<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM 10-KSB


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

      For the fiscal year ended July 31, 1998

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


                         COMMISSION FILE NUMBER 0-24283
                                                -------


                           REGISTRY MAGIC INCORPORATED
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)


         FLORIDA                                         65-0623427
-------------------------------                     -------------------
(State or Other Jurisdiction of                      (I.R.S. Employer
Incorporation or Organization)                      Identification No.)

                            ONE SOUTH OCEAN BOULEVARD
                                    SUITE 206
                            BOCA RATON, FLORIDA 33432
--------------------------------------------------------------------------------
               (Address of Principal Executive Offices)(Zip Code)


                                 (561) 367-0408
--------------------------------------------------------------------------------
                (Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Securities Exchange Act of
1934:


         TITLE OF EACH CLASS        NAME OF EACH EXCHANGE ON WHICH REGISTERED
         -------------------        -----------------------------------------

                  NONE                              NONE


Securities registered under Section 12(g) of the Securities Exchange Act of
1934:

                     COMMON STOCK, PAR VALUE $.001 PER SHARE
                                (Title of Class)


Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not 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]

State registrant's revenues for the year ended July 31, 1998.  $885,110.

State the aggregate market value of the voting stock held by non-affiliates of
the registrant on October 30, 1998 computed by reference to the closing bid
price of the Registry Magic Incorporated Common Stock as reported by THE WALL
STREET JOURNAL on that date ($4.00): $13,824,000


                      APPLICABLE ONLY TO CORPORATE ISSUERS

The number of shares outstanding of the registrant's Common Stock, par value
$.001 per share (the "Common Stock"), as of October 23, 1998, was 5,813,000.

Transitional Small Business Disclosure Format (check one): Yes [ ]  No [X] 


                       DOCUMENTS INCORPORATED BY REFERENCE





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                                     PART 1

ITEM 1.           DESCRIPTION OF BUSINESS

INTRODUCTION

         Registry Magic(R), (the "Company") was organized to design, develop,
commercialize and market proprietary products and services that exploit recent
advances in speech recognition technologies. The products currently available or
under development by the Company have the objective to enable a user to speak
into a telephone or to a computer in a natural conversational manner and, in
turn, have the product listen, understand and respond by performing tasks or
retrieving information.

         The Company's initial product is the Virtual Operator(TM), a speech
driven auto-attendant and call routing turnkey product, that has received a
number of industry awards including "Product of the Year 1997" by both CTI
MAGAZINE and TELECONNECT MAGAZINE, "Best of Show" at the 1998 CT Expo and
included in the Smithsonian's permanent collection of Information, Technology
and Society. This product has begun to generate limited sales and rental revenue
for the Company and is being marketed and installed through both independent
resellers and a direct sales force. Recent installations span multiple
industries, and include prominent financial institutions, a major automotive
retailer, a credit card services company, a pharmaceutical manufacturer and a
teleservice firm. In addition to product sales, the Company is also seeking to
license its proprietary speech driven products to telephone switch and voice-
mail manufacturers, among others, on an original equipment manufacturer ("OEM")
basis.

         The Company's MagicCalendar(TM) product, a speech driven desktop
calendar management tool, is currently being distributed by Lernout and Hauspie
Speech Products N.V. ("L&H") and has generated revenue to the Company. In
addition, the Company has entered into a Virtual Employee(R) service agreement
with Office Depot Corporation to handle a specific category of incoming calls to
their call center which will generate revenue, on a per transaction basis, to
the Company.

         While the Company is beginning to generate limited recurring revenues
and licensing revenues, and anticipates increased revenues during its 1999
fiscal year, the Company's expenses continue to significantly exceed its current
revenues. There can be no assurance that the Company will generate sufficient
revenues to enable the Company to operate profitably during its 1999 fiscal year
or thereafter.

         The Company's goal is to continue to develop and refine its speech
recognition products and services by adding additional functionality and foreign
language understanding to enable users to easily access computer automated
transactions via telephone or PC without the need for extensive touch-tone menus
or computer proficiency while providing customers with cost-saving benefits.

         While the Company is currently marketing its initial products on a
stand-alone basis through independent reseller channels and a direct sales
force, the Company's ultimate strategy is to establish alliances with corporate
partners and manufacturers to license the Company's proprietary software
products to generate revenue on a transaction or recurring basis.

INDUSTRY BACKGROUND

         While various types of speech recognition technology have existed for
several years and the number of commercially available speech-enabled products
continue to grow, until recently, speech recognition technology and products
have been deficient and costly, thereby limiting widespread acceptance.
Historically, emphasis in the speech recognition industry has been placed on the
development of core speech recognition engine technology, rather than on the
development of speech recognition



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applications technology. The speech recognition engine is the core technology
upon which various applications are based. Major companies, including IBM,
Dragon Systems, Inc., Lernout & Hauspie Speech Products, N.V. Voice Control
Systems, Fonix, Nortel and Lucent, have spent vast sums of money over the last
quarter century in developing core engine technology, but have, for the most
part, relegated developing applications to others.

         Speech recognition engine technologies require distinct skills
including speech algorithms, statistics, digital signal processing algorithms,
digital signal processing programming, phonetics, linguistics, information
theory and coding theory. On the other hand, creating speech recognition
products requires an entirely different set of skills including speech and word
recognition, linguistics, usability engineering, speech engine tuning, noise
cancellation, phonetics, multimedia application development and telephone
application development.

         Early speech recognition applications typically required programming of
equipment to recognize a limited number of discrete words spoken by a specific
user, referred to as "speaker enrollment." These speaker-dependent systems also
tended to be sensitive to background noise and to changes in speech patterns
that resulted from an enrolled speaker being tired or excited. Additionally,
these initial speech recognition applications had limited vocabularies and
required the user to speak discretely, pausing between each word, rather than
allowing natural continuous speech. Moreover, in addition to these performance
challenges, the development of foreign language versions of automatic speech
recognition and text-to-speech synthesis (technologies for converting textual
information into synthetic speech output) has been costly and time consuming. As
a result, most developers have limited development to one (typically English) or
a few language versions of their technology.

         As the number of electronic devices used by businesses and consumers
proliferate and the features and functionality of these products and services
increase and become more complex, manufacturers continually seek to increase the
ease of use and the interface between their products and the end user. The
manner and simplicity of operation of a product can have a direct effect on its
popularity, frequency of use and market acceptance. The introduction of the
"mouse" and the graphical user interface (GUI), each of which simplified the use
of the personal computer, are examples of how improving a product's
user-friendliness can enhance its marketability.

         Speech is typically the most natural, efficient and easiest means of
human communication. With the increase in the power and capability of core
speech recognition engine technology, as well as the increase in speed and
reduction of costs in computer processors, integration of human speech as an
interface to telephone and computer applications is now feasible. Recent
advances in the accuracy of speech recognition technologies have led to
improvements in the performance and reliability of speech recognition products,
allowing for multiple languages to be developed for a specific application.
Management believes that these improvements and continuing advances in speech
recognition technologies, including the development of intuitive and easy-to-use
natural language user interfaces, are accelerating the growth of speech-enabled
products in daily business and personal use. Furthermore, management believes
that electronic devices and products incorporating speech recognition technology
will be available in an increasing variety of applications, provided that these
applications are easy to use, natural, accurate and cost effective.

STRATEGY

         The Company's overall goal is to exploit existing speech engine
technology to create advanced speech recognition products and services for
commercial applications. This technology, among other attributes, will (i)
substantially eliminate the need for touch-tone menus, (ii) allow for the
automation of telephone systems in international locations where touch-tone
systems may not be prevalent, (iii) reduce


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operational costs by performing repetitive tasks of live employees, and (iv)
allow for the access of information from any location and at anytime through
speech prompting. The Company's business strategy is to focus on products and
pricing models that produce revenue on a transaction or recurring basis.

         In pursuit of this goal, the Company has assembled a development team
which includes (i) speech recognition developers to enhance the capabilities of
the speech recognition engines that form the foundation of the Company's
products; (ii) natural dialogue designers with linguistic and phonetic skills to
design applications that anticipate user responses; (iii) multimedia application
developers to exploit and integrate audio and video functionality; (iv)
usability engineers to design intuitive, easy-to-use applications; and (v)
telephone application developers to integrate telephone systems with computer
applications.

         While the Company is currently marketing its initial products on a
stand-alone basis through independent reseller channels and a direct sales
force, the Company's ultimate marketing strategy is to establish alliances with
corporate partners and manufacturers to license the Company's proprietary
software products to generate revenue on a transaction or recurring basis.

PRODUCTS

         GENERAL

         The Company is developing proprietary applications software products
that simulate the manner in which human beings communicate by incorporating the
following key attributes:

                  o SPEAKER INDEPENDENCE -- enables any person to speak and be
understood. As a result, within a geographic region or country, the Company's
technology "listens" to and can understand different dialects, ages and genders.

                  o NATURAL, CONTINUOUS SPEECH -- allows users to speak at a
continuous and natural pace rather than one word at a time.

                  o DIALOGUE DETECTION (KEY WORD SPOTTING) -- identifies the key
words for action within any naturally spoken command. For example, a caller may
say, "I'd like to speak with John Doe, please." Dialogue Detection locates the
name "John Doe" and ignores all other words that have been spoken.

                  o TALK-THRU (BARGE-IN) -- allows callers to override prompts
with their voice. The computer stops speaking, "hears" the new input and
responds by going into its database to retrieve the requested information.

                  o MAGIC BULLSEYE(TM) -- performs automatically the desired
task based on the confidence of the understanding of the callers spoken command,
without the need for an additional confirmation prompt, thereby making the
caller interaction with the computer more efficient and natural.

                  o ADVANCED STATISTICAL METHODS -- analyzes what users say
based on quantitative statistical analyses that evaluates the combination of
responses in order to understand the spoken language. For example, although it
is currently not possible for a computer system to understand each individual
city, town or village in the United States (e.g., Boise, Dallas or Buffalo), it
can understand a specific city or town when coupled with a specific state (e.g.,
Idaho, Texas or New York).

         PRODUCTS AVAILABLE OR UNDER DEVELOPMENT 

         The Company believes that because of its universality, the telephone
offers a particularly effective



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means for information retrieval, transactions and messaging. While in the United
States interactive voice response telephone systems using touch-tone input have
enjoyed considerable success in automating a variety of transactions, users
often find that using touch-tone telephone menus, which require a user to push
different buttons based upon a series of commands, tend to be inefficient and
frustrating. The limitations for touch-tone input for more complex and varied
transactions are significant and provide a strong opportunity for speech driven
products. Furthermore, outside North America, many telephone systems are still
rotary-driven, which precludes touch-tone telephone application capability. The
recent deregulation of the telecommunication market in the European Union
("EU"), however, is expected to result in telecommunication products and
services becoming more competitive. The Company believes it is well positioned
to compete in the overseas market based on its prior experience in developing
multilingual voice recognition products. The Company has developed and
demonstrated a Japanese language prototype, as well as a Spanish language
prototype of its Virtual Operator, which recently was awarded "Best of Show" at
the 1998 CT Expo. In light of the foregoing and as a result of better
applications and advances in speech recognition technologies, management
believes that the exploitation of speech driven applications in the telephony
market will increase. Accordingly, the Company has determined to focus its
initial development efforts primarily on telephone products and services.

         o VIRTUAL OPERATOR(R). The Company's first stand-alone product is a
speech driven auto-attendant that enables a caller to request connection to a
person or department by speaking into a telephone in a natural manner. A caller
does not need to remember the extension of the person or department to whom the
caller wishes to speak, and the caller is not required to enter touch-tones to
transfer to a desired department. Additionally, a caller can interrupt a prompt
at any time and state the caller's request without waiting for the prompt to
finish. The Company believes that this product can be successful in the
international market, where it can automate telephone systems that do not
support touch-tone. Depending on individual configuration, the Virtual Operator
has the ability to answer up to twelve calls at once without placing a caller
on-hold, and function seven days a week, twenty four hours a day.

         A product prototype of the Virtual Operator won a Best-of-Show Award at
the Computer Technology Expo 1997, a major trade show for products and services
using computer telephone solutions that was held in Los Angeles in March 1997.
The Virtual Operator was also named "Product of the Year" for 1997 by both
TELECONNECT MAGAZINE and CTI MAGAZINE, leading trade publications for telephone
equipment dealers, and "Best of Show" at the 1998 CT Expo. In December 1997, the
Company was nominated as a finalist for a COMPUTERWORLD SMITHSONIAN AWARD and
included in the Smithsonian's permanent collection of Information, Technology
and Society.

         The Company has begun customer installations of its Virtual Operator
and is beginning to generate limited rental and sales revenue from customers
within a wide variety of industries. There were no rental revenues as of year
end July 31, 1998. Recent installations include several prominent financial
institutions, a major automotive retailer, a credit card services company, a
pharmaceutical manufacturer and a teleservice firm. The Virtual Operator is sold
to dealers or is rented to end-users, where it has the potential to generate
recurring revenue to the Company.

         In September 1998, the Company began customer beta installations of a
newly designed Virtual Operator that provides the same accuracy, performance and
functionality as the earlier version, but with a reduction of approximately 50%
in product cost. The Company anticipates that this new version will replace the
current version before the end of calendar year 1998 and allow the Company to
offer a lower priced product to customers.

         o MAGICCALENDAR(TM). MagicCalendar is a speech driven desktop software
application that allows users to schedule activities by speaking to the
computer. This product is currently being sold by L&H. In December 1997, the
Company entered into a royalty agreement with L&H for distribution of


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MagicCalendar pursuant to which L&H agreed to pay $450,000 in royalties to the
Company. Pursuant to this agreement L&H paid $325,000 in royalties by July 31,
1998 and paid the remaining $125,000 of additional royalties at October 2, 1998.
No additional royalties will be paid by L&H to the Company until L&H completes
sales of in excess of 75,000 units. While the Company does not believe that
sales by L&H will exceed 75,000 units, such royalties paid by L&H are not
subject to refund under the terms of the royalty agreement. In addition, an
enhanced version of this product is under development that provides for
integration with Microsoft(R) Outlook(TM) 98, thereby making the product more
useful to the large number of businesses which use Outlook.

         o VIRTUAL DIALER(TM). The Company is currently in beta testing of a
speech driven personal phonebook that is a turnkey hardware product that enables
a user to place calls to a contact list by stating the requested name rather
than requiring a user to remember individual telephone numbers. The Company has
positioned its product as a productivity tool that accepts hundreds of telephone
numbers used both inside and outside of the office. This product is targeted at
companies providing cellular telephone services, as well as to long distance and
calling card companies. In prior communications, the Company has referred to
this product as MagicDialing(TM).

         o VIRTUAL PERSONAL ASSISTANT(TM). The Company is currently in
development of a conversational personal assistant that can be sold as either a
turnkey hardware product or as a service on a subscription basis. It is
anticipated that this product will perform a number of tasks for the individual
user including remote voice mail, facsimile and e-mail retrieval, as well as the
functions of the Virtual Operator and the Virtual Dialer product. In prior
communications, the Company has referred to this product as Conversational
Personal Assistant(TM) or as MagicOne(TM).  

         o VIRTUAL EMPLOYEE(R) FOR CALL CENTERs. Available as an outsourced
service bureau through a strategic alliance with Phone Interactive Corporation,
this service is designed to handle selected incoming calls to call centers and
produce transaction revenue to the Company. The Company has entered into a
Service Agreement with Office Depot Corporation and anticipates the service to
be operational by the end of calendar year 1998. In prior communications, the
Company has referred to this product as Conversational Call Centers(TM).

   DISCONTINUED PRODUCTS

          The Company has previously developed prototypes of the following 
products, but does not plan further development of these products at this time.

         o CONVERSATIONAL KIOSKS(TM). Employing most of the Company's
proprietary technologies and integrating full motion video, this product
prototype was developed with the objective of allowing users to have two-way
conversations with computers in order to sell products, generate sales leads and
provide easy access to a wide variety of information.

         o CONVERSATIONAL POINT-OF-SALE APPLICATIONS(TM). Employing the
Company's technologies, this product prototype was developed with the objective
to allow for a diverse number of point of sale applications including telephone
fast food ordering or as part of an in-store informational kiosk.

          For the above two products, the Company has pursued strategic
alliances to which third parties could contribute technology, services,
financing or marketing in connection with the development and commercialization
of these specific solutions. To date, no business opportunities have been
identified that can yield significant long term or short term profit to the
Company. The Company is, therefore, de- emphasizing the development and
marketing of applications in the Kiosk and Point-of-Sale areas.



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STRATEGIC RELATIONSHIPS

         The Company continues to expand its relationships with technology
providers and distribution partners. Currently, some of these relationships
include:

         o LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. The Company has entered into a
distribution and licensing agreement (the "Distribution Agreement") with L&H, an
international provider of speech recognition core engine technologies. Under the
terms of the Distribution Agreement, L&H will market and sell the Company's
MagicCalendar product to end-users. The Company also has acquired rights to 
incorporate certain L&H technologies within the Company's products.

         o DIALOGIC CORPORATION. The Company is a Platinum Partner of Dialogic
Corporation, one of the largest manufacturer of computer telephone equipment. As
such, the Company is authorized to participate in a number of marketing programs
in support of the promotion of the Company's products.

         o INTER-TEL TECHNOLOGIES INCORPORATED. The Company has entered into a
Factored Products Distribution Agreement with Inter-Tel Technologies
Incorporated ("Inter-Tel"), a significant manufacturer and distribution company
of telephone related equipment. Under the terms of this agreement, Inter-Tel
will have the right to market and sell the Company's Virtual Operator product
through its 34 North American based sales offices.

         o NEC AMERICA INCORPORATED. The Company's Virtual Operator product has
received a certification from NEC and is the only speech recognition product
included within their "Fusion" Strategic Alliance Program. As such, the Company
is authorized to participate in a number of marketing programs in support of the
promotion of the product. The Company intends to pursue and expects to receive
certification endorsements from other OEMs as well.

         o NORTHERN TELECOM CORPORATION. The Company is a member of Northern
Telecom's Business Affiliate Program. As such, the Company is authorized to
participate in a number of marketing programs in support of the promotion of the
Company's products.

         o PHONE INTERACTIVE CORPORATION. The Company has entered into a
strategic alliance agreement with Phone Interactive Corporation ("PIC"), a
telephone service bureau business. As part of this agreement, the Company has
agreed to contribute its speech recognition call center software under
development, while PIC will provide its telecommunications platforms, marketing,
customer base and other contributions, and each will receive a percentage of the
overall revenue from the proposed services based upon each party's contribution
in developing and marketing a specific application. The Company and PIC have
begun the integration of the Company's call center software with PIC's
telecommunications platforms, and the Company believes that the service will be
available for customers prior to the end of calendar year 1998.

         o VERITEL CORPORATION OF AMERICA. The Company has entered into a
number of agreements with Veritel Corporation of America ("Veritel") for a
variety of products. Veritel is a provider of speaker verification technology.
Under a development agreement, the Company will receive revenue by developing a
proprietary interface that allows Registry Magic's Virtual Dialer product to
work seamlessly with one of Veritel products. As a result, the Virtual Dialer
will incorporate "voiceprint" technology that will provide additional user
security. Under a companion licensing agreement, the Company has secured rights
to develop and market a software product that uses Veritel's speaker
identification technology to limit access to specific files and programs via a
unique 'voiceprint'. Lastly under a separate distribution agreement, the Company
intends to expand its distribution through Veritel for the Virtual Dialer and
other products.


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         o SIMON PROPERTY GROUP. The Company and M.S. Management Associates,
Inc. ("MSM"), an affiliate of the Simon Property Group, L.P. ("SPG"), a national
shopping mall developer, have entered into a letter of intent in anticipation of
consummation of a Strategic Technology and Marketing Agreement for purposes of
identifying opportunities for installation of conversational kiosks at a limited
number of SPG properties. Under the terms of the proposed joint venture, MSM
would provide national advertisers and mall facilities for the conversational
kiosks, while the Company would contribute its speech application conversational
software and related technology under development. Given the de-emphasizing of
the conversational Kiosks product by the Company, it is doubtful that full-scale
deployment will take place when planned. The strategic technology and marketing
agreement will remain in place should any significant opportunities present
themselves.

RESEARCH AND DEVELOPMENT EXPENSES

         For the fiscal years ended July 31, 1997 and 1998, the Company incurred
research and development expenses of $418,164 and $1,076,567, respectively.

SALES AND MARKETING

         To date, marketing efforts have been conducted by Company personnel and
have focused on international businesses, national and regional distribution
companies and OEM telephone switch and voicemail manufacturers.

         The Company is currently in the process of establishing a distribution
network for North America. Initial sales of the Virtual Operator are being
achieved primarily through independent resellers that supply telephone and
voicemail systems to businesses, as well through the Company's direct sales
force which offers a rental program. To date, the Company has entered into
distribution agreements with both regional and national dealers including
Inter-Tel Technologies Incorporated and Southeastern Telecom Incorporated.

         The Company intends to establish a similar network in the EU, focusing
initially on the United Kingdom ("U. K."), based on the natural progression from
U.S. English-based applications to U.K. English-based applications. Thereafter,
the Company intends to expand into other EU countries based on the expected size
of the market opportunities and the availability of distribution partners. The
Company will also be required to provide ongoing technical support and training
to distributors of its applications software. There can be no assurances that
the Company will be successful in establishing a distribution network within
North America or the EU.

         The Company's ultimate strategy is to establish alliances with
corporate partners pursuant to which it will license the Company's proprietary
software products and generate revenue on a transaction or recurring basis.
There can be no assurances, however, that the Company will be able to enter into
any additional agreements or arrangements with any entities to develop, market,
distribute or sell applications software products. Furthermore, there can be no
assurance, that any sales and marketing efforts undertaken by or on behalf of
the Company will be successful or will result in substantial sales of the
Company's applications software products.

         The Company has allocated a substantial portion of the proceeds of its
recently completed public offering for sales and marketing activities, including
retention of internal sales and telemarketing personnel, attendance at trade
shows, cost of trade journal publications and advertising and promotional
materials aimed at increasing awareness of the Company's products and
establishing a network of committed distributors and resellers. The Company
currently has 13 people to sell its products and is testing direct sales in
Florida. The Company's internal sales organization has been responsible for




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substantially all of the Company's current sales.

SUPPLIERS AND LICENSORS

         The Company's proprietary software incorporates core speech engine
technology developed by others for which the Company has obtained licenses.

         The Company has entered into a four-year, non-exclusive, worldwide
license agreement, effective as of December 31, 1996 and as subsequently amended
(the "L&H Agreement"), to use and exploit L&H's proprietary core speech
recognition engine technologies and text-to-speech technologies. L&H is an
international developer, licensor and provider of multilingual advanced speech
and language technologies and services for telephone and desktop applications.
Included in the license to the Company are all advances or improvements made by
L&H to such technologies and all foreign language uses requested by the Company
which initially include American English, Castillian Spanish, French, German,
Italian, Dutch, and in certain instances, British English and Korean. L&H has
agreed to provide technical support, marketing support and training to the
Company. To date, the Company has paid L&H an aggregate of $1,000,000 in
non-refundable prepayments against future royalties due to L&H on sales of
certain of the Company's products incorporating L&H technology.

         The Company has entered into a three-year, non-exclusive worldwide
license agreement, effective as of September 30, 1998 to use and exploit
Veritel's proprietary core speaker verification engine technologies. Veritel is
a developer, licensor and provider of speaker verification "voiceprint"
technologies.

         The Company had also entered into a licensing arrangement with
International Business Machines for use of its core speech engine technology to
incorporate into certain Company product prototypes under development.

         The Company's software products are designed to be used with personal
computers, specifically Intel(R) Pentium processors that the Company currently
purchases from Dell Corporation, although these personal computers are available
from numerous sources on similar terms and conditions. The Company's turnkey
hardware products also require a modem for remote maintenance that the Company
currently purchases from Boca Research, although these modems are available from
numerous sources on similar terms and conditions. Standard telephone interface
cards are also required for certain of the turnkey hardware products if these
products communicate via the telephone. The Company's telephony products
currently require telephone interface cards manufactured by Dialogic of
Parsippany, New Jersey, however there are a number of other manufacturers,
including Natural Microsystems, Rhetoric, and NewVoice from which the Company
may purchase cards on similar terms and conditions. Certain of the Company's
products also rely on special processing boards that are manufactured by
Dialogic as well. The loss of Dialogic as a source for these cards could have a
material adverse impact on the Company, since the Company might not be able to
offer all the features of a particular application if it were required to rely
on other suppliers.

         The Company's personal computer desktop software products require high
quality sound cards shipped with most PCs today, as well as high quality
noise-canceling microphones available from a number of suppliers including
Andrea Electronics. The Company's telephone based products are designed to be
used with Microsoft(R) Windows NT and its desktop software products are designed
to be used with Microsoft(R) Windows 95 and Windows 98. The Company undertakes
its software development using Microsoft programming tools. To the extent that
Microsoft programming tools become unavailable, the Company should be able to
utilize Borland programming tools; however, the loss of the Microsoft
programming tools could have a material adverse affect on the development of the
Company's


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applications. Additionally, toolkits (i.e. collections of programs that
facilitate the creation of applications software) from engine providers enable
the Company to exploit speech recognition engine technologies developed by
different vendors. Typically, the Company selects engine toolkits and speech
recognition engine technology manufactured by the same entity. Alternatively,
the Company selects a programming toolkit to complement a specific application
based on the toolkit that produces the fastest results in a high quality manner
and yields efficiencies in hardware requirements.

PROPRIETARY RIGHTS

         The Company considers its software and applications as propriety and
currently relies on a combination of copyright, trade secret and trademark laws
and license agreements to protect its intellectual property rights. The Company
also has entered and will enter into license agreements with end-users of the
products and applications, and has required all employees to enter into
confidentiality and non- disclosure agreements. Despite these precautions, it
may be possible for unauthorized third parties to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. The Company currently has filed for federal trademark protection
with the United States Patent and Trademark Office (the "PTO") and has received
registration for the marks REGISTRY MAGIC(R), VIRTUAL OPERATOR(R), and VIRTUAL
EMPLOYEE(R).

         There are four patent applications currently pending with the PTO on
various aspects of its applications software including for the Company's
barge-in and key word spotting attributes. The Company has five additional
provisional patent disclosures filed with the PTO which relate to the Virtual
Personal Assistant and the Virtual Dialer products. There can be no assurance
that any of these patents will be granted, or if granted, will provide the
Company with significant protection against competitors. Certain of the
Company's competitors have obtained patent protection, and the Company believes
that certain of its competitors are seeking patent protection on various aspects
of their speech recognition technology. There can be no assurances that the
Company's technology will not be subject to challenges that such technology
infringes on the proprietary rights or trade secrets of others.

COMPETITION

         The speech recognition applications market is growing and is expected
to be characterized by intense competition. The Company's products will compete
with, or affect the sales of, many well-established companies including IBM,
AT&T, Digital Equipment, Lucent, Nortel and Unisys. Most of these companies have
substantially greater financial, technical, personnel and other resources than
the Company and have established reputations for success in the development,
licensing and sale of their products and technology, especially the larger
organizations. Several of these competitors have the financial resources
necessary to enable them to withstand substantial price competition or downturns
in their markets. In addition, certain companies may be expected to develop
technologies or products that may be functionally similar to some or all of
those being developed by the Company. With respect to the Virtual Operator
product, the Company's competitors will likely include Voice Control Systems,
Locus, Phonetics, Parlance and Vocalis. With respect to the Virtual Dialer
product, the Company's competitors will likely include IntelliVoice, Brite and
Periphonics. In the Virtual Personal Assistant product, the Company expects that
its initial competitors will be Wildfire, General Magic and Webley.
Additionally, manufacturers of voice-mail and telephone switches may also
attempt to develop their own conversational speech recognition applications.
There can be no assurance that the Company will be able to compete successfully,
that its competitors or future competitors will not develop technologies or
products that render the Company's products and technology obsolete or less
marketable, or that the Company will be able to successfully enhance its
proposed products or technology or adapt them satisfactorily.



                                       10

<PAGE>   11





EMPLOYEES

         The Company currently has 35 full-time employees. Of such employees, 5
persons are in management and provide services in the areas of marketing and
business development, administration and research and development; 15 are
employed in research and development; 13 are engaged in sales and marketing and
2 are in administration. No employee of the Company is covered by a collective
bargaining agreement or is represented by a labor union. The Company considers
its employee relations to be good. The Company also has entered into independent
contractor arrangements with three individuals on an as-needed basis to develop
programming or provide sales and marketing assistance for the Company.

ITEM 2.           DESCRIPTION OF PROPERTIES

         The Company currently leases adjacent facilities consisting of
approximately 1,594, 1,009, 387 and 1,600 square feet of office space in Boca
Raton, Florida, for initial monthly base rental amount of $1,727, $1,093, $661
and $2,500, respectively, plus the Company's proportionate share (6.26%) of
taxes and operating expenses for the common area of the building. The Company's
leases for the 1,594 and 1,009 square feet of office space terminate on December
31, 1999, and for the 387 and 1,600 square feet of office space on April 30,
1999 and June 30, 2001, respectively.

ITEM 3.           LEGAL PROCEEDING

         On June 4, 1998, the Company instituted an action against Mr. Gregg
Marcus seeking a judicial declaration requiring Mr. Marcus to return to the
Company a stock certificate evidencing 240,000 shares of Common Stock that was
issued to Mr. Marcus after Mr. Marcus represented that his original stock
certificate was lost, destroyed, or stolen. The action is pending in the 15th
Judicial Circuit in and for Palm Beach County, Florida. As described hereafter
under "Item 11. Security Ownership of Certain Beneficial Owners and Management",
the Company believes that the shares in question were assigned by Mr. Marcus to
a third party in connection with a loan transaction, and that Mr. Marcus is not
the beneficial owner of the shares. On June 29, 1998, Mr. Marcus removed the
action to the United States District Court Southern District of Florida.
Separate litigation is pending between Mr. Marcus and such third party. The
Company has reached a tentative oral agreement with Mr. Marcus under which terms
the certificate evidencing Mr. Marcus' shares will be placed in escrow pending
the outcome of litigation or settlement between Mr. Marcus and such third party.
As a result, the Company believes that the outcome of this litigation should
have no adverse effect on the Company or result in any change in the outstanding
capitalization of the Company.

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

         Not Applicable.


                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED  SHAREHOLDER
                  MATTERS

         The Company's Common Stock is traded on the NASDAQ SmallCap Market
under the symbol "RMAG." The following sets forth the range of high and low
closing bid prices for the Common Stock as reported on NASDAQ during each of the
periods presented. The quotations set forth below are inter-dealer quotations,
without retail mark-ups, markdowns or commissions, and may not necessarily
represent actual transactions.


                                       11

<PAGE>   12






               PERIOD                                HIGH             LOW
               ------                                ----             ---

         May 29, 1998 to July 31, 1998              $13.13            $7.75
         August 1, 1998 to October 30, 1998         $11.75            $4.00


         The Company believes that as of October 23, 1998, there were
approximately 83 record holders of the Company's Common Stock. The Company
believes that there are substantially in excess of 300 beneficial and round lot
holders of the Company's Common Stock.

         The Company has not paid any cash dividends on its Common Stock and
currently does not intend to declare or pay cash dividends in the foreseeable
future. The Company presently intends to retain any earnings that may be
generated to provide funds for the operation of business.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

         The following discussion and analysis should be read in conjunction
with the financial statements of the Company and the notes thereto appearing
elsewhere.

OVERVIEW

         Registry Magic Incorporated, was organized to design, develop,
commercialize and market proprietary products and professional services that
exploit recent advances in speech recognition technologies. The products
currently available or under development by the Company have the objective to
enable a user to speak into a telephone or to a computer in a natural
conversational manner and, in turn, have the product listen, understand and
respond by performing tasks or retrieving information.

         The Company's products and services, among other attributes, will (i)
substantially eliminate the need for touch-tone menus, (ii) allow for the
automation of telephone systems internationally where touch-tone may not be
prevalent, (iii) reduce operational costs by performing repetitive tasks of live
employees and (iv) allow for the access of information from anywhere and at
anytime through speech. The Company's business strategy is to focus on products
and pricing models that produce revenue on a transaction or recurring basis.

         While the Company is beginning to generate limited recurring revenues
and licensing revenues, and anticipates increased revenues during its 1999
fiscal year, the Company's expenses continue to significantly exceed revenues
currently and for the foreseeable future. There can be no assurance that product
installations, royalties or licensing will generate sufficient revenues to
enable the Company to operate profitably during its 1999 fiscal year or
thereafter.

         The Company is subject to all of the risks inherent in the
establishment of a new business enterprise. To address these risks, the Company
must, among other things, increase the number of key customer installations,
enter into successful distribution arrangements, expand into the international
market, respond to competitive developments, and attract, retain and motivate
qualified personnel. Failure to achieve one or more of these goals could have a
material adverse effect upon the Company's business, operating results and
financial condition.

RESULTS OF OPERATIONS

         Since its inception in October 1995, the Company's efforts have been
principally devoted to research, development and design of products, initial
marketing activities and raising capital.


                                       12

<PAGE>   13






         For the year ended July 31,1998, the Company had total revenues of
$885,110, total costs and expenses of $3,192,596 and a net loss of $2,307,486.
Since inception, the Company has sustained cumulative losses of $3,725,530.

         For the year ended July 31, 1998 the Company sold $517,135 of computer
software and hardware. Of this amount, $450,000 was a non-refundable royalty
from Lernout & Hauspie Speech Products, N.V. for a software package that is not
expected to generate recurring revenue as a result of future L&H sales. The
Company also performed consulting projects for L&H totalling $367,975. For the
year ended July  31, 1997, the Company had consulting fees of $344,944. For the
years ended July 31, 1998 and 1997 revenues derived from L&H were 94% and 76% of
total revenues, respectively.

         For the year ended July 31, 1998, cost of goods sold amounted to
$59,527 on sales of $67,135, representing hardware costs associated with the 
sales of the Company's Virtual Operator.

         General and administrative expenses increased by $761,034 from $770,283
for the year ended July 31, 1997 to $1,531,317 for the year ended July 31, 1998.
These increases were due to additional employees hired to begin marketing and
selling the Virtual Operator, additional office support staff and increased
legal fees incurred in connection with the Company's growth. For the year ended
July 31, 1998, the Company incurred a charge of $75,366 for stock options issued
to consultants.

         Research and development expenses for the year ended July 31, 1997 were
$418,164 compared to $1,076,567, for the year ended July 31, 1998, an increase
of $658,403. These increases were due to the development of the Company's
Virtual Operator product, Virtual Dialer, Magic Calendar and host- based product
and service prototypes, and expenses related to the Company's performance of
consulting contracts. Research and development expenses incurred in the course
of establishing technological feasibility of the Company's software applications
have been charged to operations pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 86 - "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed."

         Royalty expenses for the fiscal years ended July 31, 1997 and 1998 were
$500,000 and $500,000, respectively. These amounts represent a non-refundable
prepayment to L&H on royalties to use certain speech recognition engine
technologies and text to speech technologies.

         The Company has entered into a number of agreements with Veritel
Corporation of America, a provider of speaker verification technology. While the
Company expects to receive revenue for certain of its agreements with Veritel,
it is also obligated to pay licensing fees in the amount of $500,000 to Veritel.
Of this amount, $200,000 was paid in September 1998 and $300,000 is payable on
November 15, 1998. The Company expects to generate revenues from products
deploying Veritel's technology beginning in the 1999 fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

          As of July 31, 1998 the Company had $10,252,511 in cash and cash
equivalents. The Company does not have any available lines of credit.

         Net cash used in operating activities increased by $1,316,301 from
$789,858 for the year ended July 31, 1997 to $2,106,159 for the year ended July
31, 1998. Net cash used in operating activities primarily related to the
Company's continued expansion of its research and development and sales and
marketing efforts.

         Net cash used in investing activities during the years ended July 31,
1998 and 1997 were $320,074 and $130,349 respectively, an increase of $189,725.
The expenditures primarily related to purchases of




                                       13

<PAGE>   14





computer equipment and patent costs.

         Net cash provided from financing activities during the years ended July
31, 1998 and 1997 were $11,750,064 and $1,814,195 respectively, an increase of
$9,935,869. From inception through January 31, 1998, the Company's capital was
provided by loans made by the Company's Chairman and his wife in the amount of
$100,000, of which $50,000 was repaid at December 31, 1996. The remaining
$50,000 and accrued interest still outstanding and due to the Chairman shall be
paid on November 28, 1998, or such date thereafter as the Company has cash flow
from operations. Such related party loans included interest ranging from 6 1/2%
to 7% per annum.

         Between November and December 1996, the Company completed a private
placement in which it sold 82 units of its securities consisting in the
aggregate of $410,000 principal amount of its subordinated promissory notes and
410,000 shares of Common Stock for an aggregate payment net of expenses of
$1,606,216. The notes included interest at the rate of 7% per annum and were to
mature on October 1, 1998. In accordance with the terms of the notes, the
principal amount of such notes together with accrued interest in the amount of
$20,208 were repaid from the proceeds of the Company's Public Offering completed
in June 1998.

         In January 1997, the Company issued 58,000 shares of its Common Stock
to three unaffiliated investors at $3.50 per share for a total payment of
$203,000.

         In November 1997, the Company received net proceeds of $997,159 through
the issuance of 200,000 shares of its Common Stock at $5.00 per share to
1-800-REACH ME LLC, a dealer for certain of the Company's products and services.

         On June 2, 1998, the Company completed the public offering of 1,600,000
shares of Common Stock at an offering price of $7.25 per share through
Commonwealth Associates. The total gross proceeds from the offering was
$11,600,000 less underwriting discounts of approximately $.54 per share or an
aggregate of $870,000. In addition, the Company paid a non-accountable expense
allowance equal to 1.5% of the gross proceeds of the offering ($174,000) and a
financial advisory fee of $266,800. On June 26, 1998, Commonwealth Associates
exercised an over-allotment option and acquired 220,000 shares of Common Stock
under the same terms and subject to the same discounts and expense allowance.
Expenses of the offering paid through October 15,1998 were $594,956. The balance
of the proceeds is being maintained by the Company in cash and cash equivalents.
The aggregate net offering proceeds to the Company, after deducting total
offering expenses including expenses attributable to the exercise of the
over-allotment option ($167,725) were $11,162,905. The proceeds of the offering
have been used to date solely to pay certain of the aforementioned offering
expenses and to repay indebtedness to participants in the Company's previous
private placement in the principal amount of $410,000 and related interest of
approximately $20,208. The Company believes that its current revenues and cash
resources will enable it to finance operations for the ensuing 12 months.

IMPACT OF THE YEAR 2000 ON COMPANY PRODUCTS

         Computers, software and other equipment utilizing microprocessors that
use only two digits to identify a year in a date field may be unable to process
accurately certain date-based information at or after the year 2000. The Company
recognizes the need to insure that its operations will not be adversely affected
by Year 2000 software failures. Software failures due to processing errors
potentially arising from calculations using the year 2000 date are a recognized
risk, and the Company is addressing this issue on several different fronts.

         The Company is in contact with its suppliers to assess their
compliance. There can be no assurance that there will not be a material adverse
effect on the Company if third parties do not convert their



                                       14

<PAGE>   15





systems in a timely manner and in a way that is compatible with the Company's
systems. The Company believes that its actions with suppliers will minimize
these risks.

         Finally, the Company has established an internal workforce to
coordinate solutions for the Year 2000 issue with a goal of having all its
products Year 2000 compliant by the end of 1998. After evaluation of the
responses from suppliers, which the Company anticipates to complete in the third
quarter, the Company will prepare a contingency plan to mitigate such Year 2000
issues, if necessary.

         Through July 31, 1998, the Company has not incurred material expenses
relating to Year 2000 compliance efforts and believes that the expenses
associated with completing its Year 2000 compliance plans will not have a
material adverse impact on the Company's operations. Internal and external
expenses specifically associated with modifying internal-use software for the
Year 2000 will be expensed as incurred. The Company's current estimates of the
amount of time and expenses necessary to implement and test its computer systems
are based on the facts and circumstances existing at this time. Nevertheless,
achieving Year 2000 compliance is dependent on many factors, some of which are
not completely within the Company's control. Should either the Company's
internal system or the internal systems of one or more significant vendors or
suppliers fail to achieve Year 2000 compliance, the Company's business and its
results of operations could be adversely affected.

YEAR 2000 IMPACT ON INTERNAL BUSINESS OPERATIONS

         The Company uses a significant number of computer software programs and
operating systems in its internal operations, including applications used in
financial business systems and various administration functions. To the extent
that these software applications contain source code that is unable to
appropriately interpret the upcoming calendar year "2000," some level of
modification or even replacement of such source code or applications will be
necessary. The Company is in the process of identifying the software
applications that are not "Year 2000" compliant. Given the information known at
this time about the Company's systems, coupled with the Company's ongoing
efforts to upgrade or replace business critical systems as necessary, it is
currently not anticipated that these "Year 2000" costs will have a material
adverse impact on the Company's business, financial condition and results of
operations. However, the Company is still analyzing its software applications
and, to the extent they are not fully "Year 2000" compliant, there can be no
assurance that the costs necessary to update software or potential systems
interruptions would not have a material adverse effect on the Company's
business, financial condition and results of operations.




                                       15

<PAGE>   16





RISK FACTORS

         THIS ANNUAL REPORT FORM 10-KSB CONTAINS "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS,
OTHER THAN STATEMENTS OF HISTORICAL FACTS, INCLUDED IN OR INCORPORATED BY
REFERENCE INTO THIS FORM 10-KSB, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION,
WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE," "ESTIMATE," "PROJECT" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR
SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY
MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED. ALTHOUGH THE COMPANY
BELIEVES THAT THE EXPECTATIONS WE INCLUDE IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, WE CANNOT ASSURE YOU THAT THESE EXPECTATIONS WILL PROVE TO BE
CORRECT.

         Among the key risks that could cause actual results to differ
materially from expectations, estimates of costs, projected results or
anticipated results are as follows:

LIMITED OPERATING HISTORY; OPERATING LOSSES

         We have received only limited revenues from our inception in October
1995 through July 31, 1998. Total revenues for the year ended July 31, 1998 were
$885,110 and these included $367,975 of consulting fees. We have only recently
begun generating limited sales and rental revenue from our Virtual Operator
product. There was no such rental revenue for the year ended July 31, 1998.
Accordingly, we have only a limited history upon which you can evaluate our
prospects and future performance. Our prospects must be considered in light of
the risks, expenses and difficulties frequently involved in the operations and
expansion of a new business in an evolving industry which has not obtained
widespread commercial acceptance and which experiences rapid technological
obsolescence and intense competition.

         From inception through July 31, 1998, we have incurred cumulative
losses of $3,725,530 and anticipate that our losses will continue during the
current fiscal year ending July 31, 1999. We expect to incur significant
expenditures in connection with the development and marketing of our speech
recognition applications which will likely result in losses until such time, if
ever, as we are able to obtain sufficient contracts for our speech recognition
products and services which will generate adequate sources of revenue to support
our operations. We cannot assure you that our current business strategy will
enable us to ever achieve profitable operations.

SIGNIFICANT CAPITAL REQUIREMENTS; POSSIBLE NEED FOR ADDITIONAL FINANCING

         We will continue to have significant capital requirements due to the
substantial costs associated with product development and refinement,
recruitment of skilled personnel and the marketing of innovative speech
recognition products and related services primarily to large established
corporations and other organizations. Our cash requirements for the purpose of
developing our products have been substantial and, as a result, we have been
dependent upon capital resources provided by investors in order to finance our
operations.

         At the current time our expenditures are exceeding our limited revenues
on a monthly basis. While we expect our revenues to increase during the 1999
fiscal year, if we are wrong, or our revenues do not increase substantially, we
will continue to deplete our cash resources from our previous public offering.
In the event we do not develop and refine our products on a timely basis, we do
not complete contracts for the provision of products and technology in
sufficient number or in the event the proceeds of our initial public offering
are insufficient to fund the implementation of our business plan and working




                                       16

<PAGE>   17





capital requirements, we may require additional financing. We have no current
arrangements with respect to, or potential sources of, additional financing and
we do not anticipate that existing shareholders will satisfy any portion of our
future financing requirements. We cannot assure you that any additional
financing will be available to us when needed, on commercially reasonable terms,
or at all. If we are unable to obtain additional financing when needed, this may
have a material adverse effect on us, including the curtailment of our product
development, marketing and expansion activities.

DEVELOPMENT OF MARKETS REQUIRED FOR SUCCESSFUL PERFORMANCE BY THE COMPANY

         We have only recently commenced major marketing activities, and we
cannot assure you that our marketing program will be successful or that our
applications software will be accepted by the market. Market acceptance for our
products will require substantial marketing efforts and the expenditure of
significant funds. Our financial performance will depend, in part, on acceptance
of speech recognition technology and the future development, growth and size of
this market. Our applications software products will compete with more
conventional means of information processing (e.g. data entry or access by
keyboard or touch-tone phone). The development of these markets also will depend
upon the following:

         o        demand for new applications
         o        ability of our products and services to meet and adapt to
                  these needs
         o        continuing price and performance improvements in speech
                  recognition engine technology and hardware technology that
                  will reduce the cost and increase the performance of products
                  incorporating our applications

UNCERTAINTY OF PRODUCT AND TECHNOLOGY DEVELOPMENT BY THE COMPANY

         Our initial product, the Virtual Operator, is a speech driven
auto-attendant. In addition, we have developed prototypes for two additional
telephone-based speech recognition products including a voice driven speed
dialing product and a conversational personal assistant that performs
voice-mail, facsimile, and e-mail retrieval, as well as the functions of the
Virtual Operator and the speed dialing product. To date, however, we have not
developed foreign language versions for our Virtual Operator product (other than
Spanish and Japanese) or our two prototypes. Additionally, we also intend to
continue to develop and refine additional products including conversational call
centers which is currently in the relatively early stages of development. In
order to finalize development of these products, we will be required to spend
considerable time, effort and resources. Our success will depend, in part, upon
the ability of our proposed products to meet targeted performance, cost
objectives, and their timely introduction into the marketplace.

         In addition, early versions of software products often contain errors
or defects. We cannot assure you that, despite extensive testing by us and
potential customers, errors or defects will not be found in our applications
software products prior to or after commencement of their commercial deployment.
This may result in redevelopment costs and loss of, or delay in, market
acceptance of our products. Additionally, we cannot assure you that our products
will satisfactorily perform the functions for which they are designed or, that
they will meet applicable price or performance objectives. Moreover, we
currently do not maintain errors and omissions insurance, although we intend to
do so in the future. In the event of any errors or defects in any of our
products that may adversely affect end users, we may be liable for such errors
or defects. This could have a material negative impact on our financial
condition.




                                       17

<PAGE>   18


RAPID TECHNOLOGICAL CHANGE

         The speech recognition products market is expected to involve rapid
technological change resulting in dynamic customer demands, frequent new product
and service introductions and short product lifecycles. The markets for our
products may change rapidly as a result of the following:

         o         innovations in core speech recognition engine technology
         o         computer hardware
         o         software and communications technologies

Our success will depend, in part, upon our ability to make timely and
cost-effective enhancements and additions to our existing applications software
products and developing new products that meet changing customer demands. We
cannot assure you that we will have the resources necessary to achieve this
objective and that our products will not be rendered obsolete.

COMPETITION

         The speech recognition applications market is growing and expected to
become intensely competitive. Our products will compete with those developed or
being developed by many well-established companies. For example, we will compete
with International Business Machines Corporation, American Telephone and
Telegraph Company, Microsoft Corporation, Digital Equipment Corporation, Lucent
Technologies, Inc., American Nortel Communications, Inc. and Unisys Corporation.
Most of these companies have substantially greater financial, technical,
personnel and other resources than us and have reputations for success in the
development, licensing and sale of their products and technology, especially the
larger organizations. A number of these competitors have the financial resources
that enables them to withstand substantial price competition or downturns in
their markets. In addition, certain companies may be expected to develop
technologies or products which may be similar to some or all of those being
developed by us. With respect to our Virtual Operator product, our competitors
may include Voice Control Systems, Vocalis Group plc, and PureSpeech, Inc. In
the conversational speed dialing and personal assistant applications, we expect
that our initial competitors will be Wildfire Communications, Inc., General
Magic, and Webley Systems, Inc. Additionally, voicemail companies and telephone
switch manufacturers could also attempt to develop their own conversational
speech recognition applications.

         Industry standards with respect to the markets for the technology and
products being developed by us are continually evolving. This often results in
product obsolescence or short product life cycles. Accordingly, our ability to
compete successfully will depend on a number of factors including:

         o        our ability to complete development and introduce into the
                  marketplace our proposed products and technology
         o        to continually enhance and improve our products and technology
                  in a timely manner
         o        to adapt our proposed products in order to be compatible with
                  specific products manufactured by others
         o        to successfully develop and market new products and technology

We cannot assure you that we will be able to compete successfully, that our
competitors or future competitors will not develop technologies or products that
make our products and technology obsolete or less marketable, or that we will be
able to successfully improve our proposed products or technology or adapt them
satisfactorily.



                                       18

<PAGE>   19





DIFFICULTIES IN MAINTAINING PROPRIETARY RIGHTS

         Our success depends upon our proprietary applications software
technology which may be difficult to protect. We currently rely on a combination
of contractual rights, trade secrets, know-how, trademarks, non-disclosure
agreements and technical knowledge to establish and protect our proprietary
rights. We cannot assure you, however, that the measures we have taken to
protect our proprietary rights will be adequate to prevent misappropriation of
the technology or independent development by others of products with features
based upon, or otherwise similar to, those of our products. Additionally,
although we believe that we have independently developed our technology and our
technology does not infringe on the proprietary rights or trade secrets of
others, we cannot assure you that our technology does not and will not so
infringe or that third parties will not assert infringement claims, trade secret
violations, competitive torts or other proprietary rights violations against us
in the future. In the case of infringement, we could, under certain
circumstances, be required to modify our products or obtain licenses, which
could require cash or other consideration. We cannot assure you that we will be
able to do either in a timely manner or upon acceptable terms and conditions,
and this failure could have a material negative effect on us. In addition, we
cannot assure you that we will have the resources to defend or prosecute a
patent infringement or other proprietary rights infringement action.

DEPENDENCE ON OTHER COMPANIES FOR ASSEMBLY AND COMPONENT PARTS

         We do not manufacture component parts for our products and,
accordingly, will be dependent on others for the supply and assembly of various
of our products. Our products are designed to be used with personal computers
(PCs), specifically Intel Pentium MMX (multi-media extension) processors. While
we currently purchase our modems, which are required for our software
applications, for remote maintenance from Boca Research, Inc. and our telephone
interface cards, which are also required for our software applications, from
Dialogic Corporation, located in Parsippany, New Jersey, there are a number of
other manufacturers who can supply similar products to us, and we are not
dependent upon a single supplier for any equipment or component parts. However,
the loss of Dialogic as a source for telephone interface cards could have a
negative impact on us, since we may not be able to offer all of the features of
a particular application if a card manufactured by another entity is used.
Additionally, we generally do not have long-term contracts with suppliers for
the purchase and delivery of component parts or contractors for the assembly of
our products. However, any interruption of supply in the assembly services we
use or in the supply of key components, for any reason, could result in
significant delivery delays, which would have a material negative effect on our
marketing efforts, customer relations, revenues and profitability.

LACK OF SALES AND MARKETING CAPABILITIES; DEPENDENCE UPON INDEPENDENT
DISTRIBUTORS, CORPORATE PARTNERS AND STRATEGIC ALLIANCES

         Our sales and marketing efforts have been limited to date, and we are
currently in the process of establishing a distribution network for North
America consisting of independent resellers as well as a direct sales force. Our
ultimate strategy is to establish alliances with corporate partners so that we
will be able to license our proprietary software products and generate revenue
on a recurring basis. We cannot assure you that our distribution network can be
successfully established or will result in substantial sales of our products.
Furthermore, we cannot assure you that our strategic partners will provide us
with the support anticipated by us, or that any of the strategic alliances will
be successful in marketing speech technology applications without further delays
or within budget. Failure of these joint ventures to be successful would have a
material negative effect on our business and prospects.



                                       19

<PAGE>   20





IMPACT OF THE YEAR 2000 ON COMPUTER SYSTEMS

         Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the year 2000. Some older
computer systems store dates with only a two-digit year with an assumed prefix
of "19". Consequently, this limits those systems to dates between 1900 and 1999.
If not corrected, many computer systems and applications could fail or create
erroneous results by or at the year 2000 (the "Year 2000").

         Because we will rely heavily on computers to conduct our business we
are subject to all the risks associated with the Year 2000. We have assessed the
scope of our risks related to problems these computer systems may have related
to the Year 2000 and we believe such risks are not significant. In addition, we
are in the process of questioning our vendors and business partners about their
progress in identifying and addressing problems related to the Year 2000.
However, no assurance can be given that all of these third party systems or our
computer systems will be Year 2000 compliant.

RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH

         Under our business plan the anticipated growth in our customer base and
continued development of our speech recognition products and related services
also involve potential risks. This growth and continued development could place
a major strain on our management, employees and operations. In the event of this
expansion, we would have to continue to implement and improve our operating
systems, and to expand, train and manage our employee base. If we are unable to
implement and improve these operating systems and manage our employee base
effectively, our operations could be negatively affected.

RISK OF INTERNATIONAL SALES

         Our business is expected to be conducted in the European Union, as well
as in the United States, and may be affected by changes in demand resulting from
fluctuations in currency exchange rates, as well as by governmental controls and
other risks associated with international sales. Our international business may
be subject to longer payment cycles, difficulties in accounts receivable
collection, delays in shipments, increases in duties and taxes, price controls,
adverse changes in foreign regulations and the burdens of complying with a wide
variety of foreign laws. We will generally deal in local currencies in foreign
markets. If the U.S. dollar strengthens in relation to these international
currencies, our revenues from international sales and the gains and losses on
the settlement of receivables from international operations may be negatively
affected. We cannot assure you that exchange rate fluctuations and other risks
associated with international operations will not have a material negative
effect on our business and prospects.

VARIABILITY OF QUARTERLY RESULTS

         Our quarterly operating results may fluctuate as a result of a variety
of factors, including:

         o        the length of the sales cycle
         o        the timing of orders from and shipments to customers
         o        delays in product development and customer acceptance of
                  custom applications 
         o        product development expenses
         o        the success of new product introductions or announcements by
                  us or our competitors
         o        levels of market acceptance for new and existing products
         o        the hiring and training of additional staff as well as general
                  economic conditions.



                                       20

<PAGE>   21





         Because a significant portion of our overhead is fixed in the
short-term, our results of operations may be negatively affected if revenues
fall below our expectations. If our management's estimate of product sales and
product mix turn out to be substantially inaccurate, we may not have the
necessary inventory available to deliver systems in a timely manner. This could
have a material negative effect on our results of operations during quarterly
periods.

DEPENDENCE ON KEY PERSONNEL

         Our success depends on the efforts of the members of our management,
especially Walt Nawrocki, our President and Chief Executive Officer, Lawrence
Cohen, our Chairman of the Board, and Neal Bernstein, our Vice President of
Business Development. Although we have entered into employment agreements with
various members of our management, we cannot assure you that these persons will
continue their employment with us. The loss of the services of these key people
could have a material negative effect on our ability to maximize our use of our
products and technologies, to develop related products and technologies or
conduct the normal operations of the Company. We obtained $2,500,000 of key man
insurance on the life of Mr. Nawrocki, which may prove insufficient in the event
Mr. Nawrocki were to become deceased. Our success also depends upon our ability
to hire and retain additional qualified executive, programming, engineering and
marketing personnel especially if any of our current key members of management
became unavailable for any reason. Qualified executives and employees are in
great demand and are likely to remain a limited resource for the future.
Competition for skilled, creative and technical talent is also intense. We
cannot assure you that we will be successful in attracting and retaining such
personnel. Any failure by us to retain existing employees or to hire new
employees when necessary could have a material negative effect on us.

CONTROL OF THE COMPANY BY MANAGEMENT

         Our executive officers and directors will own or have the right to
acquire within the next 60 days up to approximately 43.7% of the outstanding
shares of Common Stock. Accordingly, our management will have the ability to
elect our entire Board of Directors and control the outcome of all matters
submitted to a vote of our shareholders.

POSSIBLE DELISTING OF SECURITIES FROM NASDAQ

         The Company's Common Stock is listed on The Nasdaq SmallCap Market. In
order to continue to be listed on Nasdaq, however, we must maintain at least
$2,000,000 in net tangible assets (total assets less total liabilities and
goodwill) or $500,000 in net income in the latest fiscal year or in two of the
last three years or $35,000,000 in market capitalization, a public float of at
least 500,000 shares, a $1,000,000 market value of public float, a minimum bid
price of $1.00 per share, at least two market makers, at least 300 shareholders
and at least two outside directors. The failure to meet these maintenance
criteria in the future may result in the delisting of the Company's securities
from Nasdaq, and the Company's Common Stock would thereafter be traded in the
non-Nasdaq over-the-counter market. As a result of such delisting, an investor
could find it more difficult to dispose of or to obtain accurate quotations as
to the market value of the Company's Common Stock.



                                       21

<PAGE>   22





AUTHORIZATION OF PREFERRED STOCK; POSSIBLE ANTI-TAKEOVER EFFECTS

         The Board of Directors is authorized to issue shares of preferred stock
and to determine the dividend, liquidation, conversion, redemption, and other
rights, preferences, and limitations of such shares without any further vote or
action of the shareholders. Accordingly, our Board of Directors has the power,
without shareholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting, or other rights which could negatively affect
the voting power or other rights of the holders of the Common Stock. In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging and delaying or preventing a change
in control of the Company. We have no present plan to issue any shares of our
preferred stock, although we cannot assure you that the Company will not do so
in the future.

LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS

         Our Articles of Incorporation include provisions to eliminate, to the
full extent permitted by the Florida Business Corporation Act (the "Florida
Act") the personal liability of our directors for monetary damages arising from
a breach of their fiduciary duties as directors. The Articles of Incorporation
also include provisions that we shall, to the maximum extent permitted under the
laws of the State of Florida, indemnify, and upon request shall advance expenses
to any director or officer, to the extent that such indemnification and
advancement of expense is permitted under law.


ITEM 7.           FINANCIAL STATEMENTS

         See "Index to Financial Statements" for the financial statements
included in this Form 10-KSB.


ITEM 8.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                   ACCOUNTING AND FINANCIAL DISCLOSURE

         None.




                                       22

<PAGE>   23





                                    PART III


ITEM 9.           MANAGEMENT

         The following table sets forth certain information concerning the
current directors and nominee directors of the Company and the executive
officers of the Company:

<TABLE>
<CAPTION>
NAME                              AGE              TITLE
----                              ---              -----

<S>                               <C>              <C>                                  
Walt Nawrocki                     53               President, Chief Executive Officer
                                                   and Director

Lawrence Cohen(1)(2)              53               Chairman of the Board

Neal A. Bernstein                 37               Vice President-Business Development

Martin Scott                      30               Treasurer, Secretary and Controller

Sheldon E. Misher(1)(2)           57               Director

Cornelia Eldridge(1)              57               Director

</TABLE>


-----------------------

(1)   Member of the Compensation Committee.
(2)   Member of the Audit Committee.

         WALT NAWROCKI has served as President, Chief Executive Officer and a
director of the Company since July 1996. Prior to joining the Company, Mr.
Nawrocki spent over 30 years at IBM where he was employed in positions of
increasing responsibility becoming Manager for Worldwide Product Development and
Business Management in August 1992. In such capacity, he oversaw a number of
business areas, including speech products, and was responsible for acquisitions,
joint development and OEM licensing programs. While at IBM, Mr. Nawrocki was
responsible for the shift from 5 1/4 inch diskettes to 3 1/2 inch diskettes and
the standardization of keyboards currently used on most PCs today. His working
teams have been honored with five BYTE MAGAZINE awards for speech recognition
products and an IBM MARKET DRIVEN QUALITY award for customer requirements and
customer satisfaction.

         LAWRENCE COHEN has served as Chairman of the Board since he founded the
Company in October 1995. Mr. Cohen has been engaged in providing financial
consulting and merchant banking services to early-stage companies for more than
the past 25 years. He has served as Vice Chairman of the Board and Executive
Vice President of Bristol Retail Solutions, Inc. (Nasdaq:BRTL), a point-of-sale
equipment distributor ("Bristol"), since he co-founded such company in April
1996. He is also the co-founder and a director of Apollo BioPharmaceuticals,
Inc., a privately-held company in Massachusetts engaged in the development of
neuroprotective pharmaceuticals ("Apollo"), and currently serves on the board of
directors of ASHA Corp. (Nasdaq:ASHA), an automotive drive train developer.
Between November 1990 and September 1996, Mr. Cohen served as Chairman of the
Board of BioTime, Inc. (Nasdaq:BTIM), a biotechnology firm he founded to develop
an artificial blood plasma substitute. He was a co-founder of Cryomedical
Sciences (Nasdaq:CMSI), a low temperature surgery company, and served as its
President from November 1990 to November 1991.



                                       23

<PAGE>   24





         NEAL A. BERNSTEIN has served as Vice President-Business Development of
the Company from January 1997 to April 1998 and Vice President-Business
Development of the Company since April 1998. Prior to joining the Company, Mr.
Bernstein spent approximately 13 years at IBM where he was employed in a variety
of sales, marketing and business development capacities, serving last as a
Business Development Manager within the IBM Internet Division from May 1996
until December 1996. From January 1992 until May 1996, he held a number of
management positions within the Speech Products Business Unit, including Manager
of OEM and Licensing, Manager of Business Development and Strategic Alliances
and Manager of North American Sales and Marketing.

         MARTIN SCOTT, a certified public accountant, has served as Controller,
Secretary and Treasurer of the Company since October 1997. From June 1996 until
October 1997, he was employed as an Audit Supervisor by Millward & Co., CPAs.
From October 1995 until June 1996, Mr. Scott served as Controller of ERD Waste
Corp. (Nasdaq:ERDI), a waste disposal company. Prior thereto, from January 1995,
he was employed as a Senior Accountant with the firm of Richard A. Eisner & Co.,
LLP. From January 1991 to January 1995, he was employed as a Senior Accountant
with the firm of Feldman Radin & Co., P.C.

         SHELDON E. MISHER has served as a director of the Company since the
completion of the Company's initial public offering on June 2, 1998. Mr. Misher
has been a partner in the law firm of Bachner, Tally, Polevoy & Misher LLP, New
York, New York since 1971, and has over 35 years experience in the areas of
corporate and securities law.

         CORNELIA ELDRIDGE has served as a director of the Company since October
1, 1998. Ms. Eldridge has been President of Eldridge Associates, Inc., a
management consulting firm she founded in 1981. Ms. Eldridge currently serves on
the board of directors of DE Frey, Inc., a financial services firm, SysComm, the
largest assembler and reseller of IBM mid-range computers, and Sims
Communications, a provider of intelligent POS terminals and software
applications.

         In addition to the above executive officers and directors, the Company
has retained the services of the following key employees.

         BILL BURBANK was appointed as Vice President-Sales and Marketing of the
Company on October 14, 1998 and was originally hired in September 1998 as
General Manager of Worldwide Corporate Accounts. Prior to joining the Company,
Mr. Burbank spent two years as Vice President of Sales for The Automatic Answer,
ranked as one of Inc. Magazine's "Fastest Growing Companies" in both 1996 and
1997. From January 1994 to July 1996 he was Vice President of Sales and
Marketing for Voice Processing Solutions, Inc. From October, 1990 to December
1993, Mr. Burbank was General Manager of Bennett Communications/Cellular One
which was acquired by AT&T Wireless Communications in August 1993. From June
1988 to September 1990, he was President of Allied Coordinated Trade Services,
Inc., a sales and marketing firm retained by corporations in the 'power sports'
industry.

         DAVID MAY was appointed as Vice President-Product Strategy and
Development of the Company on June 15, 1998. Prior to joining the Company, Mr.
May spent approximately 13 years at Nortel where he held leadership positions in
the areas of business development, program management, and strategic marketing
serving last as Director in the Wireless New Business Ventures unit, and prior
to that as Director of Strategic Marketing and Business Development, involved in
Nortel's public and private network speech recognition products. Prior to 1992
Mr. May held R&D management positions in Nortel Technology (previously Bell
Northern Research). Mr. May holds several awarded and pending patents.

         The Company's officers are elected annually by the Company's Board of
Directors and serve at the discretion of the Company's Board of Directors. The
Company compensates each non-employee director $500 per meeting for attending
meetings of the Board of Directors. In addition, directors will


                                       24

<PAGE>   25





be reimbursed for expenses incurred in attending such meetings and will be
indemnified against any claims arising out of his or her status as a director of
the Company, including claims arising under federal and state securities laws.
In addition, directors are eligible to receive options under the Company's 1997
Stock Option Plan.

         Mr. Ted Gordon, who served as a director of the Company beginning in
October 1995, resigned as a director on November 5, 1998.

         During the year ended July 31, 1998, the Company's Board of Directors
held meetings and took action by unanimous written consent a total of 12 times.

BOARD COMMITTEES AND RELATED INFORMATION

         The Compensation and Audit Committees were formed on July 15, 1998
after the Company's initial public offering. The Compensation Committee,
comprised of Lawrence Cohen, Sheldon E. Misher and Cornelia Eldridge, will
administer the Company's stock option plan and make recommendations to the full
Board of Directors concerning compensation, including bonuses and incentive
arrangements, of the Company's officers and key employees. The Audit Committee,
comprised of Lawrence Cohen, Ted Gordon and Sheldon E. Misher, will review the
engagement of the independent accountants and the independence of the accounting
firm, as well as review the audit and non-audit fees of the independent
accountants and the adequacy of the Company's internal accounting controls. The
initial Audit Committee included Lawrence Cohen, Sheldon E. Misher and Ted
Gordon. Mr. Gordon resigned as a director on November 5, 1998, and will be
replaced by either Ms. Eldridge or another independent director upon election of
a new director to replace Mr. Gordon. The Compensation and Audit Committees will
be comprised of a majority of the independent directors.

COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of the Company's outstanding Common Stock to file with the Securities
and Exchange Commission (the "SEC") initial reports of ownership and reports of
changes in ownership of Common Stock. Such persons are required by SEC
regulation to furnish the Company with copies of all such reports they file.

         To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than ten percent beneficial owners have been
complied with for the period which this proxy relates.


ITEM 10.          SUMMARY COMPENSATION TABLE

         The following table sets forth the aggregate compensation paid to Walt
Nawrocki, Lawrence Cohen and Neal Bernstein (the "Named Executive Officers") by
the Company. No other executive officer of the Company was paid a total annual
salary and bonus for the fiscal year ended July 31, 1998 which was $100,000 or
more.




                                       25

<PAGE>   26



<TABLE>
<CAPTION>


                                                                                      SECURITIES             OTHER
NAME AND PRIN-                  FISCAL                                                UNDERLYING            ANNUAL
CIPAL POSITION                  YEAR              SALARY             BONUS              OPTIONS          COMPENSATION
--------------                  ------            ------             -----            ----------         ------------

<S>                             <C>               <C>                    <C>               <C>                 <C>
Walt Nawrocki                   1998              $175,000              -0-               -0-                 -0-
President and                   1997              $175,000              -0-             200,000               -0-
Chief Executive                 1996               $14,583              -0-               -0-                 -0-
   Officer

Lawrence Cohen                  1998              $115,500              -0-               -0-                 -0-
Chairman                        1997               $67,375              -0-             100,000               -0-
                                1996                 -0-                -0-               -0-                 -0-

Neal Bernstein                  1998              $125,000              -0-               -0-                 -0-
Vice-President                  1997               $62,500              -0-             50,000                -0-

</TABLE>

----------

EMPLOYMENT AGREEMENTS

         Effective December 21, 1997, the Company entered into three-year
employment agreements with each of Walt Nawrocki, Lawrence Cohen and Neal
Bernstein providing for base annual salaries of $175,000, $115,500 and $125,000,
respectively. The employees may receive annual bonuses at the discretion of the
Company, with bonuses to be determined by the Compensation and Audit Committee.
No formula or criteria have been specifically determined. The agreements provide
for severance equal to one year's salary in the event of (i) non-renewal of the
agreement upon expiration other than for cause or (ii) a change of control of
the Company as a result of which the employee is not retained by new management
on a comparable basis. In addition, the agreements contain confidentiality
provisions and 12-month post termination non-competition restriction which may
be imposed by the Company provided the employee receives a lump sum payment
equal to one year's salary within 30 days of termination of employment. Under
Florida law, a court of competent jurisdiction may determine not to enforce such
non-competition restrictions or partially enforce or modify such provisions.


OPTION GRANTS IN LAST FISCAL YEAR

         1997 STOCK OPTION PLAN

         The 1997 Stock Option Plan (the "Plan") provides for the grant of
options to purchase up to 300,000 shares of Common Stock to employees, officers,
directors, and consultants of the Company. Options may either be "incentive
stock options" within the meaning of Section 422 of the United States Internal
Revenue Code of 1986, as amended (the "Code"), or non-qualified options.
Incentive stock options may be granted only to employees of the Company, while
non-qualified options may be issued to non-employee directors, consultants, and
others, as well as to employees of the Company.

         The Plan will be administered by the Board of Directors or a committee
thereof, who determine, among other things, those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of Common Stock issuable upon the exercise of
each option, and the option exercise price.



                                       26

<PAGE>   27





         The exercise price of an incentive stock option may not be less than
the fair market value per share of Common Stock on the date the option is
granted. The exercise price of a non-qualified option may be established by the
Board of Directors. The aggregate fair market value (determined as of the date
the option is granted) of Common Stock for which any person may be granted
incentive stock options which first become exercisable in any calendar year may
not exceed $100,000. No person who owns, directly or indirectly, at the time of
the granting of an incentive stock option to such person, 10% or more of the
total combined voting power of all classes of stock of the Company (a "10%
Shareholder") shall be eligible to receive any incentive stock options under the
Plan unless the exercise price is at least 110% of the fair market value of the
shares of Common Stock subject to the option, determined on the date of grant.
Non-qualified options are not subject to such limitation.

         Incentive stock options may not be transferred by an optionee other
than by will or the laws of descent and distribution, and, during the lifetime
of an optionee, the option will be exercisable only by the optionee. In the
event of termination of employment other than by death or disability, the
optionee will have no more than three months after such termination during which
the optionee will be entitled to exercise the option, unless otherwise
determined by the Board of Directors. Upon termination of employment of an
optionee by reason of death or permanent and total disability, an optionee's
options remain exercisable for one year thereafter to the extent such options
were exercisable on the date of such termination. No similar limitation applies
to non-qualified options.

         Options under the Plan must be issued within ten years from the
effective date of the Plan, which is March 12, 1997. Incentive stock options
granted under the Plan cannot be exercised more than ten years from the date of
grant. Incentive stock options issued to a 10% Shareholder are limited to five
year terms. Options granted under the Plan generally provide for the payment of
the exercise price in cash and may provide for the payment of the exercise price
by delivery to the Company of shares of Common Stock already owned by the
optionee having a fair market value equal to the exercise price of the options
being exercised, or by a combination of such methods. Therefore, if so provided
in an optionee's options, an optionee may be able to tender shares of Common
Stock to purchase additional shares of Common Stock and may theoretically
exercise all of his stock options with no additional investment other than the
purchase of his original shares.

         Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by the Company become available again for
issuance under the Plan.

         The Plan may be terminated or amended at any time by the Board of
Directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the Plan may not be
increased without the consent of the shareholders of the Company.

         Options to purchase 241,850 shares of Common Stock have been granted
pursuant to the Plan leaving a balance of 58,150 shares of Common Stock
available for issuance. The Company issued options to purchase an aggregate of
207,350 shares of Common Stock on March 12, 1997 exercisable at $3.50 to $3.85
per share over a four-year term to two executive officers and other employees of
the Company. Lawrence Cohen, the Company's Chairman of the Board, received
options to purchase 100,000 shares of Common Stock exercisable at $3.85 per
share during their four-year term. Neal Bernstein, the Company's Vice President
- Business Development, received options to purchase 50,000 shares of Common
Stock. Tony Nawrocki, an employee and the adult son of Walt Nawrocki, the
Company's President and Chief Executive Officer, received options to purchase
30,000 shares of Common Stock. Other employees also received options to purchase
27,350 shares of Common Stock exercisable at $3.50 per share during their
four-year term. In addition, Martin Scott, the Company's Secretary and
Treasurer, received options to purchase 5,000 shares of Common Stock of the
Company on October 15, 1997 at an exercise price of $3.50 per share over their
four-year term and an employee received options to purchase 15,000 shares of



                                       27

<PAGE>   28





Common Stock of the Company on December 15, 1997 at an exercise price of $5.00
per share over their four-year term. Such options are exercisable as to 50% of
the options granted commencing one year following the date of grant and as to
the remaining 50% of such options, commencing two years from the date of grant,
except for Lawrence Cohen whose options are currently exercisable in their
entirety. Subsequent to January 31, 1998, options to purchase 14,500 shares of
Common Stock were granted to three consultants. Such options are exercisable at
$7.00 per share, expiring in five years and vesting immediately.

         The Company intends to submit for shareholder approval at its 1998
Annual Meeting of Shareholders the 1998 Stock Option Plan ("1998 Plan"). Under
the 1998 Plan, the Company will reserve an aggregate of 1,000,000 shares of
Common Stock for issuance pursuant to options granted under the 1998 Plan. The
1998 Plan contains essentially the same terms and conditions as the existing
Plan.

         OTHER OPTION GRANTS

         In addition to options granted pursuant to the Company's 1997 Stock
Option Plan described above Registry Magic granted options in October 1996 to
Walt Nawrocki, the President and Chief Executive Officer of the Company, to
purchase 200,000 shares of Common Stock of the Company exercisable at $3.50 per
share on or prior to October 20, 2001. At that time, the Company also issued
options to purchase an aggregate of 100,000 shares of Common Stock to two
employees of the Company, exercisable at $.50 per share on or prior to October
20, 2001. See "Management's Discussion and Analysis and Plan of Operation." In
December 1996, the Company issued warrants to purchase 100,000 shares of Common
Stock to the placement agent for the Company's private placement completed in
December 1996. The warrants are exercisable at $5.00 per share (following
adjustment) over their five year term and vested immediately. In addition,
between March and July 1997, the Company granted options to purchase an
aggregate of 19,500 shares of Common Stock to two consultants of the Company,
exercisable at $3.50 per share during the five year term of such options. During
the six months ended January 31, 1998, options to purchase 6,926 shares of
Common Stock were granted to two consultants of the Company. Such options are
exercisable at $3.50 to $5.00 per share, expiring in five years and vesting
immediately.


         EXPENSES ASSOCIATED WITH OPTION GRANTS

         During the year ended July 31, 1997, $300,000 was charged to operations
representing the difference between the market price of the stock and the
exercise price of options to purchase a total of 100,000 shares of Common Stock
on the date the options were granted to two employees of the Company. In
addition, $4,500 was charged to operations for services received in exchange for
the grant of options. During the year ended July 31, 1998, $75,366 was charged
to operations in connection with the grant of options to three consultants to
purchase a total of 21,426 shares of Common Stock.

AGGREGATED FISCAL YEAR END OPTION VALUE TABLE

         The following table sets forth certain information concerning
unexercised stock options held by the Named Executive Officers as of July 31,
1998. No stock options were exercised by the Named Executive Officers during the
period ended July 31, 1998. No stock appreciation rights were granted or are
outstanding.



                                       28

<PAGE>   29



<TABLE>
<CAPTION>


                           NUMBER OF UNEXERCISED OPTIONS                 VALUE OF UNEXERCISED IN THE MONEY
                                 HELD AT JULY 31, 1998                      OPTIONS AT JULY 31, 1998 (1)
                          -----------        -------------               -----------         -------------
NAME                      EXERCISABLE        UNEXERCISABLE               EXERCISABLE         UNEXERCISABLE
----                      -----------        -------------               -----------         -------------

<S>                         <C>              <C>                          <C>                   <C>     
Walt Nawrocki               200,000                 --                    $1,400,000            $      0
  
Lawrence Cohen              100,000                 --                      $665,000            $      0

Neal Bernstein               25,000             25,000                      $175,000            $175,000

</TABLE>


--------------

(1) Dollar values are calculated based on the difference between the option
exercise price and $10.50, the closing price of the Company's Common Stock on
July 31, 1998, as reported by NASDAQ.





                                       29

<PAGE>   30



ITEM 11.           SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                   MANAGEMENT


         The following table sets forth, as of November 5, 1998, information
with respect to the beneficial ownership of the Company's Common Stock by (i)
each person who is known by the Company to own beneficially more than 5% of its
Common Stock, (ii) each director and nominee for director, (iii) each Named
Executive Officer (as defined herein), and (iv) all directors and executive
officers as a group:


<TABLE>
<CAPTION>
                                                            PERCENTAGE OF
                                                              OUTSTANDING
NAME AND ADDRESS OF                SHARES OF COMMON STOCK    SHARES BENEFI-
BENEFICIAL OWNERS(1)(2)              BENEFICIALLY OWNED      CIALLY OWNED(1)
-----------------------            ----------------------    ---------------

<S>                                       <C>                    <C>  
Lawrence Cohen (3) .................      1,800,000              30.4%

Walt Nawrocki(4) ...................        501,000               8.3%

Neal Bernstein (5) .................        326,000               5.6%

Ted Gordon .........................        320,000               5.5%

Harbor View Fund, Inc. (6) .........        340,000               5.8%
  488 Madison Avenue
  New York, New York 10019

Martin Scott(7) ....................         17,500                *

Sheldon Misher(8) ..................             --                 --

Cornelia Eldridge(9) ...............         40,000                *

All officers and directors
as a group (6 persons) .............      2,684,500              43.7%


</TABLE>

----------

*        Less than 1%.

(1)      Unless otherwise indicated below, the persons in the table above have
         sole voting and investment power with respect to all shares shown as
         beneficially owned by them, subject to community property laws where
         applicable. A person is deemed to be the beneficial owner of securities
         that can be acquired by such person within 60 days from the date of
         this Proxy Statement upon the exercise of options. Each person's
         percentage of ownership is determined by assuming that any



                                       30

<PAGE>   31





         options held by such person have been exercised. As of October 23, 1998
         there were 5,813,000 shares of Common Stock outstanding.

(2)      Unless otherwise indicated below, the address of each person is c/o the
         Company at One South Ocean Boulevard, Suite 206, Boca Raton, Florida
         33432.

(3)      Includes (i) 100,000 shares of Common Stock underlying immediately
         exercisable options and (ii) 1,700,000 shares owned by Alliant. Alliant
         is wholly owned by East Ocean Limited Partnership, as to which Mr.
         Cohen is the general partner and members of Mr. Cohen's family are
         limited partners. Mr. Cohen disclaims beneficial ownership with respect
         to the limited partnership interests owned by members of his family.
         Does not include 340,000 shares beneficially owned by Harbor View Fund,
         Inc., as to which Mr. Cohen has voting control pursuant to a Voting
         Trust Agreement, as such shares must be voted in the same proportion as
         votes cast by the Company's other shareholders.

(4)      Includes (i) 200,000 shares of Common Stock underlying immediately
         exercisable options and (ii) 300,000 shares owned by Mr. Nawrocki's
         wife. Mr. Nawrocki disclaims beneficial ownership of his wife's shares.

(5)      Includes (i) 25,000 shares of Common Stock underlying immediately
         exercisable options and (ii) 300,000 shares owned by Mr. Bernstein's,
         wife. Mr. Bernstein disclaims beneficial ownership of his wife's
         shares.

(6)      Harbor View Fund, Inc. ("Harbor View") is an entity controlled by Cori
         Orr, the wife of Kenneth Orr, the former principal of the placement
         agent for the Company's private offering completed in December 1996.
         Harbor View's holdings include (i) 100,000 shares underlying warrants
         originally issued to the placement agent in the aforementioned private
         offering, and (ii) 145,000 shares acquired by Sheldon Schwartz, Mrs.
         Orr's father, as to which she disclaims beneficial ownership. Harbor
         View and Mr. Schwartz have entered into a Voting Trust Agreement
         pursuant to which Lawrence Cohen, Chairman of the Board of the Company,
         has been granted the right to vote their shares in the same proportion
         as votes cast by the Company's other shareholders. A dispute exists as
         to the ownership of an aggregate of 240,000 of the shares beneficially
         owned by Harbor View and Mr. Schwartz. Based on supporting
         documentation reviewed by the Company and statements of Mr. and Mrs.
         Orr, the Company believes that the shares in question were assigned to
         Mr. Orr by Gregg Marcus in May 1997 in connection with a loan
         transaction. Mr. Marcus had acquired the shares from the Company in
         August 1996. In August 1997, Mr. Marcus submitted an affidavit of lost
         stock certificate to the Company pursuant to which the Company reissued
         the 240,000 shares to Mr. Marcus. The representations contained in the
         affidavit are inconsistent with certain transfer and assignment
         documentation subsequently supplied to the Company by Mr. and Mrs. Orr,
         and a lawsuit has been filed by Mrs. Orr against Mr. Marcus (whose
         counsel has advised the Company that he is a convicted felon) seeking,
         INTER ALIA, delivery of a formal stock power for the transfer. It is
         the Company's present position, based on the foregoing, that the
         240,000 shares were validly transferred to Mr. Orr and that Mr. Marcus
         is not currently a beneficial shareholder of the Company. The Company
         subsequently instituted a legal action against Mr. Marcus seeking a
         pretrial declaration that would require Mr. Marcus to


                                       31

<PAGE>   32





         return to the Company his stock certificate. The Company has reached a
         tentative oral agreement with Mr. Marcus in which Mr. Marcus would
         place in escrow the certificate endorsing his shares pending the
         outcome of litigation between Mr. Orr and Mr. Marcus. See "Item 3.
         Legal Proceeding"

(7)      Includes 2,500 shares of Common Stock underlying immediately
         exercisable options.

(8)      Address is 380 Madison Avenue, New York, New York 10017.

(9)      Address is 25 Broad Street, 17M, New York, New York 10004.

ITEM 12.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         During 1996 and 1997, Lawrence Cohen contributed $25,959 and $3,500,
respectively, to the capital of the Company. At that time he also advanced the
Company $50,000 which bears interest at the rate of 6.5% per annum. This loan
and related interest is payable on November 28, 1998 or on such date thereafter
as the Company has cash flows from operations. In October and November 1996,
Donna Cohen, Mr. Cohen's wife, advanced the Company a total of $50,000, which
was repaid in December 1996 together with interest at the rate of 7% per annum.

         In November 1997, the Company issued 200,000 shares of its Common Stock
to 1-800-REACH ME, LLC ("REACH ME") in consideration for a cash payment of
$1,000,000 (net proceeds of $997,159). REACH ME, subsequently entered into a
dealer agreement with the Company. REACH ME has certain demand and piggyback
registration rights with regard to these shares of Common Stock that it
acquired, and the Company will register the resale of such shares 12 months from
the date hereof.

         All transactions between the Company and its officers, shareholders and
each of their affiliated companies have been made on terms no less favorable to
the Company than those available from unaffiliated parties. In the future, the
Company intends to handle transactions of a similar nature on terms no less
favorable to the Company than those available from unaffiliated parties. In
addition, any forgiveness of loans must be approved by a majority of the
Company's independent directors who do not have an interest in the transaction
and who have access, at the Company's expense, to the Company's counsel or
independent counsel.

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.

A.       EXHIBITS:

EXHIBIT
NUMBER                              DESCRIPTION

 1.1     Form of Underwriting Agreement(1)
 3.1     Articles of Incorporation, as amended(1)
 3.2     By-Laws(1)
 4.1     Form of Common Stock Certificate(1)




                                       32

<PAGE>   33





4.2      Form of Subordinated Promissory Note issued to private investors(1)
4.3      Promissory Note issued to Lawrence Cohen and addendum thereto(1) 
4.4      Form of Representative's Warrants(1) 
4.5      Form of Voting Trust Agreement with Harbor View Fund, Inc. and Sheldon 
         Schwartz(1)
10.1     1997 Stock Option Plan(1)
10.2     Employment Agreement with Walt Nawrocki(1)
10.3     Employment Agreement with Lawrence Cohen(1)
10.4     Employment Agreement with Neal Bernstein(1)
10.5     Lease Agreements with Intervest - One Ocean Plaza L.P.(1)
10.5(a)  Lease Agreements with Intervest - One Ocean Plaza, L.P.(2)
10.6     Prepaid Royalty Agreement with Lernout & Hauspie Speech Products,
         Inc.(1)
10.7     Agreement with 1-800 REACH ME, LLC(1)
10.8     Phone Interactive Agreement(1)
10.9     Agreement with M.S. Management Associates, Inc.(1)
10.10    Licensing Agreement with International Business Machines Corporation(1)
10.11    Financial Advisory and Consulting Agreement(1)
10.12    Form of Lock-Up Agreement(1)
10.13    Indemnification Agreement(1)
10.14    Distribution and License Agreement with Veritel Corporation of
         America(2)
10.15    Master Software Joint Development Agreement with Veritel Corporation of
         America(2)
27.1     Financial Data Schedule(2)

----------


(1)      Filed as an exhibit to the Company's Registration Statement on Form
         SB-2 (File No. 333-47715) as filed with and declared effective by the
         Commission on May 28, 1998.
(2)      Filed herewith

B.       REPORTS ON FORM 8-K:

         None.



                                       33

<PAGE>   34





                                   SIGNATURES


         In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                     REGISTRY MAGIC INCORPORATED


DATE: November 13, 1998              By:  /s/ Walt Nawrocki                    
                                         -------------------------------------
                                         Walt Nawrocki, Chief Executive Officer
                                         and President


           In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:



DATE: November 13, 1998         /s/ Walt Nawrocki                             
                                -----------------------------------------------
                                Walt Nawrocki, Chief Executive Officer
                                and President, Director and Principal Executive
                                Officer



DATE: November 13, 1998         /s/ Lawrence Cohen                       
                                -----------------------------------------------
                                Lawrence Cohen, Director



DATE:                                                                          
                                -----------------------------------------------
                                Sheldon Misher, Director



DATE: November 13, 1998         /s/ Cornelia Eldridge                        
                                -----------------------------------------------
                                Cornelia Eldridge, Director



DATE: November 13, 1998         /s/ Martin Scott                                
                                -----------------------------------------------
                                Martin Scott, Treasurer and Secretary
                                Principal Financial and Accounting Officer




                                       34

<PAGE>   35




                                INDEX TO EXHIBITS

EXHIBIT
NUMBERS                    DESCRIPTION
-------                    -----------

10.5(a)  Lease Agreements with Intervest - One Ocean Plaza, L.P.

10.14    Distribution and License Agreement with Veritel Corporation of America

10.15    Master Software Joint Development Agreement with Veritel Corporation of
         America

27.1     Financial Data Schedule









                                       35




<PAGE>   36





                           REGISTRY MAGIC INCORPORATED


                                                                        CONTENTS




<TABLE>
<CAPTION>
                                                                                                             PAGE
                                                                                                             ----

<S>                                                                                                          <C>
                  Report of Independent Certified Public Accountants                                         F-2

                  Balance Sheet                                                                              F-3

                  Statements of Operations                                                                   F-5

                  Statements of Shareholders' Equity                                                         F-6

                  Statements of Cash Flows                                                                   F-7

                  Notes to Financial Statements                                                              F-8



</TABLE>




                                      F-1
<PAGE>   37



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and Stockholders of
Registry Magic Incorporated


We have audited the accompanying balance sheet of Registry Magic Incorporated,
as of July 31, 1998 and the related statements of operations, shareholders'
equity and cash flows for each of the two years in the period then ended. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Registry Magic Incorporated, as
of July 31, 1998 and the results of its operations and its cash flows for each
of the two years in the period then ended in conformity with generally accepted
accounting principles.




Miami, Florida                                               BDO Seidman, LLP
October 16, 1998




                                      F-2

<PAGE>   38



                           REGISTRY MAGIC INCORPORATED


                                  BALANCE SHEET





                                                         JULY 31,
                                                           1998
                                                       -----------

ASSETS

Current assets:
     Cash and cash equivalents (Note 1) .........      $10,252,511
     Accounts receivable (Note 1) ...............          124,060
     Inventories ................................          238,494
     Other current assets .......................           43,621
                                                       -----------

Total current assets ............................       10,658,686

Property and equipment, net (Note 3) ............          337,209

Deferred patent costs ...........................           36,073

Other assets ....................................           21,092
                                                       -----------

                                                       $11,053,060
                                                       =========== 



                                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.




                                      F-3
<PAGE>   39


                           REGISTRY MAGIC INCORPORATED


                                  BALANCE SHEET




                                                                  JULY 31,
                                                                    1998
                                                               ------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
     Accounts payable and accrued liabilities                  $    708,896
     Notes payable - related party (Note 4)                          50,000
                                                               ------------

Total current liabilities                                           758,896
                                                               ------------

COMMITMENTS AND SUBSEQUENT EVENTS (NOTES 7 AND 9)

SHAREHOLDERS' EQUITY: (NOTES 2 AND 6)
     Preferred stock $.01 par value; 5,000,000
         shares authorized; no shares outstanding                       
     Common stock, $.001 par value; 30,000,000
         shares authorized; 5,813,000
         issued and outstanding                                       5,813
     Additional paid-in capital                                  14,013,881
     Deficit                                                     (3,725,530)
                                                               ------------

Total shareholders' equity                                       10,294,164
                                                               ============

                                                               $ 11,053,060
                                                               ============


                                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.



                                      F-4

<PAGE>   40


                           REGISTRY MAGIC INCORPORATED


                            STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>

YEARS ENDED JULY 31,                                                  1998               1997
----------------------------------------------------------------------------------------------- 
<S>                                                               <C>               <C>        

REVENUES:

Consulting fees                                                   $   367,975       $   344,944

Product sales                                                         517,135                --
                                                                  -----------       ----------- 

Total revenues (Note 1)                                               885,110           344,944
                                                                  -----------       ----------- 

Costs and Expenses:

Cost of sales                                                          59,527                --

General and administrative                                          1,531,317           770,283

Research and development                                            1,076,567           418,164

Royalty expense (Note 7)                                              500,000           500,000

Depreciation and amortization                                         101,284            36,357

Interest income, net of interest expense of $28,325 and
  $22,958 in 1998 and 1997, respectively                              (76,099)           (5,657)
                                                                  -----------       ----------- 

Total costs and expenses                                            3,192,596         1,719,147
                                                                  -----------       ----------- 

Net Loss                                                          $(2,307,486)      $(1,374,203)
                                                                  -----------       ----------- 

Weighted average shares outstanding (Note 1)                        4,216,836         3,625,200
                                                                  -----------       ----------- 

Net loss per common share (basic and diluted) (Note 1)            $      (.55)             (.38)
                                                                  ===========       =========== 

</TABLE>


                                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.


                                      F-5

<PAGE>   41


                           REGISTRY MAGIC INCORPORATED


                       STATEMENTS OF SHAREHOLDERS' EQUITY



<TABLE>
<CAPTION>
                                                                               
                                                        COMMON STOCK          ADDITIONAL
                                                  ----------------------       PAID-IN
                                                   SHARES        AMOUNT         CAPITAL         DEFICIT          TOTAL
                                                  ---------   ------------    ------------   ------------    ------------

<S>                                               <C>         <C>             <C>            <C>             <C>          
Balance at August 1, 1996                         3,325,000   $      3,325    $     25,959   $    (43,841)   $    (14,557)


Issuance of stock options to employees
     (Note 8)                                            --             --         300,000             --         300,000

Capital contributions (Note 6)                           --             --           3,500             --           3,500

Issuance of common stock for cash at
$3.50 per share net of offering
costs of $191,020 (Note 6)                          410,000            410       1,243,570             --       1,243,980

Issuance of stock options for services
     (Note 8)                                            --             --           4,500             --           4,500

Issuance of common stock for cash at
     $3.50 per share (Note 6)                        58,000             58         202,942             --         203,000

Net loss                                                 --             --              --     (1,374,203)     (1,374,203)
                                                  ---------   ------------    ------------   ------------    ------------

Balance at July 31, 1997                          3,793,000          3,793       1,780,471     (1,418,044)        366,220

Issuance of common stock for cash at
     $5.00 per share net of offering cost of        200,000            200         996,959             --         997,159
     $2,841 (Note 6)

Issuance of stock options for services
     (Note 8)                                            --             --          75,366             --          75,366

Issuance of stock in public offering,
net of offering costs of $2,032,095               1,820,000          1,820      11,161,085             --      11,162,905
(Note 2)

Net loss                                                 --             --              --     (2,307,486)     (2,307,486)
                                                  ---------   ------------    ------------   ------------    ------------

Balance at July 31, 1998                          5,813,000   $      5,813    $ 14,013,881   $ (3,725,530)   $ 10,294,164
                                                  =========   ============    ============   ============    ============

</TABLE>


                                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.


                                      F-6



<PAGE>   42


                           REGISTRY MAGIC INCORPORATED


                            STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
YEAR ENDED JULY 31,                                                                     1998                1997
-------------------------------------------------------------------------------------------------------------------

<S>                                                                                 <C>                <C>          
OPERATING ACTIVITIES:
   Net loss                                                                         $ (2,307,486)      $ (1,374,203)
   Adjustments to reconcile net loss to net cash used in operating activities:
     Depreciation and amortization                                                       101,284             36,357
     Stock option compensation expense                                                    75,366            304,500
     Increase in accounts receivable                                                    (118,920)            (5,140)
     Increase in inventories                                                            (238,494)                --
     Increase in other current assets                                                    (39,537)            (4,084)
     Increase in other assets                                                            (14,167)            (6,925)
     Increase in accounts payable and accrued expenses                                   673,295             22,137
     (Decrease) increase in deferred revenue                                            (237,500)           237,500
                                                                                    ------------       ------------

Net cash used in operating activities                                                 (2,106,159)          (789,858)
                                                                                    ------------       ------------

INVESTING ACTIVITIES:
   Purchase of equipment                                                                (301,848)          (116,525)
   Deferred patent costs                                                                 (18,226)           (13,824)
                                                                                    ------------       ------------

   Net cash used in investing activities                                                (320,074)          (130,349)
                                                                                    ------------       ------------

FINANCING ACTIVITIES:
   Borrowings from related party                                                              --             50,000
   Repayment to related party                                                                 --            (50,000)
   Stock subscription receivable                                                              --              1,479
   Payment of deferred loan costs                                                                           (47,764)
   Net proceeds from sale of common stock                                             12,160,064          1,450,480
   Notes payable - repayment                                                            (410,000)                --
   Notes payable-borrowing                                                                    --            410,000
                                                                                    ------------       ------------

Net cash provided by financing activities                                             11,750,064          1,814,195
                                                                                    ------------       ------------

Net increase in cash                                                                   9,323,831            893,988
Cash and cash equivalents - beginning of period                                          928,680             34,692
                                                                                    ------------       ------------

Cash and cash equivalents - end of period                                           $ 10,252,511       $    928,680
                                                                                    ============       ============

Supplemental disclosures:
   Cash paid for interest                                                           $     38,152       $     10,064
                                                                                    ============       ============

Common stock and options issued for services rendered                               $     75,366       $      3,500
                                                                                    ============       ============

</TABLE>


                                 SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.





                                      F-7
<PAGE>   43


                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================

1.      SUMMARY OF SIGNIFICANT     ORGANIZATION AND BUSINESS
        ACCOUNTING POLICIES
                                   Registry Magic Incorporated (the "Company"),
                                   was incorporated on October 11, 1995
                                   (Inception). The Company is engaged in the
                                   development and marketing of proprietary
                                   applications software incorporating core
                                   speech recognition technology. The Company's
                                   products are designed to enable a user to
                                   perform tasks or retrieve information by
                                   speaking into a telephone or a computer in a
                                   natural conversational manner. The Company
                                   has developed voice recognition products that
                                   span the spectrum of applications areas from
                                   telephony to point-of-sale human interface
                                   solutions. The Company's offices are located
                                   in Boca Raton, Florida.

                                   PREPARATION OF FINANCIAL STATEMENTS

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

                                   CASH EQUIVALENTS

                                   The Company considers all highly liquid debt
                                   instruments with original maturities of three
                                   months or less to be cash equivalents. Cash
                                   equivalents include investments in money
                                   market accounts.

                                   CONCENTRATION OF CREDIT RISK AND RELIANCE ON
                                   CUSTOMERS AND SUPPLIERS

                                   The Company had cash balances at a financial
                                   institution in excess of insured limits by
                                   approximately $10,152,000.




                                      F-8

<PAGE>   44

                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================




                                   In 1998, one customer accounted for
                                   approximately 94% of total revenues and 100%
                                   of accounts receivable.

                                   Certain of the Company's products rely on
                                   special processing boards that are
                                   manufactured by one supplier. The loss of
                                   this supplier could have a material adverse
                                   impact on the Company.

                                   RESEARCH AND DEVELOPMENT COSTS

                                   Research and development costs incurred to
                                   establish the technological feasibility of
                                   computer software products are charged to
                                   operations as incurred.

                                   INVENTORIES

                                   Inventories are stated at the lower of cost
                                   or market. Cost is determined using the 
                                   first-in, first-out method.

                                   PROPERTY AND EQUIPMENT

                                   Property and equipment is recorded at cost.
                                   Depreciation is calculated on a straight line
                                   basis over the estimated useful lives of the
                                   assets, which range from three to five years.

                                   DEFERRED PATENT COSTS

                                   Costs incurred in relation to patent
                                   applications are capitalized as deferred
                                   patent costs. If and when a patent is issued,
                                   the related patent application costs will be
                                   transferred to a patent account and amortized
                                   over the legal life of the patent. If it is
                                   determined that a patent will not be issued,
                                   the related patent application costs will be
                                   charged to expense at the time such
                                   determination is made.

                                   FAIR VALUE OF FINANCIAL INSTRUMENTS

                                   The Company's financial instruments consist
                                   principally of cash and cash equivalents,
                                   accounts receivable, accounts payable,
                                   accrued liabilities and notes payable. The
                                   carrying amounts of such financial
                                   instruments as reflected in the balance sheet



                                      F-9

<PAGE>   45

                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================



                                   approximate their estimated fair value as of
                                   July 31, 1998. The estimated fair value is
                                   not necessarily indicative of the amounts the
                                   Company could realize in a current market
                                   exchange or of future earnings or cash flows.

                                   CAPITALIZED SOFTWARE COSTS

                                   Costs for developing computer software are
                                   capitalized when technological feasibility
                                   has been established for the computer
                                   software product. Capitalization of computer
                                   software costs is discontinued when the
                                   product is available for general release to
                                   customers and such costs are amortized on a
                                   product-by-product basis over the estimated
                                   lives of the products. There are no
                                   capitalized costs in the accompanying
                                   financial statements.

                                   REVENUE RECOGNITION

                                   Revenue from consulting services is
                                   recognized as services are provided. Revenue
                                   from the sale of software products is
                                   recognized at the time of sale and shipment
                                   of the product. Revenue from product
                                   development is recognized when development is
                                   complete.

                                   INCOME TAXES

                                   The Company accounts for income taxes
                                   pursuant to the provisions of FASB No. 109,
                                   "Accounting for Income Taxes," which
                                   requires, among other things, a liability
                                   approach to calculating deferred income
                                   taxes. The asset and liability approach
                                   requires the recognition of deferred tax
                                   liabilities and assets for the expected
                                   future tax consequences of temporary
                                   differences between the carrying amounts and
                                   the tax bases of assets and liabilities. The
                                   Company has had losses since inception and
                                   accordingly has not provided for income
                                   taxes. Realization of the benefits related to
                                   the net operating loss carryforwards may be
                                   limited in any one year due to IRS Code
                                   Section 382, change of ownership rules.



                                      F-10
<PAGE>   46

                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================



                                   NET LOSS PER COMMON SHARE

                                   In February 1997, the Financial Accounting
                                   Standards Board issued SFAS No. 128,
                                   "Earnings Per Share," which simplifies the
                                   standards for computing earnings per share
                                   ("EPS") previously found in APB No. 15,
                                   "Earnings Per Share." It replaces the
                                   presentation of primary EPS with a
                                   presentation of basic EPS. It also requires
                                   dual presentation of basic and diluted EPS on
                                   the face of the income statement for all
                                   entities with complex capital structures and
                                   requires a reconciliation of the numerator
                                   and denominator of the diluted EPS
                                   computation. The Company adopted SFAS No. 128
                                   in January 1998 and its implementation did
                                   not have an effect on the financial
                                   statements. EPS has been restated for all
                                   prior periods presented.

                                   Net loss per common share (basic and diluted)
                                   is based on the net loss divided by the
                                   weighted average number of common shares
                                   outstanding during each year.

                                   The Company's potentially issuable shares of
                                   common stock pursuant to outstanding stock
                                   purchase options and warrants, for fiscal
                                   years ended July 31, 1998 and 1997 (totaling
                                   828,276 shares and 626,850 shares with prices
                                   ranging from $0.50 to $9.06 and $0.50 to
                                   $6.00, respectively) are excluded from the
                                   Company's diluted computation as their effect
                                   would be antidilutive to the Company's net
                                   loss per share.

                                   LONG-LIVED ASSETS

                                   In accordance with Financial Accounting
                                   Standards Board Statement of Financial
                                   Accounting Standards (SFAS) No. 121
                                   "Accounting for Impairment of Long-Lived
                                   Assets and for Long-Lived Assets to be
                                   Disposed of," the Company includes as a
                                   component of income from continuing
                                   operations before taxes on income, the
                                   impairment loss on assets to be held and
                                   gains and losses on assets expected to be
                                   disposed of. There was no impairment in 1998
                                   or 1997.


                                      F-11
<PAGE>   47

                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================


                                   STOCK BASED COMPENSATION

                                   In October 1995, the Financial Accounting
                                   Standards Board issued SFAS No. 123,
                                   "Accounting for Stock Based Compensation."
                                   SFAS No. 123 establishes a fair value method
                                   for accounting for stock-based compensation
                                   plans either through recognition or
                                   disclosure. The Company did not adopt, for
                                   employee options the fair value based method
                                   but instead will disclose the pro forma
                                   effects of the calculation required by the
                                   statement.

                                   FUTURE ACCOUNTING PRONOUNCEMENTS

                                   Statement of Financial Accounting Standards
                                   No. 130, "Reporting Comprehensive Income,"
                                   establishes standards for reporting and
                                   display of comprehensive income, its
                                   components and accumulated balances.
                                   Comprehensive income is defined to include
                                   all changes in equity except those resulting
                                   from investments by owners and distributions
                                   to owners. Among other disclosures, SFAS No.
                                   130 requires that all items that are required
                                   to be recognized under current accounting
                                   standards as components of comprehensive
                                   income be reported in a financial statement
                                   that is displayed with the same prominence as
                                   other financial statements.

                                   SFAS No. 131, "Disclosures about Segments of
                                   an Enterprise and Related Information," which
                                   supersedes SFAS No. 14, Financial Reporting
                                   for Segments of a Business Enterprise,
                                   establishes standards for the way that public
                                   enterprises report information about
                                   operating segments in annual financial
                                   statements and requires reporting of selected
                                   information about operating segments in
                                   interim financial statements issued to the
                                   public. It also establishes standards for
                                   disclosures regarding products and services,
                                   geographic areas and major customers. SFAS
                                   No. 131 defines operating segments as
                                   components of an enterprise about which
                                   separate financial information is available
                                   that is evaluated regularly by the chief
                                   operating decision maker in deciding how to
                                   allocate the resources and in assessing
                                   performance.


                                      F-12

<PAGE>   48

                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================

                                   Both SFAS No. 130 and 131, issued in June
                                   1997, are effective for financial statements
                                   for periods beginning after December 15, 1997
                                   and require comparative information for
                                   earlier years to be restated. Due to the
                                   recent issuance of these standards,
                                   management has been unable to fully evaluate
                                   the impact, if any, they may have on future
                                   financial statement disclosures.

                                   In June 1998, the Financial Accounting
                                   Standards Board Issued SFAS 133, ACCOUNTING
                                   FOR DERIVATIVE INSTRUMENTS AND HEDGING
                                   ACTIVITIES. SFAS 133 requires companies to
                                   recognize ALL derivatives contracts as either
                                   assets or liabilities in the balance sheet
                                   and to measure them at fair value. If certain
                                   conditions are met, a derivative may be
                                   specifically designated as a hedge, the
                                   objective of which is to match the timing of
                                   gain or loss recognition on the hedging
                                   derivative with the recognition of (i) the
                                   changes in the fair value of the hedged asset
                                   or liability that are attributable to the
                                   hedged risk or (ii) the earnings effect of
                                   the hedged forecasted transaction. For a
                                   derivative NOT designated as a hedging
                                   instrument, the gain or loss is recognized in
                                   income in the period of change. SFAS 133 is
                                   effective for all fiscal quarters of fiscal
                                   years beginning after June 15, 1999.

                                   Historically, the Company has not entered
                                   into derivatives contracts either to hedge
                                   existing risks or for speculative purposes.
                                   Accordingly, the Company does not expect
                                   adoption of the new standard on August 1,
                                   1999 to affect its financial statements.

2.  INITIAL PUBLIC 
    OFFERING                       In June 1998, the Company completed a public 
                                   offering of 1,820,000 shares of common
                                   stock. The Company received gross proceeds
                                   of $13,195,000 from this public offering.
                                   Costs associated with this transaction were
                                   $2,032,095.

                                   Proceeds of $410,000 from this offering were
                                   used to pay subordinate notes issued in
                                   connection with a private placement of
                                   securities.


                                      F-13

<PAGE>   49

                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================




3.   PROPERTY AND EQUIPMENT       The Company's property and equipment is 
                                  summarized as follows:

                                  JULY 31, 1998
                                  --------------------------------------------

                                  Office equipment              $       65,618
                                  Computers                            359,761
                                  Leasehold improvements                10,660
                                  --------------------------------------------

                                                                       436,039
                                  Accumulated depreciation             (98,830)
                                  --------------------------------------------

                                                                $      337,209
                                  ============================================

4.   NOTES PAYABLE RELATED        Notes payable - related party is an unsecured
     PARTY                        $50,000 loan from an officer and director of
                                  the Company, bearing interest at a rate of
                                  6.5% per annum and is payable on November
                                  28, 1998 or on such date thereafter as the
                                  Company has cash from operations.

5.   INCOME TAXES                 At July 31, 1998, the Company had a net
                                  operating loss carryforward (NOL) of
                                  approximately $2,075,000, which expires
                                  through 2013.

                                  The net deferred tax asset is comprised of
                                  the following at July 31, 1998:

                                  --------------------------------------------

                                  Deferred tax assets:
                                    Prepaid royalty expense            280,000
                                    Start up costs                     225,000
                                    Compensation                       113,000
                                    Net operating loss carryforward    781,000
                                  --------------------------------------------

                                                                     1,399,000
                                  --------------------------------------------

                                  Deferred tax liability:
                                    Depreciation                       (49,000)
                                  --------------------------------------------

                                  Net deferred tax asset             1,350,000
                                  Deferred tax asset valuation 
                                   allowance                        (1,350,000)
                                  --------------------------------------------

                                  Net deferred tax asset                   
                                  ============================================

                                      F-14

<PAGE>   50
                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================



                                   Realization of any portion of the Company's
                                   deferred tax asset at July 31, 1998 is not
                                   considered to be more likely than not and
                                   accordingly a $1,350,000 valuation allowance
                                   has been provided.

6. SHAREHOLDERS' EQUITY            During 1997, the Company received $3,500 in 
                                   additional capital contributions from its 
                                   Chairman.

                                   In December 1996, the Company completed a
                                   private offering of securities. The Company
                                   received gross proceeds of $1,845,000 from
                                   this private offering. Costs associated with
                                   this transaction were $238,784. In connection
                                   with this offering, 410,000 shares of common
                                   stock were sold for $1,435,000 and $410,000
                                   in subordinated notes were also sold. In
                                   addition, five year warrants to purchase
                                   100,000 shares of common stock exercisable at
                                   $6.00 per share were granted to the
                                   investment banker. Subsequent to year end,
                                   the exercise price of these warrants was
                                   reduced to $5.00 per share.

                                   In January 1997, in connection with a private
                                   placement, the Company issued 58,000 shares
                                   of common stock, at $3.50 per share for cash
                                   of $203,000.

                                   In November 1997, in connection with a
                                   private placement, the Company issued 200,000
                                   shares of common stock at $5.00 for cash
                                   consideration of $1,000,000. Costs associated
                                   with this transaction were $2,841.

                                   In June 1998 the Company completed a public
                                   offering of common stock (note 2).           
      
7. COMMITMENTS                     a)   In December 1997, the Company entered
                                        into three year employment agreements
                                        with three of its executive-officers,
                                        which provide for aggregate base
                                        salaries totaling $415,500. In the event
                                        of a change of control of the Company,
                                        where the officers are not retained on a
                                        comparable basis by new management, the
                                        officers will receive lump sum payments
                                        equivalent to one year's salary. In
                                        addition, in the event of the
                                        non-renewal of the employment
                                        agreements, the officers will be
                                        entitled to the same lump sum payments.


                                      F-15
<PAGE>   51

                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================



                                  b)    On December 31, 1996, the Company
                                        entered into a licensing agreement with
                                        Lernout & Hauspie Speech Products N.V.
                                        ("L&H") which grants the Company the
                                        right to use a certain software object
                                        code in the development of its products
                                        in exchange for payment of certain
                                        amounts for royalties. The agreement
                                        runs for a term of four years and
                                        provides for the payment of percentage
                                        royalties and unit royalties as
                                        specified in the agreement. During 1998
                                        and 1997, the Company incurred $500,000
                                        and $500,000, respectively, of
                                        non-refundable royalties which were
                                        expensed.

                                  c)    On December 8, 1997, the Company entered
                                        into a licensing agreement with L&H 
                                        which grants L&H the right to use and 
                                        market certain proprietary software  
                                        developed by the Company in exchange for
                                        non-refundable payments of $450,000. The
                                        agreement may be terminated by either 
                                        party after January 1, 2001 and provides
                                        for the payment of unit royalties as 
                                        specified in the agreement.        

                                  d)    The Company occupies premises under
                                        four operating leases. The facilities
                                        are leased for terms of one to three
                                        years with annual rental payments of
                                        approximately $72,000. Rent expense for
                                        1998 and 1997 aggregated approximately
                                        $49,000 and $10,000, respectively.
                                        Minimum guaranteed lease payments under
                                        these leases are as follows:


                                  ----------------------------------------------

                                  1999                            $    69,792
                                  2000                                 45,100
                                  2001                                 27,500
                                  ----------------------------------------------

                                                                  $   142,392
                                  ==============================================
                                  
8. STOCK BASED                    In March 1997, the Company adopted a Stock 
   COMPENSATION                   Option Plan (the "Plan") under which
                                  300,000 shares of common stock are reserved 
                                  for issuance upon exercise of stock based 
                                  awards including, non-qualified stock options.
                                  The Plan is also authorized to issue 
                                  short-term cash incentive awards. The Plan is
                                  administered by either the Board or such
                                  committees; officers and/or employees of the
                                  Company as the Board may so designate. The
                                  purchase price of each share of common stock
                                  purchased upon exercise of any option granted
                                  is as follows: (i) Incentive stock options
                                  shall be equal to or greater than the fair
                                  market value of the common stock



                                      F-16
<PAGE>   52

                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================



                                on the date of grant as required under Section
                                422 of the Internal Revenue Code, (ii) Options
                                granted to 10% holders and designated by the
                                plan administrator as incentive stock options
                                shall be at least 110% of the fair market value
                                of the common stock on the date of grant as
                                required under Section 422 of the Internal
                                Revenue Code, (iii) Non-employee director
                                options shall be equal to or greater than the
                                fair market value of the common stock on the
                                date of the grant. Pursuant to the plan, options
                                to purchase 241,850 and 207,350 shares of common
                                stock exercisable at $3.50 to $7.00 and $3.50 to
                                $3.85 have been granted as of July 31, 1998 and
                                1997, respectively. These options vest over
                                terms up to five years from the grant date with
                                expiration dates beginning in 2001. Included in
                                the options granted as of July 31, 1998 were
                                four-year options to purchase 14,500 shares at
                                $7.00 which were granted to three consultants
                                for general business services. These options
                                were fully vested at date of grant. In
                                connection with these grants, approximately
                                $49,000 was charged to operations representing
                                the difference between the market price of the
                                stock and the exercise price of the options on
                                the date the options were granted.

                                In addition, during 1998, five-year non-plan
                                options to purchase 6,926 shares ranging at
                                $3.50 were granted to two consultants for
                                general business services. These options were
                                fully vested at date of grant. In connection
                                with these grants, approximately $26,000 was
                                charged to operations representing the
                                difference between the market price of the stock
                                and the exercise price of the options on the
                                date the options were granted.

                                During 1997, five-year non-plan options to
                                purchase 4,500 shares at $3.50 were granted to a
                                consultant for general business services and
                                five-year non-plan options to purchase 300,000
                                shares ranging between $0.50 and $3.50 were
                                granted to certain employees. These options were
                                fully vested at date of grant. In connection
                                with these grants, $300,000 was charged to
                                operations representing the difference between
                                the market price of the stock and the exercise
                                price of the options on the date the options
                                were granted and $4,500 was charged to
                                operations representing the value of the


                                      F-17

<PAGE>   53

                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================



                                services provided. In 1997 four year non-plan
                                options to purchase 15,000 shares at $3.50 were
                                granted to an employee. These options vest over
                                two years.

                                SFAS No. 123, Accounting for Stock-Based
                                Compensation, requires the Company to provide
                                pro forma information regarding net loss and net
                                loss per share as if compensation cost for the
                                Company's stock option plan had been determined
                                in accordance with the fair value based method
                                prescribed in SFAS No. 123. The Company
                                estimates the fair value of each stock option at
                                the grant date by using the Black-Scholes
                                option-pricing model with the following
                                weighted-average assumptions used for grants in
                                1998 and 1997: no dividend yield percent;
                                expected volatility of .500 and 0.001,
                                respectively; risk-free interest rates of 5.8%
                                and 6.1%, respectively, and expected lives
                                ranging between 4 and 5 years for the Plan and
                                non-plan options.

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

<TABLE>
<CAPTION>
                                YEAR ENDED JULY 31,                             1998            1997
                                -------------------------------------------------------------------------
<S>                                                                         <C>              <C>            
                                Net loss
                                    As reported                             $  2,307,486    $ 1,374,203
                                    Pro forma                               $  2,328,956    $ 1,641,203

                                Net loss per common share
                                    As reported                             $       (.55)   $      (.38)
                                    Pro forma                               $       (.55)   $      (.45)

</TABLE>






                                      F-18
<PAGE>   54



                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================


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


<TABLE>
                                YEAR ENDED JULY 31,                               1998                        1997
                                ----------------------------------------------------------------------------------------------
                                                                                       WEIGHTED-                   WEIGHTED-
                                                                                       AVERAGE                     AVERAGE
                                                                                       EXERCISE                    EXERCISE
                                                                          SHARES         PRICE        SHARES         PRICE
                                                                        ----------    -----------   -----------   ------------

<S>                                                                       <C>          <C>          <C>            <C>
                                Outstanding at beginning of year          526,850      $    3.00            --     $      --
                                Granted                                    41,426           5.27       526,850          3.00
                                Exercised                                      --             --            --            --
                                Forfeited                                      --             --            --            --
                                ----------------------------------------------------------------------------------------------

                                Outstanding at end of year                568,276           3.16       526,850          3.00
                                ----------------------------------------------------------------------------------------------
                                Options exercisable at year-end           485,101           3.06       404,500          2.80



                                YEAR ENDED JULY 31,                          1998           1997
                                ------------------------------------------------------------------

                                Weighted-average fair value of options granted
                                  during the year:
                                     Below market                       $    3.22      $    3.13
                                     At market                          $    2.34      $    0.74
                                     Above market                       $      --      $    0.70

</TABLE>


The following table summarizes information about fixed stock options and
non-plan options outstanding at July 31, 1998.


<TABLE>
<CAPTION>
                                          OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE
                           --------------------------------------------------- -------------------------------------
                                                    WEIGHTED
                                  NUMBER             AVERAGE       WEIGHTED           NUMBER             WEIGHTED
           RANGE OF          OUTSTANDING           REMAINING        AVERAGE        EXERCISABLE           AVERAGE
           EXERCISE                   AT         CONTRACTUAL       EXERCISE             AT               EXERCISE
             PRICES              7/31/98                LIFE          PRICE          7/31/98                PRICE
      ------------------------------------------------------------------------     ---------------------------------

<S>                            <C>              <C>               <C>              <C>                  <C>   
             $ 7.00               14,500           3.7 years         $ 7.00           14,500               $ 7.00
             $ 5.00               15,000           3.4 years         $ 5.00                -               $ 5.00
             $ 3.85              100,000           2.6 years         $ 3.85          100,000               $ 3.85
             $ 3.50              338,776           3.3 years         $ 3.50          270,601               $ 3.50
             $ 0.50              100,000           3.2 years         $ 0.50          100,000               $ 0.50





</TABLE>


                                      F-19

<PAGE>   55



                           REGISTRY MAGIC INCORPORATED


                          NOTES TO FINANCIAL STATEMENTS


================================================================================



9.  SUBSEQUENT EVENT            On September 11, 1998, the Company settled both
                                the legal action which it initiated on April 3,
                                1998 against a former employee of the Company
                                whose employment was terminated on such date and
                                the counter-claim initiated by the former
                                employee. Under the terms of the agreement, the
                                former employee was permitted to retain the
                                20,000 shares of common stock and the option to
                                purchase 90,000 shares of common stock, which
                                had previously been granted to him.

                                On September 25, 1998, the Company entered into
                                a licensing agreement with Veritel Corporation
                                of America, Inc. which grants the Company the
                                right to use a certain software object code in
                                the development of its products in exchange for
                                payment of certain royalties. The agreement runs
                                for a term of three years. The Company has
                                agreed to pay a total of $500,000 of which
                                $200,000 was due and paid in September 1998 and
                                $300,000, which is due on November 15, 1998.




                                      F-20