SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549
                                  -------------

                                   FORM 10-KSB

(Mark One)

|X|     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

For the fiscal year ended December 31, 1998

                                       OR

|_|     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

For the transition period from ________ to ___________

                         Commission file number: 0-26464


                         CSI Computer Specialists, Inc.
             (Exact name of Registrant as specified in its charter)

Delaware                                                     52-1599610
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

904 Wind River Lane  Suite 100
Gaithersburg, Maryland                                       20878
(Address of principal executive offices)                     (Zip code)

                                                             301-921-8860
               (Registrant's telephone number including area code)

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

Title of Securities                               Exchanges on which Registered
Common Stock, par value $0.001 per share          OTB Bulletin Board



Securities  registered pursuant to section 12(g) of the Act:
N/A



         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports),  and (2) has been subject to such filing  requirements for the past 90
days. Yes X No ________

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

State issuer's revenues for its most recent fiscal year.  $28,954,839


As of July 31, 1999, the aggregate market value of Common Stock outstanding held
by  non-affiliates  of the issuer was  $2,786,916  (computed by reference to the
average bid and asked price of the Common  Stock) and the total number of shares
of Common Stock outstanding was 3,715,888.


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


Certain   statements   made  in  this   Annual   Report  on  Form   10-KSB   are
"forward-looking"  statements  within  the  meaning  of the  Private  Securities
Litigation Reform Act of 1995. Such statements  involve known and unknown risks,
uncertainties,  and other factors that may cause actual results, performance, or
achievements of the Company to be materially  different from any future results,
performance,  or  achievements  expressed  or  implied  by such  forward-looking
statements.  Although the Company  believes that the  expectations  reflected in
such  forward-looking  statements  are based upon  reasonable  assumptions,  the
Company's  actual  results could differ  materially  from those set forth in the
forward-looking  statements.  Certain factors that might cause such a difference
include,  but are not limited to, the timing of  revenues,  rapid  technological
change,  the demand for  services  for  computer  hardware  systems and computer
equipment,  the  timing  and  amount of  capital  expenditures  and other  risks
detailed herein.



<PAGE>


                                    CONTENTS

                                                                          Page

Part I   Item 1   Description of Business                                    4

         Item 2   Description of Property                                    8

         Item 3   Legal Proceedings                                          9

         Item 4   Submission of Matters to a Vote of Security Holders        9


Part II  Item 5   Market for Common Equity and Related Stockholder Matters   9

         Item 6   Management's Discussion and Analysis                       9

         Item 7   Financial Statements                                     F-1

         Item 8   Changes in and Disagreements with Accountants on
                  Accounting and Financial Disclosure                       12


Part III Item 9   Directors, Executive Officers, Promoters and Control
                  Persons; Compliance with Section 16(a)                    12

         Item 10  Executive Compensation                                    13

         Item 11  Security Ownership of Certain Beneficial Owners and
                  Management                                                14

         Item 12  Certain Relationships and Related Transactions            15

         Item 13  Exhibits List and Reports on Form 8-K                     15



<PAGE>


                                     PART 1

Item 1.  Description of Business

General

                  CSI   Computer   Specialists,   Inc.   (the   "Company")   was
incorporated pursuant to the laws of the State of Delaware on February 22, 1994.
The Company is the  successor to  CSI-Maryland.  CSI-Maryland  was  incorporated
pursuant to the laws of the State of Maryland in October 1988 for the purpose of
providing computer hardware services, including installation and de-installation
of equipment,  computer upgrades,  computer maintenance and repair, and the sale
of computer parts and equipment.  The Company was organized by  CSI-Maryland  to
enable  CSI-Maryland  to merge with and into the  Company  on March 31,  1994 in
order to effectuate a reincorporation in the State of Delaware.

         The  Company  provides  a full  range of  computer  hardware  services,
including  sales and maintenance of mainframe and mid-range  computer  equipment
and parts, network design and installation,  computer upgrades, and installation
and  de-installation  of  equipment.   The  Company  provides  its  services  to
commercial  customers,  agencies of federal,  state and local  governments,  and
universities,  hospitals,  and  associations in the  Mid-Atlantic  region of the
United  States,  including West Virginia,  Virginia,  Maryland,  the District of
Columbia, New Jersey, New York, Connecticut,  Pennsylvania,  and in Illinois and
California.

         In pursuit of its plans for  geographic  expansion,  the Company opened
offices  near  Philadelphia,  Pennsylvania  in  January,  1995 and in  Richmond,
Virginia in December,  1995. In addition,  as part of the  Company's  efforts to
expand its technological  expertise and customer base, the Company completed its
acquisition of Capitol  Computer  Systems,  Inc., doing business as CCS Systems,
Inc. in December,  1995.  CCS Systems,  Inc. is a Lanham,  Maryland  value added
reseller  specializing  in equipment  sales and computer  hardware  maintenance.
Furthering its expansion efforts,  the Company acquired  Cintronix,  Inc., which
specializes in the sale and servicing of personal computers,  in January,  1997,
and Advanced Network Systems,  which provides  network  integration  service and
sales to companies and associations in the Washington,  DC metropolitan area, in
February, 1997. The Company acquired the assets of Phoenix Service, Inc. in May,
1997. Phoenix Service provides  mainframe sales and maintenance  services in the
Eastern  region of the  country,  as well as outside  Chicago,  Illinois and San
Francisco,  California.  The Company sold the assets of Cintronix, Inc., on June
30, 1999, pursuant to poor performance as discussed later in this Form 10-K.

         Initially,  the Company's business was limited to providing service for
computer mainframes  manufactured by International Business Machines ("IBM") and
peripheral  equipment,  such as printers,  disk drives, tape drives and computer
controllers.  The  Company  has  broadened  its  peripheral  support  to include
servicing for products  manufactured by Memorex,  Storage Technology and various
other original equipment  manufacturers of input/output  products.  In addition,
the Company offers  maintenance  services for personal  computers and associated
peripheral  equipment  produced  by several  major  manufacturers,  such as IBM,
Compaq, NEC, Epson and  Hewlett-Packard,  as well as provides parts and services
for computer mainframes  manufactured by Digital Equipment  Corporation ("DEC"),
such as DEC/VAX platforms and peripheral equipment.

         The Company provides its services to customers  pursuant to maintenance
agreements.  Substantially  all  of the  Company's  maintenance  agreements  are
fixed-fee  agreements  for  terms  of one or  more  years.  Pursuant  to such an
agreement, a customer agrees to pay a fixed amount, payable monthly, in exchange
for the Company's  agreement to provide all parts (other than expendable  parts)
and labor necessary to maintain or repair the equipment  during the term of such
agreement.  The Company occasionally provides services on a "time-and-materials"
basis  pursuant  to which a  customer  agrees to pay a  specified  rate for each
particular  service  to  be  performed  by  the  Company  and  to  purchase  any
replacement parts used in connection therewith.

         The Company began  actively  selling  computer  equipment in 1993,  and
management  believes that current  market  conditions  have afforded the Company
strong potential for growth.  The Company sells computer  equipment  pursuant to
equipment sales agreements.  Pursuant to such agreements,  customers pay for the
computer equipment which they purchase from the Company upon delivery. Given the
Company's large existing customer base, the Company has what management believes
to be a "niche  market  audience,"  which  enables the  Company to "bundle"  its
services to include the sale of equipment  to a customer,  the  installation  of
such equipment and the  maintenance  of the installed  equipment on a continuing
basis. The acquisition of Cintronix,  Inc. has enabled the Company to expand its
sales of mid-range and personal computer products, bringing purchasing volume to
levels that provide more competitive pricing from suppliers and distributors.

         The industry in which the Company  operates has been  characterized  by
rapid  and  continuous   technological  advances,   permitting  cost  reduction,
increased  computer  processing  capacities and broadened  equipment  platforms.
Customers  frequently  upgrade or replace  equipment and also use mainframes and
peripheral  equipment  manufactured  by  various  vendors to take  advantage  of
technological innovations. As a result, equipment which is replaced by different
or newer  models  becomes  available  to the resale or  secondary  market.  This
enables the Company to purchase this  equipment and support  additional  product
lines.

         Management   believes  that  the  Company  has  been  able  to  compete
successfully because of the high quality of service the Company provides and the
competitive pricing it is able to offer to its customers. As a result, since its
inception,  the  Company  has  been  able  to  attract  and  maintain  long-term
relationships  with its  existing  customers  and to expand  its  customer  base
consistently and effectively.


Maintenance Services

         The Company provides  third-party,  multi-vendor  computer hardware and
peripheral equipment maintenance services to commercial  customers,  agencies of
federal, state and local governments,  universities, hospitals, associations and
other  organizations  located primarily in the Mid-Atlantic region of the United
States. The equipment currently  maintained and serviced by the Company consists
of a wide range of peripheral subsystems, including terminals, disk drives, tape
drives,  printers and computer  controllers,  and also includes the  mainframes,
mid-range   minicomputers  and  personal  computers  on  which  such  peripheral
subsystems  are dependent.  The equipment  serviced or maintained by the Company
varies  from  customer  to  customer  and ranges  from  providing  services  for
individual computers or peripherals to providing services for many computers and
peripherals  located in a customer's  mainframe computer room. Services provided
by the  Company  consist  primarily  of  scheduled  preventive  maintenance  and
emergency  remedial  services.   Preventive  maintenance  includes  inspections,
diagnostic analysis,  cleaning,  adjustments,  and replacement of components and
parts.  In addition,  the Company  conducts  inspections  for  certification  of
equipment in connection  with  determining  whether  mainframes  and  peripheral
equipment meet original equipment manufacturer maintenance standards.

         Most of the mainframe computers  maintained and serviced by the Company
are  manufactured  by IBM,  although the Company also provides such services for
computers   manufactured  by  other  companies,   including   Memorex,   Storage
Technology,  and DEC. The personal computers and peripheral  equipment currently
serviced by the Company are manufactured by numerous companies.  The Company, in
1995,  expanded  its  business  to include  the sale and  servicing  of IBM RISC
System/6000,  IBM AS/400 and IBM  ES/9000.  In  addition,  the  Company  greatly
expanded its sale and servicing capabilities in the mid-range computer area with
the acquisitions of Cintronix, Inc.
and Advanced Network Systems in early 1997.


Maintenance Agreements

         The Company  provides  most of its  services  pursuant  to  maintenance
agreements  having terms of one or more years.  Pursuant to such  agreements,  a
customer is obligated  to pay a fixed amount on a monthly  basis in exchange for
the Company's  agreement to provide all parts (other than expendable  parts) and
labor  necessary to maintain or repair the  equipment  subject to the  agreement
during  the  term  of the  agreement.  Additionally,  the  Company  occasionally
provides services on a  "time-and-materials"  basis pursuant to which a customer
agrees to pay a specified  rate for each  particular  service to be performed by
the Company and to purchase any replacement parts used in connection  therewith.
The Company's  standard  maintenance  agreement provides that upon expiration of
the initial term thereof, such agreement will continue on a month-to-month basis
until  such time as  either  party  terminates  the  agreement.  It has been the
Company's  experience  that  very  few of its  maintenance  agreements  with its
customers are cancelled or  discontinued  upon expiration of their initial terms
given the monthly renewal provisions.

         Most of the  Company's  maintenance  agreements  with  agencies  of the
federal  government are entered into for terms of three to five years.  However,
such  maintenance  agreements  provide agencies an annual right to terminate the
contract  in  the  event  that  the  agencies  do  not  receive  the   requisite
governmental  funding.  Revenues from such contracts are,  therefore,  dependent
upon  annual  governmental  funding.  Such  termination  rights have seldom been
exercised,  however,  and  such  maintenance  agreements  have  terminated  upon
expiration of their  specified  terms and, in some cases,  have been renewed for
one-year periods.


Subcontracting

         The Company has entered into subcontracting  agreements with several of
its vendors  pursuant to which such vendors perform  certain  services which the
Company has agreed to provide to  customers  pursuant  to  existing  maintenance
agreements.  In such cases,  the Company acts as the "prime  contractor" for the
provision  of  computer   maintenance  services  and  the  vendor  acts  as  the
"subcontractor."  The Company enters into such  agreements for several  reasons.
The Company may elect to enter into subcontracting agreements when the equipment
that  is  subject  to a  maintenance  agreement  is  expensive  or is  otherwise
difficult for the Company to obtain or replace.  Similarly,  such subcontracting
agreements have been advantageous to the Company when the services required by a
maintenance  agreement have been of a particular level of engineering  expertise
that the  Company  does not  otherwise  provide.  The  Company  also enters into
subcontracting  agreements  because  customers  sometimes  prefer to be provided
services by one entity,  such as the  Company,  which has the ability to service
all of its computer equipment  (notwithstanding  the manufacturer or the model),
rather  than rely on the  services  which may be provided  individually  by each
vendor with respect to its own  manufactured  product or model.  Such agreements
may be terminated by either party at any time upon delivery of written notice 30
days in advance of such  termination.  Several  companies offer the services and
expertise  for  which  the  Company  enters  into   subcontracting   agreements.
Therefore,  management  believes  that  the  loss  of the  services  of any  one
subcontractor  would  not  have a  material  adverse  effect  on  the  Company's
business.


Equipment Sales

         The  Company  sells  computer  equipment  pursuant to  equipment  sales
agreements.  Pursuant  to  such  agreements,  customers  pay  for  the  computer
equipment  which they purchase from the Company upon  delivery.  Generally,  the
Company takes an order for equipment from a customer,  contacts its suppliers to
ascertain the availability of the equipment, provides the customer with a quoted
price for the equipment and executes an agreement upon the customer's acceptance
of the terms.  The Company does not,  therefore,  maintain a large  inventory of
computer  equipment,  particularly  mid-range and personal  computer  equipment,
which is readily  available.  Revenues from the sale of computer  equipment have
steadily increased during recent years, with the largest increase resulting from
the sale of mid-range  and  personal  computer  equipment.  The  acquisition  of
Cintronix,  Inc.  in 1997  significantly  increased  revenues  from  the sale of
mid-range and personal computer  equipment,  and the Company intends to continue
to expand this area of its business during the next few years. But affecting the
expansion of sales in this area are the increase in competition, especially from
the manufacturers, and changes in the buying patterns of the federal government.


Sales and Marketing

         The  Company  currently  employs  approximately  twenty-five  full-time
marketing   representatives.   Most  representatives  direct  their  efforts  to
promoting the Company's sales and services to commercial accounts, universities,
hospitals and associations in the Mid-Atlantic region,  Illinois and California.
The remaining representatives market the Company's services primarily to federal
government  agencies.  The  majority  of the  leads  pursued  by  the  marketing
representatives  are  generated  by existing  customers  and by  referrals  from
various  vendors.  In  addition,  the Company  utilizes  the services of several
contract marketing representatives, who provide marketing services. To date, the
Company has done little advertising.  However,  the Company is in the process of
developing an effective  marketing and  advertising  program,  a primary part of
which will be the integration and  cross-education  of sales personnel to market
each  subsidiary's and division's  products and services to the others' customer
base.


Principal Suppliers and Subcontractors

         The Company  acquires from IBM a significant  part of the equipment and
parts which it uses in  connection  with  providing  maintenance  services.  The
Company also relies on IBM to provide subcontracting  services.  Acquisitions of
parts and  equipment  for  resale,  especially  personal  computer  and  network
equipment,  are purchased from a variety of suppliers,  including  Ingram Micro,
Pinacor,  Merisel and Tech Data. The Company also subscribes to a service called
"CDLANET,"  which  provides the Company  with access to an "on-line"  nationwide
database of equipment offered for sale by various vendors and distributors.  The
Company frequently acquires equipment from various vendors identified using this
service.  Due to the significant number of comparable vendors of these products,
the  Company  does not  feel  that the  loss of any one  supplier  would  have a
material adverse effect on the Company's business.


Customers

         Historically,  most of the Company's  direct  revenues are derived from
services performed through maintenance agreements. However, with the acquisition
of Cintronix,  Inc.,  equipment  and parts sales  accounted a larger part of the
Company's combined revenues.  The percentage of commercial customers serviced by
the  Company  pursuant  to  maintenance  agreements  for the fiscal  years ended
December 31, 1998 and 1997 equaled approximately 82% and 79%,  respectively,  of
all  customers  serviced by the  Company  pursuant  to  maintenance  agreements.
Federal  government   agencies  serviced  pursuant  to  maintenance   agreements
accounted  for  approximately  18%  and  21%,  respectively,  of  the  Company's
customers  for the fiscal  years  ended  December  31,  1998 and 1997.  Revenues
derived from time and materials agreements approximated 5% and 7%, respectively,
of the Company's gross revenues for the fiscal years ended December 31, 1998 and
1997. Revenues generated by parts and equipment sales, represented approximately
55% and 58%, respectively, of gross revenues for the fiscal years ended December
31, 1998 and 1997.

         The  Company's  customers  generally  have been loyal.  It has been the
Company's  experience  that  most of its  maintenance  agreements  are  renewed.
Currently,  no one customer represents more than 7% of the total revenues of the
Company. The Company's commercial customers include American Management Systems,
Inc., Lockheed Martin, Northrop Grumman, IBM, Interactive Systems, Inc. ("ISI"),
ACS,  Amdahl,  Blue  Cross/Blue  Shield of  Washington,  INOVA Health System and
Medlantic Health Care System, Inc.


Business Strategy

         The  objectives of the Company are,  through the provision of currently
offered and new  services,  to increase its customer  base and to also  increase
equipment sales. Management believes that increasing the Company's customer base
can be achieved by the cross  marketing  of products  and  services  between the
Company and its acquired subsidiaries and divisions, as well as the expansion of
sales and servicing of additional mainframe and mid-range computers. The Company
can also realize these objectives by expanding its business to provide sales and
service outside of the Mid-Atlantic  region into other  geographical  locations.
Management also believes that it can continue to increase its sales of parts and
equipment as a result of the Company's  designation as a "Value Added  Reseller"
of  computer  equipment  produced  by various  manufacturers,  and  through  the
provision  of  network  design  and  integration  services  to new and  existing
customers.  Designation  as a "Value  Added  Reseller"  enables  the  Company to
acquire computer  equipment  directly from manufacturers at discounts based upon
the volume of its purchases.  The  acquisition of Cintronix,  Inc.,  resulted in
increased parts and equipment sales. Changes in the mid-range computer parts and
equipment  sales are  expected  in the future as  competition  increases  and as
profit margins decrease, and the Company sold certain assets of Cintronix, Inc.,
in June, 1999, in response to these changes.


Acquisitions

         The  Company's  long-term  plan  has  been to  pursue  its  growth  and
acquisition  strategy  on  both a  national  and  regional  level.  The  Company
implemented  this plan on a national level in 1997when it acquired the assets of
Phoenix  Service,  Inc., which gives the Company the ability to develop business
in major population areas in California and Illinois where it had not previously
been represented.  Management had hoped that the acquisitions of Cintronix, Inc.
and Advanced  Network  Systems in early 1997 would further the Company's goal of
developing  regional  clusters of sales and service  representatives  to improve
customer  service  and to gain  greater  market  penetration,  but the  expected
integration of these  acquisitions  and the projected  increase in marketing and
decrease in costs due to economies of scale failed to materialize in 1998.  Only
the Phoenix Service  division of the Company provided  significant  expansion in
growing the customer base  profitably.  The  disappointing  performance of these
acquisitions  caused the Company to take a one-time charge of approximately $1.7
million  to  write  down  the  carrying  value  of  these  companies  due to the
impairment of the related assets,  primarily goodwill. In addition,  the Company
sold certain of the assets of Cintronix,  Inc. in June, 1999, in response to the
poor  performance,  and in an effort to stem the losses  generated by changes in
the personal computer equipment and sales market. The Company now plans to focus
its efforts on the core business of mainframe  computer  maintenance  and sales,
and to take advantage of opportunities  for expanding  national accounts in this
segment of  operations.  The Company does not presently  anticipate  any further
acquisitions  until  it  has  sufficiently   recovered  from  the  disappointing
performance  in 1998 of the  acquired  companies  and the overall  effect on the
combined  operations of the Company,  and its plans to  accomplish  this include
more aggressive integration of the companies into the parent's operations.

         The Company could be subject to liabilities arising from an acquisition
in the event the Company has assumed unknown or contingent liabilities or in the
event such liabilities are imposed on the Company. In an effort to minimize such
risks,  prior to making  acquisitions,  the Company has  conducted due diligence
investigations of its targets. In addition, the Company has sought to avoid such
liabilities by purchasing only selected assets and assuming selected liabilities
of certain  acquirees  and seeking  indemnification.  There can be no assurance,
however,  that these efforts will result in the Company's  avoidance of any such
liabilities,  which  could  have a  material  adverse  effect  on the  Company's
financial condition.


Employees

         The Company has approximately  160 full-time  employees who are located
at the Company's  headquarters in  Gaithersburg,  Maryland and in nine cities in
the Mid-Atlantic region, Illinois and California.



Item 2.  Description of Property

                  The  Company's   headquarters  are  located  in  Gaithersburg,
Maryland  (the  "Gaithersburg   facility").  In  addition  to  the  Gaithersburg
facility,  the Company  maintains  its National  Support  Center in  Beltsville,
Maryland (the  "Beltsville  facility");  sales and marketing  offices in Towson,
Maryland  ("the  Towson  facility"),   Fairfield,  New  Jersey  (the  "Fairfield
facility"),  and Addison,  Illinois  (the  "Addison  facility");  and office and
warehouse  space  in  Moorestown,   New  Jersey  (the  "Moorestown   facility"),
Sunnyvale,  California  (the "Sunnyvale  facility") and Richmond,  Virginia (the
"Virginia facility").  In addition, CCS Systems, Inc., a wholly-owned subsidiary
of the Company,  maintains  its offices and service  facilities in the Company's
Gaithersburg  and  Beltsville  facilities,   and  Cintronix,   Inc.,  the  other
wholly-owned  subsidiary  of the Company,  maintains  its offices in  Annapolis,
Maryland (the "Annapolis facility").

         The Gaithersburg  facility is leased by the Company pursuant to a lease
having  a  term  of ten  years,  which  term  expires  in  November,  2007.  The
Gaithersburg  facility consists of 12,566 square feet and is used by the Company
primarily as general office space.  The monthly rental payment for such space is
approximately $13,350 and is subject to annual increases.

         The  Beltsville  facility is leased by the Company  pursuant to a lease
having a term of five years, which term is scheduled to expire in October, 2002.
The  monthly  rental  payment for such space is $13,912 and is subject to annual
increases.  The Beltsville facility currently consists of 31,000 square feet and
is used by the Company to house the Company's technical support staff,  in-house
training  instructors  and  logistical  personnel,   and  for  the  storage  and
warehousing  of  the  bulk  of  the  Company's   equipment,   parts  and  supply
inventories.

         The Towson  facility is used by marketing  personnel of the Company and
is leased by the Company on a  month-to-month  basis. The monthly rental payment
for such space is $995.

         The Fairfield  facility is used by marketing  personnel of the Company.
The lease is for a five year period and expires in September,  2003. The monthly
rental payment for such space is $2,600.

         The Addison facility is used by marketing  personnel of the Company and
includes some warehouse  space.  The lease is for a five-year period and expires
in February, 2001. The monthly rental payment for such space is $2,604.

         The  Moorestown  facility is leased by the Company  pursuant to a lease
having a term of five  years,  which term is  scheduled  to expire in  February,
2004. The Moorestown  facility consists of approximately  19,200 square feet and
is used by the  Company  for storage and  warehousing  of  equipment,  parts and
supplies  for  accounts in its  service  area,  as well as office  space for the
computer  engineers  assigned to that area.  The monthly rental payment for such
space is $10,160 per month.

          The  Sunnyvale  facility is leased by the Company  pursuant to a lease
having a term of two years,  which term is scheduled to expire on June 22, 1999.
The Sunnyvale  facility consists of approximately  3,726 square feet and is used
by the Company for storage and warehousing of equipment,  parts and supplies for
accounts  in that  service  area,  as  well as  office  space  for the  computer
engineers  assigned to that area.  The monthly  rental payment for such space is
$5,384 and is subject to annual increases.

         The  Virginia  facility  is leased by the  Company  pursuant to a lease
having a term of five years,  which term is  scheduled to expire on December 31,
2000. The Virginia facility  consists of approximately  5,900 square feet and is
used by the Company for storage and warehousing of equipment, parts and supplies
for  accounts in that  service  area,  as well as office  space for the computer
engineers  assigned to that area.  The monthly  rental payment for such space is
$4,316 and is subject to annual increases.


         The Annapolis facility is leased by Cintronix, Inc. pursuant to a lease
having a term  expiring in October,  1999.  The Annapolis  facility  consists of
approximately  6,000  square feet and is used  primarily  for housing the sales,
administrative  and  service  personnel  of such  company,  and for  storage and
warehousing of equipment,  parts and supplies en route to customers  under sales
agreements.  The monthly  rental payment for such space is $4,377 and is subject
to annual increases.

         In addition to the foregoing  facilities,  the Company  maintains local
parts storage facilities in various locations throughout the Mid-Atlantic region
of the United States and in Illinois to provide local support to area  accounts.
The  monthly  rental  for these  storage  centers  is less than $100  each.  The
facilities are leased pursuant to  month-to-month  leases. In the event that any
lease is  terminated  or not  otherwise  renewed,  management  believes that the
Company would be able to lease adequate space  elsewhere on terms  comparable to
those in the current lease.

         The Company  does not intend to invest in real estate or  interests  in
real estate,  real estate  mortgages,  or  securities of or interests in persons
primarily engaged in real estate activities in the foreseeable future.

Item 3.  Legal Proceedings

None.

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

None.

                                     PART II


Item 5.  Market for Common Equity and Related Stockholder Matters

The  Company's  Common Stock  trades on the OTC Bulletin  Board under the symbol
"CSIS".  The  following  table sets forth the range of high and low trade  price
information for the periods indicated:

1st Quarter 1997           High     2 5/8   Low      1 3/16
2nd Quarter 1997           High     2 5/8    Low     1 13/16
3rd Quarter 1997           High     1 15/16 Low      1
4th Quarter 1997           High     1 9/16  Low      25/32
1st Quarter 1998           High     1 1/2   Low      3/4
2nd Quarter 1998           High     1 1/16   Low     9/16
3rd Quarter 1998           High     1       Low      13/32
4th Quarter 1998           High     1       Low      21/64
1st Quarter 1999           High     3/4     Low      1/2
2nd Quarter 1999           High     7/8     Low      7/16


As of June 13, 1998,  the Company's  Common Stock was held by  approximately  40
holders of record.  As of June 1, 1997,  the Company's  Common Stock was held by
approximately 35 holders of record and approximately 732 beneficial holders. The
Company believes that it continues to have in excess of 700 beneficial  holders.
The Company has never  declared or paid a cash  dividend and has no present plan
to do so in the foreseeable  future. The Company currently intends to retain its
future  earnings,  if any, to fund the development and finance the growth of its
business.  The amount and timing of any future  dividends will depend on general
business  conditions  encountered  by the  Company,  as  well  as the  financial
condition,  earnings and capital  requirements  of the  Company,  and such other
factors as the Board of Directors of the Company may deem relevant.

***
Item 6.  Management's Discussion and Analysis


GENERAL

         The  Company  provides  a full  range of  computer  hardware  services,
including  sales and maintenance of mainframe and mid-range  computer  equipment
and parts, network design and installation,  computer upgrades, and installation
and  de-installation  of  equipment.  These  services are provided to commercial
customers,  agencies  of  federal,  state and local  governments,  universities,
associations and hospitals  primarily in the  Mid-Atlantic  region of the United
States, including West Virginia,  Virginia,  Maryland, the District of Columbia,
New Jersey,  New York,  Connecticut and  Pennsylvania,  and also in Illinois and
California.

         The Company's principal business is providing computer  maintenance and
repair services,  which are provided under both fixed fee and time and materials
arrangements.  Under the fixed fee  arrangement,  which is the primary method of
service,  a customer  pays a fixed  monthly  fee for the term of the  agreement,
generally one to two years,  for which the Company  provides the parts and labor
for both scheduled  preventative  maintenance and emergency repairs. The Company
records  the  revenue  from  fixed fee  contracts  ratably  over the term of the
contract,  while the costs the  Company  incurs to provide the  maintenance  and
emergency  repairs  are  charged  to  expense  as  incurred.   Accordingly,  the
profitability  of the Company's  maintenance and repair services can and will be
affected  by period to period  fluctuations  in the number and  severity  of the
emergency repairs required by its customers, which the Company cannot predict or
control.  Additionally,  in certain  circumstances  the  Company  will choose to
provide the contracted-for services by subcontracting with others,  particularly
when the  equipment  covered  by the  agreement  cannot  be  serviced  in a cost
effective  manner,  is  difficult  to  repair or  replace,  or  requires  unique
engineering  expertise  that  is  not  applicable  to  equipment  utilized  by a
significant  number of the Company's other  customers.  The Company obtains such
subcontracting  services through  short-term  agreements,  and its profit margin
will  generally be lower than if the work were not  subcontracted.  Accordingly,
operating  results may fluctuate from period to period as a result of changes in
the level and nature of subcontracted services.

         The sale of computer  equipment  accounts  expanded rapidly in 1997 and
leveled out in 1998,  but,  due to  increased  competition,  decreases in profit
margins and changes in  purchasers'  buying  patterns,  revenues  therefrom  are
likely to show some fluctuation from period to period. Cross marketing among the
Company's  subsidiaries  and divisions should decrease these  fluctuations  over
time.  Mainframe  equipment  sales  are  entered  into more  commonly  to secure
contracts for the maintenance  thereof than for the profit on the equipment sale
itself,  and the  margins  on these  sales of  equipment  are  subject to market
conditions.  Consequently,  operating profits as a percentage of gross sales are
subject to  fluctuation  due to the volume  and the makeup of  equipment  sales.
Other areas of expansion are in the areas of servicing laser printers, providing
help desk support services,  and expanding the Company's technical  capabilities
to maintain the more current mainframe technology.


RESULTS OF OPERATIONS

         Revenues for the fiscal year ended  December 31, 1998  increased by 20%
to  $28,954,839  compared to revenues of  $24,185,609  for the fiscal year ended
December 31, 1997.  This  increase in annual net  revenues  resulted  from sales
growth in both maintenance  services and equipment sales.  Maintenance  revenues
increased  principally  due to  growth  in  the  Company's  book  of  fixed  fee
agreements,  both in number and  dollar  amount of the  agreements.  Maintenance
revenues  for 1998  increased  by 28% to  $12,965,040  compared  to  maintenance
revenues  of  $10,111,099   for  1997.   Maintenance   services   accounted  for
approximately  45% of the Company's  revenues for 1998 compared to 42% for 1997.
Equipment and parts sales  increased 13% to  $15,989,799  for 1998 compared with
$14,074,510 for 1997, comprising 55% of sales in 1998 and 58% of sales in 1997.

         The Company's cost of sales as a percentage of revenues was 86% in 1998
compared to 82% in 1997. An increase in the costs of  maintenance  services as a
percentage  of  maintenance  service  income was  combined  with an  increase in
equipment  sales on which profit margins  percentages  are lower.  The increased
costs  of  maintenance  services  resulted  primarily  from  increased  costs of
emergency  replacement parts and increased  reliance on subcontracted  services.
Subcontractor  costs could  decrease as the  necessary  expertise  is  developed
in-house  to service  newer  technology;  however,  as the  Company  enters into
contracts on even more recent  technology,  the services of  subcontractors  may
still be  required.  Additionally,  gross  margins  in  fiscal  1998  have  been
adversely  affected by the costs  associated  with  difficulties  encountered in
integrating  the Company's  subsidiaries  with parent  company  operations.  The
Company  expects  that the costs of  maintenance  services  as a  percentage  of
maintenance service income to increase in future quarters as the Company expands
the  mix  of  hardware  that  will  be  maintained  under  contracts  and as the
competition  based on pricing  results in lower margins.  The Company expects to
partially  offset  these  costs by reducing  subcontract  expense as the Company
develops the additional in-house  expertise,  and by increasing both the book of
fixed fee agreements and the parts and equipment sales.

         Selling,  general and  administrative  expenses as a percentage  of net
revenues were 23% and 22%, respectively,  for 1998 and 1997. The Company expects
short-term  fluctuations  in this  percentage  in the  future  as it adds to its
technical support,  marketing staff and other administrative  personnel in order
to expand its customer base and increase  equipment sales. The selling,  general
and  administrative  expenses  increased 25% to $6,655,829  for 1998 compared to
$5,331,448  for 1997.  The  increase in amount and the  percentage  is primarily
attributable  to charges  for  uncollectible  debts,  increases  in utility  and
occupancy  charges for new facilities,  and increases in  professional  fees, as
well as costs  attributable to trying to integrate the subsidiaries'  operations
with the parent company.

         The Company took a one-time charge to operations of approximately  $1.7
million in writing off the goodwill  attributable to several of the acquisitions
the Company  made in 1995 and 1997.  This charge was taken  because the expected
cash  flows  from  these  operations  were less than the  carrying  value of the
investment  in these  companies.  The  Company  has taken  steps to recover  the
expected earning  capacity that existed at the time that the  acquisitions  took
place,  primarily by changes in management and  consolidation  of certain of the
companies with the parent company operations.

         The  Company's  operating  loss for the fiscal year ended  December 31,
1998 increased to a loss of $4,248,134  compared to a loss of $919,378 for 1997.
The  increase  in  operating  loss was  primarily  attributable  to the  overall
increase in costs of sales  compared to the  increase in  revenues,  increase in
selling  and  administrative  costs  related  to  building  up sales  staff  and
integrating the combined operations of each of the newly acquired businesses and
certain increased charges, and finally by the one-time charge for decreasing the
carrying value of certain of the subsidiaries.

         Net interest  expense  increased  to net  interest  expense of $82,470,
compared to net  interest  income of $39,317 for 1997,  primarily as a result of
the decrease in investment  earnings as the remaining  proceeds of the Company's
1995 initial  public  offering were utilized for the 1997  acquisitions  and the
Company  made  more use of its  revolving  line of  credit  to  provide  working
capital. The Company expects that net interest expense will continue to increase
until the Company starts generating additional cash from operations.

         Net loss  increased  to a loss of  $3,986,475  for 1998  from a loss of
$569,440 for the prior year, primarily as a result of the higher costs of sales,
the  increase in selling and  administrative  costs and the  integration  of the
acquired  companies,  and the one-time  charge for the writedown of the carrying
value of several of the  Company's  acquisitions.  The Company  expects that its
cross marketing efforts,  as well as cost-cutting  efforts to reduce duplication
of  administrative  expenses,  and the steps  taken to effect  control  over the
operations of several of the  subsidiaries  will improve its  performance in the
future.

         The Company's results of operations have been adversely affected in the
last year by increased competition in the computer market, as well as management
time and  expenses  associated  with  integrating  the  Company's  acquisitions.
Management  is now focused on the expansion of the core business of the Company,
primarily maintenance services, and taking advantage of what are perceived to be
favorable conditions for expansion in this industry.


LIQUIDITY AND CAPITAL RESOURCES

         Working  capital  was  $410,848  at  December  31,  1998,  compared  to
$2,719,240 at December 31, 1997.  Cash flows used in operations for 1998 totaled
$962,596,  resulting  primarily  from  operations and by an increase in accounts
receivable  and the parts and supply  inventories  necessary to support  service
contracts on newer technologies, and partially offset by an increase in accounts
payable and accrued expenses. The ratio of current assets to current liabilities
decreased to 1.1:1 from 1.8:1 at December 31, 1997.  The decrease in the current
ratio  was due  chiefly  to the use of the  Company's  line  of  credit  to fund
operating losses.

         The Company has a $2,500,000 revolving line of credit with Crestar Bank
which expired in October, 1998 and continued under a forbearance agreement until
May, 1999, until the financial operations of the Company could be reevaluated by
the bank. The bank has since rejected  extending this line for another year, but
has extended the line until August,  31, 1999, or until the Company has acquired
alternative  financing.  At December 31, 1998,  the balance owed on this line of
credit was $2,308,656.

         The Company's  principal  commitments at December 31, 1998 consisted of
obligations under operating leases for facilities.

         The  Company  believes  that its  existing  cash , as  supplemented  by
expected  cash flow from  operations  and existing  credit  facilities,  will be
sufficient  to  satisfy  its  currently   anticipated   working  capital  needs.
Management  acknowledges  that  failure to renew the line of credit with Crestar
Bank could  significantly  affect the ability of the Company to meet  short-term
working  capital  requirements,  and  is  exploring  other  options  to  provide
alternative financing.

Year 2000 Issues

         Year 2000 Compliance means the ability of software and other processing
capabilities  to interpret and  manipulate  correctly all data that includes the
Year 2000 and dates  thereafter.  The  Company  principally  sells and  services
computer hardware and has not been confronted with Year 2000 issues in providing
such services.  Further,  the Company has surveyed all of its internal  business
systems  and  software  applications  and  determined  that  they are Year  2000
compliant.  Consequently,  the  Company  does  not  expect  its  business  to be
adversely affected in any material respect because of Year 2000 issues.






<PAGE>




Item 7.  Financial Statements and Supplementary Data


                CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES

                                     INDEX



                                                                      Page

Reports of Independent Auditors .............................    F-2........F-3

Consolidated Balance Sheet as of December 31, 1998 ..........    F-4........F-5

Consolidated Statements of Operations for the years ended
December 31, 1998 and 1997...................................    F-6

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998 and 1997...................................    F-7

Consolidated Statements of Cash Flows for the years ended
December 31, 1998 and 1997...................................    F-8........F-9

Notes to Consolidated Financial Statements ..................    F-10.......F-20







                             . . . . . . . . . . . .




<PAGE>








                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholders of
   CSI Computer Specialists, Inc.



                  We have audited the accompanying consolidated balance sheet of
CSI Computer Specialists, Inc. and Subsidiaries as of December 31, 1998, and the
related consolidated  statements of operations,  stockholders'  equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audit.

                  We conducted our audit 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 audit  provides a  reasonable  basis for our
opinion.

                  In our opinion,  the  financial  statements  referred to above
present fairly, in all material respects, the financial position of CSI Computer
Specialists,  Inc. and  Subsidiaries as of December 31, 1998, and the results of
their  operations  and their cash flows for the year then ended,  in  conformity
with generally accepted accounting principles.

                  The  accompanying  financial  statements  have  been  prepared
assuming the Company will continue as a going concern. As discussed in Note 2 to
the  financial  statements,  the  Company  has  suffered  recurring  losses from
operations that raise substantial doubt about its ability to continue as a going
concern.  Management's plans in regard to this matter are also described in Note
2. The  financial  statements do not include any  adjustments  that might result
from the outcome of this uncertainty.







GOLDSTEIN GOLUB KESSLER LLP


New York, New York
May 28, 1999,  except for the fourth  paragraph of Note 12, as to which the date
 is June 30, 1999


<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholders of
   CSI Computer Specialists, Inc.
   Rockville, Maryland



                  We have audited the  accompanying  consolidated  statements of
operations,  stockholders'  equity, and cash flows of CSI Computer  Specialists,
Inc. and subsidiaries  for the year ended December 31, 1997. These  consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audit.

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

                  In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects,  the consolidated  results of
their  operations  and their cash flows of CSI  Computer  Specialists,  Inc. and
subsidiaries  for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.







                                            MOORE STEPHENS, P. C.
                                            Certified Public Accountants.

Cranford, New Jersey
April 8, 1998


<PAGE>



                       CONSENT OF INDEPENDENT ACCOUNTANTS



We consent to the  incorporation  in this  annual  report on Form  10-KSB of our
report  dated  April  8,  1998,  on  our  audit  of the  consolidated  financial
statements of CSI Computer Specialists, Inc. and its subsidiaries as of December
31, 1997 and for the two years in the period ended December 31, 1997.




                                            MOORE STEPHENS, P. C.
                                            Certified Public Accountants.

Cranford, New Jersey
August 31, 1999



<PAGE>





CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998




Assets:
Current Assets:
   Cash                                                        $        49,035
   Accounts Receivable                                               3,483,934
   Accounts Receivable - Related Party                                 138,500
   Net Investment in Sales Type Leases - Current                       118,502
   Resale Inventory                                                    513,179
   Parts and Supplies                                                  926,044
   Prepaid Income Taxes                                                343,662
   Prepaid Expenses                                                    104,427
   Miscellaneous Receivables                                            25,198
                                                               ---------------

   Total Current Assets                                              5,702,481

Property and Equipment:
   Vehicles                                                            122,787
   Furniture and Fixtures                                              284,434
   Equipment                                                         1,286,318
   Leasehold Improvements                                              143,193
                                                               ---------------

   Totals - At Cost                                                  1,836,732
   Less:  Accumulated Depreciation                                   1,131,490

   Property and Equipment - Net                                        705,242
                                                               ---------------

Other Assets:
   Cash - Restricted                                                   443,846
   Goodwill                                                            500,890
   Deferred Tax Asset (net of valuation allowance of $300,000)         145,000
   Net Investment in Sales-Type Leases - Noncurrent                     72,360
   Other Assets                                                         96,403
                                                               ---------------

   Total Other Assets                                                1,258,499

   Total Assets                                                $     7,666,222
                                                               ===============



The  accompanying  notes and  independent  auditors'  reports  should be read in
conjunction with the consolidated financial statements.


<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998




Liabilities and Stockholders' Equity:
Current Liabilities:
   Accounts Payable                                              $    2,713,031
   Accrued Expenses                                                     262,246
   Bank Revolving Lines of Credit                                     2,308,656
   Current Maturities of Long-Term Debt                                   7,700
                                                                 --------------

   Total Current Liabilities                                          5,291,633

Long-Term Debt - Net of Current Maturities                                4,474
                                                                 --------------

   Total Liabilities                                                  5,296,107

Commitments                                                                  --

Redeemable Common Stock - 313,726 shares                                400,000
                                                                 --------------

Stockholders' Equity:
   Preferred Stock - Authorized, 10,000,000 Shares of $.001 Par Value;
     Issued, None                                                            --

   Common Stock - Authorized, 25,000,000 Shares of $.001 Par Value;
     Issued and Outstanding, 3,715,888 Shares                             3,716

   Paid-in Capital                                                    5,117,439

   Accumulated Deficit                                               (3,151,040)

   Total Stockholders' Equity                                         1,970,115

   Total Liabilities and Stockholders' Equity                    $    7,666,222
                                                                 ==============



The  accompanying  notes and  independent  auditors'  reports  should be read in
conjunction with the consolidated financial statements.


<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS


                                                            Years ended
                                                            December 31,
                                                     1 9 9 8          1 9 9 7

Revenues                                           $28,954,839      $24,185,609
                                                   -----------      -----------

Costs and Expenses:
   Cost of Sales                                    24,825,990       19,773,539
   Selling, General and Administrative               6,655,829        5,331,448
   Asset Impairment                                  1,721,154               --
                                                   -----------      -----------

   Total Costs and Expenses                         33,202,973       25,104,987
                                                   -----------      -----------

   Operating [Loss]                                 (4,248,134)        (919,378)
                                                   -----------      -----------

Other Income [Expense]:
   Interest Income                                     104,082          114,318
   Interest Expense                                   (186,552)         (75,001)
                                                   -----------      -----------

   Total Other Income [Expense]                        (82,470)          39,317
                                                   -----------      -----------

   [Loss] Before Benefit for Income Taxes           (4,330,604)        (880,061)
                                                   -----------      -----------

[Benefit] for Income Taxes:
   Current                                             (16,294)        (225,558)
   Deferred                                           (327,835)         (85,063)
                                                   -----------      -----------

   Total [Benefit] for Income Taxes                   (344,129)        (310,621)
                                                   -----------      -----------

   Net [Loss]                                     $ (3,986,475)    $   (569,440)
                                                  ============     ============

   Net [Loss] Per Share                           $      (0.99)    $      (0.14)
                                                  ============     ============

   Weighted Average Number of Shares Outstanding     4,029,614        3,966,126
                                                   ===========     ============



The  accompanying  notes and  independent  auditors'  reports  should be read in
conjunction with the consolidated financial statements.


<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY



                                     Common Stock          Paid-in
                                  Shares      Amount       Capital

Balance - December 31, 1996     3,727,500   $  3,727   $   5,227,428

   Issuance Pursuant to Stock
     Purchase Agreement -
     January 10, 1997             313,626        314         399,686

   Net [Loss]                          --         --              --
                               ----------   --------    ------------

Balance - December 31, 1997     4,041,126      4,041       5,627,114

   Issuance Pursuant to Stock
     Purchase Agreement -
     December 28, 1995             75,000         75             (75)

   Redemption of Stock            (86,512)       (86)       (109,914)

   Reclassification of
   Redeemable Common Stock       (313,726)      (314)       (399,686)

   Net [Loss]                          --         --              --
                                ---------   --------   -------------

Balance - December 31, 1998     3,715,888   $  3,716   $   5,117,439
                               ==========   ========   =============




The  accompanying  notes and  independent  auditors'  reports  should be read in
conjunction with the consolidated financial statements.


<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                  Retained
                                                  Earnings             Total
                                               (Accumulated        Stockholders'
                                                  Deficit)            Equity

Balance - December 31, 1996                   $     1,404,875    $   6,636,030

   Issuance Pursuant to Stock
     Purchase Agreement -
     January 10, 1997                                      --          400,000

   Net [Loss]                                        (569,440)        (569,440)
                                              ---------------   --------------

Balance - December 31, 1997                           835,435        6,466,590

   Issuance Pursuant to Stock
     Purchase Agreement -
     December 28, 1995                                     --               --

   Redemption of Stock                                     --         (110,000)

   Reclassification of
   Redeemable Common Stock                                 --         (400,000)

   Net [Loss]                                      (3,986,475)      (3,986,475)
                                              ---------------    -------------

Balance - December 31, 1998                   $    (3,151,040)   $   1,970,115
                                              ===============    =============




The  accompanying  notes and  independent  auditors'  reports  should be read in
conjunction with the consolidated financial statements.


<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


                                                          Years ended
                                                          December 31,
                                                   1 9 9 8           1 9 9 7
Cash Flows from Operating Activities:
   Net [Loss]                               $     (3,986,475) $      (569,440)
                                            ----------------  ----------------
   Adjustments to Reconcile Net Loss to
     Net Cash Used in Operating Activities:
     Depreciation and Amortization                    436,389          463,433
     Asset Impairment                               1,721,154               --
     Amortization of Parts and Supplies             1,086,313          727,311
     Provision for Bad Debts                          310,747           42,829
     Deferred Income Taxes                           (327,835)         (85,063)

   Changes in Assets and Liabilities:
     [Increase] Decrease in:
       Accounts Receivable                           (196,249)        (351,306)
       Resale Inventory                              (128,938)        (214,025)
       Parts and Supplies                            (979,289)        (905,609)
       Prepaid Income Taxes                           (20,118)        (208,126)
       Prepaid Expenses                                68,604          (62,615)
       Miscellaneous Receivables                      (12,246)          (5,970)
       Other Assets                                       170          (15,427)

     Increase [Decrease] in:
       Accounts Payable and Accrued Expenses        1,065,177           15,137
       Income Taxes Payable                                --          (73,929)
                                             ----------------  ---------------

     Total Adjustments                              3,023,879         (673,360)
                                             ----------------  ---------------

   Net Cash Used in Operating Activities             (962,596)      (1,242,800)
                                             ----------------  ---------------

Cash Flows from Investing Activities:
   Net Cash Transferred - Acquisition of Subsidiaries      --           13,907
   Cash - Restricted                                  (26,949)        (400,000)
   Payment of Acquisition Costs                            --       (1,968,549)
   Acquisition of Property and Equipment             (198,621)        (549,168)
                                             ----------------   --------------

   Net Cash Used in Investing Activities             (225,570)      (2,903,810)
                                             ----------------   --------------

Cash Flows from Financing Activities:
   Payments on Long-Term Debt                          (7,672)          (9,751)
   Redemption of Common Stock                        (110,000)              --
   Net Proceeds from Revolving Line of Credit       1,161,817          433,839
                                             ----------------   --------------

   Net Cash Provided by Financing Activities        1,044,145          424,088
                                             ----------------  ---------------

   Net [Decrease] in Cash and Cash Equivalents       (144,021)      (3,722,522)

Cash and Cash Equivalents - Beginning of Years        193,056        3,915,578
                                             ----------------  ---------------

   Cash and Cash Equivalents - End of Years  $         49,035  $       193,056
                                             ================  ===============


The  accompanying  notes and  independent  auditors'  reports  should be read in
conjunction with the consolidated financial statements.


<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                             Years ended
                                                             December 31,
                                                     1 9 9 8           1 9 9 7
Supplemental Disclosures of Cash Flow Information:
   Cash paid during the years for:
     Interest                                 $        174,752  $        72,383
     Income Taxes                             $         10,394  $        14,300

Supplemental Disclosure of Noncash Investing and Financing Activities:
On January 10, 1997, the Company  purchased all of the issued and outstanding
shares of Cintronix, Inc. for a total purchase price of $1,300,000.  On this
date, $900,000 was paid, and the remaining  $400,000  was paid on January 10,
1997 with 313,726 shares of the  Company's  common stock,  calculated  using the
then closing bid price of the common stock.





The  accompanying  notes and  independent  auditors'  reports  should be read in
conjunction with the consolidated financial statements.



<PAGE>



CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


[1] Corporate Organization and Principles of Consolidation

The  consolidated  financial  statements  include the accounts of CSI  Computer
Specialists,  Inc. and its wholly owned subsidiaries, Capitol Computer Services,
Inc.  D/B/A CCS Systems,  Inc.,  and  Cintronix,  Inc. [the  "Company"].    All
intercompany  balances and transactions have been eliminated.

CSI Computer  Specialists,  Inc., a Delaware  corporation,  is the  successor to
Computer Specialists,  Inc., a Maryland corporation ["CSI-Maryland"],  which was
incorporated  in 1988.  The  Company was  organized  by  CSI-Maryland  to enable
CSI-Maryland  to  merge  with and into  the  Company  in March  1994 in order to
effectuate a reincorporation in the State of Delaware.

The Company, which operates primarily from Maryland,  provides computer hardware
services,   which  primarily  consist  of  maintenance  and  repair  along  with
installation and de-installation of equipment,  and sales of parts and equipment
to governmental and commercial entities in the Mid-Atlantic region of the United
States.  The Company  provides its services to customers  primarily  pursuant to
maintenance agreements for terms of one to three years.

[2] Summary of Significant Accounting Policies

A summary of the  significant  accounting  policies  in the  preparation  of the
accompanying consolidated financial statements follows:

Cash and Cash  Equivalents - Cash  equivalents  are comprised of certain highly
liquid  investments  with a maturity of three months or less when purchased.

Parts and  Supplies  - Bulk  purchases  of spare  parts and  supplies  which are
utilized to support maintenance contracts are recorded at cost and are amortized
to operations on a  straight-line  basis over a period  ranging from eighteen to
twenty-four  months.  The Company also purchases certain parts for immediate use
which are  charged  to  expense  as  incurred.  Management  estimates  that this
methodology  approximates  a lower of cost or market  inventory  valuation on an
average cost basis.

Property and Equipment and  Depreciation - Property and equipment is recorded at
cost.  Depreciation  is provided for using  declining  balance  methods based on
estimated useful lives of five to seven years.  Equipment under operating leases
are depreciated  over the terms of the respective  leases,  usually two to three
years.

Depreciation  for the years ended  December  31, 1998 and 1997 was  $262,068 and
$300,502, respectively.

Expenditures  for normal repairs and  maintenance  are charged against income as
incurred.

Net Investment in Sales-Type Leases - The Company's leasing  operations  consist
principally of the leasing of computer equipment to existing monthly maintenance
customers.  The leases are for terms of two to three years and are cancelable at
any time by the lessee.  If the lease goes to term,  ownership of the  equipment
passes to the lessee. The Company's leasing  operations  consist  principally of
leasing  computer  equipment under  sales-type  leases expiring in various years
through 2001.



<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2


[2] Summary of Significant Accounting Policies [Continued]

Minimum lease payments to be received as of December 31, 1998 are:

 Year ended
December 31,
   1999                                           $   186,140
   2000                                                87,968
   2001                                                31,057
         ----------------------------------------------------

   Total                                              305,165
   Less: Interest Portion                            (114,303)

     Total                                     $      190,862
     -----                                     ==============

   Current                                     $      118,502
   Noncurrent                                  $       72,360

Income Taxes - The provision for income taxes includes  federal and state income
taxes  currently  payable and those  deferred  because of temporary  differences
between the  financial  statement  and tax bases of assets and  liabilities.  In
1997,  the  Company  elected to change its  method of  reporting  income for tax
purposes  to  the  accrual  method.   Temporary  differences  between  financial
reporting and tax reporting  existing as of January 1, 1996 are being recognized
over the next five-year period [see Note 8].

Goodwill Policy - Amortization is provided on a straight-line basis over fifteen
years. Goodwill of $568,797 represents the excess of cost over the fair value of
net  assets  acquired.   Accumulated  amortization  at  December  31,  1998  was
approximately $68,000.

Impairment -  Management  evaluates  the period of  amortization  of  intangible
assets to determine whether events and  circumstances  warrant revised estimates
of useful lives.  Additionally,  management  reviews long-lived assets including
intangible  assets for impairment  whenever  events or changes in  circumstances
indicate  that the  carrying  amount  may not be  recoverable.  Concurrent  with
management's  annual  planning  process,  it was determined that at December 31,
1998 the  estimated  future  cash  flows were  below the  carrying  value of the
Company's  goodwill.  Accordingly,  the Company  adjusted the carrying  value of
goodwill to the estimated value of approximately $500,000 resulting in a noncash
impairment loss of approximately $1,721,000 ($0.43 per share) for the year ended
December 31, 1998.

Stock Options Issued to Employees - The Company  adopted  Statement of Financial
Accounting   Standards   ["SFAS"]   No.   123,   "Accounting   for   Stock-Based
Compensation," for disclosure purposes and applies the intrinsic value method of
Accounting Principles Board ["APB"] Opinion No. 25, "Accounting for Stock Issued
to Employees," for accounting purposes.

Advertising  Costs - Advertising costs are expensed when incurred.  Advertising
expense was $50,841 and $31,339 for the years ended December 31, 1998 and 1997,
respectively.



<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3


[2] Summary of Significant Accounting Policies [Continued]

Revenue  Recognition - The Company  derives its revenue  principally  from fixed
price maintenance  contracts,  which it recognizes  ratably over the term of the
contract.  Revenue from computer  equipment sales and performance under time and
materials  contracts are recognized upon product  shipment or the performance of
the related work.

Use of Estimates - The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions  that affect the reported  amounts of assets 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 periods. Actual results could differ from those estimates.

Earnings Per Share - Earnings per share are  calculated by dividing net earnings
by the weighted average common shares outstanding.  Options and warrants did not
result in dilution for the years ended December 31, 1998 and 1997.

Going  Concern  - The  accompanying  financial  statements  have  been  prepared
assuming  that the Company  will  continue as a going  concern.  The Company has
suffered  recurring losses from its operations and,  effective October 31, 1998,
the Company's  line of credit  expired.  The lender has decided not to renew the
line of credit with the Company (see Note 5) and the Company is currently  using
the line to fund its  operations  until it can secure a new source of financing.
There is no  assurance  that the Company  will be able to secure a new source of
financing,   but  its   management  is   aggressively   exploring  a  number  of
alternatives.  The financial  statements do not include any adjustments relating
to the  recoverability and classification of recorded assets, or the amounts and
classification  of liabilities  that might be necessary in the event the Company
cannot continue as a going concern.

[3] Accounts Receivable

Accounts receivable at December 31, 1998 consist of:

Receivables Under U. S. Government Contracts and Subcontracts: $      1,190,860
Commercial and Other Receivables                                      2,939,772
                                                               ----------------

Total                                                                 4,130,632
Less:  Allowance for Doubtful Receivables                               483,000

   Total                                                       $      3,647,632
   -----                                                       ================

[4] Notes Payable

The  Company  has a note  payable to General  Motors  Acceptance  Corp.  with an
interest rate of 9% and maturity date of January 11, 1999.  The note payable was
used to finance the  purchase of a vehicle.  The Company also has a note payable
through  its  subsidiary,  Cintronix,  Inc. to First Union Bank with an interest
rate of 8.5% and a maturity  date of November  2000.  This note payable was also
used to finance the purchase of a vehicle.

                                                                 December 31,
                                                                    1 9 9 8

Notes Payable                                                 $          12,174
Less: Current Maturities                                                  7,700
                                                              -----------------

   Long-Term Debt                                             $           4,474
   --------------                                             =================



<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4


[4] Notes Payable [Continued]

Maturities of long-term debt at December 31, 1998 is as follows:

1999 $                                                                    7,700
2000                                                                      4,474
                                                              -----------------

   Total                                                      $          12,174
   -----                                                      =================

[5] Revolving Lines of Credit

The  Company  arranged  for a bank  line of  credit  with a  maximum  amount  of
$2,500,000.  The line bears interest at the rate of 0.25% over prime.  The prime
rate at December 31, 1998 was 7.75%. The line is secured by substantially all of
the Company's  assets.  The Company is required to maintain  certain  ratios and
$4,400,000  in tangible net worth.  The Company was not in  compliance  with the
ratios  and  tangible  net worth  requirements  at  December  31,  1998,  and is
currently in a workout  arrangement with the lender. The balance due on the line
of credit at December  31, 1998 was  $2,308,656.  The line of credit  expired on
October 31, 1998 and the lender has decided not to renew the line of credit with
the Company.  The Company is using the line to fund its  operations  until a new
source of financing can be obtained.

[6] Fair Value of Financial Instruments

Statement of Financial  Accounting Standards ["SFAS"] No. 107, "Disclosure about
Fair Value of Financial  Instruments," requires the disclosure of the fair value
of financial  instruments.  The carrying  amounts of cash and cash  equivalents,
accounts  receivable,  accounts  payable  and notes  payable  are  estimated  to
approximate fair value because of the short maturities of those instruments.

[7] Commitments

The Company leases  facilities and vehicles under operating  leases which expire
at various  dates  through  2007.  Facility  lease  agreements  provide for rent
increases  based on changes in the Consumer  Price Index and  adjustments  for a
proportionate share of real estate taxes and operating expenses.

Minimum  rental  commitments  under all  noncancelable  operating  leases with a
remaining term in excess of one year are as follows:

Year Amount

1999                                                            $       691,134
2000                                                                    617,781
2001                                                                    534,079
2002                                                                    488,421
2003                                                                    333,530
Thereafter                                                              671,856
                                                                ---------------

   Total                                                        $     3,336,801
   -----                                                        ===============

Total rent expense for the years ended  December 31, 1998 and 1997  approximated
$860,100 and $423,400, respectively.



<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5


[7] Commitments [Continued]

In April 1995, the Company  entered into  employment  agreements  with its Chief
Executive  Officer,  Chief Financial  Officer,  and its President for an initial
period through 1999 with automatic  renewals for  successive  one-year  periods,
unless  terminated by the Company or the executive.  The agreements  provide for
initial base compensation  aggregating  approximately $444,000 subject to annual
cost of  living  increases,  as well as a bonus to the Chief  Executive  Officer
equal  to  5.5%  of the  Company's  earnings  before  income  taxes.  Additional
employment agreements were entered into as part of the acquisition of Cintronix,
Inc. [See Note 12].

[8] Income Taxes

The component of benefit for income taxes are as follows:

                                                         December 31,
                                                         ------------
                                                    1 9 9 8           1 9 9 7
                                                    -------           -------

Current:
   Federal                                      $     116,385     $   (184,658)
   State                                             (132,679)         (40,900)
                                                -------------     ------------

   Total Current Benefit                              (16,294)        (225,558)
                                                -------------     ------------

Deferred:
   Federal                                           (298,504)         (69,637)
   State                                              (29,331)         (15,426)
                                                 -------------     ------------

   Total Deferred Benefit                            (327,835)         (85,063)
                                                -------------     ------------

     Total                                      $    (344,129)    $   (310,621)
     -----                                      =============     ============


The following table reconciles the U.S. federal income tax rate to the Company's
effective tax rate:

                                                    1 9 9 8           1 9 9 7
                                                    -------           -------

U.S. Statutory Rate                                  (34.0)%           (34.0)%

Increases [Decreases] Resulting from:
   State Income Taxes                                 (7.0)%            (7.0)%
   Surtax Exemption                                    5.0 %             5.0 %
   Adjustment for non-deductible goodwill expense     28.0 %             0.0 %
                                                 -----------      ------------

   Totals                                             (8.0)%           (35.0)%
   ------                                        ===========       ===========


The tax effects of temporary  differences,  loss carryforwards and the valuation
allowance  that gives rise to deferred  tax assets at December  31, 1998 were as
follows:

Temporary Difference - Inventory Adjustment                     $       145,000
Net Operating Losses                                                    300,000
Less:  Valuation Allowance                                             (300,000)
                                                                ---------------

   Deferred Tax Asset                                           $       145,000
                                                                ===============




<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6


[8] Income Taxes [Continued]

The Company has approximately  $840,000 of loss carryforwards that may be offset
against future taxable  income.  If not used,  the  carryforward  will expire in
2018.

[9] Related Party Transactions

For the years ended December 31, 1998 and 1997, the Company  recognized  revenue
approximating  $1,061,000 [including equipment sales of $518,400],  and $490,000
[including equipment sales of $107,000],  respectively, from a corporation owned
by the Company's majority stockholder. At December 31, 1998, accounts receivable
include $138,500 from the related party.

[10] Major Customers

Revenue under U. S. Government contracts approximated 18% and 21%, respectively,
of total maintenance contract revenues for the years ended December 31, 1998 and
1997.

[11] Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of
credit  risk  consist  of cash and cash  equivalents  and  accounts  receivable.
Concentrations of credit risk with respect to accounts receivable are limited as
a  result  of  the  dispersion  of  the  Company's   customer  base  among  both
governmental and commercial  entities in the Mid-Atlantic area.  Generally,  the
Company  does not  require  collateral  or other  security  to support  customer
receivables.  The  Company  routinely  assesses  the  financial  strength of its
customers  and based upon factors  surrounding  the credit risk of its customers
establishes  an  allowance  for  uncollectible  accounts  receivable  and,  as a
consequence,  believes that its accounts  receivable credit risk exposure beyond
such  allowances is limited.  The Company  places its cash with what it believes
are high credit quality financial institutions. The amount on deposit in any one
institution that exceeds federally insured limits is subject to credit risk. The
Company has $344,000 in financial institutions which are subject to such risk.

[12] Acquisition of Subsidiary and Divisions

The Company  acquired 100% of the outstanding  capital stock of Capitol Computer
Services,  Inc.  D/B/A CCS Systems on  December  28,  1995 for  $1,128,750  in a
business combination accounted for under the purchase method of accounting.  The
Company paid $585,000 in cash. The balance of the purchase price,  $543,750, was
payable in  January  1998 in shares of the  Company's  common  stock  based on a
formula  providing  for the issuance of a minimum of 75,000 shares and a maximum
of 150,000 shares and calculated  using the then-closing bid price of the common
stock.  In January  1998,  the  Company  issued  75,000  shares of common  stock
pursuant  to this  agreement.  The  issuance  of the  shares  did not change the
recorded amount of the acquired company.

The purchase price of this acquisition exceeded the fair value of the net assets
of CCS Systems by $800,969  which was being  amortized  over fifteen years under
the straight-line  method.  As a result of severe changes in market  conditions,
Capitol  Computer  Services,  Inc.  has  continued  to  operate at a loss and is
expected to operate at a loss in the future. This has triggered an impairment of
the goodwill (see Note 2). The Company prepared  revised  projections by product
line which provided the basis for  measurement of the asset  impairment  charge.
Accordingly,  the Company has charged  operations  for the remaining  balance of
goodwill of $652,371 during the fourth quarter of 1998.



<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7


[12] Acquisition of Subsidiary and Divisions [Continued]

The Company acquired 100% of the outstanding  capital stock of Cintronix,  Inc.,
on January 10, 1997 for $1,300,000 in a business combination accounted for under
the  purchase  method of  accounting.  The Company  paid the  purchase  price at
closing with $900,000 cash and the balance of the purchase price,  $400,000, was
paid with 313,726  shares of the  Company's  common stock  calculated  using the
then-closing bid price of the common stock. The Company set up a $400,000 escrow
account to redeem these shares at the seller's option. This option was exercised
in January  1999,  at which time these  shares  were  redeemed by the Company in
exchange for the balance of the escrow account which included  accrued  interest
of $43,846.

The purchase price of this acquisition exceeded the fair value of the net assets
of Cintronix,  Inc. by $1,022,901  which was being  amortized over fifteen years
under  the  straight-line  method.  As a result  of  severe  changes  in  market
conditions,  Cintronix,  Inc. has continued to operate at a loss and is expected
to operate at a loss in the future.  This has  triggered  an  impairment  of the
goodwill (see Note 2). The Company prepared revised  projections by product line
which  provided  the  basis for  measurement  of the  asset  impairment  charge.
Accordingly,  the Company has charged  operations  for the remaining  balance of
goodwill  of  $886,514,  during the fourth  quarter of 1998.  On June 30,  1999,
certain  assets and  liabilities  of Cintronix,  Inc.  were sold to  Interactive
Systems,   Inc.  ["ISI"],   a  corporation  owned  by  the  Company's   majority
stockholder,  for $200,000.  The book value of these assets and  liabilities did
not  differ  materially  from the  purchase  price.  ISI also has the  option to
purchase  the common stock of  Cintronix,  Inc. for the sum of $10. In addition,
ISI  will  assume  responsibility  of  Cintronix,  Inc.'s  office  sublease  and
employment agreements.

Certain  principal  stockholders  of  Cintronix,  Inc. and certain key employees
entered into employment agreements with Cintronix,  Inc. in conjunction with the
closing on January 10, 1997. The employment  agreements  provide that Cintronix,
Inc. will employ each of such persons for varying terms of two or three years at
salaries  commensurate  with their positions and duties.  Each of the employment
agreements contain noncompete and confidentiality provisions.

The  Company  acquired  the book of  business of  Advanced  Network  Systems,  a
division of American Bankers  Corporation Service  Corporation,  on February 28,
1997 for  $200,000 in a business  combination  accounted  for under the purchase
method of  accounting.  The  acquired  business is operated as a division of the
Company. The Company paid the purchase price at closing with $200,000 cash.

The purchase  price of this  acquisition  was recorded as goodwill and was being
amortized  over fifteen  years under the  straight-line  method.  As a result of
severe changes in market  conditions,  Advanced Network Systems has continued to
operate  at a loss and is  expected  to operate  at a loss in the  future.  This
triggered  an  impairment  of the  goodwill  (see Note 2). The Company  prepared
revised  projections by product line which provided the basis for measurement of
the asset impairment charge. Accordingly, the Company has charged operations for
the remaining balance of goodwill of $182,269 during the fourth quarter of 1998.

Certain key employees  entered into  employment  agreements  with the Company in
conjunction  with the closing on February 28, 1997.  The  employment  agreements
provide that the Company  will employ each of such persons for varying  terms of
two or three years at salaries  commensurate  with their  positions  and duties.
Each  of  the  employment  agreements  contain  noncompete  and  confidentiality
provisions.



<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8


[12] Acquisition of Subsidiary and Divisions [Continued]

The Company  acquired 100% of the business assets of Phoenix  Service,  Inc., on
May 28, 1997 for  $793,579  in a business  combination  accounted  for under the
purchase method of accounting.  The acquisition is operated as a division of the
Company. The Company paid the purchase price at closing in cash.

The purchase price of this acquisition exceeded the fair value of the net assets
of Phoenix Service, Inc. by $568,797 which is being amortized over fifteen years
under the straight-line method.

Certain  key  employees  of  Phoenix  Service,   Inc.  entered  into  employment
agreements with the Company in conjunction with the closing on May 28, 1997. The
employment  agreements provide that the Company will employ each of such persons
for  varying  terms of two or three years at  salaries  commensurate  with their
positions and duties.  Each of the employment  agreements contain noncompete and
confidentiality provisions.

All results have been included from the date  acquired.  The following pro forma
[unaudited] information assumes the acquisitions occurred on January 1, 1997:

                                                                Year ended
                                                                December 31,
                                                                  1 9 9 7

Revenues                                                      $   25,150,216
Net [Loss]                                                    $     (547,838)
Earnings Per Share:
   Net [Loss]                                                 $        (0.13)

[13] Stock Options

The Company adopted the CSI Computer Specialists, Inc. 1994 Stock Option Plan in
1994 which  provides  for the grant of both  qualified  and  nonqualified  stock
options to officers, directors, employees and consultants. The Stock Option Plan
has  authorized  the granting,  in the  aggregate,  of options to purchase up to
200,000 shares of stock. Options granted under the Plan vest immediately.

Following is a summary of the status of fixed  options  outstanding  at December
31, 1998:


                                               Outstanding Stock Options
                                         Weighted-Average
      Range of                               Remaining          Weighted-Average
   Exercise Prices        Shares         Contractual Life        Exercise Price

$0.87 - $1.50              11,050                7                       $0.93
$5.38                     119,750                7                       $5.38



                                                      Exercisable
                                                     Stock Options
                                                          Weighted-Average
   Exercise Prices        Shares               Shares      Exercise Price

$0.87 - $1.50              11,050               11,050             $0.93
$5.38                     119,750              119,750             $5.38


<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9


[13] Stock Options [Continued]

A summary of stock options activity under all plans is as follows:

                                                            1 9 9 8
                                                            -------
                                                                Weighted-Average
                                                   Shares        Exercise Price

Outstanding - January 1,                             139,350               4.99

Granted                                                   --              --
Exercised                                                 --              --
Forfeited/Expired                                     (8,550)             (4.69)
                                                ------------    ---------------

   Outstanding - December 31,                        130,800               5.00
   --------------------------                   ============    ===============

   Exercisable - December 31,                        130,800               5.00
   --------------------------                   ============    ===============

   Shares Available on December 31,
     For Options that may be Granted                 269,200
     -------------------------------            ============

                                                             1 9 9 7
                                                             -------
                                                                Weighted-Average
                                                      Shares     Exercise Price

Outstanding - January 1,                              129,500              5.35

Granted                                                11,850               .93
Exercised                                                  --                --
Forfeited/Expired                                      (2,000)            (3.81)
                                                 ------------     -------------

   Outstanding - December 31,                         139,350              4.99
   --------------------------                     ===========      ============

   Exercisable - December 31,                         139,350              4.99
   --------------------------                     ===========      ============

   Shares Available on December 31,
     For Options that may be Granted                  260,650
     -------------------------------              ===========

The  Company  also  adopted  an  incentive  compensation  plan in 1995,  for the
majority  stockholder whereby the stockholder has been granted a ten-year option
to purchase up to 200,000  shares of common stock at an exercise  price of $1.95
per share.  The options are exercisable if the Company achieves certain earnings
levels as follows:

   Earnings Before
  Interest and Taxes                                 Number of Shares

    $    1,200,000                                            100,000
    $    2,000,000                                            100,000

If it becomes  probable  that the above  earnings  levels will be achieved,  the
Company will recognize  compensation expense equal to the difference between the
fair  market  value at the grant date and the  exercise  price  pursuant  to APB
Opinion No. 25.  Achievement of the above earnings levels is likely to result in
substantial compensation expense to the Company in future years.

The Company  applies APB Opinion No. 25 for stock options issued to employees in
accounting  for its stock option plans for  financial  reporting  purposes.  The
exercise price for all stock options  issued to employees  during 1997 was equal
to the market price of the Company's stock at the date of grant. Accordingly, no
compensation   expense  has  been  recognized  for  the  Company's   stock-based
compensation plans.

Had  compensation  cost for the Company's stock options issued to employees been
determined  based upon the fair value at the grant date for stock options issued
under these plans  pursuant to the  methodology  prescribed  under  Statement of
Financial  Accounting  Standards  ["SFAS"] No. 123,  "Accounting for Stock-Based
Compensation,"  the  Company's  net  loss and loss per  share  would  have  been
unchanged,  on a pro forma  basis,  for the year  ended  December  31,  1998 and
increased by approximately $6,570 or $0.00 per share for the year ended December
31, 1997. The weighted-average  fair value of stock options granted to employees
used in determining the pro forma amounts



<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10


[13] Stock Options [Continued]

is   estimated   at  $.55  during  1998  and  1997,   using  the   Black-Scholes
option-pricing  model  for the pro forma  amounts  with the  following  weighted
average assumptions:

                                                             December 31,
                                                               1 9 9 7

Risk-free Interest Rate                                           6.18%
Expected Life                                                   4 Years
Expected Volatility                                             65.20%
Expected Dividends                                                N/A

Net loss  and  loss  per  share  as  reported,  and on a pro  forma  basis as if
compensation  cost had been  determined  on the basis of fair value  pursuant to
SFAS No. 123, is as follows:

                                                            December 31,
                                                       1 9 9 8        1 9 9 7
Net Loss:
   As Reported                               $     (3,986,475) $      (569,440)
                                             ----------------  ----------------
   Pro Forma                                 $     (3,986,475) $      (576,010)
                                             ----------------- ----------------

Loss Per Share:
   As Reported                               $           (.99) $          (.14)
                                             ----------------  ----------------
   Pro Forma                                 $           (.99) $          (.14)
                                             ----------------  ----------------


[14] Segment Information

In 1998,  the Company  adopted SFAS No. 131,  "Disclosure  about  Segments of an
Enterprise and Related  Information." The Company  evaluates  performance of its
segments  and  allocates   resources  to  them  based  on  sales  and  operating
profit/(loss).   The  Company  operates  primarily  in  two  industry  segments,
Maintenance  Services and Parts and  Equipment  Sales.  The tables below present
information about reported segments:

                                  Maintenance        Parts And      Consolidated
Year Ended December 31, 1998       Services       Equipment Sales       Total
--------------------------------------------------------------------------------

Revenues                           12,965,040        15,989,799       28,954,839

Cost of Goods Sold and Services
Performed                          10,156,641        14,669,349       24,825,990

Asset Impairment                      834,640           886,514        1,721,154

                                  Maintenance        Parts And      Consolidated
Year Ended December 31, 1997       Services       Equipment Sales       Total
--------------------------------------------------------------------------------

Revenues                           10,111,099        14,074,510       24,185,609

Cost of Goods Sold and Services
Performed                           7,498,705        12,274,834       19,773,539




<PAGE>


CSI COMPUTER SPECIALISTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #11


[15] New Authoritative Pronouncements

Management  does not believe that any recently  issued,  but not yet  effective,
accounting  standards if currently  adopted would have a material  effect on the
accompanying financial statements.







<PAGE>



                                    PART III

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

None.

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

Directors and Executive Officers of Registrant

Donald C. Weymer
Chairman of the Board of Directors
Chief Executive Officer
Secretary

Donald C. Weymer has been the Chief Executive  Officer and Chairman of the Board
of Directors of the Company since 1988 and has been the Secretary of the Company
since March,  1994. He was the Chief  Financial  Officer from March,  1994 until
October,  1995. In 1991 Mr.  Weymer  founded ISI, a Virginia  corporation  which
provides data processing outsourcing,  timesharing and fundraising assistance to
agencies of the federal  government,  non-profit  organizations  and  commercial
clients.  Mr. Weymer has served as the Chief Executive Officer and the President
of ISI since 1991.
         Term of Office: Mr. Weymer's term as director is three years, expiring
         in 2000 or until a  successor is elected and qualified.
         Age: 54


William F. Pershin
Director
President
Chief Accounting Officer

William F. Pershin has been the  President  and a director of the Company  since
1988 and has been the Chief Accounting Officer of the Company since March, 1994.
         Term of Office: Mr. Pershin's term as director is three years, expiring
         in 1999 or until a successor is elected and qualified.
         Age: 44


Herbert H. Derian
Director

Herbert H. Derian has been the president and a director since 1985 of Cintronix,
Inc., which is a MicroAge franchisee specializing in the sale and  servicing  of
personal computers. Cintronix, Inc. is a wholly-owned subsidiary of the Company.
Mr. Derian was appointed to the Board of  Directors  in  January, 1997 to fill a
vacancy.
         Term of Office: Mr. Derian's term as director expires in 2001 or  until
         a successor is elected and qualified.
         Age: 69




C. A. Miller, III
Director

C. A. Miller III has been employed with Southern  States  Cooperative,  Inc., of
Richmond,  Virginia  since  1979,  and  currently  serves as Vice  President  of
Information  Systems.  Mr.  Miller was  appointed  to the Board of  Directors in
March, 1998 to fill a vacancy.
         Term of Office: Mr. Miller's term as  director expires in 1999 or until
         a successor is elected and qualified.
         Age: 59



David A. Chappell
Director

David A.  Chappell has been an  insurance  agent with  Northwestern  Mutual Life
since 1984. In addition, he has been an account representative with Jacksonville
Specialty  Advertising  since 1997.  Mr.  Chappell was appointed to the Board of
Directors in March, 1998 to fill a vacancy.
         Term of Office: Mr. Chappell's term as  director  expires  in  2001  or
         until a successor is elected and qualified.
         Age: 44


James D. Boccabella
Chief Financial Officer

James D. Boccabella, age 45, has been the Chief Financial Officer of the Company
since  October,  1995. For the five years prior to that, he owned and operated a
public accounting practice, James D. Boccabella, CPA, CFP.



Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act"),  requires that the Company's directors,  executive officers,  and persons
who own more than 10% of a  registered  class of the  equity  securities  of the
Company  ("reporting  persons") file with the Securities and Exchange Commission
(the  "Commission")  initial  reports of  ownership,  and  reports of changes in
ownership,  of shares of stock,  and options to  purchase  such  shares,  of the
Company.  Reporting  persons  are  required by  Commission  rules to furnish the
Company with copies of all Section 16(a) reports they file.

Based solely on a review of Section 16(a)  reports  furnished to the Company for
the  fiscal  year  ended  December  31,  1998,  (the  "1998  fiscal  year")  and
representations by reporting persons that no other reports were required for the
1998 fiscal year, all Section 16(a) reporting requirements were met.













Item 10.  Executive Compensation


SUMMARY COMPENSATION TABLE


The following table summarizes the  compensation  paid or accrued by the Company
during  the three  fiscal  years  ended  December  31,  1998,  to the  Company's
executive officers:


               Annual Compensation                                      Awards
-------------------------------------------------------------------------------
Name                                                    Other         Number of
and                                                     Annual         Under-
Principal                                               Compen-        lying
Position       Year          Salary            Bonus    sation         Options
-------------------------------------------------------------------------------
Donald C. Weymer 1998    $180,152                 0          0             0
Chief Executive
Officer,
Chairman of the
Board, Secretary
                 1997    $178,464                 0          0             0

                 1996    $163,404                 $9,600     0             0

William F.       1998    $150,122                 0          0             0
Pershin
President and
Director
                 1997    $142,974                 0          0             0
                 1996    $136,168                 0          0             0

James D.         1998    $104,279                 0          0             0
Boccabella
Chief Financial
Officer
                 1997    $101,333                 0          0             0
                 1996    $96,842                  0          0             0



Item 11.  Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of May 31, 1999, the number and percentage of
outstanding  shares of Common Stock  beneficially owned by (i) all persons known
by the Company to own more than 5% of such  shares,  (ii) each  director,  (iii)
each  executive  officer,  and (iv) all  executive  officers and  directors as a
group.  Unless  otherwise  noted below,  each person named in the table has sole
voting and sole investment power with respect to each of the shares beneficially
owned by such person.


Name and Address               Amount of
of Beneficial Owner            Beneficial
                               Ownership                     Percent
--------------------------------------------------------------------------------
Donald C Weymer                  1,060,000                     28.5%
1013 Parrs Ridge Road
Spencerville, Maryland  20868

William F Pershin                640,000                       17.2%
11616 Morning Star Drive
Germantown, Maryland  20876

James D. Boccabella              25,000          (1)           0.7%
P O Box 399
Olney, Maryland  20830

All executive officers and       1,725,000                     46.4%
directors as a group (3
persons)
 (1) Consists of stock options granted to Mr. Boccabella which have vested.

Item 12.  Certain Relationships and Related Transactions

Donald C. Weymer

The Company  provides  computer  maintenance  services to ISI, which is owned by
Donald C. Weymer, a stockholder,  director and officer of the Company,  pursuant
to the terms of maintenance  agreements.  Mr. Weymer is also the owner and chief
executive  officer of ISI.  During the fiscal years ended  December 31, 1998 and
1997,  approximately  $1,061,000  (including  equipment  sales of $518,400)  and
$490,000 (including equipment sales of $107,000), respectively, of the Company's
revenues were  generated by services  rendered and equipment  sold to ISI by the
Company. See Note 9 of the Financial Statements included in Item 7 hereof.


Item 13.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)      Exhibits

Exhibit
Number            Title of Exhibit

3.4  **  Agreement  and Plan of Merger  between CSI Computer  Specialists,  Inc.
     (Delaware)  and  Computer  Specialists,  Inc.  (Maryland)  filed  with  the
     Securities  and  Exchange  Commission  as an  exhibit  to the  Registration
     Statement  filed  on July  19,  1995  (the  "Registration  Statement")  and
     incorporated herein by reference.

3.5  ** Bylaws of CSI Computer  Specialists,  Inc.  (Registrant)  filed with the
     Securities  and  Exchange  Commission  as an  exhibit  to the  Registration
     Statement and incorporated herein by reference.

3.7  ** Certificate of Amendment of Certificate of Incorporation of CSI Computer
     Specialists,  Inc.  (Delaware)  as filed with the Secretary of State of the
     State of Delaware on August 5, 1994, filed with the Securities and Exchange
     Commission as an exhibit to the  Registration  Statement  and  incorporated
     herein by reference.

4.1  **  Specimen  Common  Stock  Certificate,  filed  with the  Securities  and
     Exchange  Commission  as an  exhibit  to  the  Registration  Statement  and
     incorporated herein by reference.

4.2  ** Specimen  Warrant  Certificate,  filed with the  Securities and Exchange
     Commission as an exhibit to the  Registration  Statement  and  incorporated
     herein by reference.

4.3  ** Form of Underwriter's  Unit Purchase  Option,  filed with the Securities
     and Exchange  Commission  as an exhibit to the  Registration  Statement and
     incorporated herein by reference.

4.4  ** Form of Warrant Agreement by and among the Company, Biltmore Securities,
     Inc. and  Continental  Stock  Transfer & Trust  Company,  amended from that
     which was filed with the Securities  and Exchange  Commission as an exhibit
     to the Registration Statement and incorporated herein by reference.

10.1 ** Form of  Maintenance  Agreement  filed with the  Securities and Exchange
     Commission as an exhibit to the  Registration  Statement  and  incorporated
     herein by reference.

10.2 ** Form of Subcontracting  (Microcomputer Service) Agreement filed with the
     Securities  and  Exchange  Commission  as an  exhibit  to the  Registration
     Statement and incorporated herein by reference.

10.3 ** Form of Equipment Sales Agreement filed with the Securities and Exchange
     Commission as an exhibit to the  Registration  Statement  and  incorporated
     herein by reference.

10.6 **  Employment  Agreement,  dated April 7, 1994, by and between the Company
     and Donald C. Weymer filed with the Securities  and Exchange  Commission as
     an  exhibit  to the  Registration  Statement  and  incorporated  herein  by
     reference.

10.7 **  Employment  Agreement,  dated April 7, 1994, by and between the Company
     and William Pershin filed with the Securities and Exchange Commission as an
     exhibit to the Registration Statement and incorporated herein by reference.

10.8 ** CSI  Computer  Specialists,  Inc.  1994 Stock Option Plan filed with the
     Securities  and  Exchange  Commission  as an  exhibit  to the  Registration
     Statement and incorporated herein by reference.

10.9 ** Plan for  Incentive  Compensation  of Donald C.  Weymer  filed  with the
     Securities  and  Exchange  Commission  as an  exhibit  to the  Registration
     Statement and incorporated herein by reference.

10.10**  Revolving  Commercial  Loan  Note,  dated  May 27,  1994,  in  favor of
     Citizens  Bank of Maryland in the principal  amount of $750,000  filed with
     the  Securities and Exchange  Commission as an exhibit to the  Registration
     Statement and incorporated herein by reference.

10.11** Security  Agreement,  dated May 27, 1994,  in favor of Citizens  Bank of
     Maryland and  corresponding  Financing  Statement filed with the Securities
     and Exchange  Commission  as an exhibit to the  Registration  Statement and
     incorporated herein by reference.

11.  Computation  of Net Income  per Common  Share  (included  in the  Financial
     Statements in Item 7).

21.  Subsidiaries of the Company

27.  Financial Data Schedule.

**   Previously filed as noted.


(b)      Reports on Form 8-K

         None.



<PAGE>



         SIGNATURES

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

                         CSI Computer Specialists, Inc.

August 31, 1999                      By:   /s/  Donald C. Weymer
--------------------                   --------------------------
Date                                     Donald C. Weymer
                                         Chief Executive Officer



August 31, 1999                      By:  /s/ William F. Pershin
---------------                         ------------------------
Date                                     William F. Pershin
                                         Chief Accounting Officer






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

August 15, 1999                      By:   /s/  Donald C. Weymer
---------------                         ------------------------
Date                                     Donald C. Weymer
                                         Chairman of the Board, Chief Executive
                                         Officer and Director



August 15, 1999                      By:   /s/  William F. Pershin
---------------                         --------------------------
Date                                     William F. Pershin
                                          President and Director









                                   Exhibit 21


                           Subsidiaries of the Company

Subsidiary          (Year Acquired)         State of Incorporation

CCS Systems, Inc.        1995                      Virginia

Cintronix, Inc.          1997                       Maryland