SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

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

   For the fiscal year ended December 31, 1997
                               OR

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

          For the transition period from ___________ to ____________

                        Commission file number 000-22611

                                Compu-DAWN, Inc.
                 (Name of Small Business Issuer in its Charter)

            Delaware                                            11-3344575
(State or Other Jurisdiction of                           (I.R.S. Employer
Incorporation or Organization)                         Identification Number)

                     77 Spruce Street, Cedarhurst, NY 11516
              (Address of Principal Executive Offices) (Zip Code)

                                 (516) 374-6700
                (Issuer's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Exchange Act:

                     Common Stock ($.01 par value per share)
                                (Title of Class)

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act 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 there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

As of  March  25,  1998,  the  aggregate  market  value  of the  shares  held by
non-affiliates was approximately $[ ]. ----------------------

The issuer's revenues for the fiscal year ended December 31, 1997 were $591,375.

                    APPLICABLE ONLY TO CORPORATE REGISTRANTS.

The  number of shares  outstanding  of each of the  issuer's  classes  of common
equity as of March 25, 1998 is 2,834,223 shares of Common Stock,  $.01 par value
per share.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None
<PAGE>
                                      INDEX

                                                                        Page No.

Forward Looking Statements ................................................. 1


PART I

Item 1. Description of Business............................................. 1

Item 2. Description of Property............................................. 15

Item 3. Legal Proceedings................................................... 15

Item 4. Submission of Matters to a Vote of Security Holders................. 15


PART II

Item 5. Market for Common Equity and Related Stockholder Matters............ 15

Item 6. Management's Discussion and Analysis or Plan of Operation........... 18

Item 7. Financial Statements................................................ 21

Item 8. Changes in and Disagreements with Accountants on Accounting
        and Financial Disclosure............................................ 21


PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act.................. 22

Item 10. Executive Compensation............................................. 25

Item 11. Security Ownership of Certain Beneficial Owners and Management..... 30

Item 12. Certain Relationships and Related Transactions..................... 31


PART IV

Item 13. Exhibits and Reports on Form 8-K................................... 33

Signatures


<PAGE>




                           FORWARD LOOKING STATEMENTS

     When used herein,  the words "believe,"  "anticipate,"  "think,"  "intend,"
"will be," "expect" and similar expressions identify forward-looking  statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not guarantees of future  performance  and involve  certain risks
and uncertainties  discussed herein,  which could cause actual results to differ
materially from those in the forward-looking  statements.  Readers are cautioned
not to place undue reliance on the  forward-looking  statements which speak only
as of the date hereof.  Readers are also urged to carefully  review and consider
the various  disclosures made by the Company which attempt to advise  interested
parties of the factors which affect the Company's business,  including,  without
limitation,  the disclosures made under the caption "Management's Discussion and
Analysis  or Plan of  Operation."  All  references  to a fiscal  year are to the
Company's fiscal year which ends December 31.

                                     PART I

Item 1. Description of Business

History

     Compu-DAWN Inc., (the "Company") was incorporated under the name of Coastal
Computer Systems,  Inc. in New York on March 31, 1983 and was  reincorporated in
Delaware  under its present name on October 18, 1996.  The Company is engaged in
the business of  designing,  developing,  licensing,  installing  and  servicing
computer software  products and systems  predominantly for public safety and law
enforcement agencies.  The Company's customers are primarily located in New York
State. See Item 1 - "Description of Business -Customers."

     In October 1996, the Company  successfully  completed the sale of 77 units,
each unit  consisting  of a $10,000  Promissory  Note (the "Bridge  Note") and a
Common Share  Purchase  Warrant (the "Bridge  Warrant") to acquire  5,600 Common
Shares of the Company (the "Bridge Financing  Transaction")  (Bridge Warrants to
acquire  42,000  Common  Shares were  canceled  subsequent to the closing of the
Bridge Financing Transaction.)

     The Bridge Warrants are exercisable at a price of $3.00 per share.  Each of
the Bridge  Notes was paid upon the  closing  of the  Company's  initial  public
offering  (the  "IPO"),  which  was  successfully  completed  in June  1997,  as
discussed  below.  The  terms of the  Bridge  Warrants  provide  for a five year
exercise period expiring in June 2002;  however the Company,  the underwriter of
the Company's  IPO, and the Bridge  Warrant  holders have agreed that the Bridge
Warrants will not be exercised or transferred,  and the underlying Common Shares
will not be transferred, for a two-year period expiring in June 1999.

     In June 1997,  the  Company,  successfully  completed  an IPO of its Common


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Shares.  The Company sold 1,380,000 Common Shares  (including  180,000 shares in
the  underwriter's  over-allotment  option)  at a price of $5.00  per  share for
aggregate net proceeds, after expenses, of $5,625,874. A portion of the proceeds
realized  from this  offering  was used to repay  promissory  notes  aggregating
$770,000 to the bridge lenders as described  above. See Item 5 - "Market for the
Registrant's Common Stock and Related Stockholder Matters - Use of Proceeds from
Initial  Public  Offering"  for a discussion of the use of proceeds from the IPO
through  December  31,  1997.  See also Item 6 -  "Management's  Discussion  and
Analysis or Plan of Operation - Liquidity and Capital Resources."

General Business Description

     The Company is currently  primarily  engaged in the business of  designing,
developing,  licensing,  installing and servicing computer  application software
systems for law enforcement and public safety agencies.  The Company's  software
systems include  computer-aided  dispatching ("CAD"),  computer interfacing with
local, state and national crime information databases,  advanced wireless mobile
on-line communications computing ("AMO") (utilizing radio frequency),  automatic
vehicle location ("AVL") (employing dynamic map displays),  records  management,
and photo-imaging database systems. These modules may be integrated and licensed
as a package, or may be licensed individually.

     Certain  of  these  applications  utilize   telecommunications   and  space
satellite  technology,  other  infrastructure,  and  hardware  provided by third
parties.  The third party providers of such technology and infrastructure,  with
respect to a particular customer's system, vary depending on the location of the
customer  and whether or not the  customer  has a business  relationship  with a
third  party  provider.  Accordingly,  the  Company  is  not  dependent  on  any
particular third party's  technology or infrastructure  for its software systems
to function.  These third parties are typically  major CDPDs  (cellular  digital
packet data providers) such as AT&T Wireless Data, Inc. ("AT&T"),  Bell Atlantic
Corporation  ("Bell  Atlantic"),  and GTE Mobilnet  Service  Corp.  ("GTE"),  or
dedicated  radio  frequency  data network  providers such as RAM Mobile Data USA
Limited  Partnership  ("RAM Mobile  Data") and Motorola Inc.  ("Motorola").  The
Company's AMO system  requires  computer  hardware and services from third party
providers,  and  interfaces  with  dedicated  radio  frequencies  owned  by  the
Company's  customers which require special radio equipment provided by companies
such as Motorola and Dataradio  Corp. The Company's  customers may purchase such
technology, infrastructure, services and hardware directly from these providers,
and, with respect to radio equipment, through authorized dealers as well.

     The Company's  software is compatible with virtually all operating systems.
The Company has  installed  its systems in more than 60 agencies,  primarily law
enforcement  agencies  located in the state of New York. The Company  provides a
full range of product  support and  maintenance  services,  both  on-site and by
remote connection.



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<PAGE>



Industry Background

     The goal of law  enforcement  and public safety agencies is to maximize the
safety  and  improve  the  quality  of  life  of  people  and  communities.  The
effectiveness  of a law  enforcement or public safety agency is dependent on its
personnel and resources. Such effectiveness is enhanced by maximizing the patrol
time of agency personnel,  and the availability of timely, accurate and reliable
information. This allows services to be provided in an efficient, cost-effective
manner.  Computer  technology is an important tool for providing  information to
law enforcement and public safety personnel,  reducing  administrative  time and
streamlining procedures, to support an agency's strategic and operational goals.

     Generally,  a law  enforcement  or public safety  agency's  strategy is not
geared to one  overall  plan for an entire  community,  but is based on  several
individual plans addressing the unique needs of the neighborhoods  that comprise
that community. Agencies need the ability to maximize their resources, customize
information, analyze crime information by sector, district and area, and analyze
repeat call areas that tax agencies'  resources.  Additionally,  agencies have a
need to respond to  incidents  and 911 calls as  rapidly,  efficiently  and cost
effectively as possible.

     Computer  technology  has been  developed  for the public  safety market to
address these needs. CAD systems, integrated with enhanced 911 ("E911") systems,
allow a  dispatcher  to  retrieve  information  about  the 911  caller,  and the
location and the  individuals  involved in the incident being  reported.  Mobile
wireless communication systems in vehicles provide agency personnel in the field
with the ability to receive  information  regarding  an incident  and the people
involved, such as location, "mug shots" and photographs,  and arrest and booking
data.  Such systems also enable such personnel to go "on-line" with the agency's
database,  and with other vehicles, in real time. Wireless communication systems
also provide  personnel  with the capability to file reports from their vehicles
instead of having to return to the station.  This  increases  personnel time and
visibility in the community.  AVL system  technology  provides a dispatcher with
the capability of immediately  identifying the location of the most  appropriate
vehicle to  investigate  an incident,  significantly  shortening  response time.
Without an AVL system, a dispatcher has to alert the vehicles in the field of an
incident  and then wait,  as they report  their  location  and/or  availability,
before  determining which vehicle would be the most appropriate to respond to an
incident. Information sharing technology allows agencies to link their databases
to local,  state and national  crime  databases to access  information  for more
in-depth and  efficient  investigation  of  incidents.  Records  management  and
photograph imaging systems for law enforcement  agencies make arrest and booking
procedures and incident investigations more efficient, while similar systems for
fire and EMS departments  contribute to the efficient deployment of firefighting
and emergency  equipment and investigation of incidents.  Without a computerized
records management  system,  records and reports would need to be handwritten or
typed,  and physically  stored in various  filing  cabinets,  file rooms,  or on
microfilm or  microfiche.  In such form,  such reports are  comparatively  error
prone, and may be misplaced or unavailable,  which makes retrieval difficult and
time consuming. Computerized records systems allow for easy entry and retrieval,
and increased productivity, enabling agency personnel to spend more time "on the
beat" in the community.

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<PAGE>



     In essence,  the foregoing computer  technology enables law enforcement and
public safety  agencies to allocate and utilize  resources and manpower hours to
maximize their goal of public safety.

     The  Company  believes  that  the  market  for  application   software  and
technology  products utilized in the law enforcement and public safety market is
growing  due to (i) an  increased  public  and  governmental  priority  for  law
enforcement  and  public  safety,  (ii)  an  awareness  that  specific  computer
technology for the law  enforcement  and public safety market now exists,  (iii)
the availability of federal funding  assistance to obtain computer equipment and
technology,  (iv)  breakthroughs in development of new mobile wireless  computer
communications  technology  and (v)  acknowledgment  by  certain  agencies  that
computer-aided  law enforcement has contributed to a recent drop in crime rates,
and the ability to  effectively  handle  increasing  incidents of crime  without
increasing personnel.  For example, The New York Times reported in 1997 that New
York City's mayor and top police  officials  attribute that city's drop in crime
rate, in part, to a series of new police strategies which includes,  among other
things, the use of computer technology that has allowed the police department to
identify  crime  patterns  much more  quickly  and flood  problem  streets  with
undercover  and beat  officers.  Also, the city of Chicago has installed an E911
dispatch  system which has contributed to a recent decline in crime. In addition
to New York City and Chicago (which do not utilize Company systems), the city of
Glens Falls, New York, a customer of the Company,  in 1997,  advised the Company
that, although incidents of crime had increased, its computer system enabled the
police department to effectively respond to, and handle, these incidents without
increasing personnel.

Development of Technology

     The  Company's  current  technology  has been  developed  and enhanced over
approximately an eight year period. The Company's  technology is not patented or
covered by any registered  copyrights;  however,  the Company  believes that its
software  programs have copyright  protection under common law. The Company does
not license any technology  from third parties other than technology for certain
operating software. The Company continually undertakes research and development,
under the supervision of Louis Libin, the Company's Chief Technology Officer, to
develop  new,  and  enhance  existing,  technology  and  products.  See Item I -
"Description of Business - Research and  Development and Technology  Development
Alliance"  for  a  discussion  about  the  Company's   continuing  research  and
development activities.

Products and Services

     Products

     The Company's software products consist of CAD systems,  computer interface
systems  which  connect  the  customer's  computer  system to  local,  state and
national crime information databases,  AMO communication systems utilizing radio
frequency,  AVL systems  employing  dynamic  map  displays,  records  management

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<PAGE>



systems, and photo-imaging  database systems.  Certain of the Company's software
systems  also   interface   with  and  utilize   space   satellite   technology,
telecommunications  technology,   computer  hardware  and  other  infrastructure
provided by third parties.  The Company's  software is compatible with virtually
all operating systems, utilizing a variety of software, including Windows(R) and
Unix(R). The Company's software also allows linkage of its products to mainframe
systems and is adaptable to both small and large hardware systems.

     The Company  markets its  products to law  enforcement  agencies  under the
ALECS 2000(TM)  (Advanced Law Enforcement  Computer  System) product line and to
fire and EMS departments  under its AFFECT(TM)  (Advanced  Firefighter  Computer
Technology) product line.

     The Company  licenses its  software to  customers in modules  pursuant to a
perpetual license. Customers may acquire all the modules as an integrated "total
solution" package, or any of the modules individually, on a stand alone basis or
as an addition to, or as a  replacement  for, an existing  system.  The software
modules  licensed from the Company can be integrated  with the customer's  other
software systems.  The Company's "total solution" package of integrated  modules
maximizes efficiency since data entered into one module will be available in all
modules in real time. A hybrid  network  comprised  of certain of the  Company's
modules  and other  software  systems may  require  data to be entered  into the
Company modules and other software systems separately.

     The  price to the  customer  of the  Company's  products,  whether a "total
solution"  package or individual  modules,  varies depending on several factors,
including the need for, and existence of,  communication  infrastructure  in the
customer's  jurisdiction (such as radio towers necessary for AMO radio frequency
modules),  volume of use of telecommunications  systems (such as telephone lines
and radio cells), and the customer's computer hardware requirements to implement
the software system.

     The  Company's  ALECS  2000(TM)  product line for law  enforcement  and its
AFFECT(TM)  product  line for fire and EMS are  similar in many  respects.  Both
address the reporting of incidents, the dispatch of resources and the deployment
of personnel.

     In May 1997,  the Company  received  the 1997 Long Island  Software  Awards
("LISA") software product of the year award for its ALECS 2000(TM) software. The
Company competed with 15 finalists for this award including,  among others, Long
Island Lighting Company ("LILCO"), Henry Schein, Inc., Life Sciences Associates,
Lightstone Group, and Quantum Research and Technologies,  Inc. The 1997 LISA was
sponsored by the Long Island Research Institute, State University of New York at
Stony  Brook,  Cheyenne  Software,  Inc.,  Computer  Associates,   Inc.,  LILCO,
Renaissance Technologies and Symbol Technologies, Inc., among others.

     The Company's modules are described below.

     Computer-Aided  Dispatching - CAD and AVL. The Company's CAD system,  under
both the  ALECS  2000(TM)  and  AFFECT(TM)  product  lines,  integrates  several
software and communications technologies, such as E911 dispatch systems, mapping


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<PAGE>



software  integrated with global positioning  systems for vehicle tracking,  and
geo-based  mapping systems,  which include street  addresses and  intersections,
longitude/latitude,   and  other  information  to  identify  the  locations  and
addresses of incidents.  The integration of these systems with the Company's CAD
software  provides to police and other public safety  agencies the capability to
respond rapidly and efficiently to incidents, and streamlines record management,
enhancing  productivity and accuracy of record keeping. The Company is currently
developing,  and beta site  testing,  visual CAD  software  (known as V-CAD,  or
Visual  Computer-Aided  Dispatching),  which,  in  addition  to  having  greater
functionality  than the current CAD system,  is more  user-friendly and provides
the  dispatcher  with touch  screen  graphical  interfacing  and the  ability to
dispatch police, fire and/or EMS agencies at the same time.

     The CAD system allows the dispatcher receiving the E911 call to immediately
identify the caller's telephone number, the related address, and the name of the
telephone number owner (unless the call is made from a cellular phone).  The CAD
system enables the  dispatcher to access any records  maintained in the agency's
database  relative to that  person or the  location of the  incident  (e.g.  gun
permit  issued,  prior  domestic  violence or prank  calls) as well as in local,
state and national crime information databases.

     Once a decision is made to dispatch a vehicle to an  incident,  a record is
created and the location of the incident appears on a computer-generated  map of
the area. Using AVL software,  which links the customer's  system and a receiver
in each of the customer's vehicles to GPSs (global positioning satellites),  the
map also shows the position of vehicles  "in the field"  which are  available to
respond to the incident.  The dispatcher  can then select the closest  available
vehicle to respond to the  incident and can observe the movement of that vehicle
as it responds to the call.

     Wireless  Mobile Data  Communications  System - AMO. The Company  markets a
wireless AMO data communications system which permits "on-line" real time access
between  vehicles  in the field and the  central  database,  between the central
database and local, state or national  databases,  crime information centers and
other  centralized  computer records,  and between  vehicles.  The Company's AMO
system employs radio frequency  networks (i.e.  private radio  networks,  public
radio  networks,  and cellular and short range spread  spectrum  technology)  to
provide  complete  communication  and access  from the  vehicle  to the  central
databases as well as vehicle to vehicle.  The  Company's  AMO system  allows the
agency's  personnel to log onto the customer's  central  database  directly from
their  vehicles and have access to all  information  in such  central  database.
Additionally,  the AMO technology provides capability for the agency's personnel
to input  information into the agency's  database  directly from their vehicles,
and transfer or access information from vehicle to vehicle. AMO employs "text to
voice"  technology  which  converts data received by the vehicles'  systems from
text into voice data,  and, by voice  recognition,  converts voice commands into
text to be sent to the dispatcher. This enhances the safety of vehicle operators
since they can  receive  and give  information  without  having to divert  their
attention  to  read  a  computer  screen  or  input   information  by  keyboard.
Furthermore,  the main police,  fire and EMS radio channels are not employed and
remain available.


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     AMO, through the use of photo imaging technology,  allows "mug shots" to be
rapidly made  available at a crime or incident  scene,  or the  personnel at the
scene can create a permanent computer photograph record of the accident or crime
scene and transmit it directly  into the agency's  central  database or to other
vehicles.

     The  Company  has  sold  AMO  systems  to  several  municipalities  and has
successfully  installed such AMO systems in,  Onondaga County (New York) for its
E911  department  which covers  multiple  agencies such as police,  fire and EMS
departments, the Putnam County (New York) Sheriff's Department, the Johnson City
Police  Department  (in  Broome  County,  New  York),  the  Glens  Falls  Police
Department (in Warren County,  New York),  the Johnstown  Police  Department (in
Fulton County,  New York),  the City of Lockport (in Niagara County,  New York),
the City of Port Jervis (in  Westchester  County,  New York) and the Long Beach,
Garden City and Malverne Police  Departments (in Nassau County,  New York).  See
Item 1 - "Description of Business Customers."

     Records  Management.  The  Company's  records  management  systems  for law
enforcement  and other public safety agencies offers a wide range of options and
flexibility  to fit an agency's  needs and budget.  The ALECS  2000(TM)  records
management  system processes data from the incident report through  prosecution,
and is made up of component  sub-modular  units,  including a records management
system, a photograph/"mug  shot" imaging system, a parking violation system, and
a false alarm billing system. The AFFECT(TM) records management system processes
data from the  incident  report  through  closing  the  investigation,  and also
provides  information  such as the  location of  resources,  including,  without
limitation,  hydrants  and  secondary  sources of water  (such as ponds,  lakes,
rivers,  and  seawater  access),  foam and  other  chemical  fire  extinguishing
material, hoses and jaws-of-life.

     As discussed above, the Company's  records  management  systems obviate the
need for  handwritten  or typed  reports and physical  filing  systems which are
cumbersome, comparatively error prone, and make for difficult and time consuming
information retrieval.

     Local Court  Records  Management  and  Sheriff's  Records  Management.  The
Company's   products  also  include   records   management   systems  which  are
specifically designed for local courts and sheriff departments.  The local court
records management system records summonses, tracks fines payable and enters the
appropriate dates on court calendars.  The sheriff's  records  management system
provides   several   functions   through  the   following   sub-modules:   civil
warrants/attachment records management,  pistol permit records management, photo
imaging/booking for county jails, property records management,  jewelry recovery
and pawn shop records management,  and police academy records management. One of
the goals of this  technology  is to  streamline  procedures  and allow for more
efficient allocation of resources and manpower hours.





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     Services

          Installation and Training

          System installation is an integral part of the Company's services. The
     Company's  installation  procedure commences with an in-depth  consultation
     with the customer to determine the  appropriate  modules needed to meet the
     customer's particular  requirements within budgetary  parameters.  Once the
     customer's  needs have been  identified,  the Company  provides  customized
     system design and file  creation.  The Company then  implements the system,
     undertakes  system  start-up  and  provides  training  for  the  customer's
     personnel in the operation of the  Company's  software  products.  Customer
     training  is  conducted  either  at  the  customer's  site  or at a  remote
     location,  and can range up to several  days,  depending on the  customer's
     particular system.

          Support and Maintenance

          The Company provides post-installation system software maintenance and
     training support for all of its software  products.  The Company's  systems
     support teams, which include  communications  and software  technicians and
     program developers, are available to assist customers via telephone access,
     24 hours a day,  seven days a week,  52 weeks a year,  and provide  on-site
     support, pursuant to a software maintenance agreement. Software updates and
     enhancements  to the  modules are  included  under  maintenance  contracts.
     Customers  pay the Company a set monthly  service  fee  (currently  ranging
     between 1% and 2% of the installation contract value) which is dependent on
     the extent and complexity of the customer's system.  Currently, the Company
     has  maintenance  agreements  with all of its customers.  During the fiscal
     years ended  December  31, 1996 and 1997  support  and  maintenance  income
     represented  approximately  58% and  53%,  respectively,  of the  Company's
     revenues.

Research and Development and Technology Development Alliance

     Research and Development

     The  Company  currently   employs  six  computer  software   programmers  /
developers who conduct the Company's  research and development  activities under
the direction of the Company's Chief Technology Officer,  Louis Libin. Since the
Company's  IPO,  the  Company  has spent  approximately  $1,160,000  on  product
enhancement and  development,  including,  without  limitation,  development and
beta-testing  the V-CAD  technology,  development  of graphical  user  interface
technology  (which  converts   text-driven   systems  to  a  more  user-friendly
menu-driven   system),   and  Structured  Query  Language  (SQL).  By  utilizing
Structured  Query  Language in conjunction  with the Company's  database and the
operating system software used by the Company, any field of data can now be used
as an analysis tool.  The data structure  provides for the ability to use any of
the  information  from reported  crimes,  such as time-of-day or crime type, and
submit a  specialized  query,  which will  result in a  customized  search for a
specific report.


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     The Company cannot give any assurance that it will develop any new products
or technology, or enhancements for existing products and technology, or that the
Company will have the services of Mr. Libin indefinitely.  If it does develop or
enhance any products or technology,  the Company cannot predict the pace or time
period of such new  developments  or  enhancements,  the costs  relating to such
research and  development  (which could be significant or  prohibitive),  or the
availability  of qualified  technical  personnel.  See Item 1 - "Description  of
Business - Employees" and Item 5 - "Market for the Registrant's Common Stock and
Related Stockholder Matters - Use of Proceeds from Initial Public Offering."

     Technology Development Alliance

     Effective  on January 2,  1998,  the  Company  entered  into a  development
alliance with Computer Associates International, Inc. ("Computer Associates") to
integrate the Company's AMO technology  with Computer  Associates'  Unicenter(R)
TNG(TM) to form "Air Unicenter." The Company has been advised that  Unicenter(R)
TNG(TM)  is the only  fully  integrated  management  solution  covering  network
discovery,  topology,   performance,   events  and  status,  security,  software
distribution,   storage,  workload,  help  desk,  change  management  and  other
functions for traditional and distributed computing environments, as well as for
the Internet and intranets.  Unicenter(R)  TNG(TM)'s  intelligent  manager/agent
technology   delivers  highly  scalable   management  of  the  entire  computing
environment, including hardware and software.

     The alliance  with  Computer  Associates  will enable users to retrieve and
process   information   across  wireless  and  mobile  computing   environments.
Communication is placing an important role in the mobilization of the workforce,
not just  public  safety.  The new  alliance  will help meet this  challenge  by
integrating dispatch applications with other corporate applications. The Company
believes that, by delivering proactive administrative management of wireless and
mobile  computing  resources,  the integrated  technology  will provide a common
standard for public safety agencies and law enforcement  organizations to manage
mobile computing environments.

     The Computer Associates alliance agreement is for successive  automatically
renewable 30 day terms which may be terminated at the end of any renewable  term
upon ten days prior written notice by either party.

Intellectual Property Rights and Licenses

     The  Company's  products are based on  approximately  3,000  interdependent
software  application  programs and system utility modules,  including  software
developed for creating  applications of the modules. The Company's technology is
not  patented  and the  Company  has not  obtained,  or applied  for,  copyright
registration  for any of its software.  Although the registration of a copyright
in the United States copyright  office provides a rebuttable  presumption of the
copyright's  validity,  such  registration  is not  required to make a copyright
legally  effective,  and the Company  believes  that its software  programs have
copyright protection.


                                        9

<PAGE>



     The Company believes that it takes at least two to three months of training
for a programmer to grasp the complete structure of the Company's software.  The
Company  requires  every  employee to sign an  agreement  of  nondisclosure  and
assignment of development  rights.  While large software vendors often institute
lawsuits to protect  software  property rights against  infringers,  the Company
believes that, in its case,  the complexity and total system  integration of the
Company's  products best protects its trade  secrets.  There can be no assurance
that the  intellectual  property  and  contractual  rights on which the  Company
relies to protect its  intellectual  property and  confidential  and proprietary
information will provide it with meaningful protections.

     The Company  utilizes  certain  operating  system software  (written in the
"Open  M"  computer  programming  language  and  owned  by  Intersystems,   Inc.
("Intersystems")),  in the development of its software systems. The Company uses
such operating system software  pursuant to a perpetual  license that allows the
Company to use such software to create its software modules, and, in some cases,
to "bundle" such operating  system software with its own software as part of its
software  products.  The Company pays  Intersystems  a monthly fee to sublicense
such  operating  software  (based  on the  number  of  product  units  in  which
Intersystem's  operating system software is included),  and an annual fee to use
such operating software to create software (based on the number of product units
for which the third party's  operating  system software is used to create).  The
termination  of  this  license  could  have a  material  adverse  effect  on the
Company's  ability to produce  and  deliver  its  software  products on a timely
basis.  If such license is terminated,  the Company would be required to license
alternative   operating  system  software.   The  Company  believes  alternative
operating  system  software  written in  different  versions of the "M" computer
programming  language is owned by, and currently  available from, other sources.
However,  the Company  would have to revise its  software to make it  compatible
with such  alternative  operating  system  software,  which the Company believes
would result in production  and delivery  delays of  approximately  three to six
months.

Sales and Marketing

     According to the National Directory of Fire Chiefs and Emergency Department
(1993) and the National Directory of Law Enforcement  Administration (1996), the
national law enforcement and public safety market is estimated to have more than
18,000 law enforcement agencies and more than 35,000 fire departments.  Based on
management's exposure to the marketplace, the Company believes that the majority
of such  agencies  currently  have  limited or no  computerization  of their law
enforcement  and public  safety  activities.  The Company  believes  that mobile
wireless computer communications, computer-aided dispatching, integrated mapping
and photo-imaging technology have not been marketed extensively to a majority of
these agencies.

     The  Company's  marketing  strategy  primarily  relies on direct  marketing
efforts by salespersons who represent the Company.

     As a result of the  Company's  alliance with  Computer  Associates  and the
development of a mobile agent for Computer Associates' Unicenter TNG, along with


                                       10

<PAGE>



a recent  influx  of orders  and the  additional  showing  of  interest  for the
Company's  new  products  in the New York - New Jersey -  Connecticut  tri-state
area, the Company has recently decided to reduce its direct  marketing  efforts,
not its selling  efforts,  in remote areas of the country.  This will enable the
Company  to  utilize  its  current  resources  more  efficiently.  See  Item 1 -
"Description of Business - Research and  Development and Technology  Development
Alliance."

     Direct Marketing. The Company currently participates to a limited extent in
public safety conferences and trade shows, holds regional seminars, presents and
conducts demonstrations, and conducts targeted mailings and phone campaigns.

     Current Customers. Generally, once a system is designed and installed for a
customer,  there is little repeat  business other than  maintenance and support,
and the provision of software enhancements or updates.  Accordingly, the Company
sales efforts to current customers for add-on products is minimal.

     Subcontracting and Strategic Business Alliance  Opportunities.  The Company
is  continuously  pursuing  a  strategy  whereby  it seeks to  create  strategic
business alliances and subcontractor relationships with large system integrators
and public network  providers in order to have the resources needed to establish
a presence in the "large size" market segment (i.e. departments or agencies with
more than 200  sworn  officers  or  personnel).  The  purpose  of the  strategic
business alliance agreements is to establish a relationship  between the Company
and large system  integrators  or public  network  providers  (each an "Alliance
Partner")  which provides for the Company and the Alliance  Partner to cooperate
and  complement  each other's  efforts in  identifying,  proposing and marketing
their own  products  and  services  and  integrated  systems  to  public  safety
customers. The strategic business alliance agreements which the Company seeks to
establish  typically will provide that the Company and its Alliance Partner will
agree upon a particular  teaming  arrangement  with each party assuming  defined
roles and  responsibilities  in order to more  effectively  compete  for  future
business  opportunities  and  programs,  and,  with  respect to mutually  agreed
projects, to jointly market and support each other's services without soliciting
services or products  from other  sources or offering  services  and products to
other contractors. Strategic business alliances are currently in place with AT&T
(which  expires in February 1999 and is  automatically  renewable for successive
one year  terms),  GTE (which  expires  in  November  1998) and Alpine  Software
Incorporated (which expires in March 2001) and a subcontractor  relationship has
been  established with Data General (which is terminable by either party upon 30
days prior notice). The Company is also seeking subcontractor relationships with
system  integrators  and  network  providers  including  International  Business
Machines Corp.  ("IBM") (with which the Company has acted as a subcontractor  in
the past, as described below),  Bell Atlantic,  Motorola and RAM Mobile Data. No
significant  revenues have been derived to date from the  Company's  established
strategic  alliances  (which set forth the  relationship  of the  parties in the
event of a system  installation  and do not  relate to any  particular  customer
contracts) and no assurances can be given that the Company will derive  revenues
therefrom.  In addition,  no assurances can be given that the Company will enter
into any other business alliance or subcontractor relationships.


                                       11

<PAGE>



     The Company monitors  governmental  announcements  of officially  published
requests for  proposals  ("RFPs") to find  business  alliance or  subcontracting
opportunities.  The selection of the appropriate  large system integrator by the
Company as a  potential  business  alliance  partner or prime  contractor  often
depends  on the  specifications  in the RFP.  The  Company's  strategy  includes
contact with large system  integrators  to  demonstrate  the  Company's  product
capabilities  and,  more  importantly,  to  establish  a credible  presence  for
participating in "large size" market segment  projects.  Although,  in the past,
the  Company  has had some  success in  strategic  alliances  with large  system
integrators,  no assurance can be given that the Company will be viewed by these
entities as an acceptable  business partner or  subcontractor in the future.  If
the Company is unable to establish  such a business  relationship,  its plans to
expand into the "large size" market  segment may be delayed or hindered due to a
limitation  of  resources  needed to  respond  competitively  to RFPs or to meet
"large size" market segment agency requirements.

Customers

     The Company has installed  various modules of its software systems for, and
provides  maintenance and support services to approximately 60 customers,  57 of
which are law  enforcement  agencies and four of which are  county-wide  systems
including police,  fire and EMS departments.  The following  customers accounted
for the following  percentages of software sales for the year ended December 31,
1996:  Madison  County (New York),  28.2%;  and  Westchester  County (New York),
18.6%.  No other  customer  accounted for 10% or more of the Company's  software
sales during such period.  The following  customers  accounted for the following
percentages  of software  sales for the year ended  December 31,  1997:  Chemung
County (New York), 12.6%; and the Malverne Police Department (Nassau County, New
York),  10.2%.  No other  customer  accounted  for 10% or more of the  Company's
software  sales  during such  period.  The Company  sold to, and  installed  in,
Madison  County a records  management  system,  a CAD system,  and a specialized
version of a network  wireless  radio  system  between  fixed  points,  for that
county's fire  department.  The Company sold to, and  installed in,  Westchester
County a records  management  system,  a CAD system,  a photo imaging system and
special modules such as civil warrant  processing,  jury duty  processing,  pawn
shop records and police academy records.  The Company sold to, and installed in,
the Malverne Police Department an AMO System and a photo imaging system to allow
photographs to be sent to and from the field.  The Company does not rely on past
customers for future revenues from sales and  installations of software systems.
Accordingly,  the Company  will not suffer any  material  adverse  effect if the
Company does not sell software systems to such customers in the future.

     Based on the  experience  of management  in the  marketplace,  management's
discussions  with a senior New York State Division of Criminal  Justice Services
official and an E911 consultant to a major telecommunications  company, a recent
referendum in Bergen County,  New Jersey supporting the regionalized  sharing of
services by towns and municipalities, and the specifications of RFPs received by
the Company  soliciting  bids for law  enforcement  and public  safety  software
systems,  the  Company  believes  that  there  is a trend  away  from  town  and
municipality dispatching and toward county-wide dispatching. As a result of this


                                       12

<PAGE>



trend,  the  Company  believes  that there will be a need in the near future for
comprehensive  public safety  systems which will address and integrate the needs
of police,  fire and EMS  departments.  As a "total  solution"  software  system
provider,  the Company believes that, with its marketing and product development
plan, it is in a position to meet such needs.

     Typically, a customer will procure a software system from the Company under
a perpetual license,  pursuant to which the Company will be paid a percentage of
the license fee at the time the contract is entered into,  and then will receive
further installments as certain performance milestones are met, until completion
of the contract. After the contract is completed, any further revenues from that
customer are usually derived from a maintenance and support contract.  From time
to time, however,  the Company may receive additional contracts from an existing
customer for add-on modules.

     The  length  of time  that it  takes to  complete  a  systems  installation
contract varies (generally from three to twelve months), depending on the nature
and complexity of the system and the customer's internal procurement procedures.
During the period of time that  installments are being paid, the customer,  or a
small  number of  customers  with  contracts  in  progress,  may  account  for a
significant percentage of the Company's revenues.  However, once those contracts
are completed, such customers will no longer represent a material portion of the
Company's  future  revenues.  Accordingly,  the  Company  does  not rely on such
customers for a continuing  revenue stream and the Company does not believe that
the make-up of its current significant customers is material to an understanding
of the Company's future business  prospects.  However,  the Company  anticipates
that at any particular time a limited number of large customers will continue to
represent a significant portion of its revenues for the foreseeable future.

     The following two examples are  illustrative of the diverse  application of
the Company's  products and services:  (i) The Onondaga County Police Department
utilizes an AMO application,  designed,  developed and installed by the Company,
which  links over 700  police,  fire and EMS  vehicles.  For this  project,  the
Company was retained by IBM as a subcontractor to design,  develop,  install and
service all the required AMO software.  The project included  integration by the
Company of IBM and Digital  Equipment  Corp.  hardware  which already  contained
application   software  provided  by  other   subcontractors  for  both  records
management  and  computer-aided   dispatch;  and  (ii)  The  Company,  as  prime
contractor,  designed, developed and installed a "total solution" system for the
Putnam County Sheriff's Office, a comparatively  small agency of seven vehicles.
The system  consisted of a records  management  system,  a CAD system and an AMO
system.

Competition

     The Company faces competition in the "small size" market segment (which the
Company  views as  departments  or agencies  with 20 or fewer sworn  officers or
personnel)  and the "medium  size" market  segment  (which the Company  views as
departments  or  agencies  with 21 to 200  sworn  officers  or  personnel)  from


                                       13

<PAGE>



companies such as NewWorld Systems, Pamet Systems, Inc. and Software Corporation
of America.  Although such competitors  have  significantly  greater  financial,
technical and other resources than those of the Company,  the Company feels that
it has been able to compete in such  market due to its "total  solution"  system
integration  technology and local presence, the Company having installed systems
in over 50 "small size" and "medium size" law enforcement  agencies in the state
of New York.

     The Company  believes  that more intense  competition  exists in the "large
size" market segment in which the system price ranges widely (between $1 million
and $100  million)  depending on the size of the customer and the  complexity of
the system (as  compared to the  Company's  typical sale in the "small size" and
"medium size" market segments, which historically has ranged between $25,000 and
$350,000). The "large size" market is dominated by software vendors, such as PRC
Public Safety, Inc. and Systemhouse,  Ltd., and large system integrators such as
IBM, Andersen  Consulting,  Electronic Data Systems and Harris  Corporation.  In
order to  penetrate  the "large size"  market  segment,  the Company is pursuing
strategic business alliances or subcontracting  relationships with large systems
integrators  having greater  financial  resources and name  recognition than the
Company.  The  Company  believes  that,  in the  future,  through  an  extensive
marketing plan, it can build brand name awareness for its products and services.
The Company cannot, however, assure that it will be successful in this strategy.

     The  Company  believes  that the  mobile  wireless  computer  communication
technology  sub-market is in its infancy.  With the development of the Company's
AMO system  utilizing radio frequency  networks as discussed  above, the Company
believes that, with sufficient  resources,  it will be capable of increasing its
sale price range to between $75,000 and $1 million per  installation,  depending
on the customer size and the extent and complexity of the system.

     The Company further believes that large software companies, communication
equipment   companies  and  computer   hardware   companies  are  currently  not
concentrating  their  resources on the law  enforcement and public safety market
because of that market's  special  requirements  for secure radio operations and
the  particular   applications  and  expertise  needed  to  meet  those  special
requirements.  Additionally,  most "large size" agencies have a general need for
highly specific  customized  systems and systems  integration.  Generally,  such
companies  that do have an interest in pursuing the law  enforcement  and public
safety  markets  look for a business  partner,  like the  Company,  that has the
necessary  expertise  to design and install law  enforcement  and public  safety
systems.  The Company also believes that, as a "total solution"  provider in the
field of law enforcement and public safety computer  technology,  it is, subject
to  obtaining  the   appropriate   resources,   positioned  to  develop  generic
communications software protocols for secure on-line radio frequency mobile data
transmission  basic to almost  all mobile  computers  for  police,  fire and EMS
departments.

Employees

     The  Company  currently  has  16  full-time  employees  and  one  part-time
employee, including six software  developers/programmers,  one technical writer,


                                       14

<PAGE>



one sales person, and eight executive and administrative  personnel. The Company
also  has two  part-time  industry  consultants.  Management  believes  that its
relations with its employees are satisfactory.

     The Company's  Product  Development Group performs research and development
activities  and  its  Customer  Service  Support  Group  handles  installations,
maintenance and service.  The Company's new customers are trained by consultants
who  generally  are  retired  and   active-duty   police  officers  from  police
departments  that have systems  installed by the Company.  The  Company's  daily
operations  are  managed  by  a  software  development  manager,  a  manager  of
operations, and a director of technology.

Item 2. Description of Property

     The  Company's   executive   offices  are  located  at  77  Spruce  Street,
Cedarhurst,  New York where it leases  approximately 5,000 square feet of space.
The  premises  are held  pursuant  to a five year  double net lease  expiring in
September 2001 that provides for a base annual rental of approximately  $85,000.
The  Company  believes  that its  premises  are  adequate  for its needs for the
foreseeable future.

Item 3. Legal Proceedings

     None.

Item 4. Submission of Matters to a Vote of Security Holders

     None.

                                     PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters

Market Information

     Upon completion of the Company's IPO on June 10, 1997, the Company's Common
Shares began  trading  under the symbol  "CODI" on The Nasdaq  SmallCap  Market.
Prior to June 10,  1997 there was no public  trading  market  for the  Company's
securities. The following table sets forth, for the periods indicated, the range
of high and low bid prices of the  Company's  Common  Shares as furnished by The
Nasdaq Stock Market,  Inc. The  quotations  set forth below reflect  interdealer
prices without retail mark-up,  mark-down or commissions and may not necessarily
represent actual transactions.

                                                             High      Low
           1997
       Second Quarter (1) ........................         $6.1875    $5.00
       Third Quarter .............................         $6.125     $5.25
       Fourth Quarter.............................         $9.25      $5.375

(1) Commencing on June 10, 1997, the effective date of the Company's IPO.

                                      15

<PAGE>

Holders

     The Company has been advised by its transfer agent (American Stock Transfer
& Trust Co.) that the approximate  number of record holders of the Common Shares
as of March 25, 1998 was seven.  The Company has been  advised by ADP that there
are approximately 725 beneficial owners of its Common Shares.

Dividend Policy

     Holders of the Company's  Common Shares are entitled to dividends  when, as
and if  declared  by the  Board  of  Directors  out of funds  legally  available
therefor.  The Company has not  declared or paid any  dividends  in the past and
does  not  currently  anticipate  declaring  or  paying  any  dividends  in  the
foreseeable  future. The Company intends to retain earnings,  if any, to finance
the  development  and expansion of its business.  Future dividend policy will be
subject to the discretion of the Board of Directors and will be contingent  upon
future   earnings,   if  any,  the  Company's   financial   condition,   capital
requirements,  general business conditions, and other factors.  Therefore, there
can be no assurance that any dividends of any kind will ever be paid.

Recent Sales of Unregistered Securities

     In  addition  to the  sales of  unregistered  securities  disclosed  in the
Company's Form 10-QSB for the period ended  September 30, 1997, the Company sold
the following unregistered securities during the period covered by this report.

     In April  1997,  the  Company  issued  233,000  Common  Shares  to the Mark
Honigsfeld Living Trust (the "Honigsfeld  Trust") upon the exercise of a certain
option by Mr. Honigsfeld for the purchase of such shares at an exercise price of
$.30 per share.

     In June 1997,  upon the closing of the Company's  IPO,  $100,000 of accrued
unpaid salary and $200,000 of indebtedness owed to Mr. Honigsfeld were converted
into an aggregate of 60,000 Common  Shares,  and an accrued unpaid signing bonus
of $15,000 payable to Mr. Lew was converted into 3,000 Common Shares.

     These  transactions  were  private  transactions  not  involving  a  public
offering and were exempt from the registration  provisions of the Securities Act
pursuant to Section 4(2) thereof. The Company determined that Mr. Honigsfeld and
Mr. Lew were  sophisticated  investors.  The sales of the  Common  Shares to Mr.
Honigsfeld,  the  Honigsfeld  Trust  and  Mr.  Lew  were  without  the use of an
underwriter, and the certificates evidencing the Common Shares issued to Mr.


                                       16

<PAGE>



Honigsfeld, the Honigsfeld Trust and Mr. Lew bear restrictive legends permitting
the transfer thereof only upon registration of such securities or pursuant to an
exemption  under the  Securities  Act.  See Item 10  "Executive  Compensation  -
Aggregated  Option  Exercises in Fiscal Year ended  December 31, 1997 and Fiscal
Year - End Option  Value"  table.  Item 10 - "Executive  Compensation  - Summary
Compensation"   table;  and  Item  12  -  "Certain   Relationships  and  Related
Transactions".

Use of Proceeds from Initial Public Offering

     The  Company's  Registration  Statement  of  Form  SB-2  (Registration  No.
333-18667), covering the issuance of 1,380,000 Common Shares, $.01 par value per
share,  (including  180,000 Common Shares covering  overallotments) at $5.00 per
share, or an aggregate of $6,900,000  (including  overallotment  proceeds),  was
declared  effective on June 10, 1997. The offering,  which was underwritten on a
firm commitment  basis,  and the  overallotment,  closed on June 16 and June 24,
1997  respectively.  The managing  underwriter of the offering was E.C.  Capital
Ltd.

     The following is a breakdown of the Company's use of the proceeds from, and
expenses incurred in connection with, the offering, through December 31, 1997:

                        Offering:
      Gross proceeds (including over-allotment)              $6,900,000
      Underwriting discounts and commissions (1)               (690,000)
      Expenses paid directly to underwriter                    (322,500)
      Other expenses (1)                                       (261,626)
                                                            -----------
      Net proceeds                                           $5,625,874
                                                             ==========

        Use of Proceeds Through December 31, 1997:
      Product enhancement and development (1)(3)            $ 1,160,000
      Repayment of indebtedness (2)                             770,000
      Marketing and advertising (1)(3)                          400,000
      Hiring/training personnel (1)(3)                           65,000
      Equipment purchases (1)(3)                                205,000
      Unused proceeds (4)                                     3,025,874
                                                            -----------
                                                             $5,625,874
                                                            ===========
      ----------

     (1)  Paid  directly  to persons  other than  directors  or  officers of the
          Company or their  associates,  or persons owning 10 percent or more of
          any class of equity  securities  of the Company,  or affiliates of the
          Company.

     (2)  Represents  the  repayment  of a  bridge  loan.  $130,000  was paid to
          affiliates  of  the  Company  who  participated  in the  bridge  loan.
          $640,000 was paid directly to persons other than directors or officers
          of the Company or their  associates,  or persons  owning 10 percent or
          more of any class of equity  securities of the Company,  or affiliates
          of the Company.

                                       17

<PAGE>



     (3)  Approximate.

     (4)  Unused proceeds are invested in government securities and certificates
          of deposit.

     To date,  the use of proceeds does not represent any material  changes from
the use of proceeds described in the prospectus.

Item 6. Management's Discussion and Analysis or Plan of Operation

     Introduction

     The  Company  was  incorporated  in the State of New York on March 31, 1983
under the name of Coastal Computer Systems,  Inc. The Company was reincorporated
in the State of Delaware under its present name Compu-DAWN,  Inc. On October 18,
1996.  The  Company  is  engaged  in  the  business  of  designing,  developing,
licensing,  installing and servicing  computer software products and systems for
the law  enforcement  and public safety  industry.  Historically,  the Company's
products have been marketed and sold predominantly in the State of New York.

     The  Company  generates   revenues  from  the  granting  of  non-exclusive,
non-transferable  and non-assignable  licenses to use software it has developed,
through  fixed price  contracts.  Revenues  from such fixed price  contracts are
recognized using the percentage of completion method of accounting.  The Company
retains  title to the  software  and  warrants  that it will  provide  technical
support and repair any defects in the software at no charge. The warranty period
for each contract is negotiated  individually,  with the periods ranging from 90
days to three years. To date, repair costs have been minimal and, therefore, the
Company has not had to establish a reserve for warranty costs.

     The Company also provides  post-contract,  customer support to licensees of
its software. Revenues from such services are recognized ratably over the period
of performance. Fees billed and/or received prior to performance of services are
reflected as deferred revenues.

     The  Company's  revenues,   expenses  and  operating  results  have  varied
considerably  in the past and are likely to vary in the future.  Fluctuations in
revenues  depend on a number of factors,  some of which are beyond the Company's
control.  These factors  include,  among other things,  the timing of contracts,
delays  in  customer   acceptance  of  the  Company's   software   products  and
competition.

     Results of Operations

     Revenues:

     Total  revenues  for the year  ended  December  31,  997 were  $591,375  as
compared to $477,527 for the prior year, an increase of $113,848 or 23.8%.  This


                                       18

<PAGE>



increase was a result of a 37% increase in software  sales and a 14% increase in
maintenance  income.  As a  result  of the new  systems  licensed  during  1996,
maintenance   income  for  the  year  ended   December  31,  1997  increased  by
approximately $38,000 from $275,016 to $313,389, when compared to the year ended
December 31, 1996.

     To date,  the  Company has not  generated  significant  revenues.  However,
management  believes  that  through the funds  obtained  in its  initial  public
offering (see discussion  below) for, among other things,  product  enhancement,
marketing  and the  introduction  of new  products,  the Company will be able to
increase  revenues from the sale of software  over the long term.  Such projects
include,  among other things,  the revising of computer-aided  dispatching (CAD)
and visual computer-aided dispatching (V-CAD) (which provides for visual graphic
interface), and wireless mobile computing technology.  Management of the Company
does not  believe  that  product  obsolescence  is a  significant  factor in the
Company's  business since it is continually  updating and enhancing its software
products.

     Costs and Expenses:

     Total costs  increased  from  $1,087,020 to $3,537,773  when  comparing the
years ended December 31, 1996 to 1997.

     Programming  costs  increased from $268,915 for the year ended December 31,
1996 to $406,563 for the year ended December 31, 1997.  This increase  primarily
encompasses  salaries and wages and license fees for the Company's main computer
operating system.  General and  administrative  expenses increased from $660,006
for 1996 to  $2,195,406  for  1997.  This  increase  was  primarily  a result of
increased  payroll  due to the hiring of new  sales,  marketing  and  management
personnel  and the  related  benefits  as well as the  amortization  of deferred
compensation  associated with stock options  granted.  A portion of the increase
($216,000)  is also due to an accrual for  severance  pay benefits in connection
with the  termination  of an  officer's  employment  contract.  The Company also
experienced increases in professional and consulting fees,  advertising expenses
and rent expense for the Company's new premises.  Research and development costs
increased from $158,099 to $935,804 when  comparing 1996 to 1997.  This increase
was due to increased  payroll and related costs incurred in connection  with the
Company's  decision  to  focus  on the  development  of  enhanced  and  improved
technology.

     In addition, in 1997, the Company fully amortized approximately  $1,588,000
of deferred  financing charges which were capitalized in connection with certain
debt incurred prior to the Company's initial public offering. The debt was fully
repaid during this period.

     Income/(Loss):

     For the  year  ended  December  31,  1997,  the  Company  had a net loss of
$4,436,745 or $1.95 per share. For the year ended December 31, 1996, the Company
had a net loss of  $570,769  or $.34 per share.  The  principal  reason for this
increased  loss is the  increases in costs as  described  above and the one-time
amortization of the deferred financing costs which were recognized in connection

                                       19

<PAGE>



with the bridge financing received in 1996.  See "Financial Statements, Note 7".

     Liquidity and Capital Resources

     In January 1997, the Company  entered into a secured  credit  facility loan
agreement (the "Credit  Agreement")  with Mark Honigsfeld of the Board and Chief
Executive  Officer  of the  Company,  pursuant  to which  the  Company  borrowed
$200,000. The Company and Mr. Honigsfeld agreed to convert this loan into 40,000
common  shares  (an  effective  conversion  price of $5.00 per  share)  upon the
closing of the IPO. In April 1997,  the Company and Mr.  Honigsfeld  amended the
Credit  Agreement to provide for a new line of credit of $500,000.  In May 1997,
the Company borrowed an additional  $200,000 under the Credit Agreement of which
$150,000 is  outstanding  at December 31, 1997.  The repayment of up to $200,000
under the Credit Agreement is secured by a first priority  security  interest in
all the assets owned by the Company.  See Item 12 - "Certain  Relationships  and
Related Transactions."

     In June 1997, the Company successfully completed an initial public offering
of its common stock.  The Company sold 1,380,000 shares of its common stock at a
price of $5.00 per share and realized net proceeds of approximately $5,626,000.

     At  December  31,  1997,  the  Company  had  cash of  $3,081,253,  accounts
receivable of $72,454,  a current ratio of 8.3:1 and a net worth of  $3,205,574.
At December 31, 1996, the Company had cash of $286,497,  accounts  receivable of
$100,010, a current ratio of 1.5:1 and net worth of $1,279,701. This significant
improvement in liquidity is due to the completion of the IPO as discussed above.

     In 1996,  the Company moved its facilities to new and more costly space and
signed new  compensation  agreements  with certain key  employees.  Both the new
space and the continued  employment of these key individuals are needed in order
for the Company to develop  new, and enhance  existing,  products and to grow in
the future. There can be no assurance, however, that either of these commitments
will result in increased revenues and earnings. Until such time that the Company
significantly  increases revenues, the new lease and compensation agreements are
likely to result in continuing operating losses.

     Cash Flows

     For the years ended December 31, 1997 and 1996,  cash utilized by operating
activities was $2,311,314 and $289,383,  respectively. This increase in negative
cash flow is a direct result of the increased  operating  costs  incurred by the
Company during 1997.

     For the year ended  December 31,  1997,  $135,205 was utilized by investing
activities,  primarily  for the purchase of fixed assets net of the repayment of
an officer's  loan. For the year ended December 31, 1996,  $176,609 was utilized
by investing  activities  primarily for purchases of fixed assets and for a loan
to this officer.

                                       20

<PAGE>



     For the year ended December 31, 1997, cash provided by financing activities
aggregated  $5,241,275,  primarily  due to the  completion  of the IPO and loans
received from an officer,  net of the repayment of the bridge loans  received in
1996.  For the  year  ended  December  31,  1996,  cash  provided  by  financing
activities  aggregated  $646,527,  primarily due to the completion of the bridge
financing received in October 1996 in the amount of $770,000.

     Back-Log

     The Company's back-log of software contracts as of March 5, 1998 aggregated
$767,000. These contracts when completed (usually within six months to one year)
are expected to generate approximately $150,000 of additional annual maintenance
revenue.

     Other

     The Company  believes that the net proceeds from the IPO will be sufficient
for at least the ensuing 12 month period.

     The Company believes its technology addresses year 2000 issues.

     Forward Looking Statements

     Except for historical  information  contained herein, the matters set forth
above  contain  forward  looking  statements  that  involve  certain  risks  and
uncertainties  that  could  cause  actual  results  to differ  from those in the
forward looking statements. See "Forward Looking Statements" above on page 1.

Item 7. Financial Statements

     The audited financial statements of the Company as at December 31, 1997 and
1996 and for the years then ended are  included  in this  Annual  Report on Form
10-KSB following Item 13 hereof.

Item 8.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
         Financial Disclosure

          None.

                                       21

<PAGE>





                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
        with Section 16(a) of the Exchange Act


Directors and Executive Officers.

     The names and ages of, and the positions  held by, the  executive  officers
and  directors of the Company are set forth below.

                                                               Class of
Name                      Age        Positions Held          Directorship

Dong W. Lew(1)            68      President, Chief                I
                                  Operating Officer,
                                  Treasurer and Director

Mark Honigsfeld           43      Chairman of the Board,          II
                                  Chief Executive Officer,
                                  Secretary and Director

Louis Libin               39      Chief Technology Officer        III
                                  and Director

William D. Rizzardi       55      Director                        I

Harold Lazarus, Ph.D.     71      Director                        II

------------------
(1)  Pursuant to an agreement discussed under Item 10 - "Executive  Compensation
     Employment  Contracts and  Termination of Employment and  Change-in-Control
     Arrangements" below, Dong Lew is to resign as a director and officer of the
     Company effective on or before April 24, 1998.

Dong W. Lew

     Mr. Lew  joined the  Company  in 1988.  He was  elected a director  and the
President in August 1992 and was elected  Treasurer in August 1996. He graduated
from the  Massachusetts  Institute of Technology  ("M.I.T.")  with a Bachelor of
Arts Degree in Business and Engineering Administration, and has over 25 years of
experience  in the  computer  industry.  From  1981  to  1988,  Mr.  Lew  was an
independent  computer consultant  providing turnkey computer systems with custom
software to the manufacturing and publishing  industries.  Prior to 1981, he was
employed in computer  systems design and managerial  capacities by such firms as
Mergenthaler, Inc., Harris-Intertype, Inc., and Codesco International, Inc.

                                       22

<PAGE>



Mark Honigsfeld

     Mr. Honigsfeld joined the Company as Chairman of the Board, Secretary and a
director in August 1996 and,  effective  October 1, 1996,  he was elected  Chief
Executive Officer of the Company.  In 1978, he founded Facelifters Home Systems,
Inc.  ("FACE"),  a cabinet  manufacturing and installation  company for which he
served as Chief  Executive  Officer  and  Chairman  of the Board until April 25,
1996. On such date, FACE, a publicly-traded  company, was acquired by a New York
Stock Exchange company in a transaction  valued at approximately  $70 million to
FACE's stockholders. Prior to the merger, FACE's revenues on an annualized basis
approached $50 million. As the founder,  Chief Executive Officer and Chairman of
the Board, Mr.  Honigsfeld was directly involved in the planning and development
of almost all areas of FACE's  business,  including  corporate  finance,  public
offerings,  investor  relations,  mergers and acquisitions,  licensing,  product
design and engineering, sales and marketing,  manufacturing, field installation,
customer service, management information services and management training. Prior
to the sale  transaction,  FACE had  approximately  600 employees and associates
representing   its   products  and  services  at  28  locations  in  14  states,
approximately 135 telemarketing personnel, 180 direct sellers, 120 manufacturing
employees and 165  supervisory,  management  and  administrative  personnel.  In
addition,  FACE had working  arrangements  with  approximately  175  independent
contracting  companies  nationwide.  Since  the  fourth  quarter  of  1997,  Mr.
Honigsfeld  has also  been a  director  of U.S.  Pawn,  Inc.,  a public  company
(Nasdaq:  USPN) which owns and  operates  pawn  shops.  Mr.  Honigsfeld  holds a
Bachelor of Science Degree in Industrial  Arts, magna cum laude, and a Master of
Science Degree in Industrial  Arts,  with honors,  from City College of the City
University of New York.

Louis Libin

     Mr.  Libin  joined the Company in January 1997 on a per diem basis as Chief
Technology  Officer and a director.  Effective March 10, 1997, he began to serve
as the Company's Chief Technology  Officer on a full-time basis. Since 1989, Mr.
Libin has represented the United States on satellite and transmission  issues at
the International  Telecommunications Union (the "ITU") in Geneva,  Switzerland.
Mr. Libin has also been  Chairman of the Expert  Group On Broadcast  Interactive
Services  of the ITU since  1991.  From 1987 to 1997,  Mr.  Libin  served as the
Director of Technology  (specializing in broadcast transmission systems) for the
General Electric Corporation ("GE") and the National  Broadcasting  Corporation.
From 1995 to 1997,  Mr. Libin also served as Assistant  Secretary of all of GE's
wholly-owned  subsidiaries  that  are  involved  in  broadcast  media,  with the
responsibility  for  technical   developments  and  all  Federal  Communications
Commission  (the "FCC") issues and licenses.  From 1983 to 1986, Mr. Libin was a
project manager for Radio Corporation of America ("RCA") until RCA's acquisition
by GE. From 1981 to 1982, Mr. Libin was employed by the Loral  Corporation as an
electronic  design  engineer where he designed radio  frequency  systems for the
United States  military.  From 1980 to 1981, Mr. Libin was a design engineer for
the Chryon  Corporation,  a computer  graphics  company.  From 1979 to 1980,  he
worked for  Burroughs  Computer  Systems,  Inc.  (now part of Unisys) as a field
engineer.  Additionally,  since 1988,  Mr. Libin has acted as a  consultant  and


                                       23

<PAGE>



advisor to the FCC in connection with the planning of communications systems and
logistics for major events in the United States and abroad,  including political
conventions,  presidential  inaugurations,  and  the  1996  Summer  Olympics  in
Atlanta.  Mr. Libin is an active member of the National  Society of Professional
Engineers and the Association of Federal Communications Consulting Engineers. He
also sits on the  Engineering  Advisory  Board of the  National  Association  of
Broadcasters.  Mr. Libin  received a B.S.E.E.  Degree in Electrical  Engineering
from  the  Pratt  Institute  and  completed  his  graduate  studies  in  optical
electronics  at M.I.T.'s  Executive  Program in 1991.  Mr. Libin has planned and
managed  telecommunications  projects  in the United  States and in Europe.  Mr.
Libin was  responsible for the planning and  implementation  of a new television
and  telecommunications  network  in New  Zealand  in 1990.  Mr.  Libin has also
provided  expert  consulting on satellite  issues in certain of the republics of
the former Soviet Union.  Mr. Libin was also  instrumental in the development of
the new transmission  technology and the algorithms for software modeling of the
new North American digital  terrestrial  television system which was approved by
the FCC in 1996.  Mr. Libin has published  numerous  scientific  papers in radio
frequency and telecommunications.

William D. Rizzardi

     Mr.  Rizzardi  joined  the  Company in January  1997 as a  director.  Since
December  1996,  Mr.  Rizzardi has been the  President  of Perlucid  Corporation
(f/k/a Environmental  Solutions  Corporation),  a privately held bio-remediation
company.  From  1995  to  1996,  Mr.  Rizzardi  was  an  independent  management
consultant to the Long Island Research  Institute,  a not-for-profit  technology
development  laboratory.  From 1979 to 1994, Mr. Rizzardi held various positions
with Northrop Grumman Corporation and its affiliates, including a Vice President
of Grumman Data Systems Division,  where he was responsible for the development,
operations and support of all information  systems for the Grumman  Corporation,
Corporate Vice President of Information Management and Chief Information Officer
of Grumman  Corporation,  and a Vice President of Northrop Grumman Corporation -
Data  Systems  and  Services  Division  following  the  acquisition  of  Grumman
Corporation by Northrop Corporation. Mr. Rizzardi received a Bachelor of Science
Degree in Nuclear  Physics from City College of the City  University of New York
and a P.S.E.E. Degree in Management from the Sloan School of M.I.T.

Harold Lazarus, Ph.D

     Dr. Lazarus joined the Company as a director in March 1997. Dr. Lazarus has
been a Professor of Management at the Hofstra University Frank G. Zarb School of
Business (the "Hofstra  Business  School")  since 1980.  From 1973 to 1980,  Dr.
Lazarus  served  as Dean of the  Hofstra  Business  School.  Dr.  Lazarus  is an
organization  development consultant who lectures in Europe, Asia, North America
and South America on  leadership,  time  management,  total quality  management,
managing change, effective meetings,  problem solving,  decision making, mission
statements,  management  by  objectives,  and  communications.  Dr.  Lazarus was
Professor of  Management at the New York  University  Leonard N. Stern School of
Business  for ten years,  and he also  taught at  Columbia  University  Graduate
School of Business and Harvard University Business School. Dr. Lazarus currently
serves as a director of Graham-Field Health  Products,  Inc., a  New York  Stock

                                       24

<PAGE>



Exchange - listed manufacturer and wholesaler with $200 million in annual sales.
Dr. Lazarus has served on several boards of directors of public companies in the
past,  including FACE, Ideal Toy Corporation,  Superior  Surgical  Manufacturing
Company, and Stage II Apparel Corporation. Dr. Lazarus has published seven books
and 65  articles on  business  management.  He also chairs the board of Phi Beta
Kappa  Alumni of Long  Island  (New  York).  Dr.  Lazarus  received a Masters of
Science  Degree and a Doctor of Philosophy  Degree in  Management  and Marketing
from Columbia University.

     The Company's  Certificate of  Incorporation  provides for three classes of
directors,  each having a three year term.  Each director will hold office until
the next annual meeting of stockholders during the year in which the term of his
class of directorship  expires and until his successor is elected and qualified.
The  initial  terms  of Class  II and  Class  III  directorships  expire  at the
Company's annual meeting in 1998 and 1999, respectively. The initial term of the
Class I directors was scheduled to expire in 1997; however,  the Company did not
hold  an  annual  meeting  in  1997.  Accordingly,  elections  for  the  Class I
directorships for a term ending in 2000 (the next scheduled  expiration year for
that class) will be held at the annual meeting in 1998, along with the elections
for the Class II directorships.  Executive officers serve at the pleasure of the
Board of Directors.

     There  is no  family  relationship  among  any of the  Company's  executive
officers and directors.


Section 16(a)   Beneficial Ownership Reporting Compliance

     To the Company's  knowledge,  based solely upon a review of copies of Forms
3, 4 and 5 furnished  to the Company and written  representations  that no other
reports  were  required  during the fiscal year ended  December  31,  1997,  all
Section  16(a)  filing  requirements   applicable  to  the  Company's  officers,
directors and 10% shareholders were complied with, except that six directors and
executive officers each filed his Form 3 ten days late.

Item 10. Executive Compensation

     The  following  table  provides  summary  information  concerning  cash and
certain other  compensation  paid or accrued by the Company to, or on behalf of,
Mr. Lew, the Company's President, Mr. Honigsfeld,  the Company's Chairman of the
Board and Chief Executive Officer, and Mr. Libin, the Company's Chief Technology
Officer, during the last three fiscal years. Mr. Honigsfeld was elected Chairman
of the Board and Chief  Executive  Officer  in  August  1996 and  October  1996,
respectively. Mr. Libin was elected Chief Technology Officer in January 1997. No
other executive officer of the Company had a combined salary and bonus in excess
of $100,000 for the year ended December 31, 1997.



                                       25

<PAGE>

<TABLE>
                           SUMMARY COMPENSATION TABLE


<CAPTION>
                                         Annual Compensation               Long-Term Compensation
                                                                                     Awards                  Payouts
                                                                           Restricted
Name and                                                  Other Annual      Stock          Securities        LTIP       All Other
Principal Positions           Year   Salary     Bonus     Compensation     Award(s)     Underlying Options   Payout    Compensation
-------------------           ----   ------     ------    ------------     ---------    ------------------   ------    ------------
<S>                          <C>     <C>            <C>          <C>           <C>          <C>                 <C>          <C>
Mark Honigsfeld(1)           1997    $250,000       -            -             -            100,000             -            -
  Chairman of the Board,     1996    $62,500(2)     -            -             -            233,000             -            -
  Chief Executive            1995        -          -            -             -               -                -            -
  Officer and
  Secretary

Dong W. Lew (3)              1997    $125,000       -            -             -            8,561               -            -
 President and               1996    $87,500(4) $15,000(5)       -             -            156,950             -            -
 Treasurer                   1995    $70,980        -            -             -               -                -            -

Louis Libin                  1997    $178,651       -            -             -            100,000             -            -
 Chief Technology            1996        -          -            -             -               -                -            -
                             1995        -          -            -             -               -                -            -
--------------------
</TABLE>

(1)  Mr.  Honigsfeld was elected Chief Executive  Officer of the Company and was
     entitled to compensation effective as of October 1, 1996.

(2)  Represents accrued and unpaid salary relating to 1996 (based on a salary of
     $250,000 per annum) which was converted  into 12,500 Common Shares upon the
     closing of the IPO.

(3)  Mr. Lew acted as the Company's  Chief  Executive  Officer during 1994, 1995
     and from the period January 1, 1996 to September 30, 1996.

(4)  Based upon a salary of $75,000 per annum from  January 1, 1996 to September
     30, 1996 and $125,000 per annum from October 1, 1996 to December 31, 1996.

(5)  Represents an accrued and unpaid  signing bonus  (relating to the execution
     of Mr. Lew's employment agreement in October 1996) which was converted into
     3,000 Common Shares upon the closing of the IPO.

     Each  non-employee  director  of the  Company  is  entitled  to  receive  a
director's fee of $500 per meeting (other than telephonic  meetings) and options
to purchase 5,000 Common Shares of the Company each year,  which options will be
exercisable  for a period of ten years  from the date of grant,  at an  exercise
price equal to the market price of the  Company's  Common  Shares on the date of
the grant. Additionally, each non-employee director is reimbursed for reasonable
out-of-pocket  expenses incurred in attending meetings of the Board of Directors
of the Company. The members of the Board of Directors meet regularly, as needed.



                                       26

<PAGE>




<TABLE>
              OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997

<CAPTION>
                    Number of Common    Percentage of Total
                    Shares Underlying   Options Granted To
     Name           Options Granted     Employees in Fiscal Year  Exercise Price  Expiration Date
     -----          ---------------     ------------------------  --------------  ---------------

<S>                     <C>                    <C>                    <C>                 <C>
Mark Honigsfeld         100,000                36.6%                  $3.00       January 6, 2007

Dong Lew                  8,561(1)              3.1%                  $5.50       August 27, 2002

Louis Libin              50,000                23.3%                  $3.00       January 6, 2007
                         50,000                23.3%                  $6.75       December 1, 2007
</TABLE>

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

(1)  These  options  were  granted  as a reload  feature  at the  time  Mr.  Lew
     surrendered  8,561 Common Shares valued in the aggregate of $47,085.50  (or
     $5.50 per share) to exercise options to purchase 156,950 Common Shares.


<TABLE>
                   AGGREGATED OPTION EXERCISES IN FISCAL YEAR
           EXPIRED DECEMBER 31, 1997AND FISCAL YEAR-END OPTION VALUES

<CAPTION>
                                                  Number of Shares             Value of Unexercised
                                                  Underlying Unexercised       In-the-Money Options
                     Number of                    Options at Fiscal            at Fiscal Year End
                  Shares Acquired    Value        Year End                     Exercisable /
Name               On Exercise       Realized     Exercisable/Unexercisable    Unexercisable

<S>                    <C>           <C>               <C>                         <C>
Mark Honigsfeld        233,000       $629,100          0 / 100,000                 0 / $625,000

Dong Lew               156,950       $816,140            8,561 / 0                     $ 32,104

Louis Libin               -              -             0 / 100,000                 0 / $437,500
</TABLE>

Employment  Contracts,  and  Termination  of  Employment  and  Change-in-Control
Arrangements

     Employment Agreements

     The Company is a party to Employment  Agreements  with Mark  Honigsfeld and
Dong W. Lew,  each for a term of three years  commencing  as of October 1, 1996,
subject to continuing,  automatic one-year extensions, unless either the Company
or the  individual  notifies  the  other,  at least 90 days  prior to any annual
anniversary date, of its desire not to extend the term thereof.  Each Employment
Agreement  provides for earlier  termination as discussed  below.  See Item 10 -
"Executive  Compensation" - Employment Contracts,  and Termination of Employment
and  Change-in-Control  Arrangements  -  Retirement  of Dong  Lew"  below  for a


                                       27

<PAGE>



discussion of Mr. Lew's  impending  retirement and termination of his employment
agreement.

     Pursuant to their respective Employment  Agreements,  Mr. Honigsfeld serves
as Chairman of the Board and Chief Executive  Officer of the Company and Mr. Lew
serves as President and Chief Operating Officer of the Company.

     The Employment  Agreements provide for base annual compensation of $250,000
and  $125,000  for Messrs.  Honigsfeld  and Lew,  respectively.  The  employment
agreement  for Mr. Lew  provided  for a signing  bonus in the amount of $15,000,
which was paid in 3,000 Common Shares (valued at $5.00 per share) at the closing
of the IPO. In addition,  $100,000 of accrued and unpaid compensation payable to
Mr.  Honigsfeld under his Employment  Agreement was converted into 20,000 Common
Shares (valued at $5.00 per share) at the closing of the IPO.

     In addition to base  compensation,  each of Messrs.  Honigsfeld  and Lew is
entitled to receive (i) an annual bonus  amount  equal to a  percentage  of base
salary (ranging from 7% to 20%) based upon the Company  achieving  certain sales
levels  (ranging  from  $3,750,000  to  $6,000,000  in the  initial  year,  with
$1,000,000 increased sales level thresholds per year if the bonus is earned in a
particular  year) and (ii) an annual  bonus based on the  Company's  EBITANC (as
defined  below),  if any.  Such  latter  bonus for each ranges from 5% to 10% of
EBITANC based on EBITANC thresholds ranging from $250,000 to $1,500,000. EBITANC
is an amount equal to the Company's  earnings  before  deducting the  following:
interest expense,  taxes, and any one time  nonrecurring  charges resulting from
divestitures,  acquisitions,  consolidations,   restructurings  and  changes  in
accounting  principles.  The use of  EBITANC,  as opposed to  earnings,  has the
effect  of  increasing  the  earnings  base  (by  the  amount  of  the  excluded
deductions) for the purpose of calculating the bonus.

     The Employment Agreements for Messrs.  Honigsfeld and Lew also provide that
each is entitled to receive, for each year thereof,  options for the purchase of
5,000 Common  Shares of the Company for each  $100,000 of EBITANC.  Such options
would be exercisable for a five year period at an exercise price of no less than
110% of the market value of the Common Shares on the date of the grant.  Messrs.
Honigsfeld  and Lew are also  entitled to receive an expense  allowance of up to
$500 per month and an automobile allowance in the amount of $1,000 per month.

     Each Employment Agreement provides that,  notwithstanding the rolling three
year term thereof,  it may be terminated prior to such expiration date under the
following  circumstances:  (i) death;  (ii) total disability (as provided for in
the  Employment  Agreements);  (iii)  termination by the Company for "cause" (as
defined in the Employment  Agreements);  (iv)  termination by the Company at any
time upon written notice to the employee;  (v)  termination by the employee upon
30 days written notice to the Company;  (vi)  termination by the employee at any
time for "good  reason"  (as  defined in the  Employment  Agreements);  or (vii)
termination  by the  Company  at any time  within 12 months  after a "change  in
control"  (as  defined  in  the  Employment   Agreements).   Additionally,   Mr.
Honigsfeld's  Employment Agreement allows him to devote up to 10% of his working
time to other endeavors which are not in competition with the Company.


                                       28

<PAGE>



     The  Employment   Agreements   provide  for   compensation   under  certain
circumstances  upon termination of employment (in addition to accrued but unpaid
compensation)  as  follows:  (i)  in the  event  of the  employee's  death,  the
employee's  estate or spouse shall be entitled to receive an amount equal to the
employee's  monthly  salary as of the date of death  multiplied by the number of
full  years  that  he was  an  employee  of the  Company  or a  subsidiary  or a
predecessor  in  interest  thereof;  (ii)  in the  event  of  termination  of an
Employment  Agreement  due to  disability,  the  employee  shall be  entitled to
receive an amount equal to his monthly  salary as of the date of  termination of
such Employment Agreement, multiplied by the number of full years that he was an
employee of the Company or a subsidiary  or a  predecessor  in interest  thereof
(but, in no event, would the disabled employee be entitled to an amount equal to
less than six  months of  salary);  and  (iii) in the  event of  termination  of
employment  by the  Company  following  a "change of  control" or for any reason
other than death,  disability or "cause",  or in the event of  termination of an
Employment  Agreement by the employee for "good  reason",  the employee shall be
entitled to receive his full salary for the  unexpired  term of such  agreement,
without mitigation of damages based upon employment obtained elsewhere.

     The Employment  Agreements provide for a restriction on the solicitation of
customers  of the  Company  for a  period  of two  years  following  termination
thereof,  and a covenant  not to compete  with the  Company  for a period of six
months following termination of employment for cause.

     Effective  January 6, 1997,  the  Company and Louis  Libin  entered  into a
three-year  Employment  Agreement,  providing  for Mr.  Libin  to  serve  as the
Company's Chief Technology Officer on a non-full-time per diem basis until March
10, 1997,  and on a full-time  basis  commencing on such date.  Such  Employment
Agreement provides for a salary of $200,000,  $225,000 and $250,000 per annum in
the first,  second and third  years,  respectively.  Additionally,  Mr.  Libin's
Employment  Agreement  allows  him to  devote  up to one  day a  week  to  other
endeavors  which are not in  competition  with the  Company.  Other terms of Mr.
Libin's Employment  Agreement conform in structure to the material provisions of
Messrs.  Honigsfeld's and Lew's Employment Agreements such as bonuses, benefits,
restrictive covenants and termination.

     Retirement of Dong Lew

     On  December  9, 1997,  Dong Lew  advised  the Board of  Directors  that he
desired to retire,  subject to reaching an agreement on the  termination  of his
Employment Agreement.

     As of March 17,  1998,  the Company and Mr. Lew entered  into an  agreement
(the "Termination  Agreement") which provides that, on or before April 24, 1998,
Mr. Lew's Employment  Agreement will be terminated and Mr. Lew will resign as an
officer and director of the Company. The Termination Agreement provides that the
Company will pay Mr. Lew $216,000 at the closing. The closing of the Termination
Agreement is  conditioned  upon the closing of a stock  purchase  agreement (the
"Stock Purchase  Agreement") between Mr. Lew and Mark Honigsfeld that will close
simultaneously with the Termination Agreement.

                                       29

<PAGE>



     The  Stock  Purchase  Agreement  provides  that Mr.  Lew  will  sell to Mr.
Honigsfeld and/or his designee(s) (i) 457,639 Common Shares of the Company, plus
8,561 Common Shares of the Company, which Mr. Lew will acquire upon the exercise
of a stock option less any Common Shares surrendered by Mr. Lew to exercise such
option in a cashless transaction,  less (ii) the number of Common Shares Mr. Lew
sells prior thereto pursuant to the Company's Registration Statement on Form S-8
and Rule 144  promulgated  under the  Securities  Act of 1933,  as amended.  The
purchase  price for the Common Shares to be purchased by Mr.  Honigsfeld  and/or
his designee shall be $820,000, less the sales proceeds realized by Mr. Lew from
sales under the Form S-8 and Rule 144.  Following full  performance of the Stock
Purchase  Agreement,  Mr. Lew shall own  100,000  Common  Shares of the  Company
(unless any of such Common  Shares are  otherwise  disposed of or  transferred).
Following Mr. Lew's  disposition  of his Common Shares and assuming he continues
to own 100,000 Common Shares,  Mr. Lew would beneficially own approximately 3.5%
of the outstanding Common Shares of the Company,  based on the current number of
outstanding Common Shares.

Item 11. Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Management

     The following table sets forth certain  information as of February 28, 1998
with respect to the beneficial ownership of the outstanding Common Shares of the
Company by (i) any holder of more than 5% of the outstanding Common Shares; (ii)
the Company's  directors;  (iii) the  directors  and  executive  officers of the
Company as a group.

Name and Address
of Beneficial Owner                   Number                 Percent

Mark Honigsfeld                       723,200(1)(2)          24.6%
77 Spruce Street
Cedarhurst, New York

Dong W. Lew                           566,200(2)(3)          19.9%
1350 Grand Summit Drive
Reno, Nevada

Louis Libin                           16,667(4)                  *
77 Spruce Street
Cedarhurst, New York

William D. Rizzardi                   1,667(4)                   *
77 Spruce Street
Cedarhurst, New York


                                       30

<PAGE>



Harold Lazarus                        1,667(4)                    *
134 Hofstra University
Hempstead, New York

Directors and executive officers      1,309,401(5)           44.1%
as a group (5 persons)
-------------------
*Represents less than 1%.

(1)  Includes  (i)  363,200  shares  held by the  Honigsfeld  Trust  whose  sole
     beneficiary  is Mr.  Honigsfeld's  wife;  Mr.  Honigsfeld,  the settlor and
     trustee of the trust,  has the right to terminate the Honigsfeld  Trust and
     receive the shares;  (ii)  200,000  shares held by the Mardee  Charity Fund
     Foundation, a private charitable foundation of which Mr. Honigsfeld and his
     wife are the sole  trustees;  and (iii)  100,000  shares  issuable upon the
     exercise of a currently exercisable option. Excludes 33,600 shares issuable
     upon the exercise of Bridge  Warrants  that are not  exercisable  within 60
     days.

(2)  Does not give effect to the  contemplated  sale of an  aggregate of 466,200
     Common  Shares  by  Mr.  Lew  as  described  under  Item  10  -  "Executive
     Compensation  - Employment  Contracts,  and  Termination  of Employment and
     Change-in-Control Arrangement - Retirement of Dong Lew", a portion of which
     shares may be purchased by Mr. Honigsfeld as described therein.

(3)  Includes 8,561 shares  issuable upon the exercise of currently  exercisable
     option.

(4)  Shares issuable upon the exercise of options that are currently exercisable
     or exercisable within 60 days.

(5)  Includes an aggregate of 128,562  Common Shares  issuable upon the exercise
     of options which are currently  exercisable or  exercisable  within 60 days
     (including those referred to in footnotes 1,3 and 4 above).

Changes-in-Control

     Reference is hereby made to Item 10 - "Executive  Compensation - Employment
Contracts,  and Termination of Employment and  Change-in-Control  Arrangements -
Retirement  of Dong Lew" for a discussion  of an agreement  between Dong Lew and
Mark Honigsfeld  providing for the sale of an aggregate of 466,200 Common Shares
by Mr. Lew.

Item 12. Certain Relationships and Related Transactions

     Effective  August 1996,  the Company  issued  330,200  Common Shares to the
Honigsfeld  Trust in  consideration  for $.30 per share or an aggregate price of
$99,060. Upon Mr. Honigsfeld accepting the position as Chairman of the Board, he
was issued a five year option for the purchase of up to 233,000 Common Shares of
the Company at an exercise price of $.30 per share. This option was exercised in
full  in  April  1997  and the  underlying  Common  Shares  were  issued  to the
Honigsfeld Trust. See Item 11- "Security  Ownership of Certain Beneficial Owners
and Management."

                                       31

<PAGE>




     In October 1996,  the Company loaned $70,000 to Mr. Lew for purposes of his
participation in the Bridge Financing Transaction.  Such loan was evidenced by a
promissory  note (the "Lew Note"),  providing  for the payment of principal  and
interest at the rate of 8% per annum in 120 equal monthly installments,  subject
to  acceleration  on the  closing  date of the IPO.  Payment of the Lew Note was
secured by a pledge of 28,000 Common Shares of the Company.  In March 1997,  Mr.
Honigsfeld  purchased  the Lew Note from the  Company in  consideration  for the
payment  in cash of the  outstanding  principal  amount  of the  Lew  Note.  Mr.
Honigsfeld  concurrently  received  an  assignment  of the  Company's  rights as
pledgee of Mr. Lew's  Common  Shares.  In May 1997,  the Lew Note was amended to
make it  nonrecourse  except to the  pledged  Common  Shares and to conform  the
payment  terms  to  those  of the  Bridge  Notes.  The Lew  Note  was  satisfied
contemporaneously with the closing of the IPO.


     In January 1997, the Company entered into the secured Credit Agreement with
Mr. Honigsfeld. Pursuant to the Credit Agreement, the Company initially borrowed
$200,000.  In April  1997,  the Company  and Mr.  Honigsfeld  amended the Credit
Agreement to provide for an additional  line of credit of $500,000.  Outstanding
principal  under the  Credit  Agreement  bears  interest  at the rate of 10% per
annum.  The repayment of up to $200,000 under the Credit Agreement is secured by
a first priority security interest in all the assets of the Company. The Company
entered into the Credit Agreement  because it required  additional  financing to
fund the Company's  working capital needs and no other sources of financing were
available at that time.  Contemporaneously with the closing of the IPO, $200,000
of indebtedness was converted into 40,000 Common Shares pursuant to an agreement
between the Company and Mr.  Honigsfeld.  In May 1997,  the Company  borrowed an
additional  sum of $200,000  under the Credit  Agreement.  As of March 25, 1998,
$150,000 in principal is outstanding  under the Credit  Agreement.  In 1997, the
Company paid Mr.  Honigsfeld an aggregate of $9,316 in interest under the Credit
Agreement.  The  Company  believes  that the terms of the Credit  Agreement  are
commercially  reasonable  and are at least as  favorable  to the  Company as the
Company could have obtained from an unrelated third party.  The Credit Agreement
was approved by, among others, all the disinterested directors of the Company.

     Reference is hereby made to Item 10 - "Executive  Compensation - Employment
Contracts,  and Termination of Employment and  Change-in-Control  Arrangements -
Retirement  of Dong Lew" for a discussion  of an agreement  between Dong Lew and
Mark Honigsfeld  providing for the sale of an aggregate of 466,200 Common Shares
by Mr. Lew and the  payment to Mr. Lew of a  severance  payment in the amount of
$216,000.

     To the extent that the Company may enter into any  agreements  with related
parties in the future (of which none are presently  contemplated),  the Board of
Directors of the Company has determined  that the terms of such  agreements must
be commercially reasonable and no less favorable to the Company than the Company
could obtain from unrelated third parties.  Additionally, the Board of Directors
of the Company has further determined that such agreements must be approved by a
majority of disinterested directors.

                                       32

<PAGE>

                                     PART IV

Item 13. Exhibits, Lists and Reports on Form 8-K

      Exhibits         Description of Exhibit

          2    Agreement  of Merger  between the  Company  and Coastal  Computer
               Systems, Inc., a New York corporation.*

          3.1  Articles of Incorporation of the Company.*

          3.2  By-Laws of the Company.*

          4.1  Specimen Common Share Certificate.*

          4.2  Form of Underwriter's Common Share Purchase Warrant.*

          10.1 Restated and Amended Employment  Agreement dated as of October 1,
               1996 between the Company and Dong W. Lew.*

          10.2 Restated and Amended Employment  Agreement dated as of October 1,
               1996 between the Company and Mark Honigsfeld.*

          10.3 $70,000  Promissory  Note dated October 30, 1996 from Dong W. Lew
               to the Company.*

          10.4 Form of  Warrant  between  the  Company  and  each of the  Bridge
               Lenders.*

          10.5 1996 Stock Option Plan.*

          10.6 Lease dated October 1, 1996 between Summit Equities Corp. and the
               Company.*

          10.7 Pledge and Hypothecation Agreement dated October 30, 1996 between
               the Company and Dong W. Lew.*

          10.8 Credit  Agreement  dated January 20, 1997 between the Company and
               Mark Honigsfeld.*

          10.9 Form of Promissory from the Company to Mark  Honigsfeld  relating
               to amounts borrowed under the Credit Agreement.


                                       33

<PAGE>



          10.10 Form of Indemnification  Agreement  between  the Company and the
                Company's directors and officers.*

          10.11 Employment Agreement  dated  January 6, 1997 between the Company
                and Louis Libin.*

          10.12 Amended and  Restated  Credit  Agreement  dated  April 30,  1997
                between the Company and Mark Honigsfeld.*

          10.13 Mobile Data Services Business Agreement dated as of November 15,
                1996 between the Company and GTE Mobilnet Service Corp.*

          10.14 Wireless Data  Channels  Program  Agreement dated as of February
                19, 1997 between the Company and AT&T Wireless Data, Inc.*

          10.15 Master Supplier  Agreement dated as of March 3, 1997 between the
                Company and Data General Corporation.*

          10.17 Agreement between the Company  (executed  on  September 3, 1997)
                and Computer Associates International, Inc. (executed on January
                2, 1998).

          10.18 Termination Agreement  dated as of March 17,  1998  between  the
                Company and Dong Lew.

          10.19 Business Alliance  Agreement  dated March 25,  1998  between the
                Company and Alpine Software Incorporated.

          11    Computation of Earnings Per Common Share

          23    Consent of Lazar, Levine & Felix LLP, independent auditors.

          27    Financial Data Schedule.

          *Previously  filed  as  on  exhibit  to  the  Company's   Registration
          Statement of Form SB-2, Registration No. 333-18667.

(b)  Current Reports on Form 8-K

     No report on Form 8-K was filed by the Company  during the last  quarter of
the fiscal year ended December 31, 1997.


                                       34

<PAGE>
                         - INDEX TO FINANCIAL STATEMENTS -



                                                                   Page(s)

Independent Auditors' Report                                       F  - 2

Financial Statements:
    Balance Sheets as of December 31, 1997 and 1996                F  -  3
    Statements of Operations for the Years Ended
        December 31, 1997 and 1996                                 F  -  4
    Statement of Shareholders' Equity for the Two
        Years in the Period Ended December 31, 1997                F  -  5
    Statements of Cash Flows for the Years Ended
        December 31, 1997 and 1996                                 F  -  6

Notes to Financial Statements                                      F  -  8









                                     F - 1


<PAGE>



                          INDEPENDENT AUDITORS' REPORT




To the Shareholders
Compu-DAWN, Inc.
Cedarhurst, New York



We have  audited  the  accompanying  balance  sheets of  Compu-DAWN,  Inc. as of
December  31,  1997 and 1996 and the  statements  of  operations,  shareholders'
equity and cash flows for the years 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 audits 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 Compu-DAWN, Inc. as of December
31, 1997 and 1996 and the results of its  operations  and its cash flows for the
years ended December 31, 1997 and 1996, in conformity  with  generally  accepted
accounting principles.



                                                  /s/ Lazar Levine & Felix LLP
                                                      LAZAR LEVINE & FELIX LLP




New York,  New York March 5, 1998 except as to Note 13c which is dated March 17,
1998

                                      F - 2

<PAGE>



<TABLE>
                                Compu-DAWN, Inc.
                                 BALANCE SHEETS

<CAPTION>
                               - ASSETS (Note 8) -
                                                                                                           December 31,
                                                                                                   --------------------------
                                                                                                        1997           1996
<S>                                                                                                <C>            <C>
CURRENT ASSETS:
   Cash (Note 2b)                                                                                  $3,081,253     $   286,497
   Accounts receivable, net of allowances for doubtful accounts of $13,635 and
      $30,000 for 1997 and 1996, respectively (Note 2b)                                                72,454         100,010
   Prepaid expenses                                                                                   121,802          19,281
   Loan receivable from officer  (Note 3)                                                                   -          69,247
   Income tax refund receivable (Note 12)                                                              29,868          36,004
                                                                                                   ----------      ----------
TOTAL CURRENT ASSETS                                                                                3,305,377         511,039
                                                                                                   ----------      ----------

FIXED ASSETS (Notes 2c, 4 and 6)                                                                      278,737         138,814
                                                                                                   ----------      ----------

OTHER ASSETS:
   Deferred offering costs (Note 9)                                                                         -         139,326
   Deferred compensation (Note 10)                                                                     98,270          34,056
   Financing costs (Note 7)                                                                                 -       1,588,400
   Security deposits                                                                                   21,525          21,525
                                                                                                   ----------      ----------
                                                                                                      119,795       1,783,307
                                                                                                   ----------      ----------

                                                                                                   $3,703,909      $2,433,160
                                                                                                   ==========      ==========
                    - LIABILITIES AND SHAREHOLDERS' EQUITY -
CURRENT LIABILITIES:
   Accounts payable                                                                                $   50,847     $   123,473
   Accrued expenses and other current liabilities (Note 5)                                            227,875         136,661
   Deferred revenue (Note 2d)                                                                          12,000          28,100
   Note payable - officer (Note 8)                                                                    100,000               -
   Due to former shareholders (Note 9)                                                                      -          34,710
   Capitalized lease payable - current (Note 6)                                                         5,771           7,859
                                                                                                   ----------      ----------
TOTAL CURRENT LIABILITIES                                                                             396,493         330,803
                                                                                                   ----------      ----------

NON-CURRENT LIABILITIES:
   Note payable - officer (Note 8)                                                                     50,000              -
   Capitalized lease payable (Note 6)                                                                  22,440          29,541
   Deferred rent liability (Note 13a)                                                                  29,402          23,115
   Promissory notes payable  (Note 7)                                                                      -          770,000
                                                                                                   ----------      ----------
                                                                                                      101,842         822,656
                                                                                                   ----------      ----------

COMMITMENTS AND CONTINGENCIES (Notes 11 and 13)

SHAREHOLDERS' EQUITY (Notes 9 and 10):
   Preferred stock, $.01 par value; 1,000,000 shares authorized, none issued or outstanding                 -               -
   Common stock, $.01 par value, 20,000,000 shares authorized, 2,838,450 and 986,700
      shares issued for 1997 and 1996, respectively                                                    28,385           9,867
   Additional paid-in capital                                                                       8,061,443       1,670,258
   Retained earnings (deficit)                                                                     (4,837,169)       (400,424)
                                                                                                   ----------      ----------
                                                                                                    3,252,659       1,279,701
   Less: treasury stock, 8,561 shares at cost                                                         (47,085)           -
                                                                                                   ----------      ----------

                                                                                                    3,205,574       1,279,701
                                                                                                   ----------      ----------

                                                                                                   $3,703,909      $2,433,160
                                                                                                   ==========      ==========

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

                                      F - 3
</TABLE>

<PAGE>



<TABLE>
<CAPTION>
                                Compu-DAWN, Inc.
                            STATEMENTS OF OPERATIONS


                                                                                                           For the Year Ended
                                                                                                               December 31,
<S>                                                                                                  <C>              <C>
                                                                                                           1997            1996
REVENUES (Notes 2d and 11):
      Software sales                                                                                 $    277,986     $   202,511
      Maintenance income                                                                                  313,389         275,016
                                                                                                     ------------     -----------
                                                                                                          591,375         477,527
                                                                                                          -------         -------

COSTS AND EXPENSES:
      Programming costs and expenses                                                                      406,563         268,915
      General and administrative expenses (Note 2f)                                                     2,195,406         660,006
      Research and development (Note 2e)                                                                  935,804         158,099
                                                                                                     ------------     -----------
                                                                                                        3,537,773       1,087,020
                                                                                                        ---------       ---------

LOSS FROM  OPERATIONS                                                                                  (2,946,398)       (609,493)
                                                                                                      ------------    -----------

OTHER INCOME (EXPENSES):
      Interest and other income                                                                           120,158           4,845
      Interest expense and financing costs (Note 7)                                                    (1,610,505)        (36,274)
      Loss on abandonment of leasehold improvements (Note 13a)                                            -                (5,378)
                                                                                                      ------------    ------------
                                                                                                       (1,490,347)        (36,807)
                                                                                                       ----------         -------

LOSS BEFORE PROVISION (CREDIT) FOR INCOME TAXES                                                        (4,436,745)       (646,300)

      Provision (credit) for income taxes (Notes 2g and 12)                                               -               (75,531)
                                                                                                      ------------    ------------

NET LOSS                                                                                              $(4,436,745)    $  (570,769)
                                                                                                      ============     ===========

BASIC EARNINGS (LOSS) PER SHARE (Note 2h)                                                                  $(1.95)          $(.34)
                                                                                                           =======          =====

WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
      EQUIVALENT SHARES  OUTSTANDING (Note 2h)                                                          2,270,047       1,678,913
                                                                                                        =========       =========

</TABLE>









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

                                      F - 4

<PAGE>



<TABLE>
                                Compu-DAWN, Inc.
                        STATEMENT OF SHAREHOLDERS' EQUITY

<CAPTION>
                                                                                                                          Total
                                                                                  Additional     Retained              Shareholders'
                                                 Preferred       Common Stock      Paid-in       Earnings     Treasury    Equity
                                                  Stock      Shares      Amount    Capital       (Deficit)     Stock     (Deficit)
                                                 ---------   ---------  --------- ------------  ----------   ---------- ------------

<S>                                              <C>         <C>         <C>       <C>         <C>           <C>        <C>
Balance at January 1, 1996                           -       1,157,000   $11,570   $   54,430  $   170,345   $(71,500)  $  164,845
   Cancellation of shares held in treasury
         (Note 9)                                    -        (685,750)   (6,858)     (64,642)        -        71,500         -
   Issuances of common stock (Note 9)                -         580,450     5,805      168,330         -          -         174,135
   Warrants issued pursuant to debt offering
         (Note 7)                                    -            -         -       1,509,200         -          -       1,509,200
   Options issued below fair value (Note 9)          -            -         -          37,000         -          -          37,000
   Purchase of outstanding options (Note 9)          -            -         -         (15,210)        -          -         (15,210)
   Purchases and cancellation of outstanding
          shares (Note 9)                            -         (65,000)     (650)     (18,850)        -          -         (19,500)
   Net loss                                          -            -         -            -        (570,769)      -        (570,769)
                                                 --------    -----------  --------  ----------  -----------  ---------  -----------

Balance at December 31, 1996                         -         986,700     9,867    1,670,258     (400,424)      -       1,279,701
   Options issued below fair value (Note 9)          -            -         -         374,500         -          -         374,500
   Exercise of stock options (Note 9)                -         408,750     4,088      122,297         -          -         126,385
   Treasury stock, 8,561 shares at cost (Note 9)     -            -          -           -            -       (47,085)     (47,085)
   Conversion of debt (Note 8)                       -          40,000       400      199,600         -          -         200,000
   Conversion of accrued compensation (Note 9)       -          23,000       230      114,770         -          -         115,000
   Initial public offering (Note 9)                  -       1,380,000    13,800    5,612,074         -          -       5,625,874
   Cancellation of options (Note 9)                  -            -          -        (32,056)        -          -         (32,056)
   Net loss                                          -            -          -           -      (4,436,745)      -      (4,436,745)
                                                 --------    ---------   -------   ----------   -----------  ---------  -----------
BALANCE AT DECEMBER 31, 1997                         -       2,838,450   $28,385   $8,061,443  $(4,837,169)  $(47,085)  $3,205,574
                                                 ========    =========   =======   ==========   ===========   ========   ==========

</TABLE>

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

                                      F - 5


<PAGE>



<TABLE>
                                                      Compu-DAWN, Inc.
                                                  STATEMENTS OF CASH FLOWS                                        Page 1 of 2
                                                  ------------------------


<CAPTION>
                                                                                For the Year Ended
                                                                                    December 31,
                                                                                 1997             1996

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                        <C>               <C>
   Cash received from customers                                            $    628,198      $  582,053
   Cash paid to suppliers and employees                                      (3,028,563)       (825,948)
   Interest paid                                                                (22,105)         (1,995)
   Interest and other income received                                           111,156           3,791
   Income taxes paid                                                               -            (47,284)
                                                                            ------------     -----------
   Net cash (utilized) by operating activities                               (2,311,314)       (289,383)
                                                                            -----------      -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Loans made to officer                                                           -            (70,000)
   Principal repayments of officer's loan                                        69,247             753
   Purchase of fixed assets                                                    (204,452)        (95,117)
   Proceeds from sale of fixed assets                                              -              2,500
   Payment of security deposits                                                    -            (14,745)
                                                                            ------------     ----------
   Net cash (utilized) by investing activities                                 (135,205)       (176,609)
                                                                            ------------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Loan received from officer                                                   400,000            -
   Repayment of officer's loan                                                  (50,000)           -
   Proceeds from debt offering                                                     -            770,000
   Repayment of promissory notes                                               (770,000)           -
   Expenses associated with debt offering                                          -          (100,100)
   Payments for common stock and options acquired                               (34,710)       (21,583)
   Principal payments of other long-term debt                                      -            (3,726)
   Payments of capital lease obligations                                         (9,189)        (2,828)
   Expenses associated with initial public offering                                -          (139,326)
   Proceeds from sale of shares                                               5,625,874        144,090
   Proceeds from exercise of stock options                                       79,300           -
                                                                            -----------     ----------
   Net cash provided by financing activities                                  5,241,275        646,527
                                                                            ------------    ----------

NET INCREASE IN CASH AND  CASH EQUIVALENTS                                    2,794,756        180,535

   Cash and cash equivalents, at beginning of year                              286,497        105,962
                                                                             ----------     ----------

CASH AND CASH EQUIVALENTS, END OF YEAR                                       $3,081,253     $  286,497
                                                                             ==========     ==========
</TABLE>


    The accompanying notes are an integral part of these financial statements




                                      F - 6



<PAGE>



<TABLE>
                                                      Compu-DAWN, Inc.
                                                  STATEMENTS OF CASH FLOWS                                        Page 2 of 2

<CAPTION>
                                                                                                         For the Year Ended
                                                                                                             December 31,
                                                                                                        1997             1996

RECONCILIATION OF NET LOSS TO NET CASH (UTILIZED) BY
    OPERATING ACTIVITIES:
<S>                                                                                                   <C>               <C>
      Net loss                                                                                        $(4,436,745)      $(570,769)
      Adjustments to reconcile net loss to net cash (utilized) by operating activities:
        Allowance for doubtful accounts                                                                    19,000          12,000
        Depreciation and amortization                                                                      64,529          45,947
        Deferred tax expense                                                                              -                 6,200
        Deferred rent liability                                                                             6,287          (3,315)
        Compensatory stock                                                                                278,230          32,988
        Financing charge                                                                                1,588,400         -
        Loss on disposal of fixed assets                                                                  -                 7,617
      Changes in assets and liabilities:
        Decrease in accounts receivable                                                                     8,556         106,456
        Decrease (increase) in prepaid expenses                                                            36,805         (16,714)
        Decrease (increase) in tax refund receivable                                                        6,136         (36,004)
        Increase in accounts payable and accrued expenses                                                 133,588         221,692
        (Decrease) in deferred revenue                                                                    (16,100)         (1,930)
        (Decrease) in income taxes payable                                                                -               (93,551)
                                                                                                      -----------       ---------

NET CASH (UTILIZED) BY OPERATING ACTIVITIES                                                           $(2,311,314)      $(289,383)
                                                                                                      ===========       =========


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
    FINANCING ACTIVITIES:
    (a)  During 1996, the Company incurred capital lease  obligations of $33,595
         in connection with the purchase of office equipment.

    (b) During  1997,  an officer of the  Company  converted  $200,000 of a loan
        payable to him into 40,000 shares of common stock.

    (c) During 1997, two officers of the Company  converted  $115,000 of accrued
        compensation into 23,000 shares of common stock.

</TABLE>





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





                                      F - 7


<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996



NOTE   1   -     DESCRIPTION OF COMPANY:

                 Compu-DAWN,  Inc., the Company, was incorporated under the name
                 of Coastal  Computer  Systems,  Inc.,  in New York on March 31,
                 1983, and was reincorporated in Delaware under its present name
                 on October 18, 1996.  The Company is engaged in the business of
                 designing,  developing,  licensing,  installing  and  servicing
                 computer software products and systems predominantly for public
                 safety and law enforcement  agencies.  The Company's customers,
                 to date, are primarily located in New York State.


NOTE   2   -     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

                 The  Company's  accounting  policies  are  in  accordance  with
                 generally accepted  accounting  principles.  Outlined below are
                 those policies which are considered particularly significant.

        (a)      Use of Estimates:

                 In preparing financial  statements in accordance with generally
                 accepted  accounting   principles,   management  makes  certain
                 estimates and assumptions,  where  applicable,  that affect the
                 reported  amounts of assets and  liabilities and disclosures of
                 contingent  assets and liabilities at the date of the financial
                 statements,  as well as the  reported  amounts of revenues  and
                 expenses  during the  reporting  period.  While actual  results
                 could differ from those  estimates,  management does not expect
                 such  variances,  if any,  to  have a  material  effect  on the
                 financial statements.

        (b)      Concentration of Credit Risk /Fair Value:

                 Financial  instruments that potentially  subject the Company to
                 concentration  of  credit  risk  consist  principally  of  cash
                 investments and accounts receivable.

                 The Company maintains,  at times, deposits in federally insured
                 financial  institutions in excess of federally  insured limits.
                 Management   monitors   the   soundness   of  these   financial
                 institutions and feels the Company's risk is negligible.

                 Management  believes  that  concentrations  of credit risk with
                 respect to accounts receivable are limited due to the Company's
                 methods of progress billings and collections.

                 As of December  31,  1997 and 1996,  the fair value of cash and
                 cash  equivalents,   receivables,  obligations  under  accounts
                 payable and debt instruments approximate the carrying value.



                                      F - 8

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE   2     -   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued):

        (c)      Fixed Assets:

                 Fixed assets are recorded at cost. Depreciation of fixed assets
                 is provided on a straight-line basis as follows:

                       Computer equipment             3 years
                       Furniture and fixtures         5 years
                       Motor vehicles                 5 years

                Maintenance  and repairs are  expensed  as  incurred.  Leasehold
                improvements  are amortized over the useful life of the asset or
                the lease,  whichever is shorter.  Capital  leases are amortized
                over the term of the  respective  leases or the useful  lives of
                the related assets, whichever is shorter.

                Depreciation  and  amortization  expense  for  the  years  ended
                December  31,  1997 and 1996  aggregated  $64,529  and  $25,046,
                respectively.

         (d)    Revenue Recognition:

                The   Company   generates   revenues   from  the   granting   of
                non-exclusive,  non-transferable and non- assignable licenses to
                use software it has  developed,  through fixed price  contracts.
                Revenues from such fixed price  contracts are  recognized  using
                the percentage of completion  method of accounting.  The Company
                retains  title  to the  software  and  warranties  that  it will
                provide technical support and repair any defects in the software
                at  no  charge.   The  warranty  period  for  each  contract  is
                negotiated  individually,  for periods  ranging  from 90 days to
                three  years.  To date,  repair  costs  have  been  minimal  and
                therefore  the  Company has not  established  a reserve for such
                warranty costs.

                In addition, the Company provides post-contract customer support
                to licensees of its  software.  Revenues  from such services are
                recognized  ratably over the period of performance.  Fees billed
                and/or  received  prior to performance of services are reflected
                as deferred revenue.

         (e)    Software Development Costs:

                The  Company   reflects  costs  incurred  in  establishing   the
                technological  feasibility of a computer  software product to be
                leased or sold, as research and development  costs, and expenses
                such  costs in the period  incurred.  Research  and  development
                costs for the years ended December 31, 1997 and 1996  aggregated
                $935,804 and $158,099, respectively.

                After technological feasibility has been established,  all costs
                incurred  on the  software  product  are to be  capitalized  and
                amortized  on a product  by  product  basis.  Capitalization  of
                computer  software  costs is  discontinued  when the  product is
                available to be sold or leased.

                To date, the Company has only sold or leased  software which has
                been  developed  for  specific  customers.  As such,  all  costs
                incurred have been expensed as research and development costs.

                Costs   associated   with    post-contract    customer   support
                (maintenance)  are charged to expense  when  related  revenue is
                recognized  or when those costs are incurred,  whichever  occurs
                first.


                                      F - 9

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996



NOTE   2   -     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued):

        (f)      Advertising Costs:

                 Advertising   costs,   which  are   included   in  general  and
                 administrative  expenses,  are  expensed as  incurred.  For the
                 years  ended  December  31,  1997 and 1996,  advertising  costs
                 aggregated $131,868 and $20,294, respectively.

        (g)      Income Taxes:

                 Deferred  tax assets and  liabilities  are  recognized  for the
                 future tax consequences  attributable to temporary  differences
                 between the financial  statement  carrying  amounts of existing
                 assets and liabilities and their  respective tax bases,  and to
                 net operating  loss and tax credit  carryforwards,  measured by
                 enacted tax rates for years in which  taxes are  expected to be
                 paid or recovered.

                 Deferred taxes are provided for temporary  differences  between
                 financial and tax  accounting,  principally  for differences in
                 the basis of fixed assets,  allowance for doubtful accounts and
                 other nondeductible expenses, as well as for net operating loss
                 carryforwards.

        (h)      Earnings Per Share:

                 The Company has adopted SFAS 128  "Earnings  Per Share"  ("SFAS
                 128"), which has changed the method of calculating earnings per
                 share.  SFAS 128  requires  the  presentation  of  "basic"  and
                 "diluted"  earnings  per  share  on  the  face  of  the  income
                 statement.  Prior period loss per share data has been  restated
                 in accordance  with Statement 128. The loss per common share is
                 computed by dividing net loss by the weighted average number of
                 common shares and common equivalent shares  outstanding  during
                 each period.

        (i)      Statements of Cash Flows:

                 For  purposes  of the  statements  of cash  flows,  the Company
                 considers  all  highly  liquid  investments  with  an  original
                 maturity of three months or less to be cash equivalents.

        (j)      New Accounting Pronouncements:

                 SFAS 130  "Reporting  Comprehensive  Income" is  effective  for
                 years  beginning  after December 15, 1997 and early adoption is
                 permitted.  This statement  prescribes  standards for reporting
                 comprehensive  income  and its  components.  Since the  Company
                 currently does not have any items of other comprehensive income
                 a statement of comprehensive income is not yet required.

                 SFAS 131  "Disclosures  About  Segments  of an  Enterprise  and
                 Related  Information",  is effective for years  beginning after
                 December 15, 1997 and early adoption is encouraged. The Company
                 does not  presently  believe  that it operates in more than one
                 identifiable segment.

                 See also Earnings Per Share, above.


                                     F - 10

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996



NOTE   2   -  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued):

        (k)   Impact of the Year 2000 Issue:

              The year 2000 issue is the result of  computer  programs  being
              written  using  two  digits  rather  than  four to  define  the
              applicable  year. Any of the Company's  computer  programs that
              have date-  sensitive  software may recognize a date using "00"
              as the  year  1900  rather  than  the  year  2000.  This  could
              potentially  result  in a  system  failure  or  miscalculations
              causing  disruptions  of  operations,  including,  among  other
              things,  a temporary  inability to process  transactions,  send
              invoices,   or  engage  in  other   similar   normal   business
              activities.  The  Company  has  ensured  that its  software  is
              already  year 2000  compliant,  and as such  this  issue is not
              expected  to have a material  effect on the  operations  of the
              Company.


NOTE   3   -  LOAN RECEIVABLE - OFFICER:

              In  October  1996,  the  Company  made a loan of $70,000 to its
              President and Chief  Operating  Officer for the purpose of such
              officer's  participation  in a debt offering (see Note 7). This
              loan was made to allow  such  officer  to  maintain  an  equity
              ownership in the Company that aligned his interest with that of
              the other shareholders. The loan was made since the officer did
              not have the  resources or the ability to obtain the  necessary
              funds  otherwise.  Such loan was evidenced by a promissory note
              requiring 120 equal  monthly  payments,  at an annual  interest
              rate of 8% and  secured by shares of common  stock owned by the
              individual  with a  value  equal  to  120%  of the  outstanding
              balance. This note was also due and payable upon the closing of
              a public  offering of the  Company's  common  stock should such
              occur  within  three  years of the  date of the note and  yield
              gross proceeds of at least $4,500,000.

              In  March  1997,  the  Chairman  of the  Board  of the  Company
              purchased this note from the Company in  consideration  for the
              payment in cash of the then outstanding amount. The Chairman of
              the Board concurrently  received an assignment of the Company's
              collateral for this note.


NOTE   4   -  FIXED ASSETS:

              Fixed assets consist of the following:
                                                                  December 31,
                                                                1997      1996

              Computer equipment                              $312,136  $139,916
              Furniture and fixtures                            28,495    16,499
              Motor vehicles                                    12,597    12,597
              Leasehold improvements                            65,581    45,345
              Assets under capitalized leases                   41,484    41,484
                                                              ---------  -------
                                                               460,293   255,841
              Less: accumulated depreciation and amortization  181,556   117,027
                                                              ---------  -------
                                                              $278,737  $138,814
                                                              ========  ========

                                     F - 11

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE   5   -     ACCRUED EXPENSES:

                 Accrued expenses is comprised of the following:

                                                             December 31,
                                                        1997             1996

                       Payroll and payroll taxes      $226,000        $121,037
                       Interest                          1,875          15,624
                                                      --------        --------
                                                      $227,875        $136,661
                                                      ========        ========

                 In December 1997, the President and Chief Operating  Officer of
                 the Company entered in negotiations to terminate his employment
                 agreement (see Note 13c). In connection therewith,  the Company
                 has accrued for  severance  pay  benefits  of  $216,000,  as of
                 December 31, 1997.


NOTE   6   -     CAPITALIZED LEASE OBLIGATIONS:

                 The  Company  has  entered  into  various  capital  leases  for
                 furniture, fixtures and equipment which expire in years through
                 2001.  The assets and liability  under these capital leases are
                 recorded at the lower of the present value of the minimum lease
                 payments or the fair market value of the assets. The assets are
                 depreciated over their estimated useful lives.  Depreciation of
                 assets under  capital  leases for the years ended  December 31,
                 1997 and 1996 aggregated $9,349 and $5,989, respectively.

                 Minimum  future  lease  payments  under  capital  leases  as of
December 31, 1997 are as follows:

                                1998                          $ 9,474
                                1999                            9,474
                                2000                            9,474
                                2001                            8,684
                                                              -------
                       Total minimum lease payments            37,106
                       Less: amount representing interest       8,895
                                                              -------
                                                              $28,211
                                                              =======

NOTE   7   -    DEBT OFFERING:

                 In October 1996, the Company successfully completed the sale of
                 77 units in a  private  offering,  each  unit  consisting  of a
                 $10,000  principal  amount 12% promissory  note ("bridge note")
                 and a redeemable stock purchase warrant to acquire 5,600 shares
                 of the Company's  common stock for aggregate  gross proceeds of
                 $770,000.  The warrants were exercisable at a price of $.50 per
                 share only upon the successful  completion of an Initial Public
                 Offering ("IPO"), of the Company's common stock.


                                     F - 12

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996



NOTE   7   -     DEBT OFFERING (Continued):

                 The  agreement  stated that each of the bridge notes is due and
                 payable  upon the closing of the IPO. In the event such closing
                 occurs on or before  September  15, 1997,  no interest  will be
                 payable on these notes. In the event that the Company closes an
                 IPO after September 15, 1997 but before September 15, 1999, the
                 notes  shall  bear  interest  at a rate of 8% per  annum and be
                 payable  upon the  closing of the IPO. In the event the Company
                 does not close an IPO by  September  15, 1999,  interest  shall
                 accrue  at a rate of 12% per  annum  through  such date and the
                 notes shall be payable in 120 equal monthly  installments  with
                 interest  at a rate of 8% per  annum  beginning  September  16,
                 1999.

                 In accordance with APB No. 14, the proceeds of debt issued with
                 stock purchase  warrants  should be allocated based on the fair
                 values of the debt  without the  warrants  and of the  warrants
                 themselves  when  issued.  Accordingly,  the Company  reflected
                 deferred  financing costs and additional  paid-in capital based
                 upon  the  difference  between  the  deemed  fair  value of the
                 warrants ($4.00) and the warrant exercise price.

                 Financing  costs,  which represent costs incurred in connection
                 with this private offering,  are to be charged to operations as
                 additional interest expense over the term of the bridge notes.

                 In  September  1996,  prior  to the  closing  of  this  private
                 offering,  the Company entered into a consulting agreement with
                 one of its founding  shareholders which provided for a one-time
                 payment at closing of $25,290.

                 In April 1997,  the holders of the bridge  notes  agreed to (i)
                 increase the exercise price of the five year warrants issued to
                 them  from  $.50 per  warrant  to $3.00  per  warrant  and (ii)
                 increase the holding  period of these  warrants from six months
                 to two years from the effective date of the IPO.

                 In June 1997, the Company  successfully  completed its IPO (see
                 Note 9) and repaid these  promissory  notes. In connection with
                 this  repayment,  the  Company  has  fully  amortized  deferred
                 financing costs  originally  capitalized in connection with the
                 notes. This amount has been reflected as a non-recurring charge
                 in the statement of operations.


NOTE   8   -     NOTE PAYABLE - OFFICER:

                 In April 1997,  the Chairman of the Board of the Company agreed
                 to convert a $200,000  loan  payable to him by the Company into
                 common shares at a conversion price of $5.00 per share (the IPO
                 price) upon the  consummation  of such IPO. In  addition,  this
                 officer agreed to provide a $500,000 credit line to the Company
                 for a  period  of  two  years,  secured  by all  assets  of the
                 Company. As of December 31, 1997, the balance outstanding under
                 this  credit  line was  $150,000,  which  amount is  payable in
                 quarterly  installments  of $25,000  plus  interest  at 10% per
                 annum.  For the year ended  December  31,  1997,  the  interest
                 expense relating to this loan aggregated $11,191.


                                     F - 13

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996



NOTE   9   -     CAPITAL STOCK AND EQUIVALENTS:

                 In October 1996, simultaneously with its reincorporation in the
                 State of  Delaware,  (see  Note 1) the  Company  increased  its
                 authorized  capital to 20,000,000  shares of common stock, $.01
                 par value, and 1,000,000  shares of preferred  stock,  $.01 par
                 value.  The Company  also  effected a stock split of its issued
                 and outstanding common stock on a 325 for 1 basis, resulting in
                 1,157,000   shares.   This  stock  split  has  been   reflected
                 retroactively  in the  accompanying  financial  statements  and
                 accordingly,  all  references  to the  number of common  shares
                 issued and outstanding have been restated.  No preferred shares
                 are issued and outstanding.

                 During 1994 and 1995 the Company  repurchased  an  aggregate of
                 685,750 shares of its common stock from certain shareholders at
                 an aggregate  cost of $71,500.  These  shares were  canceled in
                 1996.

                 In August 1996,  the Company sold 480,300  shares of its common
                 stock at a price  of $.30  per  share,  for  cash  proceeds  of
                 $144,090 and issued  100,150 shares of its common stock in lieu
                 of  payment of legal and  consulting  fees of  $30,045,  for an
                 aggregate amount of $174,135.

                 The Company had also granted,  to certain former  shareholders,
                 options to purchase  an  aggregate  of 50,700  shares of common
                 stock  (post-split) at an aggregate  exercise price of $156. In
                 October  1996,  following the  successful  completion of a debt
                 offering (see Note 7), the Company entered into agreements with
                 the former shareholders, canceling these unexercised options in
                 consider ation of payment of $.30 for each underlying share and
                 the  issuance of warrants  to purchase an  aggregate  of 31,200
                 shares of stock at an  exercise  price of $5.00 per share.  The
                 payment for these options  aggregating $15,210 has been charged
                 against additional paid-in capital.

                 The Company also purchased, in October 1996, 65,000 shares held
                 by these  former  shareholders  at a per  share  price of $.30.
                 These   shares  were   canceled   upon  the   repurchase,   and
                 accordingly,  common stock and additional  paid-in capital have
                 been reduced by $650 and $18,850, respectively.

                 During April 1997,  options were exercised to purchase  408,750
                 shares of common stock for which the Company  received  $79,300
                 in cash proceeds and 8,561 shares of company  common stock with
                 a fair market value of $47,085.

                 In April 1997,  two officers (the President and the Chairman of
                 the Board) agreed to convert  $115,000 of accrued  compensation
                 into  common  shares at a  conversion  price of $5.00 per share
                 (the IPO price), such conversion to occur upon the consummation
                 of the IPO.


                                     F - 14

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996


NOTE   9   -     CAPITAL STOCK AND EQUIVALENTS (Continued):

                 In  connection  with an  agreement  reached with certain of the
                 bridge note holders,  the Company  canceled  bridge warrants to
                 purchase  42,000  shares.  The number of shares  underlying the
                 bridge  warrants  has  therefore  been  reduced from 431,200 to
                 389,200 common shares.

                 In  June  1997,   the   Company,   through   its   underwriter,
                 successfully completed an initial public offering of its common
                 stock.  The  Company  sold  1,380,000  shares of  common  stock
                 (including  180,000 shares in the Underwriter's  over allotment
                 option)  at a price  of  $5.00  per  share  for  aggregate  net
                 proceeds of $5,625,874.


NOTE  10  -      STOCK OPTIONS:

                 In October  1996,  the Company  established a Stock Option Plan
                 under  which  options  (including   non-statutory  options)  to
                 purchase  up to  2,000,000  shares may be  granted to  eligible
                 persons.  As of  December  31,  1996,  the  Company had granted
                 options to purchase an  aggregate  of 491,950  shares of common
                 stock  at  prices  ranging  from  $.30  to  $4.00,  aggregating
                 $221,485. In connection therewith the Company recorded deferred
                 compensation  (measured  as the excess of the fair value of the
                 underlying  stock over the exercise price of the option at date
                 of grant) of $37,000. During 1997, prior to the consummation of
                 the IPO, the Company granted  additional options to purchase an
                 aggregate  of  187,250  shares of common  stock at an  exercise
                 price of $3.00 aggregating  $561,750,  and recorded  additional
                 deferred compensation costs of $374,500.  Deferred compensation
                 costs  are  being  amortized  over the  vesting  period  of the
                 related options. Amortization of such costs for the years ended
                 December  31, 1997 and 1996,  aggregated  $278,230  and $2,943,
                 respectively.

                 The Company has elected to follow  Accounting  Principles Board
                 Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
                 25) and related  interpretations in accounting for its employee
                 stock options because, as discussed below, the alternative fair
                 value  accounting  provided for under FASB  Statement  No. 123,
                 "Accounting  for  Stock-Based  Compensation"  requires  use  of
                 option  valuation  models  that were not  developed  for use in
                 valuing  employee stock options.  Under APB 25, if the exercise
                 price of the Company's employee stock options equals the market
                 price  of  the  underlying  stock  on the  date  of  grant,  no
                 compensation expense is recognized.

                 Pro forma  information  regarding  net income and  earnings per
                 share is required by Statement 123, and has been  determined as
                 if the Company had  accounted  for its employee  stock  options
                 under the fair value method of that  Statement.  The fair value
                 for these  options was  estimated  at the date of grant using a
                 Black-Scholes   option   pricing   model  with  the   following
                 weighted-average  assumptions for 1997 and 1996,  respectively:
                 risk-free  interest rates of 6.1% and 6.8%;  dividend yields of
                 2.6% and 1.8%;  volatility factors of the expected market price
                 of  the   Company's   common  stock  of  65%  and  69%;  and  a
                 weighted-average expected life of the options of seven years.

                 The Black-Scholes  option valuation model was developed for use
                 in  estimating  the fair value of traded  options which have no
                 vesting  restrictions and are fully transferable.  In addition,
                 option valuation models require the input of highly  subjective
                 assumptions including the expected stock price volatility.


                                     F - 15

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996



NOTE  10  -      STOCK OPTIONS (Continued):

                 Because   the   Company's    employee    stock   options   have
                 characteristics  significantly  different  from those of traded
                 options,   and  because   changes  in  the   subjective   input
                 assumptions can materially  affect the fair value estimate,  in
                 management's  opinion,  the existing  models do not necessarily
                 provide a  reliable  single  measure  of the fair  value of its
                 employee stock options.

                 For purposes of pro forma disclosures, the estimated fair value
                 of the options is amortized to expense over the options vesting
                 period. The Company's pro forma information follows:

                                                       1997               1996
                                                   -----------        ----------

                       Net loss:
                          As reported              $(4,436,745)       $(570,769)
                          Pro forma                 (4,883,470)        (570,769)

                       Basic loss per share:
                          As reported                    (1.95)            (.34)
                          Pro forma                      (2.15)            (.34)

                 A summary of stock option activity, and related information for
                 the years ended December 31, 1997 and 1996 follows:

                                                                       Weighted
                                                                       Average
                                                                       Exercise
                                                          Options      Price
                                                          -------      -----

                          Granted                         491,950      $ .45
                          Exercised                       -              -
                          Canceled                        -              -
                                                          -------      ----

                       Outstanding, December 31, 1996     491,950        .45
                                                                       ------

                          Granted                         278,311       4.04
                          Exercised                       410,417)       .32
                          Canceled                        (55,000)      1.69
                                                          -------      -----

                       Outstanding, December 31, 1997     304,844       3.69
                                                          =======       ====

                       Weighted average fair value of
                          options granted during the
                          year ended:

                          December 31, 1996                            $8.62
                          December 31, 1997                            $7.67

                       Options exercisable:
                          December 31, 1996               389,950
                          December 31, 1997                49,533



                                     F - 16

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996



NOTE  10  -      STOCK OPTIONS (Continued):

                 Exercise prices for options outstanding as of December 31, 1997
                 ranged  from  $.50 to $6.75  per  share.  The  weighted-average
                 remaining contractual life of these options is seven years.

                 In 1997, the Company  established  the 1997 Qualified  Employee
                 Stock  Purchase  Plan which  provides  for the grant of up to a
                 total of  250,000  options  intended  to  qualify  as  employee
                 incentive stock options.  The exercise price of options granted
                 under this plan shall be the lesser of 85% of fair market value
                 of the  Company's  common shares at date of grant or 85% of the
                 fair market value on the exercise date. In December 1997,  this
                 plan was amended to commence on January 1, 1999.


NOTE  11  -      ECONOMIC DEPENDENCY:

                 To date, the Company's revenues have been materially  dependent
                 on a limited  number of customers.  The nature of the Company's
                 business  (see  Note  1) is such  that  during  any  individual
                 accounting  period it will license its  software  products to a
                 limited number of significant customers. In addition,  revenues
                 from the  Company's  products  are  primarily  from the  public
                 safety and law enforcement markets.

                 Also, the Company  currently relies on a limited number of (two
                 or three)  software  licensors of its main  computer  operating
                 system. The Company cannot assure that if any of these licenses
                 are terminated,  it will be able to replace those licenses on a
                 timely basis.


NOTE  12   -     INCOME TAXES:

                 The income tax expense (benefit) is comprised of the following:

                                                  For the Year Ended
                                                      December 31,
                                                  --------------------
                                                  1997            1996
                                                  ----            ----
                            Current:
                                Federal       $    -            $(50,709)
                                State              -             (18,622)
                            Deferred:
                                Federal            -              (4,165)
                                State              -              (2,035)
                                              ------------    ----------
                                              $    -            $(75,531)
                                              ============      ========

                 The Company has net operating loss carryforwards as of December
                 31, 1997, of  approximately  $3,200,000,  ($400,000 at December
                 31, 1996) which may be applied  against future taxable  income,
                 and which expire in various years beginning  after 2011.  Since
                 there is no  assurance  that the Company will  generate  future
                 taxable income to utilize the deferred tax asset resulting from
                 its net  operating  loss  carryforwards,  the  Company  has not
                 recognized this asset.


                                     F - 17

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996



NOTE 12   -    INCOME TAXES (Continued):

               Due to the  carryback  of the 1996 loss to  previous  years,  the
               Company will recoup the maximum  amount  refundable  for taxes it
               paid. The following is a reconciliation  of the maximum statutory
               federal tax rate to the Company's effective tax rate:

                                                       For the Year Ended
                                                           December 31,
                                                      --------------------
                                                      1997            1996
                                                      ----            ----

                       Federal statutory rate           -           (34.0%)
                       State income taxes               -             (7.0)
                       Other - benefit from tax
                            loss carryback              -             29.3
                                                     --------       -------
                                                         -           (11.7%)
                                                     ========       =======

NOTE  13   -     COMMITMENTS:

          (a)  In  October  1996,  the  Company  entered  into a lease,  for its
               current executive offices,  which provides for base annual rental
               of  $85,000.  This  lease,  which is for an initial  term of five
               years, has scheduled annual increases,  and can be renewed for an
               additional  five year  period.  The total amount of the base rent
               payments  is being  charged to expenses  using the  straight-line
               method over the term of the lease.  The  Company  has  recorded a
               deferred  credit to reflect the excess of rent  expense over cash
               payments  since the  inception  of this  lease.  Previously,  the
               Company was occupying  space pursuant to a lease which expired in
               March  1997.  The  Company  elected to write-  off the  remaining
               balance of unamortized  leasehold  improvements on this old space
               of $5,378 during 1996.  Rent expense for the years ended December
               31, 1997 and 1996 aggregated $99,770 and $48,677, respectively.

                 At December 31, 1997, future minimum rentals are as follows:


                       1998                      $  87,616
                       1999                         87,975
                       2000                         93,075
                       2001                         72,675
                                                ----------
                       Total                      $341,341
                                                  ========

        (b)    The  Company  also  leases  certain  types  of  equipment   under
               operating  leases which  expire at various  dates  through  1999.
               Lease  payments,  which  are  charged  to  operations,  aggregate
               approximately $1,100 per month.


                                     F - 18

<PAGE>



                                Compu-DAWN, Inc.
                          NOTES TO FINANCIAL STATEMENTS
                           DECEMBER 31, 1997 AND 1996



NOTE  13   -     COMMITMENTS (Continued):

        (c)      Effective   October  1,  1996,  the  Company   entered  into  a
                 three-year  employment agreement with the Chairman of its Board
                 of  Directors,  whereby he will also  serve as Chief  Executive
                 Officer of the  Company.  This  agreement  provides  for annual
                 compensation  of $250,000  and a  performance  bonus based on a
                 fixed formula.

                 Effective   October  1,  1996,  the  Company   entered  into  a
                 three-year  employment  agreement  with its President and Chief
                 Operating   Officer.   This   agreement   provides  for  annual
                 compensation  of $125,000  and a signing  bonus of $15,000.  In
                 December 1997, the Company entered into  negotiations with this
                 officer  with  regards  to  a  proposed   termination   of  his
                 employment agreement. Under the proposed termination agreement,
                 this  officer  would  receive  severance  pay of  approximately
                 $216,000  and would  sell a  substantial  portion of his equity
                 share  holdings  in  the  Company  pursuant  to  the  Company's
                 Registration  Statement  on Form S-8 and  Rule 144  promulgated
                 under the  Securities  Act of 1933,  as  amended  and/or to the
                 current  Chairman  and  Chief  Executive   Officer  and/or  his
                 designee (see Note 5). This termination  agreement was executed
                 on March 17, 1998.

                 The  agreements  with  both  of  these  officers   provide  for
                 continuing   automatic  one  year   extensions,   increases  as
                 determined by the Board of Directors,  annual  bonuses based on
                 sales and pretax income and include  provisions for termination
                 and  covenants  not to compete.  In  addition,  the  agreements
                 provide for common  stock  option  grants  based upon levels of
                 Company earnings.

                 In  January  1997,  the  Company   entered  into  a  three-year
                 employment agreement with an employee to serve as the Company's
                 Chief Technology Officer. Such agreement provides for an annual
                 base salary of  $200,000,  $225,000  and $250,000 in the first,
                 second  and  third  years,  respectively.  Other  terms of this
                 employment  agreement  conform  in  structure  to the  material
                 provisions of the employment agreements described above.

                                     F - 19

<PAGE>











                                   SIGNATURES

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

                                     COMPU-DAWN, INC.


                                     By:/s/ Mark Honigsfeld
                                         Mark Honigsfeld, Chairman of the Board


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


      Signature                  Capacity                       Date


/s/ Mark Honigsfeld           Chairman of the Board          March 31, 1998
----------------------
Mark Honigsfeld               (Principal Executive,
                              Financial and Accounting
                              Officer)


/s/ Dong W. Lew               President and Director         March 30, 1998
----------------------
 Dong W. Lew


/s/ Louis Libin               Director                       March 30, 1998
----------------------
 Louis Libin


/s/ William D. Rizzardi       Director                       March 31, 1998
----------------------
 William D. Rizzardi


/s/ Harold Lazarus            Director                       March 28, 1998
----------------------
 Harold Lazarus, Ph.D



<PAGE>