U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
(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

            Transition report under Section 13 or 15 (d) of the Securities 
            Exchange Act of 1934 (No fee required)

         For the transition period from __________ to __________

         Commission file number 0-13049

                          ALYDAAR SOFTWARE CORPORATION
                 (Name of Small Business Issuer in its Charter)

       North Carolina                              13-3006788
(State of Other Jurisdiction of                  (I.R.S. Employer
 Incorporation or Organization)                  Identification No.)

              2101 W. Rexford Road, Charlotte, North Carolina 28211
               (Address of Principal Executive Offices) (Zip Code)

                                 (704) 365-2324
                (Issuer's Telephone Number, Including Area Code)

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

                                  Common Stock
                                (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 past 90 days.
Yes    X      No_____

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of Regulation S-K is not contained in this form, and no disclosure will
be contained,  to the best of  registrant's  knowledge,  in definitive  proxy or
information  statements  incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.   X

         State  the  aggregate   market  value  of  the  voting  stock  held  by
non-affiliates  computed by  reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of a specified date within
the past 60 days. $173,952,160 as of March 30, 1998.

Documents Incorporated by Reference:  See Footnotes to Exhibits


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                                     PART I

Item 1.  Business

Background

         Alydaar Software Corporation  ("Alydaar" or the "Company") is presently
engaged  in  the  business  of   providing   software   reengineering   services
specializing in the correction of existing  mainframe  computer software systems
to manage the year 2000 and thereafter.


         Alydaar  was  founded in 1982 as a Utah  corporation  under the name of
Enertronix  Corporation  ("Enertronix").  In 1992 Enertronix changed its name to
Alydaar.  Alydaar later changed its corporate domicile to North Carolina through
a same day merger with and into a North Carolina corporation,  Daar Corporation,
established  by Alydaar for that express  purpose.  Alydaar became the surviving
corporation.

         The Company commenced business in 1992. Initially,  the Company focused
on research  and  development  of  proprietary  software  known as  SmartCode(R)
("SmartCode") to provide automated software re-engineering services specializing
in computer language  translation and systems  migration.  SmartCode is computer
language and platform  independent  with the  capability  of  understanding  all
computer  language  dialects,  including  multi-dialect  languages such as PL/1,
COBOL,  Fortran and Natural.  In 1994 and 1995, the Company  performed  software
language translation services for such companies as The First Boston Corporation
and Stratacom,  Inc. In 1995 the Company  concluded that SmartCode could be used
for more  complex  tasks than  language  translation  and devoted  its  efforts,
utilizing the basic framework of SmartCode,  to develop a proprietary  detection
and solution  process to address the forthcoming  year 2000 ("Y2K") problem (the
"Y2K Problem").

         The Y2K  Problem  arises  from the fact  that  most  software  programs
automatically  assume the first two digits of any year  reference  are "19," and
thus the year 2000 and  thereafter  will be read as "1900,"  "1901," and etc. If
the software is not  converted  to correct the Y2K Problem,  the two digit field
"00" could result in improper  calculations  and, in many cases,  cause programs
not to work properly or cease to function.  The Gartner Group,  Inc., one of the
leading  technology and  consulting  firms,  estimates  that  correcting the Y2K
Problem   ("Remediation")   will  involve   expenditures  by  corporations   and
governments  ranging from $300 to $600  billion  globally.  The standard  method
employed in estimating  the cost for  Remediation  is to determine the number of
lines of code  ("LOC")  that are  contained  within  each  user's  programs  and
multiplying it times a cost per LOC.  Industry wide, the costs per LOC generally
range  from $.30 to $1.50.  It is  anticipated  that such  costs  will  increase
significantly as the year 2000 approaches.

         Worldwide,  large  business  and  governmental  organizations  rely  on
large-scale  computer  applications  to  help  manage  their  businesses.  These
applications, many of

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which are  mission-critical,  contain  the core  knowledge  and  processes  that
support  the  major  operations  of  these   organizations.   Examples  of  such
applications  include  insurance  claims  processing  systems,  on-line  banking
systems,  manufacturing systems and utility and telephone billing systems. These
mission-critical  applications primarily run on large, mainframe computers using
programs written in a variety of mainframe programming languages.  Most of these
applications must be remediated to become Y2K compliant.

         Because  most  businesses,  large or  small,  and  governments  rely on
"mission-critical" software to operate their core business functions, failure to
correct  latent  Y2K  software  problems  will  result in  malfunction  of these
essential  processes.  The result of these malfunctions can range from incorrect
customer billings to complete shutdown of the companies' operations.  Therefore,
there is no alternative to addressing and eliminating the latent defects.

         Between 1995 and the first quarter of 1997, the Company  devoted all of
its  efforts  to  extensive  research  in order to perfect  SmartCode  as a cost
effective and fully automated, artificial intelligence-based solution to the Y2K
Problem.  The  goal was to  develop  SmartCode  and a  scalable  and  repeatable
methodology  which would not be disruptive or interfere with the operations of a
client's normal business processes.

         As a result  of the  research  and  development,  the  Company  has now
developed  a  Remediation  solution to the Y2K Problem  utilizing  SmartCode  to
automatically  identify and remediate a client's Y2K Problem.  Most importantly,
SmartCode can automatically  remediate at least 15 different  computer languages
and dialects. It is this latter capability which presently distinguishes Alydaar
from its  competitors,  who mainly have  automated  solutions to  remediate  the
computer   language  COBOL  only.  The  Company   believes  that  its  automated
Remediation  capabilities  for  computer  languages  other than COBOL gives it a
competitive advantage.

         Alydaar's  approach to Y2K services consists of a step-by-step  process
starting with a methodology  for  extraction of the clients'  software  programs
which the  clients  deem  necessary  to  correct  and  delivery  of this code to
Alydaar.  Once Alydaar  receives the programs,  they are processed and corrected
and then sent back to the clients for testing and  reintroduction  back into the
clients' production system.  Since all Remediation is performed at the Company's
facilities, the Company believes that it is saving its clients time and money by
not  using  the  clients'  valuable  computer  resources  and  personnel  during
Remediation.  Each step of Alydaar's factory process is controlled by procedures
and checks to insure the most accurate results possible. In addition,  extensive
use of Alydaar's  proprietary  SmartCode  software reduces manual corrections to
the minimum extent  practicable  resulting in a low defect rate on code returned
to the  client.  Because  of  Alydaar's  approach,  a  minimum  amount of client
software must be changed.

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Present Operations

         Since the second  quarter of 1997,  the Company has been  engaged  full
time in  performing  Remediation  services  pursuant to  contracts  with various
corporations  as  well as  state  governments.  Prior  to the  Company  actually
providing  its  services,  the client is  required  to package  its  software in
accordance  with  Alydaar's  Guide to Packaging.  Once the client's  software is
received at Alydaar and properly compiled, there are five phases involved in the
Remediation  process.  In  Phase  One,  SmartCode  scans  a  client's  code  and
automatically  identifies  the areas for  Remediation.  Once this is  completed,
Phase Two is triggered,  which involves the manual verification of the Phase One
results.  Phase Three  involves an  automatic  process  that  inserts  code that
corrects the Y2K Problem. Phase Four involves another manual verification of the
output of Phase Three.  Finally,  Phase Five involves an automated quality check
to insure that the client's modified code is syntactically  correct.  The entire
process,  depending upon the size of the client's  applications and the computer
language(s) present, can take from three to eight weeks for completion.

         Once the Company has completed its Remediation, the remediated software
is returned to the client.  The client generally has sixty (60) days to test the
code to identify  any Y2K issues,  which the Company  will then  correct free of
charge. The Company prides itself on the fact that its error rate at the current
time is approximately  2.7 errors per 1,000,000 lines of code, which the Company
believes  is  substantially  lower  than  the  prevailing  market  average.  The
Company's  low error  rate  serves to attract  customers  because  they  believe
Alydaar's  process reduces testing time and costs.  The Company believes that it
can  further  improve on its error rate  through  additional  stringent  quality
controls.

         The  standard  contract  employed  by the  Company  generally  requires
payment of an initial  percentage of the contract  price after receipt and count
of the client's code, a further percentage upon delivery of the code back to the
client and a remaining small percentage at the end of the testing period. At the
inception,  the Client is quoted a price for each LOC which can vary as a result
of the number of LOC and the complexity of the undertaking.

         In addition to normal Remediation  services,  the Company also provides
auditing  services.  The  auditing  services  involve a review  by the  Company,
through  SmartCode,  of a client's  software  which has been  remediated  either
internally or by a third party.  Many  companies  that have  performed  internal
Remediation  are beginning to question the accuracy of their own Remediation and
are now looking for third-party validation. The Company believes that confirming
the accuracy of already remediated  software will become a significant source of
revenues in the future.

         For the year ended  December 31, 1997, the Company  performed  services
under 41  contracts,  many with major  corporations.  Some of Alydaar's  clients
included E.I. Dupont  DeNemours & Co., 3M Corporation,  British Airways PLC, AER
Lingus,  Ltd., Nabisco,  Inc., R.J. Reynolds Tobacco Company,  and Smith Barney,
Inc.

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Marketing

         Over  the  last  few  years,   computer-dependent   companies  and  the
government  have generally been slow to address the Y2K Problem for a variety of
reasons.  To date  there has been a general  lack of  awareness  of the  pending
problem,  an  unwillingness  to admit  that a  potential  problem  exists  or an
unwillingness to immediately  address the problem because of the high costs that
must be taken as an expense in the year in which the costs are  incurred,  which
could materially affect a company's  earnings.  As a result,  many companies and
governments  have failed to budget for an expenditure that could be substantial.
Many  companies  and  governments  are just now  beginning  to  address  the Y2K
Problem.

         The Company  currently  conducts  direct sales  through  sales  offices
located  throughout the United States and Europe with a staff of 25 salespeople.
The salespeople receive both a base salary and a commission.  Names of potential
corporate  clients are obtained  through a variety of sources,  including master
databases which the Company has purchased from various sources. The Company also
markets its services through advertising in major trade magazines, attendance at
various trade shows and telemarketing.

         The Company  has  recently  introduced  a sales  promotion  whereby the
Company demonstrates  SmartCode's Remediation capabilities by remediating 10,000
LOC at no charge to a prospective  client.  In this way, the Company  introduces
its services to  prospective  clients to determine  if their  software  requires
Remediation  or to  provide  a free  check  on  the  accuracy  of  any  previous
Remediation  performed  by the  prospective  client or a third  party.  This new
program  has  generated  interest  in  Alydaar's  services  and  resulted in new
contracts.

         The  scalability  of the Company's  Remediation  process  enables it to
service  clients with as little as 1,000,000  LOC or clients with 100 million or
more LOC within the same time period.  The Company  currently  targets companies
with more than $500  million or more in revenues or  companies  or  governmental
agencies  which have a Y2K budget of $1,000,000  or more.  While the Company has
been successful in obtaining contracts following this marketing strategy,  there
can be no assurance  that the Company  will be  successful  in the future.  (See
"Risk Factors - Uncertainty of Current and Future Demand for Y2K Solutions".)

         In addition to direct marketing,  the Company has entered into business
arrangements  with several other computer software service providers under which
those providers recommend Alydaar for code Remediation  services.  In return the
providers receive either a discount to Alydaar's list prices or a commission.

         In  October  1997,  Alydaar  entered  into a  one-year  agreement  with
Compuware Corporation ("Compuware").  The agreement calls for Alydaar to perform
Remediation services as a subcontractor for Compuware's customers.  Compuware is
a major provider

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of Y2K testing products and services with at least 11,000  customers  worldwide.
Under the arrangement,  Alydaar will receive a percentage of its normally quoted
list  prices  for such  services.  The  Company  has  already  received  several
significant contracts through Compuware's  recommendation and believes that this
relationship will produce significant revenues in the future.

         The Company  also  markets  its  services  internationally  through its
wholly owned subsidiary,  Alydaar International Ltd. ("Alydaar  International"),
which the  Company  acquired  in July 1997.  Prior to the  acquisition,  Alydaar
International  marketed the Company's services through an exclusive  arrangement
which permitted the use of the name "Alydaar" for the United Kingdom and certain
other designated European countries.  The subsidiary was acquired by an exchange
of stock and the  issuance  of  warrants  and was  accounted  for as a  purchase
transaction.  (See  "Financial  Information  -  Footnotes  to Audited  Financial
Statements").

         To further  expand its  international  business,  the  Company has also
entered into marketing alliances with computer services  organizations to market
Alydaar's services in countries not covered by the Company's direct sales. These
countries  include South Africa,  Australia,  New Zealand,  Monaco (for Poland),
Switzerland,  Norway, Sweden and Denmark.  These alliances generally provide for
the companies to market  Alydaar's Y2K services to their customers and receive a
commission or discount to list prices.

         The Company also intends to target European financial  institutions and
other  affected  businesses  for an  automated  solution  to the  conversion  of
software for the change of the various  European  currencies to the "Euro" which
is  anticipated  to begin by January 1, 1999.  The Gartner Group Inc.  estimates
that the  changeover  to the "Euro"  will cost $150  Billion to $400  Billion to
upgrade existing computer systems for financial  institutions,  other businesses
and  governments.  There can be no  assurance  that the Company  will be able to
effectively penetrate this market since at the present time the Company is still
in the process of developing a SmartCode  tool for the  conversions  and as such
may not be successful. In addition,  competitors may be much further advanced in
their  development of an effective  solution and may be able to introduce  their
solution earlier than Alydaar can.

Competition

         The Company is  confronted  with two  distinct  levels of  competition:
other  companies  that compete  directly with Alydaar by offering other types of
Remediation  and software  services and those companies which use their internal
technical staff to complete Remediation.

         On the first level, the Company presently competes with companies which
are much better  established,  more widely known,  have been  offering  computer
software  services for a much longer period and have far greater  resources than
the Company.  Some of the Companies are International  Business  Machine,  Inc.,
Computer Associates  International Inc., Computer Horizons, Inc. and Keane, Inc.
In addition, within the last six months, there

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has  been  a  proliferation  of  new  companies  claiming  to  have  Remediation
capabilities.  The Company does not believe  that these new  emerging  companies
pose a  significant  competitive  threat to the Company's  success  because they
appear inadequately staffed, and, as yet, have no proven track record.  However,
there is always the possibility that some of these companies could be successful
and therefore could pose competition for the Company.

         The second  level of  competition  arises from the fact that many large
businesses  plan to do their own  Remediation  by using their own  personnel and
licensing of Remediation  "tools" which are marketed by certain  vendors such as
Viasoft,  Inc. and Peritus Software Services,  Inc. While this poses significant
competition,  the Company  believes that as its services and  reputation  become
better known in the  marketplace,  companies that are now  considering  in-house
Remediation may decide to use the Company's services.  In addition,  the Company
believes that  companies  using internal staff who are not familiar with the Y2K
Problem might fail in their efforts,  which might create  opportunities  for the
Company to provide its services.  The Company  believes that it can successfully
demonstrate  that its Y2K approach is a more  cost-efficient  and time expedient
solution,  especially  when  the  Company's  error  rate  demonstrates  that the
customer could possibly eliminate or minimize unit testing.

Personnel

         As of December  31, 1997 the Company had 260  employees.  Additionally,
the  Company  had 43  contract  programmers  working at its site.  The  contract
programmers were supplied by independent  agencies and Alydaar has the option to
hire these  programmers as full-time  Alydaar employees after a six-month period
of time. Of the workforce,  178  individuals  are engaged in  production,  62 in
research and development,  25 in sales, and the balance of 38 in  administration
and systems support.

         The Company  recognizes  that it may require more employees as business
increases.  To date,  the Company has been  successful in  recruiting  qualified
personnel  principally  within the Southeastern  United States and, as such, the
Company believes for the near future it will be able to satisfy its requirements
from this labor pool. (See "Risk Factors - Dependence on Key Personnel.")

Patents, Trademarks and Intellectual Property

         The  Company  holds  registered  trademarks  in the  United  States for
Alydaar(R) and  SmartCode(R) and has filed for protection of these trademarks in
Europe.

         In addition, Alydaar relies on a combination of copyright, trade secret
and  trademark  laws,  and  contractual  provisions to establish and protect its
rights to its  proprietary  technology.  The  Company  protects  the source code
version of its  products  as a trade  secret and as an  unpublished  copyrighted
work. In addition, the Company has adopted stringent internal security measures.
Despite these precautions, it may be possible for

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unauthorized  parties to copy  certain  portions  of the  Company's  software or
reverse  engineer  or obtain and use  information  that the  Company  regards as
proprietary.  The Company has no patents and existing copyright and trade secret
laws offer only limited  protection.  (See "Risk  Factors - Inability to Protect
Proprietary Rights".)

Future Plans and Strategy

         The  Company  recognizes  that the life  cycle of the Y2K  business  is
limited.  While computer  industry  experts,  such as the Gartner  Group,  Inc.,
estimate  that the Y2K  business  will  continue at least  through the year 2003
because the limited amount of time  remaining  before January 1, 2000 is forcing
companies  and  governmental  authorities  to focus their  immediate  efforts on
remediating only their "mission critical" systems,  the Company anticipates that
there  will be a decline  in the  volume of Y2K  business  after the year  2000.
Therefore,  in view of the  short  life-cycle,  the  Company  has  developed  an
agressive  acquisition  strategy to acquire  companies  which are engaged in the
business  of  providing  a broad  range of  computer  services  and  products to
position the Company for  continued  growth after the year 2000.  At the present
time, the Company is engaged in preliminary discussions with several acquisition
candidates.  The Company  believes  that the current  general trend is for large
companies to retain independent contractors to manage and to take responsibility
for day-to-day operations of their Information Technology departments,  which is
known as "Outsourcing" or "Systems Integration." The Company intends to position
itself as an outsourcer or systems integrator  through its acquisition  strategy
and also by leveraging existing client relationships.  Utilizing SmartCode,  the
Company  believes  that it can automate  many of the  outsourcing  processes and
tasks,  and,  as a  result,  achieve a  significant  competitive  advantage  and
increased profit margins from  outsourcing.  However,  there can be no assurance
that the Company will be successful in its  acquisition  strategy or penetrating
other markets.  Moreover,  such acquisition  strategy will be dependent upon the
ability of the Company to raise sufficient  additional  capital through internal
cash  flow or debt or  equity  offerings.  There  can be no  assurance  that the
Company  will be  successful  in raising  such  additional  capital.  (See "Risk
Factors - Future  Acquisitions"  and "Risk Factors - Technological  Changes" and
"Dependence on Acquisitions.")

         In  addition,  the  Company  currently  has  approximately  60  of  its
employees engaged in research and development activities,  including the further
adaptation of SmartCode to offer additional  software  re-engineering  services,
such as  conversion  of the  European  currencies  into the "Euro" as  described
above;   conversion  of  financial   institutions'  software  for  the  mandated
conversions  from  fractions  to decimals for stock  transactions;  and to offer
sophisticated  language  translation  services such as converting  software code
from COBOL 68 to COBOL 370.

Risk Factors

         This Annual  Report on Form 10-K  contains  forward-looking  statements
within the meaning of Section 27A of the  Securities Act of 1933 and Section 21E
of the Securities

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Exchange  Act of  1934.  Actual  results  could  differ  materially  from  those
projected in the forward-looking  statements as a result of the risk factors set
forth below and elsewhere in this Annual Report on Form 10-K. In evaluating  the
Company's  business,   prospective   investors  should  carefully  consider  the
following factors in addition to the other information  presented in this Annual
Report.

    -    Continuing Losses

         For each  year  from  December  31,  1994 to  December  31,  1997,  the
Company's  financial  statements  have  reflected  operating  losses,  and as of
December 31, 1997, the Company has an accumulated deficit of $14,094,107.  There
can  be  no   assurance   that  the  Company  will  ever  achieve  an  operating
profitability on a quarterly basis, or if achieved,  whether the Company will be
able to sustain an operating profitability in the future.

    -    Possible Fluctuation of Operating Results

         The  Company  has   experienced   fluctuations   in   revenues.   These
fluctuations  are due,  in part,  to the fact  that the  Company  only  began to
generate  significant  revenues in the second quarter of 1997,  when it began to
receive deliveries of LOC for Y2K Remediation services. The timing of completion
of customer engagements, especially at or near the end of any accounting period,
could cause  variations  in  operating  results  from period to period and could
result in  quarterly  losses.  In  addition,  the Company has  experienced,  and
expects to  experience  in the future,  delays  arising  from the  inability  of
clients to extract and correctly package software from their mainframe  systems.
These delays could result in variations in operating  results  during  quarterly
and year-end  periods.  Finally,  variations in operating results may occur as a
result of a number of other  factors  such as  employee  hiring,  demand for the
Company's  services,  competitive  conditions in the industry,  foreign currency
exchange rates,  changes in pricing  policies by the Company or its competitors,
and the amount expended for research and development.

    -    Intense Competition

         The market for the Company's Y2K services is intensely  competitive  at
two  different  levels:  Remediation  performed  in-house  and  Y2K  Remediation
software and services offered by direct competitors of the Company, many of whom
are  better  established  and  have far  greater  resources  than  the  Company.
Likewise, the solutions for Y2K Remediation are characterized by rapid change in
technology and user needs and the frequent  introduction  of new products.  (See
"Description of Business - Competition.")

    -    Uncertainty of Current and Future Demand for Y2K Solutions

         The Company is currently  focusing all of its efforts on the  marketing
and sale of its Y2K services.  Although the Company believes that the market for
solutions  to  the  Y2K  Problem  will  grow  significantly  as  the  year  2000
approaches,  there can be no  assurance  that this  market  will  develop to the
extent anticipated by the Company. In addition,

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organizations affected by the Y2K Problem may not be willing or able to allocate
the  financial  or other  resources  required to address the problem in a timely
manner.  Many organizations may attempt to resolve the problem internally rather
than purchase tools and services from outside firms such as the Company.  Due to
these  factors,  development  of the market for the Y2K Problem is uncertain and
unpredictable.  If the market fails to increase,  or increases  more slowly than
anticipated,  the Company's business,  operating results and financial condition
could be materially  and  adversely  affected.  Furthermore,  the demand for Y2K
products and  solutions is likely to diminish  rapidly after the year 2000. As a
result, the Company could experience a significant  decline in revenues,  unless
it is able to leverage customer  relationships and knowledge of customer systems
derived from Y2K services to market other products and services  beyond the year
2000.  There  can be no  assurance  that  the  Company  will be able to  replace
revenues  related  to Y2K  services  and  solutions  after the year  2000.  (See
"Business - Future Plans and Strategy.")

    -    Dependence on Acquisitions

         In order for the Company to sustain its growth and viability  after the
year 2000, the Company intends to acquire  companies which offer a broader range
of computer  services and products.  There can be no assurance  that the Company
will be able to complete  any such  acquisitions.  Moreover,  the  Company  will
require  additional  capital to finance  such  acquisitions  and there can be no
assurance  that the Company will be  successful in raising  additional  capital.
(See "Business - Future Plans and Strategy.")

    -    Inability to Protect Proprietary Rights

         The Company regards its software  products and solutions as proprietary
and attempts to protect them under a combination of copyright,  trade secret and
trademark  laws as well as by  contractual  restrictions  on employees and third
parties. Despite these precautions,  it may be possible for unauthorized parties
to copy the Company's  software or to reverse  engineer or otherwise  obtain and
use information the Company regards as proprietary.  The Company has no patents,
and existing  trade secret and copyright  laws provide only limited  protection.
Certain  provisions  of the client  agreements  generally  used by the  Company,
including provisions protecting against unauthorized use, copying,  transfer and
disclosure,  may be unenforceable under the laws of certain  jurisdictions,  and
the Company is required to  negotiate  limits on these  provisions  from time to
time.  In  addition,  the laws of some  foreign  countries  do not  protect  the
Company's  proprietary  rights to the same  extent as do the laws of the  United
States.  There can be no  assurance  that the steps taken by the Company will be
adequate  to  deter  misappropriation  of  proprietary  information  or that the
Company will be able to detect  unauthorized use and take  appropriate  steps to
enforce its intellectual property rights.

         Significant  and protracted  litigation may be necessary to protect the
Company's   intellectual   property  rights,  to  determine  the  scope  of  the
proprietary  rights  of others or to defend  against  claims  for  infringement.
Although the Company is not currently involved in any litigation with respect to
intellectual property rights, infringement claims against

                                        9

<PAGE>



software developers are likely to increase as the number of functionally similar
products in the market  increases.  There can be no assurance  that  third-party
claims,  with or  without  merit,  alleging  infringement  will not be  asserted
against the Company in the future.  Such  assertions  can be time  consuming and
expensive  to defend and could  require the Company to cease the use and sale of
infringing  products and services,  to incur  significant  litigation  costs and
expenses  and to  develop  or  acquire  non-infringing  technology  or to obtain
licenses to the alleged infringing technology.  If an infringement claim against
the Company were successful, there can be no assurance that the Company would be
able to develop or acquire  alternative  technologies or to obtain such licenses
on  commercially  acceptable  terms.  (See  "Business - Patents,  Trademarks and
Intellectual Property.")

    -    Dependence on Major Customers

         During fiscal 1997, 3M Corporation,  Science Applications International
Corporation (SAIC) and GE Capital Global Consumer Finance LTD accounted for 14%,
12% and 9% of the Company's  revenues,  respectively.  The Company believes that
these customers may require additional  Remediation services for other divisions
in the  future,  but these  companies  are not  obligated  to use the  Company's
services  exclusively.  As such,  the Company may not receive future work orders
from those customers, which could affect the Company's future revenues. However,
at the present time, the Company's customer base has broadened.  Therefore,  the
dependence  on  these  large  customers  is  decreasing,  but the  loss of these
relationships could affect Alydaar's future strategy after the year 2000.

    -    Risks from International Operations

         Approximately 32% of the Company's total consolidated  revenues for the
year ended  December 31, 1997 were  attributable  to  international  sales.  The
Company  believes  that  international  business  will account for a significant
portion of its revenues in the future. International operations are subject to a
number of risks, including possible exchange rate fluctuations and difficulty in
enforcing agreements and collecting accounts receivable.  The Company intends to
mitigate its exchange rate risk by requiring payment in US dollars. In addition,
the  laws of  certain  countries  do not  protect  the  Company's  products  and
intellectual  property  rights to the same  extent as do the laws of the  United
States. There can be no assurance that the factors described above will not have
an  adverse  effect  on  the  Company's  future   international   revenues  and,
consequently,  on the Company's  business,  results of operations  and financial
condition.  (See "Management's Discussion and Analysis of Consolidated Financial
Condition  and  Results of  Operations"  and  "Business - Sales,  Marketing  and
Distribution.")

    -    Dependence on Key Personnel

         The Company's  success will depend,  in part, upon the retention of key
senior management and technical personnel.  At the present time the Company does
not have employment agreements with its key personnel,  nor does it maintain key
man life insurance on any of these persons.  Further, the Company's success will
also depend in part on its

                                       10

<PAGE>



ability to hire and retain  skilled  technical  personnel.  Although the Company
believes it will be able to hire such skilled technical personnel,  an inability
to do so could materially  adversely affect the Company's ability to deliver and
enhance its services.

    -    Ability to Manage Change and Rapid Growth

         The Company  expects its  business to continue to undergo  rapid growth
and expansion.  If the Company experiences such rapid growth and expansion,  the
Company's  profitability  will  depend on,  among other  things,  its ability to
manage a larger  number of  personnel  and to  handle  those  problems  normally
associated with rapid growth.

    -    Possible Volatility of Stock Price

         The  Company's  stock  price has been  highly  volatile  since it first
started trading.  The Company believes that factors such as awareness of the Y2K
Problem,  quarterly fluctuations in results of operations,  announcements of new
acquisitions  by  competitors,  change  in  revenue  or  earnings  estimates  by
securities analysts or other factors may cause the market price of the Company's
stock to continue to fluctuate, perhaps substantially. In addition, stock prices
for many technology companies fluctuate widely for reasons that may be unrelated
to operating  results.  Due to market and securities  analysts'  expectations of
continued  growth and the  higher  price/earnings  ratio at which the  Company's
stock may trade, any shortfall in meeting such expectations may have a rapid and
significant  adverse  effect  on  the  trading  price  of the  Company's  stock.
Fluctuations in the market price of the Company's stock may, in turn,  adversely
affect the Company's ability to complete any targeted  acquisitions,  its access
to  capital  and  financing  and its  ability to  attract  and retain  qualified
personnel. (See "Market for the Company's Common Stock.")

    -    Influence by Existing Shareholder

     Mr. Gruder,  the Chief  Executive  Officer and President,  is presently the
beneficial owner of approximately 40% of the outstanding shares of the Company's
Common Stock.  As such, Mr. Gruder is in a position to influence the election of
directors and generally to direct the affairs of the Company.

    -    Unlikely to Declare Dividends

         The Company has never  declared or paid cash  dividends  on its capital
stock and does not  anticipate  paying  any cash  dividends  in the  foreseeable
future.  The Company currently  anticipates that it will retain future earnings,
if any, to fund the development and growth of its business.

    -    Forward-Looking Statements and Associated Risks

         This  Annual  Report  on Form  10-K  contains  certain  forward-looking
statements,  including (i) the potential size of and  anticipated  growth in the
Y2K compliance market; (ii)

                                       11

<PAGE>



anticipated  trends  in  the  Company's   financial  condition  and  results  of
operations  (including  expected  changes  in the  Company's  gross  margin  and
general,  administrative  and selling  expenses);  (iii) the Company's  business
strategy for growth in its business for Y2K  compliance,  and (iv) the Company's
ability to  distinguish  itself from its current and future  competitors.  These
forward-looking   statements   are  based  largely  on  the  Company's   current
expectations and are subject to a number of risks and uncertainties. In addition
to the  other  risks  described  elsewhere  in the  "Risk  Factors"  discussion,
important  factors to consider in  evaluating  such  forward-looking  statements
include (i) the shortage of reliable  market data  regarding  the market for Y2K
solutions;  (ii)  changes in external  competitive  market  factors  which might
impact  trends in the  Company's  results  of  operations;  (iii)  unanticipated
working  capital  or other  cash  requirements;  (iv)  changes  in the  computer
hardware and software  industries and the Y2K solutions market;  and (v) various
competitive factors that may prevent the Company from competing  successfully in
the marketplace.  In light of these risks and  uncertainties,  many of which are
described in greater detail elsewhere in this "Risk Factors" discussion,  actual
results could differ materially from the forward-looking statements contained in
this Annual Report on Form 10-K.



Item 2.  Properties

         The Company presently leases office space to house its operations under
four different leases in two office complexes, one located at 2101 Rexford Road,
Charlotte,  North  Carolina and the other  located at 2201 Water Ridge  Parkway,
Charlotte,  North  Carolina.  The leases at 2101 Rexford Road all expire between
August 31, 1998 and  November  15, 1998.  The Company has made  arrangements  to
extend these  leases  through  January 31,  1999.  The lease at 2201 Water Ridge
Parkway expires October 31, 2000. The Company intends to relocate to one central
location by January 31, 1999 and is currently in negotiations to sublet the 2201
Water Ridge Parkway  facilities after February 1, 1999. The Company is currently
paying a total annual rent under all of these leases of $799,276.00.

         In addition,  the Company leases space for twelve sales offices located
throughout  the United States and in England.  The following is a description of
the leases and annual rent:



                                       12

<PAGE>




    Location              Expires  1       Annual Rent
    --------              -------          -----------
1.  Atlanta, GA           6-30-98          $  7,800.00
2.  Denver, CO            7-31-98          $ 16,800.00
3.  Detroit, MI           9-14-98          $ 10,908.00
4.  Los Angeles, CA       Month to Month   $ 11,340.00
5.  Minneapolis, MN       8-30-98          $ 13,800.00
6.  Oakbrook Terrace, IL  7-31-98          $ 14,376.00
7.  Reston, VA            9-14-98          $ 17,160.00
8.  Salem, NH             9-30-98          $  6,000.00
9.  San Francisco, CA     8-31-98          $ 16,800.00
10. Tampa, FL             7-31-98          $  9,276.00
11. Surrey, UK            7-6-2000         $ 87,244.00
                                           -----------
                          Total            $211,504.00
-------------------
         1 All of these  leases,  with the  exception of the Surrey,  UK, lease,
expire in 1998. It is the Company's  intention to renew these leases for a fixed
period or continue the leases on a month-to-month basis.


Item 3.  Litigation

         During the year  ended  December  31,  1997,  there  were two  lawsuits
pending  against  the  Company's  Chief  Executive  Officer,  Robert  F.  Gruder
("Gruder")  and the Company:  Robert Colby v. Robert Gruder et al., Index No. CV
96 02542045,  Superior Court (Conn.),  Judicial District of New Haven at Meriden
(the "Colby Lawsuit") and Andrew Kaplan et al. v. Robert F. Gruder et al., Index
No. CV 96 03343085,  Superior Court (Conn.),  Judicial  District of Fairfield at
Bridgeport (the "Kaplan  Lawsuit").Thomas  J. Dudchik,  Senior Vice President of
the Company, is also named as a defendant in the Kaplan lawsuit.

         The Colby Lawsuit  involved  allegations  that Mr.  Gruder  promised to
provide  Colby  with  shares of stock in Alydaar  as  reimbursement  for a prior
investment in GEM Technologies,  Inc.  ("GEM"),  a company founded by Mr. Gruder
and of which he was the  principal  shareholder.  This matter was settled by Mr.
Gruder  on July  25,  1997,  and the  Company  was  released  from  any  further
liability.  In  connection  with this  lawsuit,  Mr.  Gruder had entered into an
agreement to indemnify  and hold  harmless the Company from any  liability.  The
agreement  also provided  that the Company  would bear Mr.  Gruder's and its own
legal expenses,  which the Company paid. (See "Certain Relationships and Related
Transactions.")

                                       13

<PAGE>



         The Kaplan Lawsuit involves  allegations by a group of former creditors
of GEM of breach of contract and  misrepresentations.  The plaintiffs claim they
were  fraudulently  induced to invest in GEM;  that GEM  wrongfully  transferred
assets  to  Alydaar  and  Alydaar   promoted   products   based  on   technology
misappropriated  from GEM. The plaintiffs are seeking unspecified  damages,  but
claim they are entitled to damages equal to a nine percent  interest in GEM, and
as such,  some  interest in  Alydaar.  This matter is expected to go to trial in
April 1998.  Both Mr. Gruder and the Company  intend to  vigorously  defend this
action and believe they have meritorious  defenses to the action. Mr. Gruder has
agreed to  indemnify  and hold  harmless the Company in the event of a judgement
against the Company.  The Company has agreed to bear all costs of the litigation
for itself and Mr. Gruder.  Company's  litigation counsel is of the opinion that
in view of Mr. Gruder's agreement to indemnify the Company,  the likelihood of a
materially  adverse  outcome  against  the  Company  is  remote.  (See  "Certain
Relationships and Related Transactions.")



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

         No  matters  were  submitted  to  shareholders  during  the year  ended
December 31, 1997.



                                     PART II

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

         The  Company's  Common  Stock  trades  on the  NASDAQ  National  Market
("National  Market")  under the symbol  "ALYD." The Common Stock was admitted to
trading on the National Market on December 3, 1997.  Prior to that and from 1982
through December 2, 1997, the Common Stock traded on the Bulletin Board first as
Enertronix and then as Alydaar.

         The  following  tables  set forth the high and low bid  prices  for the
Common  Stock on the  Bulletin  Board  and the high and low  sales  price on the
National Market for the years ended December 31, 1996 and 1997.



                                       14

<PAGE>




For Year Ended December 31, 1996
                                               High Bid        Low Bid
1st Quarter Ended March 31, 1996               $13.75          $ 1.125
2nd Quarter Ended June 30, 1996                $31.50          $10.375
3rd Quarter Ended September 30, 1996           $19.75          $10.25
4th Quarter Ended December 31, 1996            $16.125         $10.375


For Year Ended December 31, 1997
                                               High Bid        Low Bid
1st Quarter Ended March 31, 1997               $12.187         $ 9.25
2nd Quarter Ended June 30, 1997                $22.125         $ 8.00
3rd Quarter Ended September 30, 1997           $32.125         $19.00
Period Ended November 30, 1997                 $22.50          $11.437
Period Ended December 31, 1997 1               $19.25          $14.125
---------------------
         1 The  Company's  Common  Stock was admitted to trading on the National
Market on December 3, 1997,  and as such,  the price  reflects  the high and low
sales for the month of December, 1997.

         The tables set forth above were for periods as reported by the National
Association  of Securities  Dealers  Corporate  composite  feed and NASDAQ.  The
figures  represent  inter-dealer  prices,  without retail mark-up,  mark-down or
commissions and may not necessarily represent actual transactions.

         As of December 15, 1997, the approximate  number of beneficial  holders
of the Common Stock of the Company was approximately 6,300, based on information
received from the Company's  transfer agent and those  brokerage  firms who hold
securities for customers in "street name."

         The Company has not paid any cash  dividends  since its  inception.  By
reason  of its  present  financial  status  and  contemplated  future  financial
requirements,  the Company does not anticipate  paying any cash dividends in the
foreseeable  future. It is anticipated that earnings will be used to finance the
Company's growth. (See "Risk Factors - Unlikely to Declare Dividends.")



                                       15

<PAGE>



Item 6.  Selected Financial Data


<TABLE>
<CAPTION>
                                                                  Years Ending December 31st
                                         -----------------------------------------------------------------------------
                                              1997             1996            1995           1994           1993
                                              ----             ----            ----           ----           ----
<S>                                        <C>               <C>             <C>            <C>            <C>    
Net Revenues                               $10,736,237       $37,500         $229,400       $160,400       $30,000
Payroll and Related Costs                  $13,800,797      $3,598,307       $443,741       $235,593       $92,990
Net (Loss) from Operations                ($7,797,167)     ($5,132,845)     ($580,148)     ($304,466)     ($196,730)
Net (Loss) from Operations
    Per Common Share                         ($.51)           ($.41)          ($.05)         ($.03)         ($.02)
Total Assets                               $18,866,474      $2,869,292       $133,195       $160,011       $24,723
Long Term Obligations                       $101,230           -0-             -0-            -0-            -0-
Cash Dividends                                 -0-             -0-             -0-            -0-            -0-
</TABLE>

         Prior to 1994, the operations of the Company were primarily  related to
research and development of computer language translation  services:  converting
one computer  language to another.  Between 1994 and 1996, the Company  directed
its efforts to adapting  SmartCode as an automated  solution to the Y2K Problem.
As such, the financial data is not truly indicative of future operating results.
The  Company  only began to  generate  revenues  from its Y2K  Problem  solution
commencing with the second quarter of calendar 1997.



Item 7. Management's Discussion and Analysis of Consolidated Financial Condition
                  and Results of Operations

         The  following  discussion  should  be read  in  conjunction  with  the
"Selected  Financial Data" and the other  financial data appearing  elsewhere in
this Report. This Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the  Securities Act of 1933 and Section 21E of the
Securities  Exchange Act of 1934.  Actual results could differ  materially  from
those  projected in the  forward-looking  statements  contained in  Management's
Discussion and Analysis and elsewhere in this Annual Report.

Results of Operations

    -    Revenues

         Net revenues  earned for the year ended  December 31, 1997 ("1997") and
December 31, 1996 ("1996") approximated  $10,736,000 and $38,000,  respectively.
The Company was essentially a research and  development  company during 1996 and
through the first quarter,  1997. The Company began to generate  revenues in the
second quarter,

                                       16

<PAGE>



1997, from its proprietary,  internally  developed software solution for the Y2K
Problem.  During 1996, the Company's revenues decreased from $229,000 in 1995 to
$38,000,  because the Company's strategy changed during 1995, from marketing its
language  translation  services to focusing all available  resources on research
and development of an automated  factory solution for the Y2K Problem.  Revenues
earned during 1995 were from the completion of contracts awarded during 1994 for
computer language translation projects.

    -    Operating Expenses

         Operating  expenses also experienced major increases from $5,199,000 in
1996 to over  $19,218,000 in 1997, a 270%  increase.  The change from a research
and  development  company in 1996 to an  operating  company in 1997  caused this
dramatic  increase in operating  expenses.  Also,  Alydaar  International,  Ltd.
("Alydaar  International"),  as a result  of the  Company's  acquisition,  added
$1,161,000 to operating  expenses during 1997 for its cost of operations  during
the last  half of  1997.  Payroll  and  related  benefit  costs  increased  from
$3,598,000 in 1996 to $13,800,000 in 1997, a 284% increase, as the Company added
new  personnel  (from 194  people at  December  31,  1996 to over 300  people at
December 31, 1997) to meet the increase in sales  volume.  As such,  the Company
absorbed a full-year  cost of the 1996  increase in personnel  from 30 people at
June 30, 1996 to 194 at December 31,  1996.  Occupancy  costs also  increased by
approximately  $781,000 from 1996 to 1997, as the Company expanded its operating
facilities  (or  "factory")  capacity  and opened  over a dozen  regional  sales
offices in the USA and UK during 1997.  Advertising  and promotion  expenditures
increased from approximately $215,000 in 1996 to $832,000 in 1997. This increase
was due to increased  marketing  efforts by the Company's sales force via print,
direct mail and telemarketing  efforts and over $208,000 worth of demonstrations
in 1997.  Depreciation and amortization  expense  increased by $488,000,  due in
large part to the amortization of $6,719,000 of goodwill,  which was recorded at
the time of acquisition of Alydaar International, and the increase in the amount
of property and equipment of $1,839,000.  Bad debt expense was $311,000 in 1997,
compared  to no bad debt  write-off  or  provision  for  losses  in 1996.  Other
operating expenses  increased  $1,619,000 in 1997, due mostly to the significant
increase in personnel,  marketing  and selling  activities  and expanded  square
footage occupied in 1997 versus 1996.  Categories showing significant  increases
included travel, meals and entertainment expenses, which increased from $219,000
in 1996 to $747,000 in 1997;  telephone  expenses  increased by $138,000 in 1997
from 1996 due to a significant  increase in sales and marketing  efforts  during
1997 and  increase  in sales  force  from one  person in 1996 to 22 people  from
August 1997 through the end of the year;  office  supplies and related  expenses
increased  to  $122,000  from  $31,000  in  1996  due  to  increased  personnel;
professional fees, which increased $348,000 primarily due to legal fees incurred
by the Company to defend  against two civil actions filed against the Company in
late 1996;  computer  supplies and related  expenses  increased  $79,000;  sales
office expenses,  including  telephone,  copying and similar expenses  increased
$57,000; and other administrative and operating expenses,  including postage and
employee training costs, increased by $378,000.

                                       17

<PAGE>



         Operating  expenses  increased  from  December  31,  1995  ("1995")  to
December 31, 1996 ("1996") by $4,396,000. Substantially all of this increase was
caused by the Company's  change in its business focus to provide a Y2K automated
factory  solution.  Payroll and related costs increased by $3,154,000 in 1996, a
710%  increase,  as the  Company  added new  personnel  (from 10 to 194  people)
required to staff its operating facility in Charlotte, North Carolina. Occupancy
costs  increased by $287,000 in 1996, a 859% increase,  as additional  space was
obtained  as the  Company  began its  facility  expansion  efforts.  Advertising
expenses increased by $127,000, a 44% increase, as the Company embarked upon its
print advertising campaign for Y2K solution.  Other operating expenses increased
$500,000,  a 232% increase,  due principally to the increase in number of square
feet occupied and number of personnel.

    -    Net Loss

         Net loss  increased  to  $7,797,000  from  $5,132,000  in  1996,  a 52%
increase,  from 1996 to 1997,  due to the Company's  increased  expenditures  to
increase its capacity during 1997. The Company experienced  significantly slower
flow of code from its customers than had been anticipated,  particularly  during
the first three quarters of 1997,  resulting in the loss from  operations due to
significant idle "factory"  capacity.  The increase in net loss from $580,000 in
1995 to $5,132,000 in 1996, a 785% increase,  was due primarily to the Company's
decision  to add  approximately  150 people  during the last half of 1996 and to
increase  space occupied from 3,100 square feet to  approximately  30,000 square
feet during the first half of 1996.

Liquidity and Capital Resources

         At December 31, 1997, the Company had working  capital of $6,466,000 as
compared to negative  working  capital of ($1,727,000) at December 31, 1996. The
change from 1996 to 1997 was due primarily to an increase in accounts receivable
of approximately  $4,963,000 and an increase in costs and estimated  earnings in
excess of billings of  approximately  $1,298,000,  which  resulted from revenues
primarily generated during the second half of 1997 of approximately  $8,500,000.
Cash increased to $1,527,000 from $379,000 at the end of 1996.

         The sources of cash were  primarily  sales of stocks and  exercises  of
warrants and options,  which provided $16,985,000,  and loans from shareholders,
net of repayments of $900,000,  of $463,000.  The uses of cash were primarily to
fund net cash operating  requirements of  $14,291,000,  purchase of equipment of
$1,664,000 and a loan to Alydaar International of $300,000, which was made prior
to acquisition.

         As of March 31, 1998, the Company is negotiating with a major financial
institution  to obtain a $5,000,000  revolving  line of credit  facility,  which
would be secured by its accounts receivable. The Company expects to complete the
negotiations and to sign an agreement for the facility by the end of April 1998.
Borrowings under the facility would be used for working capital requirements.

                                       18

<PAGE>



         Based on its current operating plan, the Company believes that its cash
on hand and its cash flow from operations will be sufficient to meet its working
capital requirements at least during the next twelve months.

Foreign Operations

         On July 1, 1997 (the third quarter),  the Company  acquired 100% of the
outstanding shares of Alydaar International,  Ltd. ("Alydaar  International") in
exchange for 791,652  shares of the  Company's  Common Stock and the issuance of
207,152  Warrants plus the forgiveness of debt.  This  acquisition was accounted
for as a purchase  transaction.  Accordingly,  100% of the  revenues  earned and
expenses  incurred by Alydaar  International  since the  acquisition  date,  are
included in the Consolidated Statement of Operations. From July through December
31, 1997, Alydaar International contracted sales accounted for approximately 30%
of the total  consolidated  revenues  recorded  for the full  year of 1997.  The
amount of sales made during the period which were  subject to currency  exchange
rate adjustment was not significant. It is anticipated that the amount of future
contracts  generated by Alydaar requiring payment in foreign  currencies will be
immaterial in amount.  Therefore,  the currency exchange rate adjustment risk is
expected to be insignificant.

         The  Company  does not  view  other  risks  inherent  in  international
operations,  such  as  political  and  regulatory,  contractual  enforceability,
economic  instability,  etc.,  to  have  a  material  effect  upon  its  foreign
operations because its target customers are large,  established  companies which
are domiciled in European Union  countries or other  countries which have stable
governments and economies.

Impact of Inflation

         The Company  believes that  inflation  will not have a material  impact
upon its future operating results.



Item 8.  Financial Statements and Supplementary Data

         The financial statements and supplementary data commence on page F-1.



Item 9.  Changes and Disagreements with Accountants on Accounting and Financial
                  Disclosure

         Not applicable.



                                       19

<PAGE>



                                    PART III

Item 10.  Directors and Executive Officers of the Registrant and Compliance with
                  Section 16(a)


Directors and Executive Officers    Age    Position
Robert F. Gruder                    39     Chief Executive Officer, President
                                           and Chairman of the Board
V. Hollis Scott                     51     Chief Financial Officer, Secretary
                                           and Director
Frank G. Milligan                   57     Chief Operating Officer
Thomas J. Dudchik                   38     Senior Vice President and Director
James F. Helm                       56     Chief Information Officer
J. Alex McMillan                    65     Director
John McCarthy                       58     Director

         Directors  are  elected  to serve  until  the next  annual  meeting  of
shareholders of the Company or until their successors are elected and qualified.
The Board of Directors  held three  meetings  during the calendar  year 1997 and
also met informally and acted by written consent during the year. Officers serve
at the  discretion  of the  Board  of  Directors  subject  to any  contracts  of
employment. At the present time there are no contracts.

     Robert F.  Gruder  has served as Chief  Executive  Officer,  President  and
Chairman  of the Board of  Directors  since  1989,  when the  Company  was first
acquired.  Prior to his  association  with the Company and for three years,  Mr.
Gruder served as president of GEM Technologies,  Inc.  ("GEM"),  a company which
was engaged in developing a computer language compiler. GEM filed for bankruptcy
in 1992  pursuant  to  Chapter 7 of the  Bankruptcy  Code.  Mr.  Gruder  was the
principal stockholder of GEM. Prior to Mr. Gruder's association with GEM, he was
employed  at three  different  banks.  Mr.  Gruder  is a  graduate  of  American
University and holds a BS degree in finance.

         V. Hollis Scott has served as Chief  Financial  Officer,  Secretary and
Director  since January 1996.  Prior to January 1996 and from November 1988, Mr.
Scott served as Senior Vice President and Treasurer of the Cato  Corporation,  a
publicly held 600-store  ladies' apparel  retailer.  Before 1988, he held senior
financial  management  positions  with a cable  television  operator  and with a
department  store chain.  Prior to that, he was employed with Ernst & Young. Mr.
Scott is a graduate of the  University  of Virginia and is a licensed  certified
public accountant.

                                       20

<PAGE>



         Frank G.  Milligan  joined the  Company as Chief  Operating  Officer in
December 1996. Between 1963 and December 1996, Mr. Milligan was employed by IBM.
He  served as a senior  manager  with  various  management  responsibilities  in
development  and  systems  integration  and  general  business  management.  Mr.
Milligan  attended  the  University  of  Tennessee,  where he received BS and MS
degrees in electrical engineering.

     Thomas J. Dudchik  joined the Company as Senior Vice  President in February
1996.  He is  responsible  for all  national  and  international  marketing  and
investor relations.  Prior to joining the Company,  Mr. Dudchik served as Deputy
Chief of Staff for Connecticut Governor Lowell P. Weicker, Jr. from January 1993
through January 1995. As part of his responsibilities,  Mr. Dudchik administered
the State of  Connecticut's  $10  billion  annual  budget for the 26 major state
agencies,  covering 50,000 state employees.  From February 1991 through December
1992, Mr. Dudchik served as Deputy Commissioner of the Connecticut Department of
Environmental Protection. From February 1995 through January 1996 he operated an
advertising and sales promotion business.  Mr. Dudchik received a BA degree from
Trinity College.

         James F. Helm  joined the  Company in April  1996.  Mr.  Helm serves as
Chief  Information  Officer  for  Information  Technology.  Prior to joining the
Company,  Mr.  Helm acted as an  independent  consultant  to  various  companies
between 1994 and 1996.  Prior to that,  he was employed by Formula  Consultants,
Inc.  from June 1992 to May 1994 in various  management  positions  and acted as
consultant  to that  company  from  February  through May of 1992.  From 1969 to
October 1991, Mr. Helm held various management positions with Unisys Corporation
("Unisys").  His last  position  with  Unisys  was Vice  President  of  Customer
Services.

         J. Alex McMillan was elected a Director of the Company  effective March
19, 1997. Mr. McMillan is currently  employed with The McMillan Group,  merchant
bankers and  consultants.  Between April 1, 1997 through  December 31, 1997, Mr.
McMillan  was  retained by the Company to act as an  independent  consultant  to
assist  the  Company  in   developing   government   contracts.   (See  "Certain
Relationships  and Related  Transactions".)  From 1985 through 1994 Mr. McMillan
served in the US House of  Representatives,  representing the 9th  Congressional
District  for the  State of North  Carolina.  While a member  of  Congress,  Mr.
McMillan served on various  committees,  including Energy and Commerce,  Budget,
Bank and Small Business.  From 1976 through 1983, Mr. McMillan was President and
Chief Executive Officer of Harris Teeter Supermarkets, Inc., a regional chain of
supermarkets owned by the Ruddick Corporation.  Mr. McMillan currently serves as
a Director of  Interstate/Johnson  Lane,  Inc.,  and Scottish Bank of Charlotte,
North Carolina, both publicly held companies. Mr. McMillan holds an MBA from the
Darden School, University of Virginia.

         John McCarthy was appointed to serve as a Director in August 1997.  For
approximately 31 years, Mr. McCarthy has been employed in the brokerage business
in the  data  processing  area.  He has held  management  positions  in  various
brokerage firms.

                                       21

<PAGE>



From 1993 until December 1997, he was employed with Smith Barney & Co. as Senior
Vice President and Year 2000 Project Director.

         Messrs.  McMillan,  McCarthy and Scott currently serve on the Company's
Audit Committee, which committee is charged with, among other things, the review
with the Company's  auditors of the general scope of the Company's annual audit;
a review  of the  annual  audit and the  auditor's  report  on the  adequacy  of
internal controls and other findings; review of the auditor's management letter;
and the implementation of any corrective measures, if so required.

         Messrs. McMillan,  McCarthy and Gruder currently serve on the Company's
Compensation Committee,  which committee is charged with the review of officers'
compensation, bonuses and the granting of stock options.

         The Company's outside  directors,  upon their appointment to the Board,
were given an award of 15,000  warrants each. The warrants are only  exercisable
one year from the date of the grant at the fair  market  price of the  Company's
Common Stock on the date of grant.  The options will expire in 2007. The outside
directors do not receive any compensation for their attendance at meetings.

         Based  solely on review of the  copies of such forms  furnished  to the
Company or written  representations  that no forms 5 were required,  the Company
believes  that during the year ended  December 31, 1997 all Section 16(a) filing
requirements applicable to its officers,  directors and greater than ten-percent
beneficial owners were complied with.



Item 11.  Executive Compensation

         The following tables set forth information with respect to compensation
paid by the Company for the services to the Company during the three years ended
December 31, 1997 by the Company's  Chief  Executive  Officer.  No other officer
receives compensation in excess of $100,000.



                                                        22

<PAGE>




<TABLE>
                                                       SUMMARY COMPENSATION TABLE
<CAPTION>
                                                                                               Long Term Compensation
                                                    Annual Compensation                  Awards             Payouts
                 (a)                     (b)         (c)          (d)         (e)          (f)          (g)        (h)        (i)
                                                                                           Re-
                                                                             Other      stricted    Securities
                                                                             Annual       Stock     Underlying     LTIP    All Other
                                                                            Compen-      Awarded     Options/    Payouts    Compen-
Name and Principal Position             Year      Salary($)    Bonus($)    sation ($)      ($)       SARs (#)      ($)    sation ($)
---------------------------             ----      ---------    --------    ----------     -----      --------     -----   ----------
<S>                                     <C>         <C>            <C>         <C>          <C>       <C>   <C>     <C>      <C>
Robert F. Gruder                        1997        60,000        -0-         -0-          -0-        2,000 1      -0-       -0-
Chief Executive Officer                 1996        60,000        -0-         -0-          -0-          -0-        -0-       -0-
                                        1995        60,000        -0-         -0-          -0-          -0-        -0-       -0-
<FN>
-------------------
         1 Mr. Gruder was granted 2,000  incentive  stock options under the 1994
Plan on April 24, 1997. The options are  exercisable  at $8.80 per share.  1,000
options vest on April 24, 1998 and 1,000  options vest on October 24, 1998.  The
options expire on April 24, 2002.
</FN>
</TABLE>

         The  senior  executive  officers  do not  currently  receive  any other
personal benefits.  The Company offers health insurance to all of its employees.
The Company  also has a 401(k)  program,  but during the year 1997,  the Company
made no contributions.



<TABLE>
                                                    OPTION/SAR GRANTS IN LAST FISCAL YEAR
-----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                                       Potential Realizable Value at
                                                                                                          Assumed Annual Rates of
                                                                                                        Stock Price Appreciation for
                                           Individual Grants                                                     Option Term
           (a)                    (b)               (c)                (d)                 (e)                (f)            (g)
                               Number of        % of Total
                              Securities         Options/
                              Underlying           SARs
                               Options/         Granted to
                                 SARs          Employees in         Exercise
Name                          Granted (#)       Fiscal Year       Price ($/Sh)       Expiration Date         5% ($)         10% ($)
----                          -----------       -----------       ------------       ---------------         ------         -------
<S>                                 <C>   <C>       <C>                <C>               <C>  <C>            <C>             <C>  
Robert F. Gruder                    2,000 1         0.2%               8.80              4/24/02             2,820           8,160
<FN>
-------------------
         1 The  exercise  price  for  the  options  granted  to Mr.  Gruder  was
established  at 110% of fair  market  value  on date of  grant.  1,000  of these
options will vest on April 24, 1998, and 1,000 will vest on October 24, 1999.
</FN>
</TABLE>



                                       23

<PAGE>




<TABLE>
                                   AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR
                                             AND FY-ENDED OPTION/SAR VALUES
<CAPTION>
                                                                                                          Value of
                                                                                    Number of            Unexercised
                                                                                   Unexercised          In-the-Money
                                                                                   Options/SARs         Options/SARs
                                          Shares                                  at FY-End (#)         at FY-End ($)
                                       Acquired on          Value Realized         Exercisable/         Exercisable/
Name                                   Exercise (#)              ($)              Unexercisable         Unexercisable
----                                   ------------             -----             -------------         -------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                  Not Applicable
</TABLE>

Employment Agreements

         At the present time none of the  Company's  senior  executive  officers
have employment  agreements  with the Company.  Once the Company is in a sounder
financial  condition to pay salaries  actually  commensurate with each officer's
position and the services he renders to the Company,  employment agreements will
be negotiated.

Stock Option Plans

         In 1994,  the Company  adopted the Omnibus Stock Plan (the "1994 Plan")
for the benefit of its employees.  The 1994 Plan covered the issuance of 375,000
options to purchase  shares of the  Company's  Common  Stock.  The 1994 Plan was
subsequently  amended in December 1996 by the Board of Directors to increase the
number of options from 375,000 to 1,000,000. This increase requires ratification
by  shareholders,  which the Company  intends to present to  shareholders at its
forthcoming  annual meeting now scheduled for May 22, 1998. On October 20, 1997,
the Board of Directors also approved an increase of the number of shares subject
to the 1994 Plan to  2,000,000,  which the  Company  also  intends to present to
shareholders for their approval at the next annual meeting. The award of options
in excess  of  375,000  under  the Plan are  therefore  subject  to  shareholder
approval.  The 1994 Plan  provides  for the  issuance  of options  and/or  stock
appreciation  rights.  The 1994 Plan  permits the  issuance of either  incentive
stock options or non-qualified stock options. In case of incentive stock options
(as defined under Section 422 of the Internal  Revenue Code), the exercise price
can be no less  than  fair  market  value on the date of  grant.  In the case of
non-qualified  stock  options,  the  exercise  price  may be less than then fair
market  value.  To date no options  have been  granted at less than fair  market
value  at date of  grant.  The 1994  Plan is  administered  by the  Compensation
Committee.  All employees and directors are entitled to  participate in the 1994
Plan,  except that no members of the Committee may  participate.  As of December
31, 1997,  there were  977,400  options  outstanding.  The Company has adopted a
policy of offering options to all full-time employees, which enables the Company
to attract and retain skilled and dedicated  personnel.  All of the  outstanding
options  expire at various  times  between  December 2005 and 2007 with exercise
prices ranging from $1.19 per share to $27.88 per share.

                                       24

<PAGE>



         During the year ended December 31, 1997 the Board of Directors approved
the adoption of the 1997 Employee  Stock  Purchase Plan (the  "Purchase  Plan").
Shareholders  of the Company  will be  requested  to ratify the  adoption of the
Purchase Plan at the Company's Annual Meeting of Shareholders. The Purchase Plan
would permit employees of the Company to purchase shares of the Company's Common
Stock  through  payroll  deductions  at six-month  intervals as specified in the
Purchase  Plan  at a 15%  discount  from  market.  The  Purchase  Plan  is to be
administered  by members of the Board who are  ineligible to  participate in the
Purchase  Plan. An employee  electing to  participate  can have up to 10% of his
weekly  salary  withheld for the  purchase of stock.  A  participant  who is not
subject to Section  16(b) of the Exchange  Act may  withdraw  shares at any time
after the shares have been purchased and credited to the participant's  account.
The  Purchase  Plan is intended  to qualify  under  Section 423 of the  Internal
Revenue Code of 1986,  as amended (the "Code"),  and as such,  the Purchase Plan
requires  approval of the  stockholders.  If participants wish to avoid a tax on
the purchase of Common Stock under the Purchase Plan, the participant  must meet
certain  holding  period  requirements  as required by the Code.  The  aggregate
amount of purchases by any employee may not exceed  $25,000 per year. A total of
200,000 shares have been reserved by the Company under the Purchase Plan.



Item 12.  Security Ownership of Certain Beneficial Owners and Management

         The following  table sets forth  information  regarding the  beneficial
ownership  of the  Company's  Common  Stock as of December  31, 1997 by (i) each
person  who is known by the  Company  to own  beneficially  more  than 5% of the
Company's  outstanding  Common Stock;  (ii) each of the  Company's  officers and
directors and (iii) all officers and directors of the Company as a group:



                                       25

<PAGE>




Name and Address                       Amount and Nature        Percent of Class
Robert F. Gruder                           7,030,325                  38.8%
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC  28211
V. Hollis Scott                              186,667 1                  1.0%
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC  28211
Thomas J. Dudchik                            226,166 2                  1.3%
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC  28211
Frank G. Milligan                             30,000 3                    *
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC  28211
James F. Helm                                 20,250 4                    *
c/o Alydaar Software Corporation
2101 West Rexford Road
Charlotte, NC  28211
J. Alex McMillan (Director)                   27,840 5                    *
3801 Barnwood Drive
Charlotte, NC  28211
John McCarthy (Director)                         -0-                      *
4 Glenwood Circle
East Windsor, NJ  08520-2304
All officers and directors
    as a group (9 persons)                 7,576,248                  42.5%



--------
     1 Includes  100,000 shares  issuable upon exercise of options which vest on
April 24, 1998.
     2 Includes  200,000  shares  issuable upon  exercise of options.  Of these,
50,000 options vest on April 24, 1998.
     3  Includes  10,000  shares  issuable  upon  exercise  of  options  and  an
additional  20,000 shares issuable upon exercise of options,  which options vest
on April 24, 1998.
     4  Includes  10,000  shares  issuable  upon  exercise  of  options  and  an
additional  10,000 shares issuable upon exercise of options,  which options vest
on April 24, 1998.
     5 Includes 15,000 shares issuable upon exercise of warrants and warrants to
purchase 7,840 shares owned by a company which Mr. McMillan controls.
     * Represents less than 1% ownership.

                                       26

<PAGE>



Item 13.  Certain Relationships and Related Transactions

         In  connection  with  the  litigation  referred  to in Item  3,  "Legal
Proceedings,"  Mr. Robert Gruder,  President and Chief Executive  Officer of the
Company,  entered  into  agreements  with the Company to  indemnify  the Company
against any liability  resulting from a final unappealable  judgment.  The Colby
Lawsuit was settled by Mr. Gruder in 1997, and the Company was released from all
liability.  Pursuant to the agreement with Mr. Gruder,  the Company paid all his
legal  expenses.  Mr. Gruder has also entered into an agreement to indemnify the
Company from all liability in connection with the Kaplan  Lawsuit,  which is now
scheduled  for  trial  in April  1998.  In  consideration  of the  agreement  to
indemnify the Company,  the Company  agreed to pay Mr.  Gruder's  legal fees and
expenses in defending the Kaplan Lawsuit.

         Between April 1, 1997 and December 31, 1997, The McMillan Group,  owned
by Mr. Alex  McMillan,  who is a Director of the  Company,  was  retained by the
Company to act as an independent  consultant to assist the Company in developing
government contracts.
(See "Directors and Executive Officers of the Registrant.")

         Robert F.  Gruder,  Chairman  and  Chief  Executive  Officer,  has made
advances to the  Company  from time to time to assist the Company in its working
capital requirements. As of January 1, 1997, $500,000 of principal and $3,550 of
interest  were owed by the  Company  to Mr.  Gruder.  During  1997,  Mr.  Gruder
advanced  an  additional  $1,100,000  to the  Company,  and  during the year the
Company repaid Mr. Gruder $800,000, leaving a balance due Mr. Gruder at year end
of $800,000 of principal and accrued interest at 10.5% per annum of $27,868. The
advances are evidenced by promissory notes payable on demand.

         Just before December 31, 1997, V. Hollis Scott, Chief Financial Officer
of the Company,  advanced the Company $166,700 with interest at 10.5% per annum.
The loan is evidenced by a promissory note payable on demand.



                                     PART IV

Item 14.  Exhibits, List and Reports on Form 8-K

(a)      1.       Financial Statements and Schedules
                  The financial  statements  and schedules  appearing  after the
                  Index to Exhibits are filed as part of this Annual Report.

         2.       Exhibits
                  The  exhibits  listed on the Index to Exhibits  following  the
                  Signature  Page are  filed as part of this  Annual  Report  by
                  incorporation  by reference from the filings  indicated in the
                  footnotes to the Index

                                                        27

<PAGE>



(b)      On September 14, 1997, the Company filed a report on Form 8-K reporting
         the  sale of  150,000  shares  of the  Company's  Common  Stock  for an
         aggregate   consideration  of  $2,250,000   pursuant  to  Regulation  S
         promulgated  under the Act.  The  report  included  Item 7 -  Financial
         Statements and Exhibits and Item 9 - Sale of Equity Securities Pursuant
         to Regulation S.

                                       28

<PAGE>



                                   SIGNATURES

                  Pursuant  to the  requirements  of  Section  13 or 15(d),  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned, thereunto duly authorized.

                                      ALYDAAR SOFTWARE CORPORATION

                                      By: /s/ Robert F. Gruder
                                      Robert F. Gruder, Chief Executive Officer,
                                         President and Chairman

Dated:  April 3, 1998


                  Pursuant to the requirements of the Securities Exchange Act of
1934,  this  Report has been  signed  below on April 3, 1998,  by the  following
persons on behalf of Registrant and in the capacities indicated.

                                      /s/ Robert F. Gruder
                                      Robert F. Gruder, Chief Executive Officer,
                                         President and Chairman

                                      /s/ Frank G. Milligan
                                      Frank G. Milligan, Chief Operating Officer

                                      /s/ V. Hollis Scott
                                      V. Hollis Scott, Chief Financial Officer,
                                         Secretary and Director

                                      /s/ Thomas J. Dudchik
                                      Thomas J. Dudchik, Senior Vice
                                         President and Director

                                      /s/ James F. Helm
                                      James F. Helm, Chief Information Officer

                                      /s/ J. Alex McMillan
                                      J. Alex McMillan, Director

                                      /s/ John McCarthy
                                      John McCarthy, Director



                                       29

<PAGE>



                                                 INDEX TO EXHIBITS


 3.1(a)     Articles of Incorporation of Daar, Inc. 1
 3.1(b)     Articles of Merger of Alydaar Software Corporation into Daar, Inc. 1
 3.1(c)     Plan of Merger 1
 3.2        Amended and Restated By-Laws of Alydaar Software Corporation 1
10.2        Omnibus Stock Option Plan 1
10.3        Amendments to Omnibus Stock Plan *
10.4        Standard Continuing Service Agreement *
10.5        Indemnification Agreement by Robert H. Gruder *
10.6        1997 Employee Stock Purchase Plan *
10.7        Purchase Contract of Alydaar International, Ltd. *
10.8        Subcontractor   Agreement   between   Alydaar  and   Compuware
              Corporation (filed separately with the Securities and Exchange
              Commission and "Confidential Treatment" requested)
16.1        Letter re:  change in accountant 1
27          Financial Data Schedule *

------------------
         * Filed herewith
         1  Incorporated  by  reference  from  the  Company's   Registration  of
Securities  on  Form 10  pursuant  to  Section  12(b)  or (g) of the  Securities
Exchange Act of 1934 filed with the Commission







                                       30

<PAGE>



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





                                                                  Page

Independent auditors' report                                      F-2

Consolidated balance sheets                                       F-3

Consolidated statements of operations                             F-4

Consolidated statement of stockholders' equity (deficiency)       F-5

Consolidated statements of cash flows                             F-6

Notes to consolidated financial statements                     F-7 - F-15




                                       F-1


<PAGE>



                          Independent Auditors' Report


Board of Directors and Stockholders
Alydaar Software Corporation and Subsidiary
Charlotte, North Carolina

We have audited the consolidated  balance sheets of Alydaar Software Corporation
and  Subsidiary as of December 31, 1997 and 1996,  and the related  consolidated
statements of operations,  stock holders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1997.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

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




                                           HOLTZ RUBENSTEIN & CO., LLP
                                           /s/ Holtz Rubenstein & Co., LLP


Melville, New York
March 6, 1998




                                       F-2


<PAGE>


<TABLE>

                   ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                                        December 31,
         ASSETS                                                                  1997                   1996
         ------                                                             --------------         ---------

<S>     <C>    <C>    <C>    <C>    <C>    <C>
CURRENT ASSETS:
   Cash                                                                     $    1,526,924         $     379,382
   Accounts receivable, net allowance for doubtful
     accounts of $115,000 and $0, respectively                                   5,150,617               187,500
   Costs and estimated earnings in
     excess of billings                                                          1,297,986                    -
   Prepaid expenses                                                                249,801                 6,903
   Other receivable (Note 3)                                                       435,000               490,000
   Deferred tax asset (Note 11)                                                    600,000                    -
   Loan to stockholder                                                              51,256                51,256
                                                                            --------------         -------------
       Total current assets                                                      9,311,584             1,115,041

PROPERTY AND EQUIPMENT, net (Note 4)                                             2,919,077             1,694,029

GOODWILL, net of accumulated amortization
   of $223,800 (Note 2)                                                          6,494,783                    -

OTHER ASSETS                                                                       141,030                60,222
                                                                            --------------         -------------

                                                                            $   18,866,474         $   2,869,292
                                                                            ==============         =============
     LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                         $    1,005,923         $   2,028,566
   Accrued sales commissions                                                       205,000                    -
   Accrued payroll                                                                 145,000                17,400
   Other current liabilities                                                       451,638               138,469
   Billings in excess of costs and estimated
     earnings on contracts in progress                                              49,497               150,000
   Current portion of capital lease obligations                                     21,869                    -
   Loans payable, stockholders (Note 5)                                            966,700               507,530
                                                                            --------------         -------------
       Total current liabilities                                                 2,845,627             2,841,965
                                                                            --------------         -------------

CAPITAL LEASE OBLIGATION                                                           101,230                    -
                                                                            --------------         ------------

COMMITMENTS AND CONTINGENCIES (Note 9)

STOCKHOLDERS' EQUITY:  (Notes 2, 5 and 6)
   Common stock, $0.001 par value, 20,000,000 shares
       authorized; 17,808,728 and 13,983,282 shares issued                          17,809                13,983
   Additional paid-in capital                                                   30,113,284             6,311,079
   Deficit                                                                     (14,094,107)           (6,296,940)
   Foreign currency translation adjustment                                         (26,924)                   -
                                                                            --------------         ------------
                                                                                16,010,062                28,122
   Less: treasury stock, at cost                                                      (445)                 (795)
         receivable from warrant exercise                                          (90,000)                   -
                                                                            --------------         ------------

       Total stockholders' equity                                               15,919,617                27,327
                                                                            --------------         -------------

                                                                            $   18,866,474         $   2,869,292
                                                                            ==============         =============
</TABLE>

                 See notes to consolidated financial statements

                                       F-3


<PAGE>


<TABLE>

                   ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>





                                                                               Years Ended
                                                                              December 31,
                                                      ------------------------------------
                                                            1997                  1996                  1995
                                                      ---------------        ---------------        --------

<S>            <C>                                    <C>                    <C>                    <C>         
REVENUES (Note 8)                                     $    10,736,237        $        37,500        $    229,400
                                                      ---------------        ---------------        ------------

EXPENSES:  (Notes 6 and 9)
   Payroll and related costs                               13,800,797              3,598,307             443,741
   Rent and occupancy                                       1,102,050                320,707              33,421
   Advertising and promotion                                  832,270                215,453              87,716
   Depreciation and amortization                              837,897                349,655              23,203
   Bad debt expense                                           310,833                     -                   -
   Other operating expenses                                 2,333,821                714,648             215,367
                                                      ---------------        ---------------        ------------
                                                           19,217,668              5,198,770             803,448
                                                      ---------------        ---------------        ------------

       Loss from operations                                (8,481,431)            (5,161,270)           (574,048)
                                                      ---------------        ---------------        ------------

OTHER INCOME (EXPENSES):
   Interest expense                                           (54,171)                (3,550)             (7,700)
   Interest income                                             14,454                  6,812               1,600
   Other income                                               123,981                 25,163                  -
                                                      ---------------        ---------------        -----------
                                                               84,264                 28,425              (6,100)
                                                      ---------------        ---------------        ------------


LOSS BEFORE TAX BENEFIT INCOME                             (8,397,167)            (5,132,845)           (580,148)

INCOME TAX BENEFIT (Note 11)                                 (600,000)                    -                   -
                                                      ---------------        ---------------        -----------

NET LOSS                                              $    (7,797,167)       $    (5,132,845)       $   (580,148)
                                                      ===============        ===============        ============


NET LOSS PER SHARE                                          $(.51)                 $(.41)               $(.05)
                                                            =====                  =====                =====

WEIGHTED AVERAGE COMMON
   AND COMMON EQUIVALENT
   SHARES OUTSTANDING                                 15,387,125             12,394,056             10,894,254
                                                      ==========             ==========             ==========
</TABLE>









                 See notes to consolidated financial statements

                                       F-4


<PAGE>



<TABLE>
                   ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY

                     CONSOLIDATED STATEMENT OF STOCKHOLDERS'
                               EQUITY (DEFICIENCY)
                               (Notes 2, 5 and 6)

<CAPTION>
                                                                                    Foreign                  Receivable    Total
                               Common Stock     Additional                          Currency                    from   Stockholders'
                             Shares               Paid-in               Subscribed Translation Treasury Stock  Warrant  (Deficiency)
                           Outstanding  Amount    Capital      Deficit     Stock   Adjustment  Shares Amount   Exercise    Equity
                           ----------- -------- ----------- ------------ --------- --------  -------- -------- -------- ------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Balance, January 1, 1995     10,932,613 $10,933 $ 1,129,644  $  (583,947)(450,000) $     -        -   $    -     $   -   $  106,630

Issuance of common shares       654,760     654     352,726           -        -         -        -        -         -      353,380
Conversion  of subscribed
   stock to treasury stock           -       -           -            -   450,000        -  (900,000)(450,000)       -           -
Retirement of treasury stock   (400,000)   (400)   (199,600)          -        -         -   400,000  200,000        -           -
Net loss                             -       -           -      (580,148)      -         -        -        -         -     (580,148)
                             ----------- ------- ----------- ------------ --------  ------- ---------  -------- --------   ---------

Balance, December 31, 1995   11,187,373  11,187   1,282,770   (1,164,095)      -         -  (500,000)(250,000)       -     (120,138)

Issuance of common shares     2,385,909   2,386   5,076,014           -        -         -        -        -         -    5,078,400
Issuance of common shares
   as treasury stock            900,000     900        (900)          -        -         -  (900,000)    (900)       -         (900)
Shares issued to employees
   from exercise of 
   stock options                 10,000      10     202,695           -        -         -   105,000      105        -      202,810
Retirement of treasury stock   (500,000)   (500)   (249,500)          -        -         -   500,000  250,000        -           -
Net loss                             -       -           -    (5,132,845)      -         -        -        -         -   (5,132,845)
                            ----------- -------- ----------- ------------ --------  -------  -------- -------- --------  ----------

Balance, December 31, 1996   13,983,282  13,983   6,311,079   (6,296,940)      -         -  (795,000)    (795)       -       27,327

Issuance of common shares
   for cash, net              1,703,500   1,704  12,986,118           -        -         -        -        -         -   12,987,822
Issuance of securities for
   services                      45,000      45     367,455           -        -         -        -        -         -      367,500
Issuance of securities in 
   connection with
   business acquisition         791,652     792   6,358,208           -        -         -        -        -         -    6,359,000
Shares issued from exercise
   of stock options/warrants  1,235,294   1,235   4,086,494           -        -         -    350,000     350   (90,000)  3,998,079
Conversion of debt for equity    50,000      50       3,930           -        -         -         -       -         -        3,980
Translation adjustments              -       -           -            -        -    (26,924)       -       -         -      (26,924)
Net loss                             -       -           -    (7,797,167)      -         -         -                 -   (7,797,167)
                             ---------- ------- ----------- ------------- -------- --------- --------- ------- --------  -----------

Balance, December 31, 1997   17,808,728 $17,809 $30,113,284 $(14,094,107)      -   $(26,924) (445,000) $ (445) $(90,000) $15,919,617
                             ========== ======= =========== ============= ======== ========= ========= ======= ========= ===========
</TABLE>

                 See notes to consolidated financial statements

                                       F-5


<PAGE>



<TABLE>
                   ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>

                                                                                        Years Ended
                                                                                       December 31,
                                                                  ---------------------------------
                                                                        1997               1996              1995
                                                                  ----------------    --------------     --------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                       $     (7,797,167    $   (5,132,845    $    (580,148)
                                                                  ----------------    --------------    -------------
   Adjustments to reconcile net loss to net cash
     used in operating activities:
       Stock based compensation                                            330,500           252,810               -
       Allowance for doubtful accounts                                     115,000                -                -
       Depreciation and amortization                                       837,897           349,655           23,203
       Deferred tax benefit                                               (600,000)               -                -
       (Increase) decrease in assets:
         Accounts receivable                                            (4,963,962)          (37,500)          91,650
         Costs and estimated earnings
           in excess of billings                                        (1,297,986)               -                -
         Prepaid expenses                                                  (66,719)           (2,760)          (4,143)
       (Increase) decrease in liabilities:
         Accounts payable                                               (1,202,354)        1,986,654           19,161
         Accrued sales commissions                                         205,000                -                -
         Accrued payroll                                                   127,600             7,702            4,557
         Other current liabilities                                         191,494           (59,274)         176,254
         Billings in excess of costs
           and estimated earnings                                         (170,495)               -                -
                                                                  ----------------    --------------     -----------
       Total adjustments                                                (6,494,025)        2,497,287          310,682
                                                                  ----------------    --------------     ------------
       Net cash used in operating activities                           (14,291,192)       (2,635,558)        (269,466)
                                                                  ----------------    --------------     ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of equipment                                                (1,664,080)       (1,988,666)         (33,821)
   Increase in other assets                                                (80,808)          (52,516)          (4,896)
   Net cash received from acquisition of subsidiary                          1,450                -                -
   Decrease in other receivables                                            55,000                -                -
   Loans receivable                                                       (300,000)               -                -
                                                                  ----------------    --------------     -----------
       Net cash used in investing activities                            (1,988,438)       (2,041,182)         (38,717)
                                                                  ----------------    --------------     ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuances of stock                                     16,985,201         4,537,500          353,380
   Advances to stockholders                                                     -            (10,183)         (40,893)
   Loans from stockholders                                               1,363,150           503,370               -
   Repayments of stockholders' loans                                      (900,000)               -               (20)
   Repayments of capital lease obligations                                 (21,179)               -                -
                                                                  ----------------    --------------     -----------
       Net cash provided by financing activities                        17,427,172         5,030,687          312,467
                                                                  ----------------    --------------     ------------

NET INCREASE IN CASH                                                     1,147,542           353,947            4,284

CASH AND CASH EQUIVALENTS,
   beginning of year                                                       379,382            25,435           21,151
                                                                  ----------------    --------------     ------------

CASH AND CASH EQUIVALENTS, end of year                            $      1,526,924    $      379,382     $     25,435
                                                                  ================    ==============     ============
</TABLE>


                 See notes to consolidated financial statements

                                       F-6


<PAGE>




                   ALYDAAR SOFTWARE CORPORATION AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                       THREE YEARS ENDED DECEMBER 31, 1997


1.     Summary of Significant Accounting Policies:

       a.  Description of business

           The Company  designs and markets  software  language  translation and
systems migration services.

       b.  Principles of consolidation

           On July 1, 1997,  the  Company  acquired a 100%  interest  in Alydaar
International,    Limited   ("International").    Accordingly,   the   Company's
consolidated financial statements include the accounts of International from the
date of acquisition. All significant intercompany transactions and accounts have
been eliminated as part of the consolidation of the financial information.

       c.  Cash and cash equivalents

           For purposes of the cash flow  statement,  the Company  considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash and/or cash equivalents.

       d.  Depreciation and amortization

           Depreciation  is  computed  using the  straight-line  method over the
estimated  useful  lives  of  the  related  assets.  Amortization  of  leasehold
improvements  is computed  using the  straight-line  method  over the  estimated
useful lives of the related assets or the remaining term of the lease, whichever
is shorter.  Maintenance  and repairs of property and  equipment  are charged to
operations and major  improvements  are capitalized.  Upon  retirement,  sale or
other   disposition  of  property  and  equipment,   the  cost  and  accumulated
depreciation  are  eliminated  from the accounts and gain or loss is included in
operations.

           Goodwill is amortized using the straight-line  method over the period
estimated to be benefited (15 years).

       e.  Revenue recognition

           During 1997,  the Company  reported  revenues  from  contracts on the
percentage-of- completion method for financial reporting purposes, in accordance
with The  American  Institute  of  Certified  Public  Accountants  Statement  of
Position  (SOP)  97-2,  "Software  Revenue  Recognition".  Revenues  under these
contracts are  recognized  based on the proportion of contract costs incurred to
total estimated contract costs.  Contract costs include all direct labor related
to  contract  performance.   Provisions  for  estimated  losses  on  uncompleted
contracts are made in the period in which such losses are determined.

           Prior to January 1, 1997,  the  Company  used the  accrual  method of
accounting,  wherein  revenue  was  recognized  when  the  contract  tasks  were
completed and accepted by the customers.

           This change had no effect on prior years, and accordingly,  pro forma
results for prior years are not applicable.

                                       F-7


<PAGE>



1.     Summary of Significant Accounting Policies:  (Cont'd)

       f.  Income taxes

           Deferred  tax  assets  and  liabilities   are  determined   based  on
differences between financial reporting and tax bases of assets and liabilities,
and are  measured  using the  enacted  tax rates and laws that will be in effect
when the differences are expected to reverse.

       g.  Estimates

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

       h.  Foreign currencies

           Assets and liabilities recorded in foreign currencies on the books of
the foreign  subsidiary are translated at the exchange rate on the balance sheet
date.  Translation  adjustments  resulting  from this  process  are  charged  or
credited to equity. Revenues, costs and expenses are translated at average rates
of exchange prevailing during the year.

       i.  Research and development

           Research and development costs are expensed as incurred.

       j.  Advertising costs

           Advertising  costs are  expensed  as  incurred.  Advertising  expense
approximated   $624,000,   $215,000   and  $88,000  in  1997,   1996  and  1995,
respectively.

       k.  Loss per share

           In 1997,  the  Company  adopted  Statement  of  Financial  Accounting
Standards  No.  128,  "Earnings  Per  Share"  (SFAS  No.  128).  This  Statement
establishes  standards for computing and  presenting  earnings  (loss) per share
(EPS).  SFAS No. 128 requires dual  presentation of basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the
period.  Diluted EPS reflects the  potential  dilution that could occur if stock
options or convertible securities were exercised or converted into common stock.
The Company's  adoption of SFAS No. 128 did not  materially  change  current and
prior years' EPS.

           Basic and diluted  loss per share  amounts  were  equivalent  for the
years ended December 31, 1997, 1996 and 1995.

       l.  Reclassifications

           Certain  items in the 1995 and 1996  financial  statements  have been
reclassified to conform to the 1997 classifications.





                                       F-8


<PAGE>



1.     Summary of Significant Accounting Policies:  (Cont'd)

       m.  New accounting standards

           In June 1997,  the  Financial  Accounting  Standards  Board  ("FASB")
issued  SFAS  No.  130,  "Reporting  Comprehensive  Income,"  which  establishes
standards for reporting and display of comprehensive  income, its components and
accumulated balances.  Comprehensive income is defined to include all changes in
equity except those  resulting from  investments by owners and  distribution  to
owners.  Among other disclosures,  SFAS No. 130 requires that all items that are
required to be recognized  under current  accounting  standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements.

           In addition, in June 1997, the FASB issued SFAS No. 131, "Disclosures
About  Segments of an Enterprise  and Related  Information,"  which  establishes
standards  for  reporting   information  about  operating   segments.   It  also
establishes   standards  for  disclosures   regarding   products  and  services,
geographic areas and major customers.

           Both of these new standards are effective for periods beginning after
December 15, 1997 and require  comparative  information  for earlier years to be
restated.  The  implementation  of  these  new  standards  will not  affect  the
Company's results of operations and financial  position,  but may have an impact
on future financial statement disclosures.

2.     Business Combination:

       On July 1,  1997,  the  Company  acquired  100% of the  capital  stock of
International.  The purchase price approximated  $6,720,000,  which consisted of
791,652  shares of common  stock  (valued  at  $6,115,000),  options  to acquire
207,152  shares of the  Company's  common  stock for $15 per  share  (valued  at
$244,000) and the  forgiveness  of debt.  The Company had no equity  interest in
International  prior to the acquisition.  The transaction was accounted for as a
purchase.  The  Company  recorded   approximately   $6,720,000  of  goodwill  in
connection with the acquisition.

       50,000 of the  shares  of common  stock  issued in  connection  with this
transaction  were  granted  to an  officer  of  the  Company,  who  was  also  a
stockholder of International.

       Pro forma  consolidated  information,  assuming the transaction had taken
place as of January 1, 1996, is as follows:
                                                   Year Ended
                                                   December 31,
                                             1997                   1996

       Revenue                            $ 10,817,237         $      37,500
                                          =============         =============

       Net loss                           $ (9,571,130)         $ (5,580,845)
                                          =============         =============

       Net loss per share                       $(.61)                 $(.42)
                                                =====                  =====

       Weighted average number
        of shares outstanding               15,782,951            13,185,708
                                            ==========            ==========

3.     Other Receivables:

       Other  receivables  consist of  amounts  owed the  Company  for shares of
common stock issued in connection  with warrant  exercises  which were collected
subsequent to year end.


                                       F-9


<PAGE>



4.     Property and Equipment:

       Property and equipment, at cost, consists of the following:
                                                         December 31,
                                                 1997                  1996

       Equipment and furniture              $   3,221,535         $   1,813,377
       Software                                   359,076               251,105
       Transportation equipment                   144,278                    -
       Leasehold improvements                     190,108                10,706
                                            -------------         -------------
                                                3,914,997             2,075,188
       Less accumulated depreciation              995,920               381,159
                                            -------------         -------------

                                            $   2,919,077         $   1,694,029
                                            =============         =============

5.     Loans Payable, Stockholders:

       Loans  payable,  stockholders  represent  loans  from  certain  corporate
officers/stockholders.  The loans are due on demand and bear interest at 10 1/2%
and 4 1/2% in 1997 and 1996, respectively.

       One of the loans,  which originated in 1992,  provided for the conversion
of the loan to common stock at a conversion rate  approximating  the fair market
value of the common  stock  ($.08 per  share) at the time the loan was made.  In
1997, this loan was converted into 50,000 shares of common stock.

6.     Stockholders' Equity (Deficiency):

       a. Capital stock

          During 1997, the Company issued 1,703,500 shares of common stock under
Regulation S offerings for net proceeds of $12,988,000.  The Company also issued
1,585,294  shares of common stock  (including  350,000 shares  distributed  from
treasury)  for net proceeds of  $4,088,000  in  connection  with the exercise of
warrants and options.

          In 1997,  the Company  issued an aggregate of 45,000  shares of common
stock to an officer and a third party as compensation for services provided. The
value of the shares ($222,500,  based upon the stock's trading value on the date
of grant) has been charged to operations.

          In December 1996, the Company issued 109,909 shares of common stock in
exchange for 65,000 Class A Warrants and 65,000 Class B Warrants.

          In December  1996,  the Company  issued 370,000 shares of common stock
for net proceeds of $65,000 and a receivable of $490,000 in connection  with the
exercise of 370,000 Class A Warrants.

          In December 1996 the Company placed 500,000 shares for anticipated net
proceeds of $3,500,000,  but the  transaction  was not completed by December 31,
1996. In December  1996,  the Company  issued  155,000 of the 500,000  shares of
common stock for net proceeds of $1,041,445.  The net proceeds  reflect a fee of
4% and other fees charged by the underwriter






                                      F-10


<PAGE>



6.     Stockholders' Equity (Deficiency):  (Cont'd)

       a. Capital stock  (Cont'd)

          In October 1996, the Company issued  1,000,000  shares in exchange for
$850,000,  565,000 of Class A Warrants  and 935,000 of Class B Warrants  and the
forgiveness of certain demand  registration  rights  previously  granted to this
warrantholder.

          In July 1996,  the Company  issued  150,000 shares of common stock for
net proceeds of $1,048,800.  In August 1996, the Company issued 25,000 shares to
the  purchaser  of the 150,000  shares,  thereby  reducing  the  proceeds to the
Company by $1 per share as a penalty for  failing to comply with a condition  of
the stock placement agreement.

          In February  1996,  the Company  granted an employee  20,000 shares of
common stock and recorded compensation of $40,000.

          In January 1996, the Company retired all of the  outstanding  treasury
shares, that were obtained when a stock subscriber  defaulted on his obligation.
Subsequently  the Company  issued  900,000  shares into treasury at par value to
fulfill obligations under employee stock grants and stock options. Distributions
of 350,000 and 105,000 shares were made from treasury to employees in connection
with the exercise of stock options in 1997 and 1996, respectively.

       During 1994, the Company accepted  non-recourse  notes totaling  $450,000
for 900,000  shares of subscribed  stock.  In 1995,  the notes  expired  without
repayment.  The Company  reclaimed  the shares from escrow,  retired  400,000 of
those shares in 1995 and retired the balance during 1996.

       b. Stock option plan

          During 1994,  the  Company's  Board of  Directors  approved an omnibus
stock  option  plan to  benefit  certain  key  employees.  Under  this  plan (as
amended),  the Company may issue up to  1,000,000  shares of stock  and/or stock
options  through  the year 2004.  The  options  become  exerciseable  at various
periods of time from thirty days to two years from the date of grant.

          The Company has granted  employees  options at various exercise prices
that  reflected  the fair value of stock on the date of grant.  The  Company has
elected to follow  Accounting  Principles Board Opinion No. 25,  "Accounting for
Stock Issued to Employees,"  and related  interpretations  in accounting for its
employee stock options.  Therefore, no compensation cost has been recognized. If
the Company  accounted for its stock options under the fair value method of SFAS
No. 123, "Accounting for Stock-Based  Compensation",  the Company's net loss and
loss per share  would have been  increased  to the pro forma  amounts  indicated
below:

                                        Years Ended
                                        December 31,
                  1997                          1996                   1995
                  --------------            --------------          ---------
Net loss:
  As reported      $(7,797,167)              $(5,132,845)            $(580,148)
  Proforma          (9,155,167)               (5,482,845)             (880,148)
Loss per share:
  As reported            $(.51)                    $(.41)               $(.05)
  Proforma               $(.59)                    $(.44)               $(.08)





                                      F-11


<PAGE>



6.     Stockholders' Equity (Deficiency):  (Cont'd)

       b. Stock option plan  (Cont'd)

         The fair  value of each  option is  estimated  on the date of the grant
using the Black-Scholes option pricing model with the following assumptions used
for grants:

                                        Years Ended
                                        December 31,
                            1997                    1996                   1995
                       -------------          -------------           --------
Dividend yield              -0-                    -0-                    -0-
Expected volatility         86.51%                 71.00%                 71.00%
Risk free interest rate      5.5%                 6.875%                 6.875%
Expected lives             3 years                3 years                3 years

          The following table summarizes the status of stock options outstanding
under the Company's option plan:
<TABLE>
<CAPTION>
                                                                      Weighted               Weighted
                                                Number                 Average                Average
                                                  of                  Exercise                 Fair
                                              Shares                    Price                  Value
<S>                                            <C>                       <C>              <C>
Granted                                        390,000                   1.49             .77
Exercised                                           -                    -
Cancelled and expired                               -                    -
                                          ------------                   ----
Outstanding, December 31, 1995                 390,000                   1.49
Granted                                        295,000                   2.23             1.16
Exercised                                     (115,000)                  1.75
Cancelled and expired                               -                    -
                                          ------------                   ----
Outstanding, December 31, 1996                 570,000                   1.82
Granted                                        907,900                  11.06             6.42
Exercised                                     (440,000)                  1.83
Cancelled and expired                          (60,500)                 12.38
                                          ------------                -------
Outstanding, December 31, 1997                 977,400                $  9.78
                                          ============                =======
</TABLE>

         The weighted average remaining  contractual life of options outstanding
as of December 31, 1997 is 9.27 years.

         The Company  contributed  the  capital in 1996 for the  exercise of the
115,000 options and recorded approximately $212,800 as compensation expense.

       c. Warrants

          In June 1997, the Company issued 207,152  warrants in connection  with
its acquisition of International.  The warrants had an exercise price of $15 per
share and were exercisable for a six-month period.  During 1997,  113,152 of the
warrants were exercised and the remaining 94,000 were cancelled.  The fair value
of the warrants  using the  Black-Scholes  option  pricing model  ($244,000) was
included as a component of the purchase price.

          The Company  issued 10,000  warrants to an  underwriter in each of the
years ended  December  31, 1997 and 1996.  The  warrants  have  exercise  prices
ranging  from  $11.25  per  share  to  $14.55  per  share.  These  warrants  are
outstanding as of December 31, 1997.

          During 1997, the Company issued an aggregate of 30,000 warrants,  with
exercise prices ranging from $9.75-$11.75 per share, to two directors.  The fair
value of the warrants is being charged to operations  over the vesting period of
the options. These warrants are outstanding as of December 31, 1997.

                                      F-12


<PAGE>



6.     Stockholders' Equity (Deficiency):  (Cont'd)

       c. Warrants  (Cont'd)

          During 1994 and 1995,  the Company  issued an  aggregate  of 1,425,000
Class A and 300,000 Class B warrants in connection  with the sale of securities.
The  exercise  prices of the Class A and Class B Warrants  were $1.50 and $2.00,
respectively.  During 1997,  425,000  Class A and 300,000  Class B Warrants were
exercised.  During  1996,  435,000  Class A and  65,000  Class B  Warrants  were
exercised,  and 565,000 Class A and 935,000 Class B Warrants were retired. As of
December 31, 1997, there are no Class A or Class B Warrants outstanding.

          In 1995, the Company issued an aggregate of 307,142  warrants to third
parties in consideration for services provided in connection with various equity
offerings.  The warrants had exercise prices ranging from $1 to $1.75,  and were
exercised in 1997.

       d. Employee stock purchase plan

          In August 1997,  the Company  adopted an Employee  Stock Purchase Plan
(the "Purchase Plan") to provide  eligible  employees an opportunity to purchase
shares  of  its  common  stock  through   payroll   deductions.   Semi-annually,
participant  account balances are used to purchase shares of stock at 85% of the
lesser  of the fair  market  value at (i) the  beginning  or (ii) the end of the
semi-annual offering period.

          The  fair  market  value  of  shares  that  may  be  purchased  by any
participant  during any calendar year may not exceed $25,000. A total of 200,000
shares are  available for purchase  under the Purchase  Plan. No shares had been
issued under the Purchase Plan as of December 31, 1997.

7.     Supplementary Cash Flow Information:

       Cash paid for  interest  expense for the years ended  December  31, 1997,
1996 and 1995 was $22,200, $-0- and $2,000, respectively.

       During 1997, the Company incurred capital lease obligations approximating
$144,000 for the  acquisition of various  property and equipment.  Further,  the
Company  issued stock and/or  options to various  parties in  consideration  for
services provided.

8.     Concentration of Credit Risk:

       The  Company  maintained  bank  balances,  which  at times  exceeded  the
federally insured limit of $100,000.

       Sales to two customers approximated 14% and 12% of net revenues for 1997.
One  customer  accounted  for 100% and 75% of net  revenues  for 1996 and  1995,
respectively.

       Sales to foreign customers,  located principally in Europe,  approximated
32% of net sales for 1997.

9.     Commitments and Contingency:

       a. Leases

          The Company leases office space under various operating  leases.  Rent
expense under these leases approximated $916,000,  $257,000 and $35,000 in 1997,
1996 and 1995, respectively. Future minimum lease payments under these operating
leases are:

                                      F-13


<PAGE>



9.     Commitments and Contingency:  (Cont'd)

       a. Leases  (Cont'd)

                        Year Ending
                       December 31,            Amount

                           1998              $  958,000
                           1999                 544,400
                           2000                 408,300

       b. Litigation

       The  Company  is  a  defendant  in  a  lawsuit   which   relates  to  GEM
Technologies,  Inc.  (GEM) a  former  affiliated  company  of  Alydaar  Software
Corporation.  Twenty  purported  noteholders  or  shareholders  of GEM  filed  a
complaint  against  certain  officers,  GEM and the  Company  alleging  that the
defendants  fraudulently  induced the  plaintiffs  into entering a note purchase
agreement  with GEM and  fraudulently  transferred  the  property  of GEM to the
Company. The plaintiffs have sought actual damages,  punitive damages,  attorney
fees and injunctive relief relative to the property allegedly transferred to the
Company.

       Although no estimate of loss or range of loss,  if any, can be determined
at this time, the Company intends to vigorously  defend the allegations  made in
this complaint. In addition, the Company's President has agreed to indemnify the
Company against any liability  resulting from a final and unappealable  judgment
or settlement in this action.

10.    Fair Value of Financial Instruments:

       The  methods  and  assumptions  used to  estimate  the fair  value of the
following classes of financial instruments were:

       Current  Assets and Current  Liabilities:  The  carrying  amount of cash,
       current  receivables and payables and certain other short-term  financial
       instruments approximate their fair value.

       Capital  Lease   Obligations:   The  carrying  amount  of  capital  lease
       obligations,  based on the  Company's  incremental  borrowing  rates  for
       similar types of borrowing arrangements, approximate their fair value.

     The  carrying  amount  and  the  fair  value  of  the  Company's  financial
instruments are as follows:
<TABLE>
<CAPTION>
                                                                          December 31,
                                                            1997                               1996
                                               ------------------------------     -----------------
                                                 Carrying            Fair           Carrying            Fair
                                                  Amount             Value           Amount             Value
<S>                                           <C>               <C>               <C>              <C>          
       Cash                                   $    1,526,900    $   1,526,900     $     379,400    $     379,400
       Accounts receivable and other
         receivable                                5,585,600        5,585,600           677,500          677,500
       Loan to stockholder                            51,300           51,300            51,300           51,300
       Accounts payable and accrued
         expenses                                  1,807,600        1,807,600         2,184,400        2,184,400
       Note payable, stockholder                     966,700          966,700           507,500          507,500
       Capital lease obligations                     123,100          123,100                -                -
</TABLE>



                                      F-14


<PAGE>



11.    Income Taxes:

       The income tax benefit for 1997  represents the estimated  benefit of net
operating  losses,  net of a valuation  allowance.  No benefit was recognized in
1996 or 1995 as the Company had a 100% valuation allowance

       The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
                                                                         December 31,
                                                               --------------------------------
                                                                     1997              1996              1995
                                                               --------------     --------------    ---------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
       Deferred tax assets:
         Net operating loss carryforward                       $    5,358,000     $    2,280,000    $    229,000
         Investment in subsidiary                                     382,000                 -               -
         Other                                                         44,000                 -               -
       Deferred tax liabilities:
         Depreciation method of
           property and equipment                                     (12,000)          (128,000)             -
         Allowance for realization of assets                       (5,172,000)        (2,152,000)       (229,000)
                                                               --------------     --------------    ------------

                                                               $      600,000     $           -     $         -
                                                               ==============     ==============    ===========
</TABLE>

       A  reconciliation  between the actual income tax expense and income taxes
computed by applying  the  statutory  federal  income tax rate to income  before
taxes is as follows:

<TABLE>

<CAPTION>
                                                                                   Years Ended
                                                                                   December 31,
                                                               --------------------------------------------------
                                                                     1997              1996              1995
                                                               --------------     --------------    -------------

<S>                                   <C>                         <C>                <C>               <C>       
       Computed income tax benefit at 34%                         $(2,855,000)       $(1,745,167)      $(197,250)
       Addition to allowance for realization
         of deferred tax asset net operating
         loss carryforward                                          2,255,000          1,745,167         197,250
                                                               --------------     --------------    ------------

                                                               $      600,000     $       -         $      -
                                                               ==============     ==============    ===========
</TABLE>

       As of December 31, 1997, the Company had net operating loss carryforwards
("NOLs") of  approximately  $13,395,000  available  through December 31, 2012 to
offset future taxable income. However, under Section 382 of the Internal Revenue
Code, a greater than 50% change in ownership,  as defined,  restricts the annual
utilization  of  available  NOLs to a  prescribed  amount.  Accordingly,  future
utilization of the NOLs may be limited.

12.    Retirement Plan:

       In August 1997, the Company adopted a salary reduction plan under Section
401(k) of the Internal Revenue Code. Participation in the Plan is voluntary, and
any  qualified  employees  may elect to  contribute  up to 10% of earnings.  The
Company may, at its  discretion,  match a percentage  of an  employee's  elected
deferrals. The Company did not make a contribution to the Plan in 1997.









                                      F-15