEMBER 30,  SEPTEMBER 30,
                                              2001             2000          2001           2000

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

<S>                                       <C>            <C>            <C>             <C>
 Sales                                    $   984,638    $   184,363    $    555,550    $    68,406
 Cost of Goods Sold                           704,311         56,667         405,204         52,487
                                          -----------    -----------    ------------    -----------
Gross Profit                                  280,327        127,696         150,346         15,919
                                          -----------    -----------    ------------    -----------


Operating costs and expenses:

      Research and development                306,806        926,382          87,521         52,803
      Depreciation & Amortization              14,364         21,460           1,323          7,086
      Interest expense                         53,333         52,772          27,699         11,104
      Sales and Marketing                     104,425        390,285          36,334        171,780
      Financing Expenses                      276,273           --           195,173           --
      General and Administrative            1,310,520      1,250,394         329,252        755,221
                                          -----------    -----------    ------------    -----------

     Total operating costs and expenses     2,065,721      2,641,293         677,302        997,994
                                          -----------    -----------    ------------    -----------

 Other Income                                   2,796          4,180             932           (255)

           Net (loss)                     $(1,782,598)   $(2,509,417)   $   (526,024)   $  (982,330)
                                          ===========    ===========    ============    ===========

Net  (loss) per common share
     Basic                                      (0.03)         (0.12)          (0.01)         (0.04)
     Diluted                                    (0.03)         (0.12)          (0.01)         (0.04)

Weighted Average shares outstanding
     Basic                                 69,606,484     21,016,674     105,171,915     22,378,608
     Diluted                               69,606,484     21,016,674     105,171,915     22,378,608

</TABLE>


          See accompanying notes to consolidated financial statements
<PAGE>

<TABLE>
<CAPTION>

                          PACEL CORP. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                    FOR THE NINE MONTHS ENDED SEPTEMBER 30,
                                  (UNAUDITED)



                                                           2001           2000
                                                           ----           ----

Cash flows from operating activities:
<S>                                                    <C>            <C>
   Net (loss)                                          $(1,782,598)   $(2,509,417)
Adjustments to reconcile net (loss) to net cash
 (used in) provided by operating activities:
   Depreciation                                             14,364         21,460
   Provision for Bad Debts                                   2,492            598
   Other non cash items                                    210,395         57,791
Increase (Decrease) in Cash from changes in:
    Accounts receivable                                   (348,664)         3,997
    Other receivables                                        9,511        (22,942)
    Inventory                                              (47,134)       (14,406)
    Other assets                                                 0              0
    Security deposits                                       (2,791)            15
    Prepaid expenses                                       (16,569)        13,168
    Accounts payable                                       705,637        (48,713)
    Accrued expense                                         16,287        (68,454)
    Loans Payable Officers-Stockholders                    143,584        (10,000)
                                                       -----------    -----------
 Net cash (used in) operating activities                (1,095,486)    (2,576,903)
                                                       -----------    -----------


Cash flows from investing activities:

    Purchase of property and equipment                     (13,856)      (122,683)
                                                       -----------    -----------
       Net cash used in investing activities               (13,856)      (122,683)
                                                       -----------    -----------

Cash flows from financing activities:

   Notes payable convertible debenture                     746,718        404,132
   Proceeds from long term leases                           98,582              0
   Proceeds from sale of common stock and options          407,838      2,296,913
                                                       -----------    -----------

   Net cash provided by financing activities             1,253,138      2,701,045
                                                       -----------    -----------
Effect of exchange rates on cash                            (4,905)        (6,162)
                                                       -----------    -----------

Net increase (Decrease) in cash and cash equivalents       138,891         (4,703)

Cash and cash equivalents at beginning of year              36,356         95,631
                                                       -----------    -----------

Cash and cash equivalents at end of period             $   175,247    $    90,928
                                                       ===========    ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
     Cash paid for interest                                  4,872          3,128
                                                       -----------    -----------
</TABLE>


          See accompanying notes to consolidated financial statements


<PAGE>


<PAGE>
                          PACEL CORP. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                    UNAUDITED
                               SEPTEMBER 30, 2001





1.         BASIS OF PRESENTATION

The unaudited financial statements included in the Form 10-QSB have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310(b)
of Regulation SB. The financial information furnished herein reflects all
adjustments, which in the opinion of management are necessary for a fair
presentation of the Company's financial position, the results of operations and
cash flows for the periods presented.

Certain information and footnote disclosures normally contained in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted, pursuant to such rules and regulations.

These interim statements should be read in conjunction with the audited December
31, 2000 consolidated financial statements and related notes included in the
Company's year ended certified financial statements. The results of operations
for the nine months are not necessarily indicative of the operating results for
the year. The Company presumes that users of the interim financial information
herein have read or have access to the audited financial statements for the
preceding fiscal year and that the adequacy of additional disclosure needed for
a fair presentation may be determined in that context. The results of operations
for any interim period are not necessarily indicative of the results for the
full year.

2.         ACQUISITION OF ADVANTAGE SYSTEMS INC. (ASI)


     In September 2001, Pacel Acquisition Corp. a wholly owned subsidiary
completed its acquisition of Advantage Systems, Inc. a computer manufacture, for
$70,000 and the assumption of $741,773 in debt. Pacel Acquisition Corp. has
accounted for the acquisition under the purchase method of accounting in
accordance with generally accepted accounting principles. Pacel has recorded in
its consolidated financial statements all of the assets and liabilities of
Advantage. Good will of $401,107 has been recorded on Pacel's books. On
September 14, 2001 Pacel Acquisition was merged into Pacel Corp. Pacel has
secured a $1,000,000 convertible note to purchase this company.



<PAGE>





FORWARD-LOOKING STATEMENTS

     When used in this document and in our filings with the Securities and
Exchange Commission, in our press releases or other public or shareholder
communications, and in oral statements made with the approval of an authorized
executive officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are subject
to certain risks and uncertainties, which could cause our actual results to
differ materially from our historical results and those we presently anticipate
or project. You should not place undue reliance on any forward-looking
statements, which speak only as of the date made. Various factors could affect
our financial performance and could cause our actual results for future periods
to differ materially from any opinions or statements we express with respect to
future periods in any current statement. These factors include, but are not
limited to, the following: increases in our operating expenses outpacing our
revenues; our inability to expand our sales and distribution channels; the
failure of strategic relationships to implement and promote our software
products; the failure of third parties to develop software components necessary
for the integration of applications using our software; and the use of our
intellectual property by others.

We do not undertake--and we specifically decline any obligation--to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.



ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

GENERAL BUSINESS

       PACEL's mission is to provide consumers and businesses with a full suite
of products and services that provide secure connectivity to and from the
Internet, including e-commerce transactions and personnel and company data
security. To that end, PACEL, and its subsidiaries, Fairfax Communications and
E-Business Store.Com, have been developing products and methods that meet that
need for both families and companies. The ChildWatch software suite of programs
puts the controls for family computer usage, including internet filtering,
access controls and community support for finding missing and abducted children
in the hands of the parents and is readily available at Zany Brany and
Electronic Boutique stores nationally. "e-Centurion" our latest technology






<PAGE>




advancement (patent pending) software product will provide complete file and
data security. This new software is designed to guard both the Inner Door (full
protection on your PC from existing and new viruses), i.e., the Love Bug, and
someone trying to penetrate your PC and by-pass your password. As well as, the
Outer Door (full intruder protection from Internet data collection devices and
programs or hackers). Our current goal is to utilize and extend these
technologies in the production of derivative products to provide secure Internet
connectivity and enhanced desktop security for customers in the home and
business marketplaces.

RESULTS OF OPERATIONS

       The following summarizes the basic results of operations for the periods
indicated in the Consolidated Statement of Operations.

NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED JUNE 30,
2000.

       For the nine months ended September 30, 2001, sales were $984,638
compared to $184,363 for the nine months ended September 30, 2000 an increase of
$800,275 or 434%. The increase in revenues is attributed to the sales generated
from existing NATO contracts of Fairfax Communication Limited (FCL) and
Advantage Systems existing customer base. Sales for the month of September 2001
for Advantage Systems were $236,138. E-Business Store continues to increase
their sales in consulting and web development. With the acquisition of Advantage
Systems we are refocusing our efforts, to the distribution of hardware and
consulting services through (FCL) NATO contracts. We will continue to focus our
efforts on the marketing of Child Watch software and e-Centurion anti-virus
software as adequate funding becomes available. We believe that marketing delays
have prevented Child Watch and e-Centurion from penetrating their respective
markets. Accordingly only limited revenues from the Child Watch and e-Centurion
software have been realized to date. The Company's' marketing delays stem from
the inability to obtain adequate financing through the end of the third quarter.
We do not expect to see any significant revenue from these products until
adequate financing is available to market these products.

       For the nine months ended September 30, 2001, direct cost of goods sold
were $704,311 compared to $56,667 for the nine months ended September 30, 2000
an increase of $647,644. The increase in direct cost of goods sold is directly
attributed to the sales generated from the NATO contracts and Advantage Systems
discussed above. FCL is selling computer hardware items through Dell and
Gateway. The mark up for computer hardware is typically greater in Great Britain
than in the United States. Advantage costs of goods sold are higher due to the
lower margins on hardware in the United States.


<PAGE>



       Research and development expenses consist principally of salaries for
software developers, outside consulting, and related facilities costs for
software development. Research and Development expenses for the nine months
ended September 30, 2001, were $306,806 compared to $926,382 for the nine months
ended September 30, 2000 a decrease of $619,576. The decrease is directly
attributable to being in the final phase of ChildWatch and e-Centurion software
development. We believe, however, that investments in research and development,
including the recruiting and hiring of software developers, are critical to
remaining competitive in the marketplace and are directly related to continued
timely development of new and enhanced products. Accordingly, we anticipate
making continuing investments in the development of our application software
products, including those targeted for the growing Internet market, as funds
permit.

       Sales and marketing expenses include salaries, commissions, travel
expenses, and marketing expenses for our sales, marketing, customer support, and
distribution consultants. Sales and marketing expenses also includes
advertising, trade shows, public relations, and other market development
programs. Sales and marketing expenses for the nine months ended September 30,
2001, were $104,425 compared to $390,285 for the nine months ended September 30,
2000 a decrease of $285,860. The decrease in sales and marketing expense is due
to the lack of funds available to us for sales and marketing for the nine months
ended September 30, 2001.

       General and administrative expenses consist principally of administrative
salaries and benefits, travel expenses, and related facilities costs for finance
and administration, human resources, legal, and information services. General
and administrative expenses for the nine months ended September 30, 2001 were
$1,310,520 compared to $1,250,394 for the nine months ended September 30, 2000
an increase of $60,126. The increase in general and administrative expenses is
due to increased expenses for outside legal and investment banking services
related to the Company's efforts to obtain continuing sources of financing and
its ongoing reporting obligations as a public reporting company. Increased
employee costs related with increased staffing have also contributed to the
increase in general and administrative expenses.


     Interest expense and Financing expenses for the nine months ended September
30, 2001 were $329,606 compared to $52,772 for the nine months ended September
30, 2000 an increase of $276,834. We entered in various convertible notes, these
notes contained a "beneficial conversion feature" Per Emerging Issues Task force
(EITF) Number 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or contingently Adjustable Conversion Ratios", this
beneficial conversion feature was assigned an intrinsic value of $260,350, as
calculated under the provision of the EITF. This amount was immediately
expensed, as the Notes were convertible into common shares of the Company at the
time of the signing of the Agreement. The remaining interest of $69.256 is
accrued interest on the Convertible Notes and interest paid on the $50,000 with
the bank.


<PAGE>


THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000.

       For the three months ended September 30, 2001, sales were $555,550
compared to $68,406 for the three months ended September 30, 2000 an increase of
$487,144. The increase in revenues is directly attributed to the sales generated
from existing NATO contracts of FCL and sales generated from Advantage Systems.

       For the three months ended September 30, 2001, direct cost of goods sold
were $405,204 compared to $52,487 for the three months ended September 30, 2000
an increase of $352,717. The increase in direct cost of goods sold is directly
attributed to the sales generated from the NATO contracts discussed above.

      Research and development expenses for the three months ended September 30,
2001, were $87,521 compared to $52,803 for the three months ended September 30,
2000 an increase of $34,718. The increase is attributable to increase in related
payroll and overhead expenses.

       Sales and marketing expenses for the three months ended September 30,
2001, were $36,334 compared to $171,780 for the three months ended September 30,
2000 a decrease of $135,446. The decrease in sales and marketing expense is due
directly to a lack of funds available in the third quarter of 2001.

       General and administrative expenses for the three months ended September
30, 2001 were $329,252 compared to $755,221 for the three months ended September
30, 2000 a decrease of $425,969. The decrease in general and administrative
expenses is due to the restructuring of administrative staff due to lack of
financing. (see discussion in liquity)

       Interest expense and Financing expenses for the three months ended
September 30, 2001 were $222,872 compared to $11,104 for the three months ended
September 30, 2000 and increase of $211,768. We entered in various convertible
notes, these notes contained a "beneficial conversion feature" Per Emerging
Issues Task force (EITF) Number 98-5, "Accounting for Convertible Securities
with Beneficial Conversion Features or contingently Adjustable Conversion
Ratios", this beneficial conversion feature was assigned an intrinsic value of
$179,250, as calculated under the provision of the EITF. This amount was
immediately expensed, as the Notes were convertible into common shares of the
Company at the time of the signing of the Agreement. The remaining interest of
$43,622 is accrued interest on the Convertible Notes and interest paid on the
$50,000 with the bank

LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 2001


       In February 2001, we secured a $50,000 line of credit with a bank, at an
interest rate of Wall Street JOURNAL'S PRIME Rate, plus 1.00% to be renewed
annually. At September 30, 2001 the entire line was outstanding,



<PAGE>


     On September 1, 2001, Pacel Acquisitions Corp. a wholly owned subsidiary
purchased the stock of Advantage Systems, Inc. a computer manufacture. Pacel
Acquisitions Corp. will pay $70,000 and assume $741,773 in debt. On September
2001 Advantage Systems Inc. was merged into Pacel Corp., and is now a division
of Pacel Corp. Pacel has secured a $1,000,000 convertible note to purchase this
company and supply the necessary cash flow for the following year. The note
bears and interest rate of 8%. These funds are designated only for the expenses
related to the acquisition of Advantage Systems, Inc., and working capital for
FCL and Advantage. We believe that the purchase of this company will give FCL
the ability to sell our hardware rather than Gateway's or Dell's, to NATO. In
doing so our margins will increase substantially. This company will also allow
Pacel to use its established customer base for the distribution of its software
products.

     Due to lack of funding and withdrawal of the registration statement we
began to lay off all nonessential personnel. We are in the process of
renegotiating our current office leases to reduce office space. We are also
evaluating all expenses and making the necessary cutbacks. We believe that with
this reduction in expenses, convertible notes and sales, we will have sufficient
working capital through the end of the year. Our ability to continue as a going
concern beyond December 2001 is dependent upon being able to successfully secure
long term financing either through the issuance of debt or equity.

       Cash and cash equivalents increased to $175,247 for the period ended
September 30, 2001 from $36,356 at December 31, 2000. Trade accounts receivable
increased to $356,055 for the period ended September 30, 2001 compared to $9,883
at December 31, 2000. Other receivables decreased to $9,511 for the period ended
September 30, 2001 compared to $64,760 at December 31, 2000. Accounts payable
increased to $1,197,563 for the period ended September 30, 2001 compared to
$491,926 at December 31, 2000. Net cash used for operating activities was
$1,095,486 during the nine-month period ended September 30, 2001 compared to
$2,576,903 in the corresponding period of 2000. Net cash used for operating
activities primarily reflect the increase in account receivable, and inventory
offset by accounts payable and loans to officers.

       Net cash used in investing activities for the nine months ended September
30, 2001 and 2000 was $13,856 and $122,683 respectively. The outlay reflects the
continual investment in computer related equipment for further development
efforts.

       Net cash provided by financing activities for the nine months ended
September 30, 2001 and 2000 was $1,253,138 and $2,701,045, respectively. The
funds were raised primarily through the issuance of convertible debentures in
the period ended September 30, 2001. The funds raised for the period September
30, 2000 were raised in conjunction with the filing of an SB-2 registration
statement to raise $3,000,000.


<PAGE>