MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL INC (MLSW.OB)

PLAN OF OPERATION
Sales and Marketing As discussed, the Company wishes to achieve significant market share for its products following the Acquisition through the utilization of methods already demonstrated by a number of companies to be extremely successful. One method involves distribution of free versions over the Internet, which has already proven to be an excellent way to attract future paying customers. Indeed, Linux itself has achieved its current market acceptance primarily because it has always been freely available over the Internet. Many other successful companies have used a similar model to establish market share including Netscape, Winzip, Eudora, Pegasus and Microsoft. Coupled with the free distribution of previous versions over the Internet, the Company will continue to offer commercial versions of its products that can be purchased directly off the MERLIN Website at prices from $69 to $89, and is aggressively pursuing contractual arrangements with distributors, resellers and other companies which will bundle its products together with MERLIN's products. Commercial versions of PerfectBackUP+ and HotWireFAX are purchased with, or without, a printed manual and come with 1 year support and maintenance service, including all updates and upgrades. For subsequent years, clients can purchase a subscription which provides ongoing service, support, updates and upgrades. The Company's sales and marketing strategy is to allocate $1,200,000 over nine months to position the major product, PerfectBackUP+ , in the industry and to increase its market share in an expanding market. The promotion strategy is quite comprehensive, and involves the hiring of nine direct sales personnel augmented by the distribution of advertising and promotional materials. In addition, trade shows and "show and tells" will be part of the strategy. MERLIN believes that the combination of the MERLIN Website, advertising, trade shows and a telemarketing campaign will be effective in gaining sales for its products. The Company's cash requirements for the 12 months ending December 31, 2001 are estimated at $4,000,000. The Company anticipates that it will be able to meet these cash requirements by raising additional equity funds through private placements. The cash requirements of $4,000,000 are based on the Company's estimates for operational costs in the 12 months ended December 31, 2001. Research and Development The Company has not expended any funds to date on the research and development of the Company. MERLIN estimates that it has expended $121,000 on the development of its current software programs. Following the Acquisition, the Company anticipates that it will require $1,800,000 to fund the continued development and enhancement of PerfectBackUP+ , HotWireFAX and the Option Source Project. The Company anticipates that it will expend $200,000 on the continued development and enhancement of PerfectBackUP+ , $165,000 on the continued development and enhancement of HotWireFAX and $1,435,000 on the development and operation of the Open Source Project.

Product Development

FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS

Certain statements contained in this Annual Report on Form 10-KSB, including, without limitation, statements containing the words "believes", "anticipates", "estimates", "intends", "expects" and words of similar import, constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. Although management believes that the expectations reflected in these forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Actual results could vary materially from those expressed in those statements. Readers are referred to "Products", "Sales and Marketing", "Product Development", "Competition", "Product Protection" and "Management's Discussion and Analysis or Plan of Operation" sections contained in this Annual Report as well as the factors described below in the section entitled "Factors That May Affect the Company's Future Results", which IDEntify some of the important factors or events that could cause the Company's and MERLIN's actual results or performance to differ materially from those contained in the forward looking statements. The following discussion relates to the factors which may substantially affect the business to be carried on by the Company and MERLIN, since the Acquisition has been completed.

THE COMPANY MAY NOT BE SUCCESSFUL IN THE OPEN SYSTEMS MARKET

The future success of the Company's business is substantially dependent on its ability to generate revenues from its product offerings. In February and March of 2000, MERLIN entered into various distribution and reseller agreements to distribute or bundle PerfectBackup+ in the United States, India and Europe. While these agreements are significant, there can be no assurance that the Company will be successful in their efforts to generate revenues from these agreements. Additionally, the software application market is characterized by rapid technological growth and intense competition. The Company may not have the financial or personnel resources to effectively capitalize on, and continue with, its early and limited success in this market.

THE COMPANY IS DEPENDENT ON RESELLERS AND IF THE COMPANY IS NOT SUCCESSFUL IN EXPANDING ITS DISTRIBUTION CHANNELS, ITS ABILITY TO GENERATE REVENUES WILL BE HARMED

The Company's growth will be dependent on its ability to expand its third-party distribution channels to market, sell and distribute its software products. The Company is currently investing, and intends to continue to invest, significant resources to develop these distribution channels, which could materially adversely affect the Company's ability to generate revenues. The Company has only limited experience in marketing its products through distributors and resellers. Additionally, the Company will have no control over its third-party distributors. There can be no assurance that the Company will be successful in its efforts to generate revenue from these distribution channels, nor can there be any assurance that it will be successful in recruiting new organizations to represent it and its products. In February and March of 2000, MERLIN entered into various distribution and reseller agreements to distribute and/or bundle its software products in the United States, India and Europe. While the Company believes that these arrangements will be beneficial, there can be no assurance that the Company will be able to deliver its products to these companies in a timely manner or that these companies will license its products in volumes anticipated by the Company. Further, these agreements are the Company's only significant distribution agreements to date. While the Company's strategy is to enter into additional agreements with resellers and distributors, it may not be able to successfully attract additional vendors to distribute its products. Any such failure would result in the Company having expended significant resources with little or no return on its investment, which would significantly harm its business. These additional investments and responsibilities will require the Company to expend substantial resources and may require it to divert employees from other projects to provide the support services and development efforts required to provide products and services to these third party vendors and other new third parties, if any.

THE COMPANY'S MARKET IS SUBJECT TO INTENSE COMPETITION AND CONTINUED COMPETITION IN ITS MARKET MAY LEAD TO A REDUCTION IN ITS PRICES, REVENUES AND MARKET SHARE

The Company may experience intense competition from other software development companies and the market is rapidly changing. The Company believes that its ability to compete successfully depends on a number of factors, including the performance, price and functionality of its products relative to those of its competitors. Most of the Company's competitors are larger and have greater financial, technical, marketing, support and other resources. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements than the Company. In addition, the software industry is characterized by low barriers to entry. There can be no assurance that the Company's current competitors or any new market entrants will not develop software products that offer significant performance, price, or other advantages over the Company's products. In addition, operating system vendors could introduce new or upgrade existing operating systems or environments that include similar software programs to those offered by the Company, which could render its products obsolete and unmarketable. The Company may not be able to successfully compete against current or future competitors which could significantly harm its business.

THE COMPANY ANTICIPATES THAT A SIGNIFICANT PORTION OF ITS REVENUES WILL BE DERIVED FROM A SINGLE PRODUCT AND IF THAT PRODUCT FAILS TO ACHIEVE AND MAINTAIN MARKET ACCEPTANCE, THE COMPANY'S BUSINESS MAY BE SIGNIFICANTLY HARMED

The Company expects that a substantial portion of its revenue in future periods will be derived from its PerfectBackUP+ software application. The Company expects that the PerfectBackUP+ product and its extensions and derivatives will account for a substantial majority, if not all, of the Company's revenue for the foreseeable future. Broad market acceptance of PerfectBackUP+ is, therefore, critical to its future success. Failure to achieve broad market acceptance of PerfectBackUP+ , as a result of competition, technological change, or otherwise, would significantly harm its business. The Company's future financial performance will depend in significant part on the successful development, introduction and market acceptance of PerfectBackUP+ and its product enhancements. There can be no assurance that the Company will be successful in marketing PerfectBackUP+ or any new products, applications or product enhancements, and any failure to do so would significantly harm its business.

THE MARKET FOR THE COMPANY'S PRODUCTS IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND THE COMPANY MAY NOT BE ABLE TO DEVELOP OR MARKET NEW PRODUCTS TO RESPOND TO SUCH CHANGE

The market for the Company's products is characterized by rapid technological developments, evolving industry standards and rapid changes in customer requirements. The introduction of products embodying new technologies, the emergence of new industry standards, or changes in customer requirements could render the Company's existing products obsolete and unmarketable. As a result, its success depends upon the Company's ability to continue to enhance existing products, respond to changing customer requirements and rapidly develop and introduce new products that keep pace with technological developments and emerging industry standards. Additionally, other operating systems, such as Windows NT, may significantly affect deployment of UNIX and Linux systems for business critical applications. A significant portion of the Company's revenue will be derived from UNIX and Linux based computer systems for the foreseeable future. A significant decline in sales of UNIX and Linux based systems would decrease the demand for the Company's products and would significantly harm its business. Finally, the Company may not be successful in developing and marketing, on a timely basis, product enhancements or new products that respond to technological change or evolving industry standards, the Company may experience difficulties that could delay or prevent the successful development, introduction and sale of these products, and any such new products or product enhancements may not adequately meet the requirements of the marketplace and achieve market acceptance.

THE COMPANY HAS A HISTORY OF LOSSES AND ANTICIPATES FURTHER SIGNIFICANT LOSSES AND CANNOT ASSURE THAT IT WILL ACHIEVE PROFITABILITY

The Company and MERLIN have each incurred operating losses since inception and cannot be certain that it will generate revenue sufficient to achieve profitability. The Company expects to continue to incur significant losses for the foreseeable future and these losses may be higher than its current losses. The Company cannot be certain when or if it will achieve profitability. Failure to become and remain profitable may adversely affect the market price or the Company's common stock and its ability to raise capital and continue operations.

FURTHER CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING

From inception, the Company and MERLIN have financed its operations through sales of equity securities. The Company's existing capital resources are adequate to maintain its current operations through June, 2000. However, the Company will require substantial additional financing to implement its current plans to expand its operations and fund its long-term product development. The Company has been actively seeking financing to expand its operations. If any planned financing fails to close and the Company is are unable to obtain alternative financing as needed, its long- term product development and commercialization programs would be delayed or prevented and the Company may be required to curtail its operations.

PENNY STOCK RULES

The Company's common shares are subject to rules promulgated by the SEC relating to "penny stocks," which apply to companies whose shares are not traded on a national stock exchange or on the NASDAQ system, trade at less than $5.00 per share, or who do not meet certain other financial requirements specified by the SEC. These rules require brokers who sell "penny stocks" to persons other than established customers and "accredited investors" to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in the such penny stocks. These rules may discourage or restrict the ability of brokers to sell the Company's common shares and may affect the secondary market for the Company's common shares. These rules could also hamper the Company's ability to raise funds in the primary market for the Company's common shares.

NATURE OF THE COMPANY'S PRESENT OPERATIONS

The success of the Company's proposed plan of operation will depend to a great extent on the operations, financial condition, and management of MERLIN. MERLIN has a limited operating history, as it was incorporated on June 25, 1999. As a result, the Company cannot ensure that it will be a commercially or economically viable business operation. It will face all of the risks inherent in a new business, the majority of which are beyond the control of the management of both the Company and MERLIN.

RECENT MARKET DEVELOPMENT

The markets for MERLIN's products and services have only recently begun to develop. Demand and market acceptance for software products developed under the open source development model and services relating to these products are subject to a high level of uncertainty and risk. Few open source software products have gained widespread commercial acceptance. This is partly due to the lack of viable open source industry participants to offer adequate service and support on a long term basis. In addition, open source vendors are not able to provide industry standard warranties and indemnities for their products, since these products have been developed largely by independent parties over whom open source vendors exercise no control or supervision. Finally, there are currently few widely available commercial applications built for use with open source operating systems, such as those based on the Linux kernel. If open source software should fail to gain widespread commercial acceptance, the Company's business, operating results and financial condition would be materially adversely affected.

INTERNET AVAILABILITY

MERLIN's historical business has been based on the sale of the official versions of PerfectBackUP+ . Using a standard telephone connection, a user can currently download PerfectBackUP+ from the Internet free of charge. Although the distribution of free older versions over the Internet has proved to be an excellent way in which to attract future paying customers, the Company would prefer users to purchase the official versions. To avoid significant download time, users can purchase the shrink-wrapped version of PerfectBackUP+ . If hardware and data transmission technology advances in the future to the point where increased bandwidth allows PerfectBackUP+ to be more quickly downloaded from the Internet, users may no longer choose to purchase the latest release of PerfectBackUP+ . Any resulting decrease in product revenue as a result, if significant, could have a material adverse effect on the Company's business, operating results and financial condition.

DIFFICULTIES IN DEPLOYING THE COMPANY'S PRODUCTS

Deployment of the Company's products often involves a significant commitment of resources, financial and otherwise, by its customers. The deployment process can be lengthy due to the size and complexity of the Company's products and the need to purchase and install new applications. If the Company fails to attract and retain services personnel, the failure of companies with which MERLIN has relationships to commit sufficient resources towards deploying its products, or a delay in deployment for any other reason could result in dissatisfied customers. This could have a material adverse effect on the Company's reputation and on the MERLIN brand, which in turn could materially adversely affect the Company's business, operating results and financial condition.

LIMITED OPERATING HISTORY/EARLY STAGE COMPANY

MERLIN was incorporated on June 25, 1999, and accordingly, both the Company and MERLIN have a relatively limited operating history upon which potential investors in the Company can evaluate its business and prospects. Investors must consIDEr the Company's prospects in light of the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets.

FLUCTUATION OF QUARTERLY RESULTS/DIFFICULTY IN FORECASTING QUARTERLY RESULTS

Due to the Company's and MERLIN's limited operating history and the unpredictability of the software industry generally, the Company's predicted revenue and net income (loss) may fluctuate significantly from quarter to quarter and, as a result, are difficult to forecast. The Company bases its current and projected future expense levels in part on its estimates of future revenue. The Company's expenses are to a large extent fixed in the short term. It may not be able to adjust its spending quickly if revenues fall short of the Company's expectations. Accordingly, a revenue shortfall in a particular quarter would have a disproportionate adverse effect on the Company's net income (loss) for that quarter. Further, the Company may make pricing, purchasing, service, marketing, acquisition or financing decisions that could adversely affect its business, operating results and financial condition. The Company's quarterly operating results will fluctuate for many reasons, including: - the Company's ability to retain existing customers, attract new customers and satisfy its demand; - changes in gross margins of current and future products and services; - the timing of the release of upgraded versions of the Company's products; - introduction of new products and services by the Company or the its competitors; - changes in the market acceptance of Linux and UNIX-based operating systems and software programs; - changes in the usage of the Internet and online services; - timing of upgrades and developments in the Linux kernel and other open source software products; - the effects of acquisitions and other business combinations, including one-time charges, goodwill amortization and integration expenses or difficulties; and - technical difficulties or system downtime affecting the Internet or the Website. For these reasons, investors should not rely on period-to-period comparisons of the Company's financial results to forecast its future performance. The Company's future operating results may fall below expectations of securities analysts or investors, which would likely cause the trading price of the Company's common stock to decline significantly.

STRAIN ON RESOURCES AS A RESULT OF RAPID GROWTH

Since MERLIN's incorporation, it has experienced a period of rapid growth and expansion which has placed, and continues to place, a significant strain on its resources. The Company expects that its anticipated growth will further strain management, operational and financial resources. The Company's management team has had limited experience managing a rapidly growing company on either a public or private basis. To accommodate its anticipated growth, the Company must: - improve existing and implement new operational and financial systems, procedures and controls; - hire, train and manage additional qualified personnel, including sales and marketing, professional services and software engineering and development personnel; and - effectively manage multiple relationships with its customers, suppliers and other third parties. The Company may not be able to install and implement adequate operational and financial systems, procedures and controls in an efficient and timely manner, and the Company's current or planned systems, procedures and controls may not be adequate to support its future operations. The difficulties associated with installing and implementing these new systems, procedures and controls may place a significant burden on management and internal resources. In addition, if the Company grows internationally, as it intends, it will have to expand its worldwide operations and enhance its communications infrastructure. Any delay in the implementation of, or any disruption in the transition to, new or enhanced systems, procedures or controls could adversely affect the Company's ability to accurately forecast sales demand, manage our supply chain, and record and report financial and management information on a timely and accurate basis. The Company's inability to manage growth effectively could have a material adverse effect on its business, operating results and financial condition.

KEY EMPLOYEES

The Company's future success depends on the continued services of its key officers, including Robert Heller (President and CEO), Gary Heller (CIO and Secretary) and Shelley Montgomery (Vice President of Sales and Treasurer). The loss of the technical knowledge and industry expertise of any of these people could seriously impede the Company's success. Moreover, the loss of one or a group of the Company's key employees, particularly to a competitor, and any resulting loss of customers to a competitor could materially adversely affect the Company's business, operating results and financial condition.

COMPETITION - Linux AND UNIX-BASED PRODUCTS AND TOOLS

The market for Linux and UNIX-based products and tools is new, rapidly evolving and intensely competitive. The Company expects competition to persist and intensify in the future. The Company expects the number of suppliers of Linux and UNIX-based software applications to grow as Linux and UNIX-based operating systems gain increased market share from its competition. In addition, there are a number of companies with large customer bases and greater financial resources and name recognition, such as Sun Microsystems, Corel and Cygnus Solutions, that have indicated a growing interest in the market for Linux and UNIX-based products and tools. These companies may be able to undertake more extensive promotional activities, adopt more aggressive pricing policies, and offer more attractive terms to their customers than the Company. Barriers to entry are minimal and accordingly, it is possible that new competitors or relationships among competitors may emerge and rapidly acquire significant market share. These companies may be able to leverage their existing service organizations and provide higher levels of support on a more cost-effective basis than the Company. If the Company is not able to compete successfully with current or future competitors, its business, operating results and financial condition will be materially adversely affected.

ESTABLISHMENT AND MAINTENANCE OF BUSINESS RELATIONSHIPS

The Company's success depends on its ability to continue to establish and maintain distribution, reseller and other collaborative relationships with industry-leading hardware manufacturers, distributors, software vendors and enterprise solutions providers in order to offer products and services to a larger customer base than the Company could otherwise reach through direct sales and marketing efforts. The Company must develop and expand its distribution channels through relationships with original equipment manufacturers (OEMs) and value-added resellers (VARs). If the Company is unable to maintain its existing relationships or enter into additional relationships, it will have to devote substantially more resources to the distribution, sale and marketing of its products than it otherwise intends to, and the Company's business, operating results and financial condition would be materially adversely affected. The Company's existing relationships do not, and any future relationships may not, afford the Company any exclusive marketing or distribution rights. The companies with which MERLIN currently has such relationships are free to pursue alternative technologies and to develop alternative products in addition to or in lieu of its products, either on their own or in collaboration with others, including the Company's competitors. The Company cannot guarantee that its resellers and distributors will market the Company's products effectively or continue to devote the resources necessary to provide effective sales, marketing and technical support. In order to support and develop leads for the Company's distribution channels, it plans to expand its field sales and support staff significantly. The Company cannot guarantee that it will be able to successfully complete this internal expansion, that the revenue generated from this expansion will exceed its cost or that the Company's expanded sales and support staff will be able to compete successfully against the significantly more extensive and better-funded sales and marketing operations of many of our current or potential competitors. The Company's inability to effectively manage the expansion of its sales and support staff, or its programming staff, would materially adversely affect the Company's business, operating results and financial condition.

INTERNATIONAL EXPANSION

The Company plans to expand its presence in foreign markets, and indeed has done so through agreements with such companies as Italsel SRI (Italy), G.T. Enterprises (India) and Hanmi Information & Communications Co. Ltd. (Korea). The Company has little experience in marketing and distributing products or services for these markets and there can be no assurance that any revenues will be generated as a result of such agreements. As the Company expands its international operations, it will face a number of additional risks associated with the conduct of business overseas, including: - difficulties relating to the management and administration of a globally- dispersed business; - fluctuations in exchange rates; - the burdens of complying with a wide variety of foreign laws; - the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property rights; - reductions in business activity during the summer months in Europe and certain other parts of the world; - export controls; - multiple and possibly overlapping tax structures; - changes in import/export duties and quotas; and - economic or political instability in some international markets.

NEW BUSINESS COMBINATIONS/ALLIANCES

The Company may expand its operations or market presence by entering into business combinations, investments, joint ventures or other strategic alliances with other companies. These transactions create risks such as: - difficulty assimilating the operations, technology and personnel of the combined companies; - disruption of the Company's ongoing business; - problems retaining key technical and managerial personnel; - one-time in-process research and development charges and ongoing expenses associated with amortization of goodwill and other purchased intangible assets; - potential dilution to the Company's stockholders; - additional operating losses and expenses of acquired businesses; and - impairment of relationships with existing employees, customers and business partners. The Company's inability to address these risks could have a material adverse effect on its business, operating results and financial condition.

COMPETITION FOR SKILLED PERSONNEL

NEED FOR CONTINUED DEVELOPMENT AND MAINTENANCE OF THE INTERNET'S INFRASTRUCTURE

The success of the Company's Internet strategy will depend in large part on the continued development and maintenance of the infrastructure of the Internet. Because global commerce and the online exchange of information is new and evolving. the Company cannot predict with any certainty that the Internet will be a viable commercial marketplace in the long term. The Internet has experienced, and it may continue to experience, significant growth in number of users and amount of traffic. To the extent that the Internet continues to experience an increased number of users, frequency of use or increased bandwidth requirements of users, it may not be able to support the demands placed upon it by such growth, and its performance and reliability may suffer. Furthermore, the Internet has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and could face similar outages and delays in the future. Any outage or delay could affect the level of Internet usage, as well as the level of traffic on the Website. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of activity or due to increased governmental regulation. If the necessary infrastructure, standards or protocols or complementary products, services or facilities are not developed, or if the Internet does not become a viable commercial marketplace, the Company's business, operating results and financial condition could be materially adversely affected. Fire, floods, hurricanes, tornadoes, earthquakes, power loss, telecommunications failures, break-ins and similar events could damage MERLIN's computer hardware systems. In addition, although MERLIN has implemented network security measures, its servers are vulnerable to computer viruses, electronic break-ins, human error and other similar disruptive problems which could adversely affect its systems and the Website. Although MERLIN has tried to prevent unauthorized access to its systems, it cannot eliminate this risk entirely. The Company's business could be adversely affected if MERLIN's systems were affected by any of these occurrences. The Company's insurance policies may not adequately compensate it for any losses that may occur due to failures or interruptions in the Company's systems. It does not presently have any secondary "off-site" systems or a formal disaster recovery plan. The Website must accommodate a high volume of traffic and deliver frequently updated information. The Website has in the past experienced slower response times or decreased traffic for a variety of reasons. These occurrences have not had a material impact on MERLIN's business. These types of occurrences in the future, however, could materially adversely affect its reputation and brand name and could cause users to perceive the Website as not functioning properly. Under these circumstances, the Company's customers could choose another website or other methods to obtain Linux or UNIX-related information.

POSSIBILITY OF PRODUCT DEFECTS

Despite testing, errors may be found in the Company's products after commencement of commercial shipments. If errors are discovered, the Company may not be able to successfully correct them in a timely manner or at all. Errors and failures in the Company's products could result in a loss of, or delay in, market acceptance of its products and could damage its reputation and ability to convince commercial users of the benefits of Linux or UNIX-based operating systems and other open source software products. In addition, the Company may need to make significant expenditures of capital resources in order to eliminate errors and failures. Although the license agreements with the Company's customers typically contain provisions designed to limit the Company's exposure to potential product liability claims, it is possible that these provisions may not be effective or enforceable under the laws of some jurisdictions. In addition, the Company's insurance policies may not adequately limit its exposure with respect to this type of claim. A product liability claim, even if unsuccessful, could be costly and time consuming. Claims related to the occurrence or discovery of these types of errors or failures could have a material adverse effect on the Company's business, operating results and financial condition.

INFRINGEMENT CLAIMS

The Company may be subject to future litigation based on claims that its products infringe the intellectual property rights of others. Claims of infringement could require that the Company reengineer its products or seek to obtain licenses from third parties in order to continue offering its products. In addition, an adverse legal decision affecting the Company's intellectual property, or the use of significant resources to defend against this type of claim, could materially adversely affect the Company's business, operating results and financial condition.

TRADEMARK PROTECTION

There is no assurance that patent, copyright and trademark registration or protection for MERLIN's intellectual property will be available, and therefore the Company may have little or no protection for its intellectual property assets, comprising the main business assets of the Company. MERLIN's software technology, business tools, consumer products and its other intellectual property are important to the Company's continued operations and success. The Company's efforts to protect this intellectual property may not be adequate. Unauthorized parties may infringe upon or misappropriate its software technology, business tools and consumer products or other proprietary information. In the future, litigation may be necessary to protect and enforce the Company's intellectual property rights or to determine the validity and scope of its intellectual property, which could be time consuming and costly. The Company could also be subjected to intellectual property infringement claims as the numbers of competitors grows. These claims, even if not meritorious, could be expensive and divert the Company's attention from its continued operations. If the Company becomes liable to any third parties for such claims, it could be required to pay a substantial damage award or to develop comparable non-infringing intellectual property and systems.

ITEM 7. FINANCIAL STATEMENTS.

The Company's financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. The financial statements are attached hereto and are found immediately following the text of this Annual Report. The Report of Independent Accountants of BDO Dunwoody LLP, Chartered Accountants, on the audited financial statements for the fiscal years ended December 31, 1999 and 1998 is included herein immediately preceding the audited financial statements. The Company's Audited Financial Statements include: Report of Independent Accountants, dated March 24, 2000. Balance Sheet at December 31, 1999. Statement of Operations for the Years Ended December 31, 1999 and 1998, and for the period from August 30, 1995 (inception) to December 31, 1999. Statement of Changes in Capital Deficit for the Years Ended December 31, 1999 and 1998, and for the period from August 30, 1995 (inception) to December 31, 1999. Statement of Cash Flows for the Years Ended December 31, 1999 and 1998, and for the period from August 30,1995 (inception) to December 31, 1999. Summary of Significant Accounting Policies. Notes to the Financial Statements. MERLIN's Audited Financial Statements include: Auditor's Report of BDO Dunwoody LLP, dated February 18, 2000. Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Differences, dated February 18, 2000. Balance Sheet at December 31, 1999. Statement of Changes in Capital Deficit for the period from June 25, 1999 (inception) to December 31, 1999. Statement of Operations for the period from June 25, 1999 (inception) to December 31, 1999. Statement of Cash Flows for the period from June 25, 1999 (inception) to December 31, 1999. Summary of Significant Accounting Policies. Notes to the Financial Statements. Prior to the Acquisition, the Company was not operating, and had no assets and no revenue during 1999. Pro-forma financial statements, which serve to state the results of 1999 as if MERLIN and the Company had combined operations during 1999, therefore, will not differ in any material way from the audited financial statements of MERLIN; therefore, the Company has not included separate pro-forma financial statements.

MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.(FORMERLY AUSTIN LAND & DEVELOPMENT, INC.) (A DEVELOPMENT STAGE COMPANY) FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 CONTENTS REPORT OF INDEPENDENT ACCOUNTANTS FINANCIAL STATEMENTS

REPORT OF INDEPENDENT ACCOUNTANTS TO THE DIRECTORS AND STOCKHOLDERS OF MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC. (FORMERLY AUSTIN LAND & DEVELOPMENT, INC.)

We have audited the Balance Sheet of MERLIN Software Technologies International, Inc. (formerly Austin Land & Development, Inc.) (a development stage company) as at December 31, 1999, the Statements of Operations, Changes in Capital Deficit and Cash Flows for the years ended December 31, 1999 and 1998 and for the period from August 30, 1995 (inception) to December 31, 1999. 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. Those standards require that we plan and perform an audit to obtain reasonable assurance 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, these financial statements present fairly, in all material respects, the financial position of MERLIN Software Technologies International, Inc. (formerly Austin Land & Development) (a development stage company) as at December 31, 1999 and the related statements of Operations, Changes in Capital Deficit and Cash Flows for the years ended December 31, 1999 and 1998 and for the period from August 30, 1995 (inception) to December 31, 1999 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has no established source of revenue. This raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ BDO Dunwoody LLP Chartered Accountants Vancouver, Canada March 24, 2000

MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.(FORMERLY AUSTIN LAND & DEVELOPMENT, INC.) (A DEVELOPMENT STAGE COMPANY)BALANCE SHEET DECEMBER 31, 1999

LIABILITIES AND CAPITAL DEFICIT

LIABILITIES

MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL, INC.

(FORMERLY AUSTIN LAND & DEVELOPMENT, INC.)

(A DEVELOPMENT STAGE COMPANY)

For more information, contact:

MERLIN Software Technologies International, Inc.
Suite 200 & 201 - 4199 Lougheed Hwy.
Burnaby, B.C. V5G 3Y6.

Toll Free: (877) 988-7227
Web site: www.merlinsoftech.com

Statements in this news release which are not purely historical are forward-looking statements, including any statements regarding belief, plans, expectations or intentions regarding the future. Unforeseen factors could cause results to differ materially from expectations, and include risks that marketing efforts may not result in sales, among other potential risks.

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