<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION


                          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, 1997
                                       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 $944,354.

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 1998 based upon the average bid and asked prices of
such stock on that date was $16,109,652.

The number of shares of the registrant's Common Stock outstanding as of March
15, 1997 was 16,109,652.

                       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. Under terms of this agreement, Data General will, in
return for a commission, market Egan's VX product and migration skills to a
portion of D.G.'s customer base. While no contracts have been awarded under this
agreement yet, there are already bids outstanding valued in the hundreds of
thousands of dollars.

NEW PRODUCTS

In 1996 the Company introduced new feature enhanced versions of its Interactive
COBOL (ICOBOL) product, an open Data Base Convention (ODBC), a new Terminal
Emulation Product (ICDGTERM) and a support product called Watch. ODBC allows PC
products like Crystal Reports and Microsoft ACCESS to read and extract data
contained in ICOBOL's ISAM data files, for the purpose of creating ad hoc
reports etc. ICDGTERM inexpensively allows a PC to emulate a variety of
proprietary terminals. WATCH allows supervisory or support individuals to view
and even take control of a terminal operated distantly from the viewer for the
purpose of instruction or correction. The Company believes that continual
product improvement coupled with appropriate accessory products are necessary to
retain existing customers and gain new ones.

In June of 1996 the Company announced and provided preliminary specification for
versions of ICOBOL created to run in native mode on Windows '95 and Windows NT.
In addition the Company announced that with the acquisition and incorporation of
technology from Flexus International Corp. of Bangor, PA users of traditionally
character based ICOBOL will be able to create Graphical User Interface (GUI)
screens not unlike those common to PC based Windows programs for existing ICOBOL
programs. Egan Systems will pay royalties to Flexus for all Flexus screen
development and runtime licenses the Company sells. These new products have been
available for evaluation by

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

prospective customers since December of 1996 and were released for sale and
delivery in late March of 1997.

The Company has posted a web site at www.icobol.com where existing customers can
usefully obtain the latest release of all products for which they are licensed
and others interested in the Company can obtain product and pricing information.

OPPORTUNITY AND INVESTMENT

As previously mentioned, the Company has for the last ten years engaged in
development activity related to the COBOL computer language. The advent of the
year 2000 or millennium poses a very substantial problem for users of computer
systems employing COBOL programs and a potentially mammoth opportunity for Egan
Systems, Inc.

In response to a 1959 request of the Department of Defense for a common business
computer language, in April of 1960 initial specification for a new programming
language called COBOL (Common Business Oriented Language) was released and is
referred to as COBOL-60. In January of 1963, the American National Standards
Institute met to create COBOL standard and in 1968 released ANSI COBOL-68.
Subsequently, ANSI-74 and ANSI-85 standards were released.

COBOL was and is the computer language of business and government. It is
employed world wide by hundreds of thousands of organizations. According to
International Data Corp. there are some 180 billion lines of COBOL code in use.
In 1994, 56% of all new multiuser programs were written in COBOL and virtually
every mainframe computer in the world employs it. And, on New Years Day, the
year 2000, it may all well crash.

The problem occurs because of COBOL's long history. In the 1960's, 70's and
80's, computer memory and disk storage were very expensive and limited. Efforts
were made therefore to minimize the size of computer code wherever possible. One
common mechanism employed was to truncate a date descriptor to six characters
(mmddyy) instead of the full eight (mmddyyyy). This saved two characters and
really was worthwhile, given the frequency with which the date occurs in
programs and data of all types. The computer simply assumed the preface 19 in
all year descriptions.

Now move forward to January 1, 2000. The computer's internal clock registers the
date change and the computer's software starts another days work in the year 00.
That is, 1900 and therein lies the problem.

In truth, no one really knows what will happen, but in the opinion of virtually
all, it will, if left uncorrected, be very unpleasant for civilization as we
know it.

                                        3
<PAGE>   4
OPPORTUNITY AND INVESTMENT (CONT'D.)

Correcting the problem is superficially simple and straight forward. Locate and
change every deficient date descriptor in every line of source code in every
COBOL program an organization's computer system(s) employ. Find every instance
where a recognized date descriptor modifies or is modified by an unknown date
descriptor. Make the changes without damaging the program. Be sure to find and
correct every one, because if one is overlooked, the consequences might be very
serious. An organizations' source code may contain only one or two million lines
of code or tens or even hundreds of millions of lines of code.

The problem is one of magnitude, compounded by the fact that by definition many,
even most, of the programs with the Year 2K problem were written years ago.
Their authors have departed and un- or under-documented code was viewed as job
security.

Egan Systems, Inc. has been providing an analysis tool with every copy of its
compiler technology shipped since 1991. The Company believes that this tool, in
substantially modified form, can provide the user with a mechanism to accurately
identify, locate and characterize every deficient date descriptor in a set of
source code, regardless of size. With this information, additional tools can be
created to facilitate appropriate modification of the sources on a manual basis
and in some cases on an automated basis. Additionally, it is possible that
certain utilities already possessed by the Company may provide one method to
address the need to modify any data fields that require correction.

Because the Company is skilled in COBOL and possesses certain technology that
the Company believes will be useful in addressing this very substantial
opportunity and lacking sufficient resources to aggressively pursue this line of
development, the Company attempted to raise additional funding from certain of
its existing investors in late 1996. By early January 1997, with the funds in
hand, the Company acknowledged its ongoing development efforts to produce a
suite of software tools intended to address the issue of year 2000 compliance.
Initial release of these products was made in the summer of 1997.

Various entities report that there are at least 200 companies world wide
addressing at least some aspect of the Year 2K opportunity, of which most are
larger than Egan Systems, Inc. Far fewer however, are engaged in the development
and support of the COBOL language.

The widely quoted Gartner Group estimate of the cost to correct the Year 2K
problem is $600 billion world wide.

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.

                                        4
<PAGE>   5
ANALYSIS OF CUSTOMERS (CONT'D.)

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 import
given the need to devote valuable programmer skills to new products and
features. The Company deals directly with approximately 90 resellers and
indirectly through distribution with another 70.

The Company enjoyed 22% of its sales total in 1997 to and through one company
that functions as a distributor for the Company.

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

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 code is 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, 1997 and 1996, research and development
expenditures amounted to approximately $691,000 and $588,000, of which
approximately $348,000 and $240,000 was capitalized as of December 31, 1997 and
December 31, 1996, respectively.

EMPLOYEES

At the end of 1997, Egan Systems has 11 full time employees, 9 of which are
engaged in software development or support and 2 involved in sales and
administration.

                                        5
<PAGE>   6
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 an 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, 1998.
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 $50,000. During the year ended December 31,
1997, the Company paid approximately $47,000 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

There were no matters submitted to a vote of Security Holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1997.


                                   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.

<TABLE>
<CAPTION>
CALENDAR YEARS                                                BID PRICES

         1997                       High                           Low
         ----                       ----                           ---
<S>                                 <C>                            <C>
First Quarter                       $3.50                          $ .34
Second Quarter                      $2.90                          $1.22
Third Quarter                       $2.53                          $1.78
Fourth Quarter                      $1.72                          $. 90

         1996
First Quarter                       $ .44                          $ .16
Second Quarter                      $ .38                          $ .25
Third Quarter                       $ .38                          $ .28
Fourth Quarter                      $ .47                          $ .25
</TABLE>

On March 15, 1998, the high bid and asked quotations for the Company's Common
Stock were $1.10 and $.90 per share, respectively.

                                        6
<PAGE>   7
The Company believes that on December 31, 1997, there were 792 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


                                        7
<PAGE>   8
ITEM 2.  MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OPERATIONS - YEARS ENDED DECEMBER 31, 1997 AND 1996:

NET SALES

For the years ended December 31, 1997 and 1996, revenue totaled approximately
$944,000 and $855,000, respectively. Sales have increased approximately 10% as a
result of higher sales to existing customers and greater exposure to new
customers through the Company's internet page.

In December 1996, the Company signed a new marketing agreement with Data General
Corp. whereby Egan Systems. Inc.'s has become an Accredited Service Provider.
Under this agreement, the major technology company will, for a commission,
market certain Egan Systems, Inc. products and skills to a portion of Data
General Corp.'s customer base. The Company is optimistic that this agreement
will continue to provide a substantial revenue source for at least the next
fiscal year.

Management remains optimistic that the Company will be profitable in 1998. 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, 1997 and 1996 were
approximately $76,000 and $76,000, and gross profit percent was approximately
92% and 91%, respectively.

Research and development costs were approximately $343,000 and $348,000 for the
years ended December 31, 1997 and 1996, 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, 1997 and 1996 were approximately $636,000 and $535,000,
respectively. SG&A costs, net of research and development costs, was
approximately $293,000 and $187,000 for the years ended December 31, 1997 and
1996, respectively. Additionally, the capitalization of computer software
development costs for the years ended December 31, 1997 and 1996 reduced SG&A
expenses by approximately $348,000 and $240,000, respectively. The increase in
SG&A costs was attributed primarily to an increase in employees in the Company's
software development facility.


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

ADVERTISING AND PROMOTION EXPENSE

For the year ended December 31, 1997, advertising and promotion expense was
approximately $78,000 and was directly related to the Company's efforts to
market its new Year 2000 Impact Assessment and Remediation Tools and Services
product.

INTEREST INCOME/EXPENSE

Interest income for the year ended December 31, 1997 was approximately $21,000
and was related to cash invested by the Company in short-term financial
instruments. Interest expense for the years ended December 31, 1997 and 1996 was
approximately $9,000 and $10,000, respectively.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense for the years ended December 31, 1997 and
1996 was approximately $238,000 and $218,000, respectively. The increase in 1997
is attributed to the increase in amortization of capitalized computer software
costs of $20,000.

LIQUIDITY

As of December 31, 1997, the Company's net cash provided by operations was
approximately $152,000 and is substantially attributed to the net loss of
$82,000, depreciation and amortization of $238,000. This compares to the year
ended December 31, 1996 where net cash provided by operations was approximately
$134,000 and was substantially attributed to depreciation and amortization of
$218,000 and the decrease in payroll tax liabilities of $98,000.

Net cash used in investing activities during the years ended December 31, 1997
and 1996 was approximately $425,000 and $265,000, respectively. This was
attributed to the purchase of computer software and hardware equipment of
approximately $77,000 and $25,000 to support the Company's ongoing research and
development activities and to the capitalization of computer software
development costs of approximately $348,000 and $240,000 for the years ended
December 31, 1997 and 1996, respectively.

Net cash provided by financing activities was approximately $1,117,000 and
$160,000 for the years ended December 31, 1997 and 1996, 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.

Management believes that the Company has obtained sufficient cash resources to
meet its expected needs in the present fiscal year. Management does 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 II, ITEM 6. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONT'D.):

INFLATION AND SEASONALITY

The Company does not anticipate that inflation will significantly impact its
business. The Company does not believe its business is subject to fluctuations
due to seasonality.


                                       10
<PAGE>   11
                                    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                      57              Chairman, Chief Executive Officer
                                                    Treasurer and President

Ralph Jordan                        45              President of Envyr Corp. Subsidiary,
                                                    Director

Barbara Jean Schultz                46              Secretary and Director

Jack Laskin                         70              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.

Barbara Jean Schultz has been Corporate Secretary and a Director of the Company
since March 10, 1987. Prior to then Ms. Schultz had been office and product
manager for Diplomat Systems from 1983 through 1986 and a product manager and
assistant product manager at Schweber Electronics.

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.

Mr. 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.

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 and Barbara Jean Schultz for the year ended
December 31, 1997 amounted to approximately $88,000 and $38,000 respectively.


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             1,600,000        10.2%

Common           Networth Partners          1,400,000 (1)     8.6%

Common           Barbara Schultz              200,000         1.3%

Common           Ralph Jordan                 490,000         3.1%

Common           Jack Laskin                  800,000 (2)     5.0%

Common           All beneficial owners,
                 executives and
                 directors as a group       4,490,000 (3)    27.0%
</TABLE>

(1) Includes options to purchase 700,000 shares exercisable within 60 days.

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

(3) Includes options to purchase 1,100,000 shares exercisable within 60 days.

Unless otherwise noted, the addressee 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 20th
day of March, 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                   March 20, 1998
-----------------------                      Executive Officer, Treasurer
Edward J. Egan                               (Principal Executive, Financial
                                             and Accounting Officer)

/s/Barbara Jean Schultz                      Secretary, Director                          March 20,1998
-----------------------
Barbara Jean Schultz

/s/Jack Laskin                               Director                                     March 20, 1998
-----------------------
Jack Laskin

/s/Ralph Jordan                              Director                                     March 20, 1998
-----------------------
Ralph Jordan
</TABLE>

                                       14


<PAGE>   15
                                 EXHIBIT INDEX


         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.
<PAGE>   16
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                        CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


<PAGE>   17
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                                DECEMBER 31, 1997


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                             Page No.
<S>                                                                                      <C>

REPORT OF INDEPENDENT AUDITORS                                                                  F-2


FINANCIAL STATEMENTS:

  Consolidated balance sheets at December 31, 1997 and 1996                                     F-3

  Consolidated statements of operations, years ended
   December 31, 1997, 1996 and 1995                                                             F-4

  Consolidated statements of changes in stockholders' equity,
   years ended December 31, 1997, 1996 and 1995                                                 F-5

  Consolidated statements of cash flows, years ended
   December 31, 1997, 1996 and 1995                                                             F-6

  Notes to consolidated financial statements,
   December 31, 1997, 1996 and 1995                                                         F-7 - F-14
</TABLE>




                                       F-1
<PAGE>   18
                         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, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years ended December 31,
1997, 1996 and 1995 in conformity with generally accepted accounting principles.



                                                /s/ Patrusky, Mintz & Semel
                                                -------------------------------


New York, New York
February 10, 1998


                                       F-2
<PAGE>   19
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
ASSETS                                                                                    1997               1996
                                                                                      -----------        -----------

<S>                                                                                  <C>                 <C>
Current Assets
  Cash (Note 2)                                                                       $   880,438        $    37,298
  Accounts receivable                                                                     125,683             85,358
  Inventory (Note 2)                                                                       16,590             12,856
  Other current assets                                                                      1,739              5,894
                                                                                      -----------        -----------
      Total Current Assets                                                              1,024,450            141,406
                                                                                      -----------        -----------

Property and Equipment (Notes 2 and 3)                                                    110,059             61,543
                                                                                      -----------        -----------

Other Assets
  Computer software development costs - net (Notes 2 and 4)                               574,490            435,400
  Security deposits                                                                         3,126              3,126
                                                                                      -----------        -----------

      Total Other Assets                                                                  577,616            438,527
                                                                                      -----------        -----------

      Total Assets                                                                    $ 1,712,125        $   641,476
                                                                                      ===========        ===========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
  Current maturities of long-term debt (Note 5)                                       $        --        $    75,750
  Accounts payable                                                                         17,335              8,352
  Payroll taxes payable                                                                        --              5,013
  Accrued expenses and other current liabilities                                           49,487             27,290
  Due to officer                                                                               --              7,156
                                                                                      -----------        -----------
      Total Current Liabilities                                                            66,822            123,561

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

     Total Liabilities                                                                    116,822            123,561
                                                                                      -----------        -----------


Commitments and Contingencies (Note 6)

Stockholders' Equity
  Common stock - $0.05 par value; shares authorized - 30,000,000, shares issued
   and outstanding -
   15,559,652 and 10,185,000 in 1997 and 1996                                             777,983            509,250
  Additional paid-in capital                                                            3,158,551          1,912,814
  Deficit                                                                              (1,986,231)
                                                                                                         -----------
                                                                                                          (1,904,149)
                                                                                        1,950,303            517,915
  Notes receivable - stock purchase (Note 11)                                            (355,000)                --
                                                                                      -----------        -----------

      Total Stockholders' Equity                                                        1,595,303            517,915
                                                                                      -----------        -----------

      Total Liabilities and Stockholders' Equity                                      $ 1,712,125        $   641,476
                                                                                      ===========        ===========
</TABLE>


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


                                       F-3
<PAGE>   20
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995



<TABLE>
<CAPTION>
                                                          1997             1996            1995
                                                          ----             ----            ----
<S>                                                   <C>                <C>            <C>
Net sales (Note 1)                                    $   944,354        $854,791       $ 770,092
                                                      -----------        --------       ---------


Cost and expenses:

  Cost of goods sold                                       76,214          75,974          65,888
  Selling, shipping, general and
   administrative expenses                                635,940         534,645         640,745
  Interest income                                         (20,585)             --              --
  Royalty expense                                          10,818              --              --
  Advertising and promotion expense                        78,337              --              --
  Interest expense                                          9,195           9,976          14,372
  Depreciation and amortization                           237,733         218,285         151,957
  Loss on sale of license                                      --              --           4,475
                                                      -----------        --------       ---------

                                                        1,027,652         838,880         877,437
                                                      -----------        --------       ---------

(Loss) income before provision for income taxes           (83,298)         15,911        (107,345)

(Benefit) provision for income taxes
 (Notes 2 and 10)                                          (1,216)             --              --
                                                      -----------        --------       ---------


Net (loss) income                                     $   (82,082)       $ 15,911       $(107,345)
                                                      ===========        ========       =========



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

 Primary                                              $      (.01)       $    .00       $    (.01)
                                                      ===========        ========       =========

 Fully diluted                                        $        --        $    .00       $    (.01)
                                                      ===========        ========       =========

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


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


                                       F-4
<PAGE>   21
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
                                             Common Stock            Additional                    Notes Receivable
                                        Shares           Amount    Paid In 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
                                       ==========       ========    ===========       ===========        =========      ===========
</TABLE>










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


                                       F-5
<PAGE>   22
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

                           INCREASE (DECREASE) IN CASH

<TABLE>
<CAPTION>
                                                           1997             1996             1995
                                                           ----             ----             ----


<S>                                                    <C>                <C>              <C>
Cash flows from operating activities:
  Net (loss) income                                    $   (82,082)       $  15,911        $(107,345)
  Adjustments to reconcile net (loss) income
   to net cash provided by operating activities:
    Depreciation and amortization                          237,733          218,285          151,957
    Loss on sale of license                                     --               --            4,475
    Accounts receivable                                    (40,325)           3,647           48,589
    Inventory                                               (3,734)          20,860           12,793
    Other current assets                                     4,155             (555)           3,874
    Accounts payable                                         8,983           (1,144)          (4,764)
    Payroll taxes payable                                       --          (97,709)          16,012
    Accrued expenses and other
     current liabilities                                    27,098          (24,896)          18,005
                                                       -----------        ---------        ---------

      Net cash provided by operating
       activities                                          151,828          134,399          143,596
                                                       -----------        ---------        ---------

Cash flows from investing activities:
  Purchase of property and equipment                       (77,403)         (25,419)         (19,710)
  Computer software development costs                     (347,936)        (239,540)        (200,586)
  Proceeds from sale of license                                 --               --          100,000
                                                       -----------        ---------        ---------


      Net cash used in investing activities               (425,339)        (264,959)        (120,296)
                                                       -----------        ---------        ---------

Cash flows from financing activities:
  Proceeds from sale of stock options                       50,000          160,000               --
  Proceeds from sale of common stock                       145,000               --           25,000
  Proceeds from sale of stock warrants                     863,000               --               --
  Proceeds from convertible notes payable                  130,000               --               --
  Prospectus issuance costs                                (64,193)              --               --
  Repayment of long-term debt                                   --               --          (42,542)
  Loans from officer                                        (7,156)            (300)          (2,100)
                                                       -----------        ---------        ---------

      Net cash provided (used in) by financing
       activities                                        1,116,651          159,700          (15,442)
                                                       -----------        ---------        ---------

Net increase (decrease) in cash                            843,140           29,140            7,858

Cash - beginning of year                                    37,298            8.158              300
                                                       -----------        ---------        ---------


Cash - end of year                                     $   880,438        $  37,298        $   8,158
                                                       ===========        =========        =========
</TABLE>



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

                                       F-6
<PAGE>   23
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

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 based in the United States of America. One customer, a
domestic distributor, comprised approximately 22% and 28% of the Company's sales
in 1997 and 1996 and approximately 22% and 14% of the Company's accounts
receivable at December 31, 1997 and December 31, 1996, 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 or
three months or less. The Company maintains its cash in various bank accounts
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.

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.

Primary 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 were 12,265,383, 10,185,000 and 10,185,000 in 1997, 1996 and 1995,
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 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 18,891,900, 10,185,000 and 10,168,333 in 1997, 1996 and 1995,
respectively (Note 11). Fully diluted earnings per share amounts are not
presented for 1997 because it is anti-dilutive (Note 11).

                                       F-7
<PAGE>   24
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

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

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.

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 10) and the
capitalization of computer software development costs (Note 4).

NOTE 3.  PROPERTY AND EQUIPMENT:

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                       1997           1996
                                       ----           ----

<S>                                  <C>            <C>
Office furniture and equipment       $ 84,788       $ 82,092
Computer software                      77,151         54,357
Computer hardware                     138,512         86,599
Leasehold improvements                  3,975          3,975
                                     --------       --------
                                      304,426        227,023
Accumulated depreciation              194,367        165,480
                                     --------       --------

                                     $110,059       $ 61,543
                                     ========       ========
</TABLE>


Depreciation expense charged to operations in each of the years ended December
31, 1997, 1996 and 1995 amounted to $28,887, $30,705 and $25,580, respectively.

                                       F-8
<PAGE>   25
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995


NOTE 4.  COMPUTER SOFTWARE DEVELOPMENT COSTS:

Computer software development costs consist of the following:

<TABLE>
<CAPTION>
                                              1997           1996
                                              ----           ----

<S>                                       <C>              <C>
Computer software development costs       $1,150,222       $802,286
Accumulated amortization                     575,732        366,886
                                          ----------       --------

                                          $  574,490       $435,400
                                          ==========       ========
</TABLE>


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


NOTE 5.  LONG-TERM DEBT:

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                     1997          1996
                                     ----          ----

<S>                                <C>           <C>
Convertible note payable (A)       $50,000       $    --
Note payable (B)                        --        75,750
                                   -------       -------

                                    50,000        75,750
Less current maturities                 --        75,750
                                   -------       -------

                                   $50,000       $    --
                                   =======       =======
</TABLE>


(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 are
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, one convertible note in the amount of $80,000 was converted in
September 1997 into 320,000 shares at $.25 per share of the Company's $.05 par
value common stock.

(B) In August 1997, the Company converted its 6.5% note payable in the amount
of $75,750 and accrued interest of $9,913 into 342,652 shares at $.25 per share
of the Company's $.05 par value common stock.

Interest expense charged to operations on the above debt for the years ended
December 31, 1997 and 1996 amounted to $9,195 and $4,924, respectively.


                                    F-9
<PAGE>   26
                       EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER 31, 1997, 1996 AND 1995



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, 1998 and 1999 and 2000 are
approximately $60,000, $53,000 and $15,000, respectively. Rent expenses charged
to operations in the years ended December 31, 1997, 1996 and 1995 amounted to
$46,863, $40,895 and $40,324, 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.

EMPLOYMENT CONTRACT:

The Company has entered into an employment contract with its sales manager
through June 1998 that provides for a minimum annual salary, incentives based
on the Company's attainment of specified levels of sales and reasonable
employee benefits. At December 31, 1997, the total commitments, excluding
employee benefits, was $55,000.

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, 1997, 1996 and 1995 were approximately $343,000, $348,000
and $421,000, 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.




                                      F-10
<PAGE>   27
                       EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER 31, 1997, AND 1996 AND 1995



NOTE 8. COMMON STOCK (CONT'D):

NOTES RECEIVABLE--STOCK PURCHASE:

In October and December 1997, the Company entered into an agreement whereby it
issued 1,420,000 shares of the Company's $.05 par value common stock to certain
employees of the Company for consideration of $.25 per share or $355,000.
Payment for the stock consisted of the issuance of non-interest bearing notes
receivable in the amount of $355,000 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 note
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, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                     Exercise Price Per Share
                                                                 -----------------------------------
                                   Number of Shares              Range               Weighted Average
                                   ----------------             --------------       ----------------
<S>                                <C>                           <C>                   <C>
Balance--December 31, 1995           3,480,000                   $      0.375            $0.375

  Granted                            6,185,000                    0.250-0.500             0.263
  Exercised                                 --                         --                    --
                                     ---------                   ------------            ------

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                   $0.250-0.375            $0.293
                                    ==========                   ============            ======
</TABLE>


The status of all options and warrants outstanding at December 31, 1997 is
summarized as follows:

<TABLE>
<CAPTION>

                                        Weighted Average
   Range of                                Remaining              Weighted Average
Exercise Prices          Shares         Contractual Life           Exercise Price
---------------          -------        -----------------        -----------------
<S>                      <C>            <C>                      <C>
$0.250                   4,578,000           1.84                     $0.250
 0.375                   1,700,000           1.28                      0.375
 0.500                     265,000           1.92                      0.500
                         ---------           ----                     ------
                         6,743,000           1.69                     $0.293
                         =========           ====                     ======
</TABLE>



                                     F-11
<PAGE>   28
                       EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER 31, 1997, AND 1996 AND 1995



NOTE 9. SUPPLEMENTAL CASH FLOW INFORMATION:

CASH TRANSACTIONS:

During the three years in the period ended December 31, 1997, the Company paid
cash for interest in the amount of $7,080, $5,052 and $12,614 in 1997, 1996 and
1995, respectively.

During the years ended December 31, 1997, 1996 and 1995, the Company paid cash
for corporate income tax payments in each year in the amount of $520.

NON-CASH TRANSACTIONS:

During the years ended December 31, 1997 and 1996, the Company converted
$165,663 and $350,000 of its convertible notes payable and accrued interest into
662,652 and 1,400,000 shares of its $.05 par value common stock at $.25 per
share, respectively (Note 5).

During the year ended December 31, 1997, the Company issued 1,420,000 shares of
its $.05 par value common stock 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 $355,000 (Note 8).


NOTE 10.  INCOME TAXES:

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


<TABLE>
<CAPTION>
                                                                                        1997             1996
                                                                                        ----             ----
                                                                                     Noncurrent        Noncurrent
                                                                                     ----------        ----------
<S>                                                                                  <C>              <C>
Total deferred tax asset (Note 2)                                                    $ 880,000        $ 498,372
Total deferred tax liability (Note 2)                                                 (575,000)        (118,500)
Valuation allowance                                                                   (305,000)        (380,200)
                                                                                     ---------        ---------

Net deferred tax asset (liability)                                                   $    --          $    --
                                                                                     =========        =========
</TABLE>

                                      F-12
<PAGE>   29
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER 31, 1997, AND 1996 AND 1995



NOTE 10.  INCOME TAXES (CONT'D.)

The provision for income taxes for the years ended December 31, 1997, 1996 and
1995 consists of the following:

<TABLE>
<CAPTION>
                                                    1997           1996           1995
                                                    ----           ----           ----

<S>                                               <C>             <C>            <C>
Current tax expense                               $   --          $  --          $  --
Deferred tax expense                                58,000          1,050          3,611
Benefit of net operating loss carryforwards        (58,000)        (1,050)        (3,611)
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>
                                                  1997             1996             1995
                                                  ----             ----             ----


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

(Benefit) provision for income taxes             $(1,216)       $    --         $     --
                                                 =======        =========       ==========
</TABLE>

As of December 31, 1997, the Company has a net operating loss carryforward
available for Federal and State income tax purpose in the amount of
approximately $2,200,000, expiring from 2002 through 2012.


                                      F-13
<PAGE>   30
                        EGAN SYSTEMS, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      DECEMBER 31, 1997, AND 1996 AND 1995


NOTE 11. 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>
                                               1997               1996               1995
                                               ----               ----               ----

<S>                                       <C>                 <C>               <C>
(Loss) income available to common
 stockholders used in basic EPS           $    (82,082)       $    15,911       $   (107,345)

Convertible note payable                         5,000               --                 --
                                          ------------        -----------       ------------

(Loss) income available to common
 stockholders after assumed
 conversions of dilutive securities       $    (77,082)       $    15,911       $   (107,345)
                                          ============        ===========       ============

Weighted average number of common
 shares used in primary EPS                 12,265,383         10,185,000         10,168,333

Effect of dilutive securities
  Stock options                              5,830,711               --                 --
  Stock warrants                               391,074               --                 --
  Convertible notes payable                    404,822               --                 --
                                          ------------        -----------       ------------

Weighted average number of common
 shares and dilutive potential
 common stock used in diluted EPS           18,891,990         10,185,000         10,168,333
                                          ============        ===========       ============
</TABLE>

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


NOTE 12.  SUBSEQUENT EVENTS:

In January 1998, warrant holders exercised 550,000 warrants at $.375 per share
representing 550,000 shares of the Company's $.05 par value common stock.


                                      F-14