<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                                   FORM 10-KSB

                          ANNUAL OR TRANSITIONAL REPORT

       (Mark One)

         [X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 1998
                                       OR

         [ ]      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                       SECURITIES AND EXCHANGE ACT OF 1934

                        COMMISSION FILE NUMBER 2-95836-NY

                               EGAN SYSTEMS, INC.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

          DELAWARE                                        13-3250816
(State or other jurisdiction of                (IRS Employer Identification No.)
 incorporation or organization)

   1501 LINCOLN AVENUE,HOLBROOK,NY                           11741
(Address of principal executive offices)                  (Zip Code)

        Registrant's telephone number,including area code: (516) 588-8000

       SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE

       SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT: NONE

CHECK WHETHER THE ISSUER(1)FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13
OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934 DURING THE PRECEDING 12
MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH
REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90
DAYS     YES X     NO

CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF
REGULATION S-B CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE CONTAINED, TO
THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-KSB OR ANY
AMENDMENT TO THIS FORM 10-KSB (X)

Revenues for the most recent fiscal year were $1,802,638.

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 4, 1999 based upon the average bid and asked prices of
such stock on that date was $5,706,628.

The number of shares of the registrant's Common Stock outstanding as of January
15, 1999 was 18,646,652.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      NONE


                                        1
<PAGE>   2
                                     PART I

ITEM 1-BUSINESS

GENERAL

Egan Systems, Inc. (the Company) was incorporated under the laws of the state
of Delaware in 1987.

The Company is engaged in the business of developing, selling and supporting
computer software products, particularly products related to the COBOL computer
language. The company's main business has been and continues to be the creation
and sale of COBOL language dialects that permit programs written in heretofore
proprietary versions of COBOL to move (migrate) to inexpensive high performance
systems available from a variety of suppliers without the need to rewrite the
programs.

Much of the Company's existing business is with firms who at one time or another
enjoyed a relationship with Data General Corp. and employed one or more versions
of Data General's COBOL products. In providing an alternative to D.G.'s
proprietary products the Company was able to gain customers that had been Data
General's but also, by the quality of Egan's product offerings, to make D.G.
both a distributor of one of the Company's products, Interactive COBOL, and in
December of 1996 to become an Accredited Service Provider to D.G. for the
Company's VX COBOL product. In 1998, the Company derived over $350,000 in
revenue from a single contract with Data General to migrate and rewrite COBOL
programs for a major railroad. The Company expects to receive additional revenue
from this ongoing relationship.

NEW PRODUCTS

In 1998, the Company introduced upgraded Year 2000 compliant versions of its
existing COBOL languages which are available and necessary for users of these
dialects worldwide. Many existing customers, with current licenses, have
received these upgrades at no charge but other, first time customers, have had
to purchase them. The growth in new customers is expected to increase in 1999.
Additionally, support for the increasingly popular Linux operating system was
added.

The Company's ODBC, which provides access to data stored in the ICOBOL ISAM
files to programs written in languages other than COBOL and released in 1997 has
proven quite successful. Originally providing read only access to the data, at
the request of several large customers it was enhanced to offer read/write
access. The success of this product and the growing use of character based as
well as GUI (Graphical User Interface) versions of the Company's Windows/NT
products was anticipated and is consistent with the Company's efforts to offer
versions of its languages that allow its customers the ability to remain fully
current in a market that is increasingly Client/Server oriented.


                                        2
<PAGE>   3
NEW PRODUCTS (CONT'D.)

In addition to offering versions of its language products that allow compliance
with the Year 2000 situation and releasing a production version of G-2K, the
Company's suite of tools permitting a customer to address the Y-2K problem in
house, in 1998 the Company began offering to perform the necessary source code
analysis and remediation (repair) itself. Unlike the sales of the tool suite,
which in 1998 did not live up to the Company's expectation, sales of the
services have been strong, to the point of creating a backlog situation.

JOINT VENTURE

The Year 2000 opportunity is not limited to companies and organizations in the
United States but is a worldwide problem. In August of 1998, the Company formed
a joint venture with Intermost Ltd., a company headquartered in Shenzhen China
to address Y-2K opportunities in that vast country. China was selected in part
because it is perceived as being under served by companies with Year 2000
capabilities and also because Intermost Ltd. offered the opportunity to
affiliate with an organization already present in China with an attractive
existing computer skill set. To date, no contracts have been received but some
large proposals are pending.

The Company's activities in China led directly to a partnership relationship
with Computer Associates International Inc. to employ their Fix 2000 tool to
analyze and remediate mainframe source code, which the Company's G-2K tool was
incapable of. This alliance applies to both China and the United States and
allows the Company to address a broader market for its service offerings. Since
the CA Fix 2000 tool appears to offer faster remediation and the Company is in a
backlog situation already, a decision was made to acquire a version of Fix 2000
that would address the Company's proprietary COBOL dialects. The first code is
being addressed with this new tool in the first quarter of 1999.

ANALYSIS OF CUSTOMERS

The Company has always focused its sales on current or prior users of Data
General hardware and software and most particularly on a category of customer
known as a reseller or VAR. Resellers create programs which are sold, modified,
improved and sold again.

In general they purchase multiple copies of COBOL every year and require a level
of ongoing support that decreases with time, a consideration of some importance
given the need to devote valuable programmer skills to new products and
features. The Company deals directly with approximately 100 resellers and
indirectly through distribution with another 80.

In 1998, sales to three customers comprised approximately 52% of the Company's
sales. One of these customers accounted for approximately 17% of sales and
functions as a distributor for the Company.

The Company's software is in use in North and South America, Europe, Africa,
Asia and Australia.


                                        3
<PAGE>   4
INVENTORY, SUPPLIES AND MANUFACTURING

The Company maintains sufficient quantities of material on hand to satisfy
normal shipping requirements. The Company is not forced to rely on any single
vendor or group of vendors to satisfy its materials requirements.

COMPETITION

The computer software industry is very highly competitive and populated by many
large and medium size companies and subject to rather rapid technological
advance. There is no assurance that the Company will continue to grow or even to
maintain a competitive position. The Company will continue to seek to develop
successful products that address market niches that provide appropriate
opportunity but are small enough to avoid determined penetration by larger,
better funded competitors.

INTELLECTUAL PROPERTY

All of the Company's products and source codes are protected by copyright.
Furthermore all delivered executable code for MS-DOS, Novell and the various
Unix versions that execute on systems employing Intel or Intel cloned processors
is protected from illicit duplication by the requirement for the presence of a
unique mechanical security device available only from the Company. This type of
protection has been extended to all categories of Unix systems with the
introduction of Interactive COBOL in April, 1994.

RESEARCH AND DEVELOPMENT EXPENDITURES

For the years ended December 31, 1998 and 1997, research and development
expenditures amounted to approximately $695,000 and $691,000, of which
approximately $401,000 and $348,000 was capitalized as of December 31, 1998 and
December 31, 1997, respectively.

EMPLOYEES

At the end of 1998, Egan Systems has 14 full time employees, 12 of which are
engaged in software development or support and 2 involved in sales and
administration.


                                        4
<PAGE>   5
ITEM 2-PROPERTIES

Egan Systems leases part of a building at 1501 Lincoln Avenue, Holbrook, New
York containing approximately 1,250 square feet, of which approximately 800
square feet are used for executive and clerical offices and production and the
remaining 450 square feet is used for warehousing, shipping and receiving. The
lease requires monthly rent payments of $695 and expires on October 31, 1999.
The Company also occupies two parts of a building at 4904 Waters Edge Drive,
Raleigh, North Carolina containing 3,500 square feet used for research and
product development. The leases expire through August 31, 2000, and require
annual payments of approximately $55,000. During the year ended December 31,
1998, the Company paid approximately $65,000 for the rental of properties.

ITEM 3-LEGAL PROCEEDINGS

No material legal proceedings are pending by or against the Company, or to the
knowledge of the Company, are contemplated against the Company.

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

On December 17, 1998 the Company held its annual shareholders meeting. The
following matters were voted upon by the shareholders at the meeting:

1.       Election of the following directors.

<TABLE>
<CAPTION>
                                            # Of Shares         # Of Shares
                                             Voted For         Voted Against
<S>                                         <C>                <C>
    Edward J. Egan                           6,379,695           4,898,572
    Jack Laskin                              6,379,695           4,898,572
    Ralph Jordan                             6,379,695           4,898,572
</TABLE>


2.       Approval of proposal to ratify the appointment of Patrusky, Mintz &
Semel, as Independent Certified Public Accountants. In respect to this,
11,277,367 shares were voted For the proposal, 0 shares were voted Against the
proposal and 900 shares Abstained.


                                        5
<PAGE>   6
                                     PART II

ITEM 5-MARKET FOR COMMON EQUITY AND RELATED MATTERS

The table below sets forth the high and low closing bid prices of the Company's
Common Stock for the last two calendar years. Since the shares are not listed on
NASDAQ, but on the Eastern Regional "Pink Sheets" and on the NASDAQ Electronic
Bulletin Board (Symbol EGNS), the Company can only supply a general estimate of
the price range of its shares on a quarterly basis.

CALENDAR YEARS                    BID PRICES

<TABLE>
<CAPTION>
     1998                 High              Low
     ----                 ----              ---
<S>                       <C>              <C>  
First Quarter             $1.81            $0.97
Second Quarter            $2.84            $1.41
Third Quarter             $1.84            $0.88
Fourth Quarter            $0.97            $0.50

     1997
     ----
First Quarter             $3.50            $0.34
Second Quarter            $2.90            $1.22
Third Quarter             $2.53            $1.78
Fourth Quarter            $1.72            $0.90
</TABLE>

On January 27, 1999, the high bid and asked quotations for the Company's Common
Stock were $0.43 and $0.45 per share, respectively.

The Company believes that on December 31, 1998, there were approximately 810
shareholders of record of the Company's stock.

The Company has not paid any dividends on its Common Stock and has determined,
for the foreseeable future, to retain earnings, if any, to fund additional
development and to take advantage of any opportunities that might become
apparent.

ITEM 7-FINANCIAL STATEMENTS

The financial statements are presented on F1 through F14.

ITEM 8-CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE:  None


                                        6
<PAGE>   7
ITEM 6.  MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

OPERATIONS - YEARS ENDED DECEMBER 31, 1998 AND 1997:

NET SALES

For the years ended December 31, 1998 and 1997, revenue totaled approximately
$1,803,000 and $944,000, respectively. Sales have increased approximately 91%
due to greater exposure to new customers through the Company's internet page,
new revenue sources arising from the Company's Accredited Service Provider
agreement with Data General, sales of the company's upgraded year 2000 compliant
versions of its existing COBOL programs and new revenue sources derived from
services performed utilizing the Company's Year 2000 suite of tools allowing the
customer to address the Year 2000 problem itself.

Management remains optimistic that the Company will be profitable in 1999. The
Company's products traditionally offer relatively high gross margins. The
Company has a number of recently released products that it is aggressively
marketing and additional software products in its development pipeline which the
Company expects to substantially contribute to sales. However, the Company is
quite small and remains subject to technological obsolescence and competitive
market conditions.

COST AND EXPENSES

Cost of goods sold for the years ended December 31, 1998 and 1997 were
approximately $161,000 and $76,000, and gross profit percent was approximately
91% and 92%, respectively. The slight decline in gross profit margin in 1998
results from higher gross margins achieved on regular products combined with
lower gross margins on the service revenues derived from the new Year 2000 suite
of tools.

Research and development costs are included in SG&A expenses and were
approximately $294,000 and $343,000 for the years ended December 31, 1998 and
1997, respectively. The Company continues to expend significant amounts of its
funds developing new software and to remain competitive in its specific field of
expertise.

Selling, shipping and general and administrative expenses (SG&A) for the years
ended December 31, 1998 and 1997 were approximately $980,000 and $636,000,
respectively. The capitalization of computer software development costs for the
years ended December 31, 1998 and 1997 reduced SG&A expenses by approximately
$401,000 and $348,000, respectively. The increase in SG&A costs was attributed
primarily to an increase in employees in the Company's software development
facility.


                                        7
<PAGE>   8
PART II, ITEM 6. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D.):

ADVERTISING AND PROMOTION EXPENSE

For the years ended December 31, 1998 and 1997, advertising and promotion
expense was approximately $209,000 and $78,000, respectively, and was directly
related to the Company's efforts to market its new Year 2000 Impact Assessment
and Remediation Tools and Services product as well as to expand the company's
overall visibility.

INTEREST INCOME/EXPENSE

Interest income for the years ended December 31, 1998 and 1997, was
approximately $36,000 and $21,000, respectively, and was related to cash
invested by the Company in short-term financial instruments. Interest expense
for the years ended December 31, 1998 and 1997 was approximately $1,000 and
$10,000, respectively. The reduction in interest expense was due to the
conversion of the Company's convertible notes payable into capital stock in
1998.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for the years ended December 31, 1998 and
1997 was approximately $300,000 and $238,000, respectively. The increase in 1998
is attributed to the increase in amortization of capitalized computer software
costs.

LIQUIDITY

As of December 31, 1998, the Company's net cash provided by operations was
approximately $109,000 and is comprised of a net loss of $(1,114,000),
depreciation and amortization of $300,000, consulting expense of $1,275,000 and
by the increase in accounts receivable of $(274,000). This compares to the year
ended December 31, 1997 where net cash provided by operations was approximately
$151,000 and was comprised of a net loss of $(82,000) and depreciation and
amortization of $238,000. Consulting expenses in 1998 amounting to $1,275,000
were paid for with the Company's $.05 par value common stock and were related to
the Company's attempt to break into new markets and geographical areas for its
product line. The increase in accounts receivable was related to higher sales in
1998 versus 1997.

Net cash used in investing activities during the years ended December 31, 1998
and 1997 was approximately $494,000 and $425,000, respectively. This was
attributed to the purchase of computer software and hardware equipment of
approximately $92,000 and $77,000 to support the Company's ongoing research and
development activities and to the capitalization of computer software
development costs of approximately $401,000 and $348,000 for the years ended
December 31, 1998 and 1997, respectively.

Net cash provided by financing activities was approximately $541,000 and
$1,117,000 for the years ended December 31, 1998 and 1997, respectively. The
funds were provided as a result of the sale of common stock and common stock
options, the exercise of common stock options and warrants, the issuance of
convertible notes payable and was offset by prospectus issuance costs.


                                        8
<PAGE>   9
PART II, ITEM 6. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D.):

LIQUIDITY (CONT'D.)

Management believes that the Company has obtained sufficient cash resources to
meet its expected needs in the present fiscal year. Management does not
anticipate a large capital expenditure in the current year related to the
Company's attempt to market and support the product for the "Millennium 2000"
problem. At present the Company does not maintain a line of credit facility with
a lending institution.


                                        9
<PAGE>   10
                                    PART III

ITEM 9-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
Name                          Age                          Position
----                          ---                          --------
<S>                           <C>              <C>
Edward J. Egan                58               Chairman, Chief Executive Officer
                                               Treasurer and President, Director

Ralph Jordan                  46               Secretary of Egan Systems, Inc.,
                                               President of Envyr Corp. Subsidiary,
                                               Director

Howard Feinsand               51               Director

Jack Laskin                   71               Director

Brian Murphy                  32               Director
</TABLE>

Edward J. Egan has been Chairman of the Board, President, Treasurer and Chief
Executive Officer of the Company since March 10, 1987. From 1983 through
December 1986, Mr. Egan had been Executive Vice President of Diplomat Systems
Corp. Prior to that, Mr. Egan had been Sales and Marketing Manager for Computer
Products at Schweber Electronics Corp., Westbury, New York.

Ralph Jordan became a Director of the Company when the Company acquired Envyr
Corp., of which Mr. Jordan was President, in December of 1987.  Mr. Jordan
left Data General Corp. where he had headed the Languages Department, in
November of 1986 to found Envyr Corp.  Mr. Jordan is still President of the
Company's Envyr subsidiary.

Howard Feinsand was elected a Director of the Company on January 20, 1999. Mr.
Feinsand is the founder and principal of Choir Capital Ltd., an investment and
financial services advisor to institutional clients regarding asset acquisition
and financing. Prior to founding Choir Capital in 1996, Mr. Feinsand held
several senior management positions with GE Capital Aviation Services and
Polaris Aircraft Leasing Corporation. Prior to this, Mr. Feinsand was a managing
director for Citicorp's Global Aviation Division heading a group responsible for
development of unique products to satisfy the financial requirements of domestic
and foreign airlines. He began his career as a tax lawyer in New York serving a
broad group of direct investment, corporate finance and tax clientele.

Jack Laskin has been a Director of the Company since its inception in March of
1987. Prior to his retirement in 1986, Mr. Laskin was President of Diplomat
Electronics Corp. from 1983 through 1986 and Vice President for Marketing at
Schweber Electronics until 1983.


                                       10
<PAGE>   11
                                    PART III

ITEM 9-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONT'D.)

Brian Murphy was elected a director of the Company on January 20, 1999. Mr.
Murphy is currently in his second three-year term as Vice President of the North
Carolina AFL-CIO union. He is also president of UFCW Local 204 and is
responsible for daily operations of the business and all contract negotiations
for over 10,000 workers in North and South Carolina. Mr. Murphy is also a
trustee of the Taft Hartley Insurance Fund which provides medical insurance
coverage to over 4,000 people in North and South Carolina.

Each director is elected by the shareholders at the annual meeting of
shareholders and holds office until the next annual meeting of shareholders.


                                       11
<PAGE>   12
ITEM 10-EXECUTIVE COMPENSATION

Compensation of Edward J. Egan for the year ended December 31, 1998 amounted to
approximately $94,000.

ITEM 11-SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

<TABLE>
<CAPTION>
Class            Name                       Number of         Percent
of Shares        of Beneficial Owner        Shares Owned      Of Class
---------        -------------------        ------------      --------
<S>              <C>                        <C>               <C>
Common           Edward J. Egan             1,542,000           8.3%

Common           Networth Partners            950,000 (1)       5.0%

Common           Ralph Jordan                 400,000           2.1%

Common           Jack Laskin                  770,000 (2)       4.0%

Common           All beneficial owners,
                 executives and
                 directors as a group       3,662,000 (3)      19.0%
</TABLE>


(1)      Includes options to purchase 240,000 shares exercisable within 60 days.

(2)      Includes options to purchase 400,000 shares exercisable within 60 days.

(3)      Includes options to purchase 640,000 shares exercisable within 60 days.

Unless otherwise noted, the addressees of all persons listed above are in care 
of the Company.

ITEM 12-CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.


                                       12
<PAGE>   13
ITEM-13 EXHIBITS AND REPORTS ON FORM 8-K

(a)      Exhibits required by Item 601 of Regulation S-B

         3A       Articles of Incorporation (1)

         3B       ByLaws of Registrant (1)

         11       Computation of per share earnings

         21       List of subsidiaries of the registrant

         27       Financial data schedule

(b)      Reports on Form 8-K:None

(1)      Filed as an exhibit to the Registration Statement on Form S-18 (File
No. 2-95836-NY) of the Registrant and incorporated by reference herein.


                                       13
<PAGE>   14
              SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS
               FILED PURSUANT TO SECTION 15(d) OF THE EXCHANGE ACT
                             BY NON-REPORTING ISSUES

No Proxy material or annual report has been sent to security-holders. Proxy
material to be furnished to security-holders subsequent to the filing of this
form shall be furnished to the Commission when it is sent to security-holders.

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, duly authorized at Hauppauge, New York on the 4th day
of February, 1998.

                               EGAN SYSTEMS, INC.

                               By/s/Edward J. Egan          
                                 ---------------------------
                               Edward J. Egan, President
                               Chairman and Chief Executive Officer

          Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:

<TABLE>
<CAPTION>
          Signature                                    Title                                        Date
          ---------                                    -----                                        ----
<S>                                          <C>                                              <C>
/s/Edward J. Egan                            Chairman, President, Chief                       February 4, 1999
---------------------------                  Executive Officer, Treasurer
Edward J. Egan                               (Principal Executive, Financial
                                             and Accounting Officer)

/s/Jack Laskin                               Director                                         February 4, 1999
---------------------------
Jack Laskin

/s/Ralph Jordan                              Secretary/Director                               February 4, 1999
---------------------------
Ralph Jordan

/s/Howard Feinsand                           Director                                         February 4, 1999
---------------------------
Howard Feinsand

/s/Brian Murphy                              Director                                         February 4, 1999
---------------------------
Brian Murphy
</TABLE>



                                       17
<PAGE>   15
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                        CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996
<PAGE>   16
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                                DECEMBER 31, 1998

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                             Page No.
<S>                                                                                         <C>
REPORT OF INDEPENDENT AUDITORS                                                                  F-2

FINANCIAL STATEMENTS:

  Consolidated balance sheets at December 31, 1998 and 1997                                     F-3

  Consolidated statements of operations, years ended
   December 31, 1998, 1997 and 1996                                                             F-4

  Consolidated statements of changes in stockholders' equity,
   years ended December 31, 1998, 1997 and 1996                                                 F-5

  Consolidated statements of cash flows, years ended
   December 31, 1998, 1997 and 1996                                                             F-6

  Notes to consolidated financial statements,
   December 31, 1998, 1997 and 1996                                                         F-7 - F-14
</TABLE>


                                       F-1
<PAGE>   17
                         REPORT OF INDEPENDENT AUDITORS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
EGAN SYSTEMS, INC. AND SUBSIDIARY

We have audited the accompanying consolidated balance sheets of Egan Systems,
Inc. and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998, 1997
and 1996. 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 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 audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Egan Systems, Inc.
and Subsidiary as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years ended December 31,
1998, 1997 and 1996 in conformity with generally accepted accounting principles.

New York, New York
January 27, 1999


                                       F-2
<PAGE>   18
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997


<TABLE>
<CAPTION>
ASSETS                                                                                1998           1997
                                                                                      ----           ----
<S>                                                                               <C>            <C>
Current Assets

  Cash (Note 2)                                                                   $ 1,036,429    $   880,438
  Accounts receivable                                                                 399,855        125,683
  Inventory (Note 2)                                                                   18,020         16,590
  Other current assets                                                                 66,525          1,739
                                                                                  -----------    -----------
      Total Current Assets                                                          1,520,829      1,024,450
                                                                                  -----------    -----------

Property and Equipment (Notes 2 and 3)                                                165,337        110,059
                                                                                  -----------    -----------

Other Assets

  Computer software development costs - net (Notes 2 and 4)                           713,060        574,490
  Security deposits                                                                     3,126          3,126
                                                                                  -----------    -----------

      Total Other Assets                                                              716,186        577,616
                                                                                  -----------    -----------

      Total Assets                                                                $ 2,402,352    $ 1,712,125
                                                                                  ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities

  Accounts payable                                                                $      --      $    17,335
  Accrued expenses and other current liabilities                                       56,070         49,487
                                                                                  -----------    -----------
      Total Current Liabilities                                                        56,070         66,822

Long-Term Debt (Note 5)                                                                  --           50,000
                                                                                  -----------    -----------

     Total Liabilities                                                                 56,070        116,822
                                                                                  -----------    -----------

Commitments and Contingencies (Note 6)

Stockholders' Equity

  Common stock - $0.05 par value; shares authorized - 30,000,000, shares issued
   and outstanding - 18,646,652 and 15,559,652 in 1998 and 1997                       932,333        777,983
  Additional paid-in capital                                                        4,877,201      3,158,551
  Deficit                                                                          (3,100,752)    (1,986,231)
                                                                                  -----------    -----------
                                                                                    2,708,782      1,950,303
  Notes receivable - stock purchase (Note 8)                                         (362,500)      (355,000)
                                                                                  -----------    -----------

      Total Stockholders' Equity                                                    2,346,282      1,595,303
                                                                                  -----------    -----------

      Total Liabilities and Stockholders' Equity                                  $ 2,402,352    $ 1,712,125
                                                                                  ===========    ===========
</TABLE>



The accompanying notes are an integral part of these consolidated financial
statements.


                                       F-3
<PAGE>   19
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                      1998           1997           1996
                                                      ----           ----           ----
<S>                                               <C>            <C>            <C>
Net sales (Note 1)                                $ 1,802,638    $   944,354    $   854,791
                                                  -----------    -----------    -----------


Cost and expenses:

  Cost of goods sold                                  161,069         76,214         75,974
  Selling, shipping, general and
   administrative expenses                            980,264        635,940        534,645
  Interest income                                     (36,485)       (20,585)          --
  Royalty expense                                      23,882         10,818           --
  Advertising and promotion expense                   209,438         78,337           --
  Interest expense                                        647          9,195          9,976
  Depreciation and amortization                       299,663        237,733        218,285
  Consulting expense (Note 10)                      1,275,000           --             --   
                                                  -----------    -----------    -----------

                                                    2,913,478      1,027,652        838,880
                                                  -----------    -----------    -----------

(Loss) income before provision for income taxes    (1,110,840)       (83,298)        15,911

Provision (benefit) for income taxes
 (Notes 2 and 11)                                       3,681         (1,216)          --   
                                                  -----------    -----------    -----------

Net (loss) income                                 $(1,114,521)   $   (82,082)   $    15,911
                                                  ===========    ===========    ===========


Net (loss) income per common share (Note 2)

 Basic                                           $       (.07)   $      (.01)   $       .00
                                                  ===========    ===========    ===========

 Fully diluted                                    $      --      $      --      $       .00
                                                  ===========    ===========    ===========

 Cash dividends per common share                      None           None           None
                                                  ===========    ===========    ===========
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                       F-4
<PAGE>   20
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                            Common Stock           Additional                        Notes
                                      -------------------------     Paid In                        Receivable
                                        Shares        Amount        Capital        Deficit       Stock Purchase         Total
                                      -----------   -----------   -----------    -----------     --------------      -----------
<S>                                   <C>           <C>           <C>            <C>             <C>                 <C>
Balance December 31, 1995              10,185,000   $   509,250   $ 1,752,814    $(1,920,060)     $      --          $   342,004

Stock options                                  --            --       160,000             --             --              160,000

Net income for 1996                            --            --            --         15,911             --               15,911
                                      -----------   -----------   -----------    -----------      -----------        -----------

Balance December 31, 1996              10,185,000       509,250     1,912,814     (1,904,149)            --              517,915
                                                                                                                     
Sale of stock                             580,000        29,000       116,000           --               --              145,000
                                                                                                                     
Conversion of notes payable               662,652        33,133       132,530           --           (355,000)           165,663
                                                                                                                     
Stock options/warrants exercised        4,132,000       206,600     1,061,400           --               --              913,000
                                                                                                                     
Stock prospectus costs                       --            --         (64,193)          --               --              (64,193)
                                                                                                                     
Net loss for 1997                            --            --            --          (82,082)            --              (82,082)
                                      -----------   -----------   -----------    -----------      -----------        -----------
                                                                                                                     
Balance December 31, 1997              15,559,652       777,983     3,158,551     (1,986,231)        (355,000)         1,595,303
                                                                                                                     
Conversion of notes payable               200,000        10,000        40,000           --               --               50,000
                                                                                                                     
Stock options/warrants exercised        1,612,000        80,600       467,400           --             (7,500)           540,500
                                                                                                                     
Stock issued for consulting services    1,275,000        63,750     1,211,250           --               --            1,275,000
                                                                                                                     
Net loss for 1998                            --            --            --       (1,114,521)            --           (1,114,521)
                                      -----------   -----------   -----------    -----------      -----------        -----------
                                                                                                                     
Balance December 31, 1998              18,646,652   $   932,333   $ 4,877,201    $(3,100,752)     $  (362,500)       $ 2,346,282
                                      ===========   ===========   ===========    ===========      ===========        ===========
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements. 


                                      F-5
<PAGE>   21
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                           INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>
                                                         1998           1997           1996
                                                         ----           ----           ----
<S>                                                  <C>            <C>            <C>
Cash flows from operating activities:

  Net (loss) income                                  $(1,114,521)   $   (82,082)   $    15,911
  Adjustments to reconcile net (loss) income
   to net cash provided by operating activities:

    Consulting expense                                 1,275,000           --             --
    Depreciation and amortization                        299,663        237,733        218,285
    Accounts receivable                                 (274,172)       (40,325)         3,647
    Inventory                                             (1,430)        (3,734)        20,860
    Other current assets                                 (64,785)         4,155           (555)
    Accounts payable                                     (17,335)         8,983         (1,144)
    Payroll taxes payable                                   --             --          (97,709)
    Accrued expenses and other
     current liabilities                                   6,582         27,098        (24,896)
                                                     -----------    -----------    -----------

      Net cash provided by operating
       activities                                        109,002        151,828        134,399
                                                     -----------    -----------    -----------

Cash flows from investing activities:

  Purchase of property and equipment                     (92,253)       (77,403)       (25,419)
  Computer software development costs                   (401,258)      (347,936)      (239,540)
                                                     -----------    -----------    -----------

      Net cash used in investing activities             (493,511)      (425,339)      (264,959)
                                                     -----------    -----------    -----------

Cash flows from financing activities:

  Proceeds from sale of stock options                       --           50,000        160,000
  Proceeds from sale of common stock                        --          145,000           --
  Proceeds from exercise of stock warrants/options       540,500        863,000           --
  Proceeds from convertible notes payable                   --          130,000           --
  Prospectus issuance costs                                 --          (64,193)          --
  Loans from officer                                        --           (7,156)          (300)
                                                     -----------    -----------    -----------

      Net cash provided by financing activities          540,500      1,116,651        159,700
                                                     -----------    -----------    -----------

Net increase in cash                                     155,991        843,140         29,140

Cash - beginning of year                                 880,438         37,298          8,158
                                                     -----------    -----------    -----------

Cash - end of year                                   $ 1,036,429    $   880,438    $    37,298
                                                     ===========    ===========    ===========
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.


                                       F-6
<PAGE>   22
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

NOTE 1.  GENERAL BUSINESS DESCRIPTION/CONCENTRATION OF CREDIT RISK:

The Company develops and markets proprietary computer software to programmers,
resellers and computer users. The Company's sales are made on credit to
customers who are primarily based in the United States of America. In 1998 and
1997, sales to three customers and one customer comprised approximately 52% and
22% of the Company's sales and approximately 63% and 22% of the Company's
accounts receivable at December 31, 1998 and December 31, 1997, respectively.

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPLES OF CONSOLIDATION:

The consolidated financial statements include Egan Systems, Inc. ("the
Company") and Envyr Corp., its wholly-owned subsidiary. All significant
intercompany accounts and transactions have been eliminated in consolidation.

CASH:

Cash includes all cash balances and highly liquid investments with a maturity
of three months or less. The Company maintains its cash in various bank
accounts and one stock brokerage institution which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts.

INVENTORY:

Inventory, which consists primarily of finished goods, is stated at the lower of
cost or market. Cost is determined by the first-in, first-out method.

PROPERTY AND EQUIPMENT:

Property and equipment is stated at cost. Depreciation is calculated on the
straight-line method over the estimated useful lives of the assets, or in the
case of leasehold improvements, over the life of the lease, if shorter.

REVENUE RECOGNITION:

Product revenues are recognized at the time of shipment. Service revenues are
recognized as services are performed.

In October 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP)
97-2, "Software Revenue Recognition." This statement is effective for fiscal
years beginning after December 31, 1997. The Company's adoption of this SOP did
not have a material effect on the Company's consolidated financial position or
results of operations.

ADVERTISING:

Advertising costs are charged to operations when incurred. There were no
capitalized advertising costs as of December 31, 1998 and 1997.


                                       F-7
<PAGE>   23
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D.):

EARNINGS PER SHARE:

In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per share. SFAS No. 128
simplifies the standards for computing earnings per share previously found in
APB Opinion No. 15, Earnings Per Share and is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods.
Earlier adoption is not permitted. The Company's adoption of SFAS No. 128 did
not have a significant impact to its reported results.

Basic net income per common share is computed based on the weighted average
number of outstanding common shares. The number of shares used in the
computation of basic net income per common share were 17,002,134, 12,265,383
and 10,185,000 in 1998, 1997 and 1996, respectively. Fully diluted net income
per common share is computed based on the weighted average number of outstanding
common shares plus the shares that would be outstanding assuming conversion of
the outstanding options, warrants and convertible note payable. In 1998 and
1997, for purposes of the fully diluted computations, the number of shares that
would be issued from the exercise of stock options has been reduced by the
number of shares that could have been purchased from the proceeds at the average
market price of the Company's stock. The number of shares used in the
computations of fully diluted earnings per share were 21,090,718, 18,891,900 and
10,185,000 in 1998, 1997 and 1996, respectively (Note 12). Fully diluted
earnings per share amounts are not presented for 1998 and 1997 because it is
anti-dilutive (Note 12).

COMPUTER SOFTWARE DEVELOPMENT COSTS:

Computer software development costs for products are capitalized subsequent to
the establishment of technological feasibility. Capitalization ceases when the
products are available for general release to customers at which time
amortization of the capitalized costs begins on a straight-line basis over the
estimated economic life of the products, which is estimated at three years (Note
4).

It is reasonably possible that the remaining estimated economic life of the
products can be reduced significantly in the near term as a result of many
factors in the marketplace. As a result, the carrying amount of the capitalized
computer software costs may be reduced materially in the near term.

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, liabilities, revenue and expenses. Actual
results could differ from those estimates.

INCOME TAXES:

The Company complies with Statement of Financial Accounting Standards No. 109
(SFAS 109), "Accounting for Income Taxes," which requires the use of the
liability method of accounting for income taxes. The liability method measures
deferred income taxes by applying enacted statutory rates in effect at the
balance sheet date to the differences between the tax base of assets and
liabilities and their reported amounts in the financial statements. The
resulting deferred tax asset or liability is adjusted to reflect changes in tax
laws as they occur.


                                       F-8
<PAGE>   24
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D.):

INCOME TAXES:

Deferred income taxes reflect temporary differences in reporting assets and
liabilities for income tax and financial accounting purposes. These temporary
differences arise from net operating loss carryforwards (Note 11) and the
capitalization of computer software development costs (Note 4).

NOTE 3.  PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                   1998       1997
                                   ----       ----
<S>                              <C>        <C>
Office furniture and equipment   $ 51,007   $ 51,007
Computer software                 125,301     77,151
Computer hardware                 182,616    138,512
Leasehold improvements              3,975      3,975
                                 --------   --------
                                  362,899    270,645
Accumulated depreciation          197,562    160,586
                                 --------   --------
                                 $165,337   $110,059
                                 ========   ========
</TABLE>

Depreciation expense charged to operations in each of the years ended December
31, 1998, 1997 and 1996 amounted to $36,975, $28,887 and $30,705, respectively.

NOTE 4.  COMPUTER SOFTWARE DEVELOPMENT COSTS:

Computer software development costs consist of the following:

<TABLE>
<CAPTION>
                                         1998         1997
                                         ----         ----
<S>                                   <C>          <C>       
Computer software development costs   $1,551,480   $1,150,222
Accumulated amortization                 838,420      575,732
                                      ----------   ----------
                                      $  713,060   $  574,490
                                      ==========   ==========
</TABLE>

Amortization expense charged to operations in 1998, 1997 and 1996 amounted to
$262,688, $208,846 and $187,580, respectively.


                                       F-9
<PAGE>   25
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

NOTE 5.  LONG-TERM DEBT:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                 1998      1997
                                 ----      ----
<S>                            <C>       <C>    
Convertible note payable (A)   $  --     $50,000
Less current maturities           --        --   
                               -------   -------
                               $  --     $50,000
                               =======   =======
</TABLE>
Interest expense charged to operations on the above debt for the years ended
December 31, 1998 and 1997 amounted to $625 and $9,195, respectively.

(A) In January 1997, the Company received $130,000 in exchange for two
convertible notes due January 1, 2002 at 10% interest per annum. The notes were
convertible through January 2002 into 520,000 shares of the Company's $.05 par
value common stock at $.25 per share. In connection with the issuance of one of
the convertible notes payable in January 1997, detachable stock warrants had
been issued entitling the holder to purchase 200,000 shares of the Company's
$.05 par value common stock through January 1, 2002. In March 1997, 200,000 of
the warrants related to this convertible note payable were exercised. In
addition, convertible notes in the amount of $80,000 was converted in September
1997 into 320,000 shares, $25,000 was converted in March 1998 into 100,000
shares and $25,000 was converted in September 1998 into 100,000 shares of the
Company's $.05 par value common stock.

NOTE 6.  COMMITMENTS AND CONTINGENCIES:

OPERATING LEASES:

The Company leases office and warehouse facilities under noncancelable operating
leases expiring through February 2000. Minimum future annual rental payments
under these leases as of December 31, 1999 and 2000 are approximately $60,000
and $15,000, respectively. Rent expenses charged to operations in the years
ended December 31, 1998, 1997 and 1996 amounted to $59,833, $46,863 and $40,895,
respectively.

SOFTWARE DEVELOPMENT AND LICENSING AGREEMENT:

On July 27, 1992 the Company entered into a software development and licensing
agreement with a computer systems manufacturer. Pursuant to the agreement, the
Company received revenue for software support services and the development of an
enhanced source code licensed to the Company by the manufacturer.

In consideration of this license and proprietary rights to the Company, the
Company is obligated to discount to the manufacturer up to $740,000 from future
royalty fees, if any, that would be due from the manufacturer out of future
sales of the enhanced software.

On January 9, 1997, the Company amended its software development and licensing
agreement with the computer systems manufacturer whereby the Company has granted
a license to the manufacturer to use and remarket certain programs developed by
the Company.


                                      F-10
<PAGE>   26
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

NOTE 7.  RESEARCH AND DEVELOPMENT COSTS:

Research and development costs are charged to operations when incurred and are
included in operating expenses. The amounts charged to operations for the years
ended December 31, 1998, 1997 and 1996 were approximately $294,000, $343,000 and
$348,000, respectively.

NOTE 8.  COMMON STOCK:

COMMON STOCK SALE:

In January 1997, the Company sold 580,000 shares of its $.05 par value common
stock at $.25 per share and granted stock warrants to purchase an additional
800,000 shares of its $.05 par value common stock at $.25 per share, the price
of which was significantly below the market price of the common stock on the
date of sale. The warrants expire in January 2001.

NOTES RECEIVABLE - STOCK PURCHASE:

In October and December 1997 and June 1998, the Company entered into agreements
whereby it issued 20,000, 1,400,000 and 30,000 shares, respectively, of the
Company's $.05 par value common stock to certain employees of the Company for
consideration of $.25 per share or $362,500. Payment for the stock consisted of
the issuance of non-interest bearing notes receivable in the amount of $362,500
payable within 20 days of the sale by the employee of the common stock related
to these notes receivable or immediately upon the employee leaving the
employment of the Company. The notes receivable are secured by the common stock
related to these notes receivable. The transaction has been recorded as a sale
of common stock with the notes receivable reflected as a reduction of
stockholders' equity.

STOCK OPTIONS/WARRANTS:

The following table provides information regarding stock option and warrant
activity for the years ended December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                    Exercise Price Per Share
                                                    ------------------------
                             Number Of Shares       Range      Weighted Average
                             ----------------       -----      ----------------
<S>                          <C>                <C>            <C>
Balance-December 31, 1996       9,665,000       $0.250-0.500   $0.303
                                                    
  Granted                       1,352,652              0.250    0.250
  Exercised                     4,474,652        0.250-0.375    0.303
                                ---------       ------------   ------
                                                    
Balance-December 31, 1997       6,543,000        0.250-0.500    0.293
                                                    
  Granted                          30,000              0.250    0.250
  Exercised                     1,612,000        0.250-0.375    0.340
                                ---------       ------------   ------
                                                    
Balance-December 31, 1998       4,961,000       $0.250-0.500   $0.277
                                =========       ============   ======
</TABLE>


                                      F-11
<PAGE>   27
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

NOTE 8.  COMMON STOCK (CONT'D.):

The status of all options and warrants outstanding at December 31, 1998 is
summarized as follows:

<TABLE>
<CAPTION>
                                Weighted Average
Range Of                           Remaining       Weighted Average
Exercise Prices       Shares    Contractual Life    Exercise Price
                                   (in Years)
---------------       ------    ----------------    --------------
<S>                 <C>         <C>                <C>
$  0.250            4,156,000         0.77            $  0.250
   0.375              540,000         0.55               0.375
   0.500              265,000         0.92               0.500
                    ---------         ----            --------
                    4,961,000         0.74            $  0.277
                    =========         ====            ========
</TABLE>


NOTE 9.  SUPPLEMENTAL CASH FLOW INFORMATION:

CASH TRANSACTIONS:

During the years ended December 31, 1998, 1997 and 1996, the Company paid cash
in each year for interest expense in the amount of $1,897, $7,080 and $5,052,
respectively.

During the years ended December 31, 1998, 1997 and 1996, the Company paid cash
for corporate income tax payments in each year in the amount of $3,534, $520 and
$520, respectively.

NON-CASH TRANSACTIONS:

During the year ended December 31, 1998, the company issued 1,275,000 shares of
its $.05 par value common stock in exchange for consulting services valued at
$1,275,000 (Note 10).

During the years ended December 31, 1998 and 1997, the Company converted $50,000
and $165,663 of its convertible notes payable and accrued interest into 200,000
and 662,652 shares of its $.05 par value common stock at $.25 per share,
respectively (Note 5).

During the years ended December 31, 1998 and 1997, the Company issued 30,000 and
1,420,000 shares of its $.05 par value common stock, respectively, in exchange
for notes receivable from certain employees of the Company in conjunction with
the exercising of their stock options at $.25 per share for $362,500 (Note 8).

NOTE 10.  NON MONETARY TRANSACTIONS:

During the year ended December 31, 1998, the Company issued 1,275,000 shares of
its $.05 par value common stock, with an approximate market value of $1,275,000
at the date of issuance, in exchange for certain consulting services which were
recorded as an operating expense on the financial statements. The common stock
was issued for consulting services related to developing business opportunities
in Asia (1,000,000 shares) and for development of other general business
opportunities (275,000 shares).


                                      F-12
<PAGE>   28
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

NOTE 11.  INCOME TAXES:

The components of the deferred tax asset and liability are as follows:

<TABLE>
<CAPTION>
                                            1998           1997
                                            ----           ----
                                         Noncurrent     Noncurrent
                                         ----------     ----------
<S>                                     <C>            <C>
Total deferred tax asset (Note 2)       $ 1,270,000    $   880,000
Total deferred tax liability (Note 2)      (285,000)      (230,000)
Valuation allowance                        (985,000)      (650,000)
                                        -----------    -----------
Net deferred tax asset (liability)      $      --      $      --   
                                        ===========    ===========
</TABLE>


The provision for income taxes for the years ended December 31, 1998, 1997 and
1996 consists of the following:

<TABLE>
<CAPTION>
                                                1998        1997         1996
                                                ----        ----         ----
<S>                                           <C>         <C>         <C>
Current tax expense                           $   --      $   --      $   --
Deferred tax expense                            55,000      58,000       1,050
Benefit of net operating loss carryforwards    (55,000)    (58,000)     (1,050)
Net change in valuation allowance                 --          --          --   
                                              --------    --------    --------

Total                                         $   --      $   --      $   --   
                                              ========    ========    ========
</TABLE>


Reconciliations of the differences between income taxes computed at Federal
statutory rates and consolidated provisions for income taxes are as follows:

<TABLE>
<CAPTION>
                                               1998      1997       1996
                                               ----      ----       ----
<S>                                          <C>       <C>        <C>
Income taxes computed at Federal statutory
 tax rate                                    $  --     $  --      $  --
Surtax exemption                                --        --         --
State tax provisions (benefit)                 3,681    (1,216)      --
Benefit of operating loss carryforwards         --        --         --
                                             -------   -------    -------

Provision (benefit) for income taxes         $ 3,681   $(1,216)   $  --
                                             =======   =======    =======
</TABLE>

As of December 31, 1998, the Company has a net operating loss carryforward
available for Federal and State income tax purposes in the amount of
approximately $3,178,000, expiring from 2002 through 2013.


                                      F-13
<PAGE>   29
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

NOTE 12. COMPUTATION OF EARNINGS PER SHARE:

The following data show the amounts used in computing earnings per share and the
effect on (loss) income and the weighted average number of shares of dilutive
potential common stock.

<TABLE>
<CAPTION>
                                           1998            1997            1996
                                           ----            ----            ----
<S>                                   <C>             <C>             <C>
(Loss) income available to common
 stockholders used in basic EPS       $ (1,114,521)   $    (82,082)   $     15,911

Convertible note payable                       625           5,000            --   
                                      ------------    ------------    ------------
(Loss) income available to common
 stockholders after assumed
 conversions of dilutive securities   $ (1,113,896)   $    (77,082)   $     15,911
                                      ============    ============    ============
Weighted average number of common
 shares used in basic EPS               17,002,134      12,265,383      10,185,000

Effect of dilutive securities
  Stock options/warrants                 3,986,392       6,221,785            --
  Convertible notes payable                102,192         404,822            --   
                                      ------------    ------------    ------------
Weighted average number of common
 shares and dilutive potential
 common stock used in diluted EPS       21,090,718      18,891,990      10,185,000
                                      ============    ============    ============
</TABLE>

For 1998 and 1997, the effect of dilutive securities were not included in
computing EPS because their effects are anti-dilutive.

NOTE 13.  JOINT VENTURE:

In August 1998, the Company entered into a joint venture agreement, the purpose
of which is to provide Year 2000 computer solutions to government ministries and
government owned industries in The People's Republic of China. The Company will
contribute certain training, technical support, patent rights and cash in
amounts to be determined, in exchange for a 51% interest in the joint venture.
At December 31, 1998, the joint venture has had no material transactions and, 
accordingly, is not reflected in the financial statements of the Company.

NOTE 14.  SUBSEQUENT EVENTS:

In January 1999, 100,000 stock options were granted to two new directors at the
Company whereby the option holders have the right to buy 100,000 shares of the
Company's $.05 par value common stock at $.36 per share. The options expire in
January 2001.


                                      F-14
<PAGE>   30
                                EXHIBIT INDEX


     Exhibit No.  Description
     -----------  --------------------------------------
         3A       Articles of Incorporation (1)

         3B       ByLaws of Registrant (1)

         11       Computation of per share earnings

         21       List of subsidiaries of the registrant

         27       Financial data schedule

(1)      Filed as an exhibit to the Registration Statement on Form S-18 (File
No. 2-95836-NY) of the Registrant and incorporated by reference herein.