C O N T E N T S


                                                                 Page

AUDITORS' REPORT                                                 F-2

FINANCIAL STATEMENTS

        BALANCE SHEET                                            F-3

        STATEMENTS OF OPERATIONS                                 F-6

        STATEMENT OF STOCKHOLDERS' EQUITY/DEFICIENCY             F-8

        STATEMENTS OF CASH FLOWS                                 F-10

NOTES TO FINANCIAL STATEMENTS                                    F-11




<PAGE>


INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Default Proof Credit Card System, Inc.

We have  audited the  accompanying  balance  sheet of Default  Proof Credit Card
System,  Inc., (a  development  stage  company) as of December 31, 1998, and the
related  statements of operations,  stockholders'  deficiency and cash flows for
the year then ended.  These financial  statements are the  responsibility of the
Company's  management.  Our  responsibility  is to  express  an  opinion  on the
financial  statements  based on our audit.  The financial  statements of Default
Proof Credit Card Systems,  Inc. (a development stage company),  were audited by
other auditors whose report,  dated March 17, 1998, on those statements included
an  explanatory  paragraph  that  described  the  substantial  doubt  about  the
Company's ability to continue as a going concern.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position of Default  Proof Credit Card
System,  Inc. (a  development  stage  company)  as of December  31, 1998 and the
results  of its  operations  and its  cash  flows  for the  year  then  ended in
conformity with generally accepted accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 2 to the
financial  statements  the Company's  dependence on outside  financing,  lack of
existing  commitments  from  lenders to  provide  necessary  financing,  lack of
sufficient working capital,  and losses since inception raise substantial doubts
about its ability to continue as a going concern.  Management's plans concerning
these  matters are also  described in Note 2. The  financial  statements  do not
include any adjustments that might result from the outcome of this uncertainty.


September 7, 1999
<PAGE>
                     DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)


                                 Balance Sheet
                               December 31, 1998



        ASSETS

Deferred Patent Costs, Net                             $         1,161
                                                       ===============

                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
        Accrued Expenses                               $       26,316
        Due to Directors                                       51,732
                                                       --------------

                Total Current Liabilities                      78,048
                                                       --------------

Stockholders' Deficiency
  Common Stock, $.001 Par Value, 25,000,000
  Shares Authorized, 12,043,510 Issued and Outstanding         12,044
  Additional Paid-In Capital                                3,959,560
  Deficit Accumulated During Developmental Stage           (4,048,491)
                                                       --------------
  Total Stockholders' Deficiency                              (76,887)
                                                       --------------
                                                      $         1,161
                                                       ==============


                See accompanying notes to financial statements.

                                      F-3
<PAGE>
                     DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                            Statements of Operations


<TABLE>
<CAPTION>
                                              Cumulative From
                                              August 14, 1985              For The Years Ended
                                              (Inception)                      December  31,
                                              Through                      --------------------
                                              December 31, 1998            1998            1997
                                              -----------------            ----            ----

<S>                                           <C>                        <C>              <C>
EXPENSES
        General & Administrative                $  3,016,206            $     71,231    $    63,590
        Officer Salary                               986,556                       -              -
        Marketing                                    393,358                       -              -
        Depreciation & Amortization                   98,707                       -              -
        Expired Public Offering Costs                179,211                       -              -
                                                ------------            ------------    -----------
        Total Expenses                             4,674,038                  71,231         63,590
                                                ------------            ------------    -----------

OTHER INCOME (EXPENSE)
        Litigation Settlements (Note 7)              (90,000)                      -              -
        Interest & Other Income                      423,220                       -              -
        Loss on Marketable Securities                (96,529)                      -              -
        Loss on Sale of Equipment                    (34,144)                      -              -
                                                -------------            -----------     ----------
        Total Other Income (Expense)                 202,547                       -              -
                                                -------------            -----------     ----------
Net Loss before Income Taxes and
    Extraordinary Item                            (4,471,491)                (71,231)       (63,590)
Income tax benefit                                    25,436                       -         25,436
                                                -------------            -----------     ----------
Net Loss before Extraordinary Item                (4,446,055)                (71,231)       (38,154)

Extraordinary item - Gain from restructuring of
    debt (net of Income Taxes of $165,200)           257,800                       -        247,800
Benefit from utilization of net operating
    loss carryforward                                139,764                       -        139,764
                                                -------------            -----------     ----------
NET (LOSS) INCOME                               $ (4,048,491)          $     (71,231)    $  349,410
                                                =============           ============     ==========
Basic Loss per Common Share
        Loss before extraordinary income        $      (0.54)          $       (0.01)    $        -
        Extraordinary item (net, plus Tax
        Benefits)                               $      (0.05)          $           -     $     0.03
                                                -------------            -----------     ----------
Net (Loss) Earnings per Common Share            $      (0.49)          $       (0.01)    $     0.03
                                                =============          ==============    ==========
Diluted Loss per Common Share
        Loss before extraordinary income        $      (0.45)          $       (0.01)    $        -
        Extraordinary item (net, plus Tax
        Benefits)                               $      (0.04)          $           -     $     0.03
                                                -------------            -----------     ----------
Net (Loss) Earnings per Common Share            $      (0.41)          $       (0.01)    $     0.03
                                                =============          ==============    ==========
Weighted Average Number of  Common
    Shares Outstanding                             8,287,754              11,982,962     11,589,462
                                                ============           =============     ==========
</TABLE>


                See accompanying notes to financial statements.
                                      F-4
<PAGE>

                     DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                 Statement of Stockholders' Equity (Deficiency)
<TABLE>
<CAPTION>
                                                                                                            Deficit
                                                              Common  Stock                              Accumulated
                                                             --------------                Additional     During the
                                                              # of Shares                  Paid-In        Development
                                                                 Issued       Amount       Capital          Stage           Total
                                                                 ------       ------       -------          -----           -----
<S>                                                              <C>            <C>         <C>               <C>           <C>
To a Director, for Cash & Other Property
(A, B, C)                                                     2,518,000       2,518        11,705                           14,223
To Directors & Officers for non-Cash
Considerations Received (A, B, D)                               582,750         583        16,900                           17,483
To Others for non-Cash Considerations
Received (A, B, D)                                               49,250          49         1,428                            1,477
                                                              ---------      ------        -------        ----------        ------
BALANCE - DECEMBER 31, 1985                                   3,150,000       3,150        30,033                  -        33,183
Private Placement Offering, Net of
Issuance Costs of $16,453 (A, E)                                312,500         312       108,235                          108,547
Patent License Costs (M)                                                                 (125,000)                        (125,000)
Dec. 31/86--Net Loss                                                                                         (44,461)      (44,461)
                                                            ------------------------------------------------------------------------
BALANCE - DECEMBER 31, 1986                                   3,462,500       3,462        13,268            (44,461)      (27,731)
May 7/87-- to a Director/Officer for Property
(A, B, C)                                                       500,000         500          (500)
May 12/87-- to a Director/Officer for Cash
(A, F)                                                          100,000         100        39,900                           40,000
Reversal of Accrued License Costs (M)                                                      25,000                           25,000
Capital Contribution by Principal Stockholder                                              78,076                           78,076
Oct. 12/87-- Public Offering, net of Costs $76,314            1,131,010       1,132     1,336,318                        1,337,450
Dec. 31/87--Net Loss                                                                                        (176,052)     (176,052)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1987                                   5,193,510       5,194     1,492,062           (220,513)    1,276,743
Apr. 7/88-- to Directors/Officers for Property
(A, G)                                                          800,000         800                                            800
May 1/88-- to Others for non-Cash Considerations
Received (A, H)                                                  95,750          96           (96)
May 19/88-- Proceeds from Public Offering, net of
Public Offering Costs of $487,287                             2,300,000       2,300     1,810,413                        1,812,713
Patent License Costs (M)                                                                 (100,000)                        (100,000)
Warrants Converted at $1.25 per Share                           128,300         128       160,247                          160,375
Dec. 31/88--Net Loss                                                                                        (405,875)     (405,875)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1988                                   8,517,560       8,518     3,362,626           (626,388)    2,744,756
Warrants Converted at $2.00 per Share                             3,000           3         5,997                            6,000
Issuance of Stock by Principal Stockholder                                                110,000                          110,000
Dec. 31/89--Net Loss                                                                                      (1,129,559)   (1,129,559)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1989                                   8,520,560   $   8,521   $ 3,478,623       ($ 1,755,947)  $ 1,731,197


</TABLE>

                See accompanying notes to financial statements.
                                      F-5


<PAGE>

                     DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)

           Statement of Stockholders' Equity (Deficiency) (Continued)

<TABLE>
<CAPTION>
                                                                                                            Deficit
                                                              Common  Stock                              Accumulated
                                                             --------------                Additional     During the
                                                              # of Shares                  Paid-In        Development
                                                                 Issued       Amount       Capital          Stage           Total
                                                                 ------       ------       -------          -----           -----
<S>                                                              <C>            <C>         <C>               <C>           <C>
BALANCE - DECEMBER 31, 1989                                    8,520,560     $ 8,521     $ 3,478,623    ($ 1,755,947)  $ 1,731,197
Dec. 31/90--Net Loss                                                                                      (1,175,201)   (1,175,201)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1990                                    8,520,560       8,521       3,478,623      (2,931,148)      555,996
Jul. 10/91--to Various Parties for Professional
Services Rendered (A, I)                                         125,000         125           7,375                         7,500
Oct. 3/91-- To Directors & Officers for non-Cash
Considerations Received (A, J)                                    85,000          85           5,015                         5,100
Dec. 31/91--Net Loss                                                                                        (430,800)     (430,800)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1991                                    8,730,560       8,731       3,491,013      (3,361,948)      137,796
Aug. 12/92-- to an Individual for Professional
Services Rendered (A, K)                                          50,000          50           2,950                         3,000
Dec. 31/92--Net Loss                                                                                        (173,144)     (173,144)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1992                                    8,780,560        8,781     3,493,963        (3,535,092)     (32,348)
Feb. 12/93-- to a Related Entity in Consideration
for Deferral of Loan Repayment (A, L)                             46,850           47         2,753                          2,800
Dec. 31/93--Net Loss                                                                                         (450,366)    (450,366)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1993                                    8,827,410        8,828     3,496,716        (3,985,458)    (479,914)
Feb. 22/94-- to Various Parties for Professional
Services Rendered (A, N)                                          75,000           75         7,425                          7,500
Jul. 25/94--to an Individual for Professional
Services Rendered (A, O)                                          30,000           30         5,970                          6,000
Jul. 25/94-- to Various Parties for Secretarial
Services Rendered (A, P)                                          10,000           10         1,990                          2,000
Dec. 31/94--Net Loss                                                                                         (198,366)    (198,366)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1994                                    8,942,410        8,943     3,512,101        (4,183,824)    (662,780)
Jul. 25/95--to an Individual for Professional
Services Rendered (A, Q)                                         125,000          125        18,625                         18,750
Dec. 31/95--Net Loss                                                                                         (103,635)    (103,635)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1995                                    9,067,410      $ 9,068   $ 3,530,726      ($ 4,287,459)  ($ 747,665)

</TABLE>


                See accompanying notes to financial statements.
                                      F-6


<PAGE>

                     DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)

           Statement of Stockholders' Equity (Deficiency) (Continued)
<TABLE>
<CAPTION>
                                                                                                            Deficit
                                                              Common  Stock                              Accumulated
                                                             --------------                Additional     During the
                                                              # of Shares                  Paid-In        Development
                                                                 Issued       Amount       Capital          Stage           Total
                                                                 ------       ------       -------          -----           -----
<S>                                                              <C>            <C>         <C>               <C>           <C>
BALANCE - DECEMBER 31, 1995                                   9,067,410     $ 9,068       $ 3,530,726   ($ 4,287,459)   ($ 747,665)
                                                            -----------------------------------------------------------------------
Jul. 12/96--to an Individual for Professional
Services Rendered (A, R)                                         25,000          25             3,725                        3,750
Jul. 12/96--to an Individual for Professional
Services Rendered (A, K)                                         60,000          60             8,940                        9,000
Aug. 28/96--to an Individual for Professional
Services Rendered (A, S)                                         30,000          30             4,470                        4,500
Aug. 28/96--to an Individual for Professional
Services Rendered (A, T)                                         50,000          50             7,450                        7,500
Sep. 13/96--to the President/Principal Shareholder
in Exchange for Accrued Salaries Waiver up to
12/31/96 (A, U)                                               2,000,000       2,000           298,000                      300,000
Dec. 31/96--Net Loss                                                                                         (39,711)      (39,711)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1996                                  11,232,410      11,233         3,853,311     (4,327,170)     (462,626)
Feb. 26/97--to Director/Officer for Professional
Services Rendered (A, V)                                         50,000          50             8,950                        9,000
Feb. 26/97-- to an Individual for Professional
Services Rendered (A, W)                                         15,000          15             2,685                        2,700
Nov. 5/97-- to an Individual for Professional
Services Rendered (A, P)                                         20,000          20             2,980                        3,000
Nov. 5/97--to a Financial Public Relations Company
for  Professional Services Rendered (A, X)                      226,100         226            24,634                       24,860
Nov. 5/97-- to a Consulting Company for Professional
Services Rendered (A, Y)                                        100,000         100            10,900                       11,000
Dec. 31/97--Net Gain                                                                                         349,910       349,910
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1997                                  11,643,510      11,644         3,903,460     (3,977,260)      (62,156)
Jan 22/98--to a Financial Public Relations Co.
for Professional Services Rendered (X)                          200,000         200            21,800                       22,000
Apr. 13/98--for Professional Services Rendered (X)              100,000         100            14,900                       15,000
Jun. 4/98--for Professional Services Rendered (Y)                50,000          50             8,950                        9,000
Aug. 4/98--for Professional Services Rendered (R)                50,000          50             7,950                        8,000
Dec. 31/98--Net Loss                                                                                         (57,947)      (57,947)
                                                            -----------------------------------------------------------------------
BALANCE - DECEMBER 31, 1998                                  12,043,510    $ 12,044        $3,957,060   ($ 4,035,207)    ($ 66,103)

</TABLE>

                See accompanying notes to financial statements.
                                      F-7

<PAGE>


                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)
           Statement of Stockholders' Equity (Deficiency) (Continued)


(A)  The shares are subject to restrictions on transfers  imposed by Rule 144 of
     the Securities Act of 1993, as amended.

(B)  In  addition  to the  shares of common  stock  issued,  the same  number of
     warrants  were issued  entitling the  shareholder  to purchase one share of
     common stock at $1.50 per share until April 12, 1990 (extended to August 2,
     1991). On May 4, 1990 the Company,  pursuant to a Resolution adopted by its
     Board  of  Directors  at a  special  meeting  of its  Board  of  Directors,
     terminated and canceled the warrants.

(C)  Other property  consisted of an exclusive license to a patent and a service
     mark recorded at par value ($.001) of the shares of common stock issued. At
     the time of issuance of the shares,  the fair market  value of the property
     exchanged was not determinable.

(D)  Non-cash consideration received consisted of professional services rendered
     in connection with the  organization  and  development of the Company.  The
     shares of stock  issued for  non-cash  services  were  recorded at the fair
     market value of the services rendered.

(E)  The Company sold 312,500 shares of $.001 par value common stock at $.40 per
     share in a private placement offering during August 1986.

(F)  In addition to the shares of common stock issued, the shareholder  received
     three hundred thousand  warrants,  each entitling him to purchase one share
     of common stock at $1.50 per share until April 12, 1990 (extended to August
     2, 1991). On May 4, 1990 the Company,  pursuant to a Resolution  adopted by
     its Board of  Directors  at a Special  Meeting  of its Board of  Directors,
     terminated and canceled the warrants.

(G)  Property  consists  of  an  exclusive  license  Patent  No.  4,718,009,   a
     Registered Trademark  "Resource",  and a  Continuation-In-Part  of a patent
     application  called  "Debit  Card".  The Canadian  patent for Default Proof
     Credit Card  System was  granted and the Company was advised  that fees for
     issuance of such patent were due before December 12, 1990. The Company paid
     such fees on October 30, 1990.  The shares of common stock were recorded at
     fair market value ($1.00 per share). Additional paid-in capital was reduced
     by $799,200 to adjust for the excess of the fair market value of the shares
     issued over the contributors' cost of the license agreement.

(H)  Non-cash   consideration   received   consisted  of  services  rendered  in
     connection with the Company's 1987  self-underwriting  public offering. The
     shares of common  stock were  recorded at fair market  value at the date of
     issuance,  net of discounts for restricted stock  (approximately  $1.00 per
     share).  A corresponding  charge was made to additional  paid-in capital to
     reflect the public offering costs.

(I)  Non-cash consideration received consisted of professional services rendered
     in connection  with the lawsuit between the Company and State Street Bank &
     Trust  Company.  The shares of stock  issued  for  non-cash  services  were
     recorded at the fair market value at the date of issuance.

(J)  Shares  were  issued  to the  directors  and  officers  of the  Company  as
     consideration for their services as directors of the Company. The shares of
     stock issued for non-cash  services  were recorded at the fair market value
     of the shares at the date of issuance.

(K)  Non-cash consideration received consisted of professional services rendered
     for software  consulting.  The shares of stock issued for non-cash services
     were  recorded  at the  fair  market  value  of the  shares  at the date of
     issuance.


                See accompanying notes to financial statements.
                                      F-8
<PAGE>

                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)

           Statement of Stockholders' Equity (Deficiency) (Continued)

(L)  Non-cash consideration received consisted of a deferral on a loan repayment
     to an entity controlled by the Company's principal stockholder.  The shares
     of stock issued for non-cash consideration were recorded at the fair market
     value of the shares at the date of issuance.

(M)  In  connection  with a  license  agreement  between  the  Company  and  its
     principal  stockholder,  the  stockholder  was paid a fee in the  amount of
     $200,000  from the  proceeds  and  earnings of the  Company's  October 1987
     self-underwriting   public  offering.  The  $200,000  fee  was  charged  to
     additional paid-in capital.

(N)  Non-cash  consideration received consisted of promotion efforts with Credit
     Union  officers.  The shares of stock  issued for  non-cash  services  were
     recorded at the fair market value of the shares at the date of issuance.

(O)  Non-cash  consideration  received  consisted of  arranging  meetings and an
     agreement . The shares of stock issued for non-cash  services were recorded
     at the fair market value of the shares at the date of issuance.

(P)  Non-cash   consideration  received  consisted  of  secretarial  and  typing
     services. The shares of stock issued for non-cash services were recorded at
     the fair market value of the shares at the date of service.

(Q)  Non-cash  consideration  received  consisted of arranging  various meetings
     with  bankers,  investors  etc.  The shares of stock  issued  for  non-cash
     services  were  recorded at the fair market value of the shares at the date
     of service.

(R)  Non-cash  consideration received consisted of accounting services performed
     to date. The shares of stock issued for non-cash  services were recorded at
     the fair market value of the shares at the date of service.

(S)  Non-cash  consideration received consisted of introductions to investors in
     Ecuador.  The shares of stock issued for non-cash services were recorded at
     the fair market value of the shares at the date of service.

(T)  Non-cash  consideration  received  consisted  of work  related to  possible
     infringement on Company's  patent.  The shares of stock issued for non-cash
     services  were  recorded at the fair market value of the shares at the date
     of service.

(U)  Non-cash  consideration received consisted of waiver of accrued salaries up
     to 12/31/96. The shares of stock issued for non-cash services were recorded
     at the fair market value of the shares at the date of service.

(V)  Non-cash  consideration  received  consisted of  advertising  and marketing
     services  supplied at no charge since 1995.  The shares of stock issued for
     non-cash  services  were recorded at the fair market value of the shares at
     the date of service.

(W)  Non-cash  consideration  received  consisted of security legal advice since
     May 1995. The shares of stock issued for non-cash services were recorded at
     the fair market value of the shares at the date of service.

(X)  Non-cash   consideration   received   consisted  of  services   related  to
     communications  relating to investor relations.  The shares of stock issued
     for non-cash  services were recorded at the fair market value of the shares
     at the date of service.

(Y)  Non-cash consideration received consisted of consulting services related to
     the  preparation  of 10K filing.  The shares of stock  issued for  non-cash
     consideration  were  recorded at the fair market value of the shares at the
     date of issuance.

                See accompanying notes to financial statements.
                                      F-9
<PAGE>



                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)

                            Statements of Cash Flows

<TABLE>
<CAPTION>
                                                           Cumulative from                   Years ended
                                                            Aug. 14, 1985                  to December 31
                                                            Dec. 31, 1998                1998         1997
                                                            -------------                ----         ----
<S>                                                          <C>                         <C>         <C>

OPERATING ACTIVITIES
Net (Loss) Gain                                             $ (4,048,991)             $ (71,231)     $  349,410
Adjustments to Reconcile Net (Loss) Gain to
    Net Cash Used in Operating Activities:
        Depreciation & Amortization                              100,535                  2,784               -
        Loss on Marketable Securities                            130,741                      -               -
        Expired Public Offering Costs                            110,000                      -               -
        Cancellation of Stockholder Note Receivable               55,490                      -               -
        Stock Issued in lieu of Cash for Prof. Services          190,460                 56,500          50,560
        Stock Issued in lieu of Cash for Waived Salaries         294,000                      -               -
        Loss on Sale of Equipment                                 34,144                      -               -
        Decrease (Increase) in Other Assets                      (25,480)                     -               -
        Increase (Decrease) in Accrued Expenses                   38,781                 11,947        (405,550)
                                                                  ------                 ------        --------
        Net Cash Used in Operating Activities                 (3,120,320)                     -          (5,580)
                                                              ==========               ========           ======

INVESTING ACTIVITIES
Purchases of Marketable Securities                              (130,741)                     -               -
Purchases of Property & Equipment                               (136,980)                     -               -
Patent License Expenditures                                     (201,864)                     -               -
Proceeds from Sale of Equipment                                   22,994                      -               -
                                                                  ------
        Net Cash Used in Investing Activities                   (446,591)                     -               -

FINANCING ACTIVITIES
Proceeds from Issuance of Stock-Private Offerings                108,547                      -               -
Proceeds from Issuance of Stock-Public Offerings               3,150,163                      -               -
Proceeds from Issuance of Stock-Exercise of Warrants             240,358                      -               -
Capital Contributions                                             78,076                      -               -
Net Receipts/Advances to Stockholder                             (10,233)                     -           5,580
                                                                 -------              ----------          -----
        Net Cash Provided by Financing Activities              3,566,911                      -           5,580
                                                               ---------              ----------          -----
        NET INCREASE (DECREASE) IN CASH                                -                      -               -
        CASH - BEGINNING                                               -                      -               -
                                                               ---------              ----------          -----
        CASH - ENDING                                        $         -            $         -       $       -
                                                              ==========              ==========         ======
Supplemental disclosures:
Common Stock & Options issued for Services Rendered          $         -            $         -       $       -
                                                              ==========              ==========         ======

</TABLE>
                See accompanying notes to financial statements.
                                      F-10

<PAGE>
                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         Notes to Financial Statements
                               December 31, 1998


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization and Business Activity
----------------------------------

Default  Proof Credit Card System,  Inc. (the  "Company")  was  incorporated  on
August 14, 1985 under the laws of the State of  Florida.  The Company is engaged
in the  development  and marketing of a patented  financial  business system for
extending lines of credit on a collateralized basis to consumers.  The Company's
offices are located in Coral Gables,  Florida. The Company is in the development
stage and its  operation  to date have  largely  consisted  of the  research and
development of its product.

Use of Estimates
----------------

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

Earnings (Loss) Per Common Share
--------------------------------

In February  1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 128,  "Earnings  per
Share" which  simplifies the standards for computing  earnings per share ("EPS")
previously  found  in  APB  No.  15,  "Earnings  Per  Share".  It  replaces  the
presentation  of primary EPS with a presentation  of basic EPS. It also requires
dual  presentation of basic and diluted EPS on the face of the income  statement
for all entities with complex capital  structures and requires a  reconciliation
of the numerator and  denominator  of the diluted EPS  computation.  The Company
adopted  SFAS No. 128 in  January  1998 and its  implementation  did not have an
effect on the financial statements.  EPS has been restated for all prior periods
presented.  Net loss per common  share  (basic and  diluted) is based on the net
loss divided by the weighted average common shares outstanding during each year.
The  Company's   potentially   issuable  shares  of  common  stock  pursuant  to
outstanding stock options has been excluded from the calculation of diluted loss
per  share in 1998  since  the  effect  would  have  been  anti-dilutive  to the
Company's net loss per common share.

Patent Costs
------------

Costs incurred in connection  with  obtaining the license  agreement of a patent
have been  capitalized and are being amortized  using the  straight-line  method
over 17 years from the date of issuance of the patents.

Income Taxes
------------

The Company accounts for income taxes pursuant to the provisions of FASB No. 109
"Accounting for Income Taxes",  which requires,  among other things, a liability
approach to calculating  deferred income taxes. The asset and liability approach
requires the recognition Notes to Financial Statements  (Continued) December 31,
1998

                                      F-11
<PAGE>
                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                         Notes to Financial Statements
                               December 31, 1998

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):

of deferred tax liabilities and assets for the expected future tax  consequences
of  temporary  differences  between  the  carrying  amounts and the tax bases of
assets and liabilities. The Company has had operating losses since inception and
accordingly  has not  provided  for income  taxes.  Realization  of the benefits
related to the net operating loss  carryforwards  may be limited in any one year
due to IRS Code Section 382, change of ownership rules.

New Accounting Pronouncements
-----------------------------

Statement  of  Position  ("SOP")  98-5,  "Reporting  on the  Costs  of  Start-up
Activities",  provides guidance on the financial reporting of start-up costs and
organization  costs. It requires costs of start-up  activities and  organization
costs to be expensed as incurred.  The SOP is effective for financial statements
for fiscal years  beginning  after December 15, 1998.  The Company's  management
does not expect this SOP to have a material  impact on the  Company's  financial
position or results of operations.

In March 1998, the American Institute of Certified Public Accountants  ("AICPA")
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use ("SOP 98-1").  SOP 98-1 requires computer
software costs  associated with internal use software to be expensed as incurred
until certain  capitalization  criteria are met. The Company will adopt SOP 98-1
on  January  1, 1999.  Adoption  of this  statement  is not  expected  to have a
material impact on the Company's  financial  position,  results of operations or
cash flows.

SFAS No. 133,  "Accounting for Derivative  Instruments and Hedging  Activities",
establishes  accounting and reporting  standards for derivative  instruments and
for hedging activities.  It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial  position and measure
those  instruments at fair value.  The Statement  applies to all entities and is
effective for all fiscal  quarters of the fiscal years  beginning after June 15,
1999. The Company did not engage in derivative instruments or hedging activities
in any periods presented in the financial statements.

NOTE 2. GOING CONCERN CONSIDERATION

The accompanying  financial  statements have been prepared  assuming the Company
will  continue  as a  going  concern.  The  Company  suffered  losses  prior  to
commencement  of operations  and has a working  capital  deficiency.  Management
intends to actively market the Resource  System and a new (patent  pending) Line
of Credit  system.  The  Company is now  engaged  in  discussions  with  several
financial  institutions  for  its  development.  In  the  absence  of  achieving
profitable  operations,  or obtaining debt or equity financing,  the Company may
not have sufficient funds to continue through December 31, 1998.

                                     F-12

<PAGE>
                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                    Notes to Financial Statements (Continued)
                               December 31, 1998

NOTE 3. DUE FROM STOCKHOLDER

Due from  stockholder  consisted  of various  non-interest  bearing and due upon
demand advances.

NOTE 4. LICENSE AGREEMENT

The Company's  president and principal  stockholder was issued two U.S.  patents
and one  Canadian  patent  between  January  1988 and  February  1991,  and also
registered  in the U.S.  the  trademark  "Resource".  On February  9, 1993,  the
Company entered into a license agreement which revoked the prior agreement dated
January 8, 1991,  which provides the Company the exclusive rights and use of the
aforementioned  patents and trademark for an indefinite period of time in return
for  nominal  consideration  to the  stockholder.  Two  new  patents  are now in
process.

NOTE 5. EMPLOYMENT AGREEMENT

On  September  1, 1988,  the  president/principal  stockholder  entered  into an
employment  agreement  with  the  Company.   Pursuant  to  the  agreement,   the
stockholder  is to receive an annual salary of $144,000,  increased  annually by
the greater of 5% or the increase in the consumer price index.  However,  rights
to this salary and its increases have been permanently waived by the stockholder
until such time as the Company's  cash flows improve.  The agreement  terminates
upon  the  stockholder's  seventieth  birthday,  or  his  death  or  disability,
whichever  occurs  first.  The  agreement  also  provides that in the event of a
termination  for  other  than  cause,  death or  disability,  he  shall  receive
severance pay in the amount equal to his salary, payable during the remainder of
his employment term.


NOTE 6. STOCK OPTIONS

1988 STOCK OPTION PLAN

In August 1988, the Company adopted the 1988 Stock Option Plan. Under this plan,
stock  options  to  purchase  600,000  shares of common  stock may be granted to
employees,  officers and other  persons  providing  services to the  Company,  a
parent or a subsidiary of the Company.

The 1988 Stock Option Plan is intended to qualify as an "Incentive  Stock Option
Plan" under Section 422A of the Internal  Revenue  Code.  Under the Stock Option
Plan, incentive stock options may be granted at not less than 100 percent of the
fair  market  value of the  Company's  common  stock at the date the  option  is
granted (110% of fair market value for 10% or greater  shareholders) and options
granted to any one  participant  may not exceed

                                     F-13

<PAGE>
                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                    Notes to Financial Statements (Continued)
                               December 31, 1998


NOTE 6. STOCK OPTIONS (Continued)

1988 STOCK OPTION PLAN (Continued)

$100,000 in option price per year.  Options may be granted within ten (10) years
from the adoption of the 1988 Stock Option Plan.  Each option  granted under the
1988 Stock Option Plan must be exercised  within ten (10) years from the date of
grant.

No options were granted under the 1988 Stock Option Plan.

OTHER STOCK OPTIONS

During 1998,  five-year  non-plan  options to purchase  695,000 shares of common
stock at prices  ranging  between  $0.14 and $1.50 per share were granted to the
President and Vice President of the Company.  These options were fully vested at
the date of grant.

During 1997  five-year  non-plan  options to purchase  445,000  shares of common
stock,  at prices ranging  between $0.15 and $1.25 per share were granted to the
President and Vice President of the Company.  These options were fully vested at
the date of grant.

At December 31, 1998 and 1997 total non-plan options  outstanding were 2,125,000
and  1,525,000,  respectively.  At  December  31,  1998 and 1997  2,125,000  and
1,525,000, respectively, of the non-plan options were fully vested.

As of December  31, 1998 and 1997 the Company has agreed to grant its  President
other  five-year  non-plan  options of 5,250,000  and  2,250,000,  respectively,
contingent  upon the  issuance  of  certain  patents.  These  options  will have
exercise prices of $0.10 and $0.15, respectively.

STOCK BASED COMPENSATION

As required  by  Statement  of  Financial  Accounting  Standards  ("SFAS")  123,
pro-forma  information regarding net loss and loss per share has been determined
as if the Company had  accounted  for its employee  stock options under the fair
value method of that  statement.  The fair value for these options was estimated
at the  date of  grant  using a  Black-Scholes  option  pricing  model  with the
following  weighted-average  assumptions  for 1998;  risk-free rate of return of
5.0%; dividend yield of 0.0%;  volatility factor of the expected market price of
the Company's common stock of 1.41 and expected lives ranging from 1 to 5 years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options  that have not vesting  restriction  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective assumptions including the

                                     F-14

<PAGE>
                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                    Notes to Financial Statements (Continued)
                               December 31, 1998

NOTE 6. STOCK OPTIONS (Continued)

STOCK BASED COMPENSATION (Continued)

expected  stock price  volatility.  Because the  Company's  stock  options  have
characteristics significantly different from traded options, and because changes
in the  subjective  input  assumptions  can  materially  affect  the fair  value
estimate,  the existing  models,  in  management's  opinion,  do not necessarily
provide a reliable single measure of the fair value of its stock options.

Under the  accounting  provisions of SFAS No. 123, the  Company's  pro-forma net
loss and loss per share would have been:

                                                     Year Ended December 31,
                                                      1998              1997
                                                      ----              ----

        Net (loss) income
             As reported                         $   ( 71,231)     $  349,410
             Pro-forma                           $   (115,978)     $  347,518
        Net (loss) income per common share
             As reported                         $      (0.01)     $     0.03
             Pro-forma                           $      (0.01)     $     0.03


A summary of the status of the  Company's  fixed stock  option plan and non-plan
options as of  December  31, 1998 and 1997,  and  changes  during the years then
ended is presented  below:

                                                Year Ended December 31,
                                        --------------------------------------
                                             1998                1997
                                             ----                ----
                                                 Weighted            Weighted
                                                 Average             Average
                                                 Exercise            Exercise
                                        Shares   Price      Shares    Price
                                        ------   -----      ------    -----

Outstanding at beginning  of year     1,525,000  $ 0.33     1,080,000  $ 0.30
Granted                                 695,000  $ 0.33       445,000  $ 0.38
Exercised                                     -       -             -       -
Forfeited                               (95,000) $(0.25)            -       -
                                      ---------  ------     ---------  ------
Outstanding at end of year            2,125,000  $ 0.33     1,525,000  $ 0.33
Options  exercisable at year-end      2,125,000  $ 0.33     1,525,000  $ 0.33


                                     F-15

<PAGE>
                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                    Notes to Financial Statements (Continued)
                               December 31, 1998


Notes to Financial Statements (Continued)
December 31, 1998

NOTE 6. STOCK OPTIONS (Continued)

STOCK BASED COMPENSATION (Continued)

Weighted-average fair value of options granted during the year:

                                                Year Ended December 31,
                                                -----------------------
                                                 1998          1997
                                                 ----          ----
Below market                                   $   -           $0.15
At market                                      $   -           $0.15
Above market                                   $0.33           $1.25

                                  Options Outstanding and Exercisable
                         ----------------------------------------------------
                                              Weighted
                           Number             Average              Weighted
   Range of              Outstanding         Remaining             Average
   Exercise                  at             Contractual            Exercise
     Prices               12/31/98              Life               Price
     ------               --------              ----               -----
 $0.10 - $0.50           1,745,000           2.76 years            $  0.16
 $0.75 - $1.25             285,000           2.59 years            $  1.00
     $1.50                  95,000           4.59 years            $  1.50

NOTE 7. INCOME TAXES

At December 31,  1998,  the Company had a net  operating  loss  carryforward  of
approximately $4 million, that expires through 2013.

The Company has a deferred tax asset of approximately  $1,490,000 as a result of
net operating loss  carryforwards,  which is offset by a valuation  allowance of
the same amount due to the uncertainties behind its realization.

NOTE 8. SUBSEQUENT EVENTS (UNAUDITED)

Subsequent  to December 31, 1998,  the board of directors  authorized a 10-for-1
reverse split  effective after the close of business on February 4, 1999 for the
Company's common stock.

Subsequent to December 31, 1998,  40,000 shares of post-split  common stock were
granted to an outside firm for services.

Between February 11, 1999 and April 15, 1999 the Company issued 10,000 shares of
its post-split common stock to its President.


                                     F-16

<PAGE>
                    DEFAULT PROOF CREDIT CARD SYSTEM, INC.
                         (A DEVELOPMENT STAGE COMPANY)
                    Notes to Financial Statements (Continued)
                               December 31, 1998


NOTE 8. SUBSEQUENT EVENTS (UNAUDITED) (Continued)

In May 1999 options to purchase 25,000 shares of the Company's post-split common
stock  were  granted  to the  Company's  current  President.  Such  options  are
exercisable at $0.38 per share, are non-qualified and expire in May 2009.

On June 25,  1999,  Vincent  Cuervo  resigned  his  position as President of the
Company,  and David Koss was appointed as President and Chief Financial Officer.