MERLIN SOFTWARE TECHNOLOGIES INTERNATIONAL INC (MLSW.OB)

2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

The following discussion and analysis should be read in conjunction with the Company's financial statements and the notes thereto, included as part of this Quarterly Report.

Certain statements contained in this Quarterly Report on Form 10-QSB, 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 the Company's 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 forward-looking statements. Readers are referred to "Sales and Marketing", "Product Development" and "Management's Discussion and Analysis or Plan of Operation" sections contained in this Quarterly 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.

ACQUISITION OF MERLIN SOFTWARE TECHNOLOGIES, INC.

As described in the Company's Form 10-QSB for the quarter ended March 31, 2000, the Company acquired (the "Acquisition") all of the issued and outstanding shares of MERLIN Software Technologies, Inc. ("MERLIN") as of April 26, 2000. The Company continues the business operations of MERLIN (see "Business of MERLIN Software Technologies, Inc." below).

The Company, MERLIN and certain principal shareholders of MERLIN entered into a Share Exchange Agreement, dated April 3, 2000 (the "Share Exchange Agreement"), that provided for, among other matters, the following:

- On April 26, 2000, the effective date of the Share Exchange (the "Effective Date"), and without any further action on the part of the shareholders of MERLIN, all of the common shares of MERLIN (an aggregate of 7,986,665) were available for exchange for an equal number of common shares of the Company (the "Exchange Shares").

- The Exchange Shares were issued and continue to be available for issuance from the treasury of the Company as fully paid and non-assessable shares, and are free and clear of all liens, charges and encumbrances. After the Share Exchange, the Exchange Shares will be "restricted shares" under Rule 144 of the Securities Act and subject to certain hold periods of one (1) or more years unless such common shares are registered under the Securities Act of 1933.

- Following the Effective Date, by virtue of the Share Exchange, all outstanding warrants of MERLIN (an aggregate of 86,665) were available for exchange for an equal number of warrants, and the outstanding stock options of MERLIN (an aggregate of 781,000) were exchanged for an equal number of stock options in the Company, as applicable (one warrant or stock option of the Company for each warrant or stock option of MERLIN). The terms applicable to the MERLIN warrants or stock options will be applicable to the warrants or stock options of the Company.

The exchange ratio of the Share Exchange was determined by the Company and MERLIN based on a variety of factors and does not bear any direct relationship to the assets or results of operations of the Company and MERLIN, or to any other historically-based criteria of value. In determining such ratio, consideration was given to, among other things, each of the Company's and MERLIN's prospects and earnings potential, its management and the risks associated with an exchange of the common shares of MERLIN. Additionally, consideration was given to the general status of the economy, the history and prospects of the e-commerce industry and other relevant factors.

MERLIN has authorized 50,000,000 shares of common stock, par value US$0.001 per common share, and had 7,986,665 common shares issued and outstanding prior to the Acquisition. MERLIN has also authorized 1,000,000 preferred shares, par value $0.01 per preferred share, none of which are issued and outstanding.

The Company has authorized 50,000,000 common shares with par value US$0.001 per common share, with 4,450,025 common shares issued and outstanding prior to the Acquisition. Pursuant to the Share Exchange Agreement, the Company was required to issue 7,986,665 common shares of the Company in exchange for all of the issued and outstanding common shares of MERLIN, and as of July 21, 2000, the Company had an aggregate of 12,263,357 common shares issued and outstanding. Following the exchange of all of the MERLIN shares (146,666 of which have yet to be tendered for exchange by the registered shareholders), the former shareholders of MERLIN will hold approximately 64% of the issued and outstanding common shares of the Company.

All shareholders of MERLIN and the Board of Directors of each of MERLIN and the Company consented to the Acquisition, and the Acquisition was completed on April 12, 2000, subject only to the share certificates, options and share purchase warrants of the Company being issued to the former shareholders of MERLIN, the majority of which have now been exchanged. As noted above, the Effective Date was April 26, 2000, being the date the Articles of Share Exchange were filed with the Secretary of State for Nevada. MERLIN is now a wholly owned subsidiary of the Company.

BUSINESS OF MERLIN SOFTWARE TECHNOLOGIES, INC.

A detailed description of MERLIN's business, which is now carried on by the Company following the Acquisition, can be found in the Company's Form 10-KSB Annual Report, filed on April 14, 2000.

PLAN OF OPERATION

The Company presently requires substantial financing to implement any of its current sales and marketing, product development, research and development or any other operational plans, all as described below. Although the Company has been actively seeking financing to expand its operations, it has yet to obtain any such financing and if it fails to obtain additional financing, it will be required to significantly curtail its current operations.

Sales and Marketing

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 such method involves the distribution of free versions of the Company's products 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 of its products over the Internet, the Company will continue to offer commercial versions of its products which are available for purchase directly from the Company's website at www.merlinsoftech.com (the "Website"), at prices ranging from $69 to $89. The Company is aggressively pursuing contractual arrangements with distributors, resellers and other companies which will bundle its products together with the Company'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 intends to continue to allocate $300,000 over the next six months to position its 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 three 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. The Company believes that the combination of the Website, advertising, trade shows and a direct marketing campaign will be an effective manner via which to gain sales for its products.

The Company's sales and marketing strategy is wholly dependent on the Company's ability to raise further financing through the sale of its common shares or securities convertible into its common shares. Although the Company has been actively seeking financing to expand its operations, it has yet to obtain any such financing and if it fails to obtain additional financing, it will be required to significantly curtail its current operations, including its sales and marketing plans.

The Company did not proceed with the aggressive advertising campaign as planned during the first and second quarters of 2000 due to a change in its marketing strategy. The campaign was to form part of the originally estimated $1,200,000 budgeted for marketing.

The Company did not enter into any further reseller and/or distributor agreements during the second quarter of 2000. While revenues were still low, sales of PerfectBackUP+ increased each month during the second quarter. It is not expected that there will be any revenues from HotWire FAX until the last quarter of 2000.

The Website was significantly upgraded during the first quarter and arrangements were made to improve the Website's visibility. The Company did not substantially upgrade the Website during the second quarter.

Cash Requirements

The Company's cash requirements for the 12 months ending June 30, 2001 are estimated at $3,000,000. 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 $3,000,000 are based on the Company's estimates for operational costs in the 12 months ended June 30, 2001.

The Company presently requires substantial financing to implement any of its current sales and marketing, product development, research and development or any other operational plans. Although the Company has been actively seeking financing to expand its operations, it has yet to obtain any such financing and if it fails to obtain additional financing, it will be required to significantly curtail its current operations.

Research and Development

MERLIN estimates that it expended $98,329 on the development of its current software programs to December 31, 1999. During the six month period ended June 30, 2000, MERLIN spent approximately $285,000 on the development of its software products, primarily PerfectBackUP+ . The Company anticipates that it will require $600,000 to fund the continued development and enhancement of PerfectBackUP+ and HotWireFAX. The Company anticipates that it will expend $287,000 on the continued development and enhancement of PerfectBackUP+ and $313,000 on the continued development and enhancement of HotWireFAX. The product development for PerfectBackUP+ and HotWireFAX was consolidated in the head office in Burnaby, BC. Network services development also continues in the head office in Burnaby, BC.

Continued development of the Company's product is wholly dependent on the Company's ability to raise additional financing as stated above.

Product Development

The computer software industry is characterized by rapid technological change and is highly competitive in regard to timely product innovation. Accordingly, the Company believes that its future success depends on its ability to enhance current products that meet a wide range of customer needs and to develop new products rapidly to attract new customers and provide additional solutions to existing customers. In particular, the Company believes it must continue to respond quickly to users' needs for broad functionality and ease of use.

The Company's strategy is to continue to enhance PerfectBackup+'s and HotWireFAX's functionality through new releases and new feature development to meet the continually advancing requirements of its customers. At the same time, The Company may seek to acquire and develop new products to meet the needs of a broader group of users.

The Option Source program, itself a product development project, was refined and the Website was announced on March 28, 2000. All necessary legal documents were posted on the Option Source website and links were created to relate the Option Source project to the Website.

Employees

As of July 21, 2000, the Company had three full-time employees, including its President and Chief Executive Officer (Robert Heller), its Vice President of Sales and Secretary (Shelley Montgomery) and its Chief Financial Officer and Treasurer (Trevor McConnell). Pursuant to the terms of the Acquisition, the Company assumed all of MERLIN's employees, which included 4 full-time employees, 4 full-time programmers, 5 consultants and 2 administration staff. During the second quarter of 2000, the Company did not hire any further employees or consultants.

On May 10, 2000, Shelley Montgomery resigned from her position as Treasurer of both the Company and MERLIN. As noted above, Ms. Montgomery remains the Vice President of Sales of the Company and the Vice President of Marketing of MERLIN. In addition, on June 23, 2000, the Company appointed Ms. Montgomery Secretary of both the Company and MERLIN.

On May 10, 2000, Trevor McConnell was appointed Treasurer and Chief Financial Officer of both the Company and MERLIN by the respective Boards of Directors. On May 22, 2000, the Board of Directors of the Company appointed Mr. McConnell a director of the Company, and on June 23, 2000, Mr. McConnell was appointed a director of MERLIN.

On May 16, 2000, Martin Holt resigned as a director of the Company.

On June 23, 2000, Gary Heller resigned from his position as a director, Chief Information Officer and Secretary of the Company, and as a director, Vice President of Engineering and Secretary of MERLIN.

Effective August 3, 2000, the Company closed its offices in Altamonte Springs, Florida and Scottsdale, Arizona (collectively, the "US Offices"), and all of its employees in the Florida office either resigned or were laid off, effective August 3, 2000. The Company elected to close the US Offices in order to consolidate its operations in an effort to conserve its limited financial resources. The Company did not have the financial resources to continue to operate three separate offices.

The Company intends to hire a number of individuals over the next twelve months including a Chief Operating Officer, a Chief Technology Officer, a Vice President Marketing, an OEM Sales Manager, a Channel Sales Manager, several account managers, sales representatives, and several office and executive assistants. As the Company presently requires substantial financing to implement any of its current operational plans, including the hiring of additional personnel, it will not be able to hire additional personnel until it obtains such further financing. Although the Company has been actively seeking financing to expand its operations, it has yet to obtain any such financing and if it fails to obtain additional financing, it will be required to significantly curtail its current operations.

Purchase or Sale of Equipment

The Company does not anticipate that it will expend any significant amount of money on equipment for its operations over the 12 month period ending June 30, 2001. However, the Company anticipates that it will make ongoing purchases of computer hardware and software.

FACTORS THAT MAY AFFECT THE COMPANY'S FUTURE RESULTS

Certain statements contained in this Quarterly Report on Form 10-QSB, 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 be correct. Actual results could vary materially from those expressed in those statements. Readers are referred to "Sales and Marketing", "Product Development" and "Management's Discussion and Analysis or Plan of Operation" sections contained in this Quarterly 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 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.

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. During the quarter ended June 30, 2000, the Company did not enter into any further distribution or reseller agreements to distribute or bundle PerfectBackup+. The Company consIDErs that such agreements are significant to its continued operations, there can be no assurance that the Company will be successful in its 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 various software products. The Company intends to invest significant resources in the development of these distribution channels. 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 software products.

MERLIN has entered into various distribution and reseller agreements to distribute and/or bundle its software products. 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, together with the 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, FUTURE 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 TWO PRODUCTS AND IF EITHER OF THOSE PRODUCTS FAIL TO ACHIEVE AND MAINTAIN MARKET ACCEPTANCE, THE COMPANY'S BUSINESS MAY BE SIGNIFICANTLY HARMED

The Company expects that a substantial portion of its future revenue will be derived from the sale of two products: PerfectBackUP+ and HotWireFAX. The Company expects that these products and their all, of the Company's revenue for the foreseeable future. Broad market acceptance of these products is, therefore, critical to its future success. Failure to achieve broad market acceptance these products, 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 these two products and their respective product enhancements. There can be no assurance that the Company will be successful in marketing either of these products 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.

There can be no assurance that the Company will be successful in developing and marketing new features or products that respond to technological change or evolving industry standards, that it will not experience difficulties that could delay or prevent the successful development, introduction and marketing of any new features or products, or that its new features or products will adequately meet the requirements of the marketplace and achieve market acceptance. Additionally, the Company's product development staff will be under increased pressure to offer its products that operate on different vendor's Linux and UNIX based operating systems. Due to the complexity of the product, it is extremely difficult to fully test PerfectBackUP+ and HotWireFAX in all possible environments and, although the Company employs a continual effort to assure a quality product, there is no assurance that errors will not be found in the released commercial product resulting in delays of new feature development. If the Company is unable, due to lack of resources or for technological or other reasons, to develop and introduce new features and products in a timely manner in response to changing market conditions or customer requirements, its business, operating results and financial condition will be materially adversely affected.

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

The Company has incurred operating losses since inception and, as a result, the Company cannot be certain that it will generate any revenue or revenues 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 generate revenues or significant revenues or 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

Since inception, the Company has financed its operations through sales of equity securities. The Company does not currently have sufficient capital resources to maintain its current operations. The Company requires substantial additional financing to continue its current operations, 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 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.

INTERNET AVAILABILITY

Historically, MERLIN's business was based on the sale of the official versions of PerfectBackUP+ . Using a standard telephone connection, a user can currently download previous releases of PerfectBackUP+ from the Internet free of charge. Although the distribution of free older versions of PerfectBackUP+ 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+ . 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 the Company commenced its current operations on January 7, 2000, 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 limited operating histories of the Company, 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 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 the Company's incorporation, it has experienced a period of rapid growth and expansion which in the past has placed 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 ssociated 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 materially adverse effect on its business, operating results and financial condition.

KEY EMPLOYEES

The Company recently closed its two offices in the United States and was unable to persuade its employees located in those offices to move to its head office location in Burnaby, BC. Accordingly, the Company is immediately required to replace a significant number of its development personnel in order to implement its plan of operation and to continue to develop its software products.

The Company's future success depends on the continued services of its key officers, including Robert Heller (President and CEO), Shelley Montgomery (Vice President of Sales and Secretary), and Trevor McConnell (Chief Financial Officer 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, as a result of which, the Company's business, operating results and financial condition may 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 The Company 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 continue to expand its presence in foreign markets, as was started by MERLIN through its 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 materially adverse effect on its business, operating results and financial condition.

COMPETITION FOR SKILLED PERSONNEL

The Company recently closed its two offices in the United States and was unable to persuade its employees located in those offices to move to its head office location in Burnaby, BC. Accordingly, the Company is immediately required to replace a significant number of its development personnel in order to implement its plan of operation and to continue to develop its software products.

The Company's future performance also depends upon its ability to attract and retain highly qualified programming, technical, sales, marketing and managerial personnel. There is intense competition for skilled personnel, particularly in the field of software engineering. If the Company does not succeed in retaining its personnel or in attracting new employees, its business could suffer significantly.

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 the Company's computer hardware systems. In addition, although the Company has implemented network security measures, its servers are vulnerable to computer viruses, electronic break-ins, human error and other similarly disruptive problems which could adversely affect its systems and the Website. Although the Company has tried to prevent unauthorized access to its systems, it cannot eliminate this risk entirely. The Company's business could be adversely affected if its 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 the Company'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 materially 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 the Company'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.

The Company'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.

About MERLIN Software Technologies International, Inc.

MERLIN Software Technologies Inc. (MERLIN Softech), is a software publishing company that provides Linux, UNIX, Windows and Mac users with unique Linux and UNIX based software that dramatically improves a system's productivity and reliability. MERLIN Softech has offices in Burnaby, British Columbia and Seattle, Washington.

For more information, contact:

Terry Jeffrey
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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