DAUPHIN TECHNOLOGY INC, 10-K, 1999-04-20

DAUPHIN TECHNOLOGY INC
10-K, 1999-04-20
COMPUTER & OFFICE EQUIPMENT

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
X Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
(Fee Required) For fiscal year ended December 31, 1998.

Transaction Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
(No Fee Required)

DAUPHIN TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)

Illinois 87-0455038
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)

800 E. Northwest Hwy, Suite 950, Palatine, IL 60067
(Address of principal executive offices) (Zip Code)

(847) 358-4406
Registrant's telephone number, including area code

Securities registered pursuant to Section 15(d) of the Act:

Common Stock $.001 par value
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)

The aggregate market value of the voting Common Stock held by non-affiliates
of the Registrant as of April 14, 1999 was $28,678,577.

As of April 14, 1999, the number of Shares of the Registrant's Common Stock,
$.001 par value, 42,174,379 issued, 42,128,322 outstanding with 46,057
treasury shares.

DAUPHIN TECHNOLOGY, INC.

Table of Contents
PART I 3
Item 1. Description of Business 3
Overview 3
Strategic Plan 3
Dauphin Technology, Inc. ("Mobile Group") 3
R.M. Schultz & Associates, Inc. 6
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to Vote of Security Holders 7
PART II 8
Item 5. Market for the Registrant's Common Stock and
Related Security Holders Matters 8
Market Price of Common Stock 8
Holders 8
Dividend Policy 8
Common Stock 8
Preferred Stock 9
Transfer Agent and Registrar 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Results of Operations 1998 Compared to 1997 and 1996 9
Liquidity and Capital Resources 10
Inflation and Seasonality 10
Other 10
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on
Accounting or Financial Disclosure 11
PART III 12
Item 10. Directors, Executive Officers and Officers of
the Registrant 12
Directors and Officers 12
Family Relationship 13
Other: Involvement in Certain Legal Proceedings 13
Involvement by Management in Public Companies 13
Item 11. Executive Compensation 13
Item 12. Security Ownership of Certain Beneficial Owners
and Management 14
Item 13. Certain Relationships and Related Party Transactions 14
PART IV 15
SIGNATURES 15

Note: This Form 10-K contains certain statements that may be deemed to be
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Statements in this Form 10-K which address
activities, events or developments that the Company expects or anticipates
will or may occur in the future, including such things as future acquisitions
(including the amount and the nature thereof), business strategy, expansion
and growth of the Company's business and operations and other such matters
are forward looking statements. Although the Company believes the
expectations expressed in such forward-looking statements are based on
reasonable assumptions within the bounds of its knowledge of its business, a
number of factors could cause actual results to differ materially from those
expressed in any forward-looking statements, whether oral or written, made by
or on behalf of the Company. Many of these factors have previously been
identified in filings or statements made by or on behalf of the Company.

PART I
Item 1. Description of Business

Overview
Dauphin Technology, Inc. ("Dauphin" or the "Company") is a technology company
with subsidiaries in mobile hand-held, pen-based computer solutions and
electronics contract manufacturing services. The Company, an Illinois
corporation, was formed on June 6, 1988 and became a public entity in 1991.
Out of its two locations in northern Illinois, the Company designs, develops
and manufactures electronic products for industrial use. The Company employs
approximately 115 people consisting of engineering, sales and marketing,
administrative, and assembly personnel. The Company's stock is traded on the
Over the Counter Bulletin Board under the symbol "DNTK".

In 1993 and 1994 the Company encountered severe financial problems. On
January 3, 1995, the Company filed a petition for relief under Chapter 11 of
the Federal Bankruptcy Code in the United States Court for the Northern
District of Illinois, Eastern Division. The Company operated under Chapter
11 until July 23, 1996, when it was discharged as Debtor-in-Possession and
bankruptcy proceedings were closed.

Strategic Plan
Before the Company emerged from bankruptcy, the Board of Directors were
reconstituted and a new management team was recruited. Individuals with
strong engineering and manufacturing backgrounds as well as finance,
accounting, sales and marketing skills were hired. The new management
formulated a strategic business plan to diversify the Company's operations to
eliminate dependence on a single product line or industry.

The plan incorporated a focus on the hand-held mobile computer market. In
particular, the management plan focused on development of miniaturized mobile
computers that would be incorporated in electronic solutions for vertical
markets. In addition to mobile computing markets, management is focused on
the electronic contract services market. Coupled with targeted acquisitions
in the technology sector, the Company will become a technology holding
company with synergistic, self-managed wholly-owned subsidiaries. The
subsidiaries are intended to share resources and cross-market products,
engineering, contract manufacturing and product development services.

As part of management's plan, on June 6, 1997 the Company acquired all
outstanding shares of stock in R.M. Schultz & Associates, Inc. ("RMS"), an
electronic contract manufacturing firm located in McHenry, Illinois.

Dauphin Technology, Inc. ("Mobile Group")

Products
Orasis is a new hand-held computer developed by the Company with features to
meet the expressed desires of many potential customers. The unit was
developed with the multi-sector mobile user in mind. As such, it
incorporated an upgradable processor, user upgradable RAM memory and hard
disc, various modules and mobile devices to satisfy the needs of various
industries.

The basic unit, weighing approximately 3 pounds with a battery life from 2 to
8 or more hours, is equipped with 166 MHz Pentium MMX processor, which can be
upgraded to 266 MHz Pentium MMX. The standard unit is equipped with 32 MEG
of RAM memory upgradable to 128 MEG of RAM, standard two type II or a single
type III PCMCIA slot, 2.1 GB expandable to 4.3 GB hard drive, built in
speaker and microphone (including sound blaster for voice recognition and
multimedia), video conferencing port, modular expansion bay with docking
connector and many other standard features. The unit can be operated with
electro-magnetic pen, voice activation and input, or by using an Infra Red
keyboard. The unit incorporates CDROM drive, floppy drive, DVD drive, heads-
up goggles, GPS module and other attachable devices. Much more flexible and
powerful than a Personal Digital Assistant ("PDA"), the Orasis is an MS-
DOS/Windows 95/98/Windows NT compatible machine.

Although the basic unit carries a number of advanced features, the most
significant advantage of Orasis is its upgradability. The expansion bay
allows for the use of CDROM, floppy drive, wireless radio, extended battery
pack or any other device through the PCI expansion bus. Unlike competitor
models Orasis does not lock the customer into a single format. Orasis
affords a customer complete flexibility and versatility offered by no other
mobile computer presently on the market. It is a time, labor, and money-
saving device that can be custom configured with a variety of options to meet
the end-user's needs.

Markets
Every day on TV, radio and in the newspapers we hear and read about people's
ability to contact the farthest reaches of our planet in seconds. We hear
about business meetings that take place over the wires, on a large TV screen
instead of in person. The increased use of the internet as a means of
commerce and communication drives us forward every day to reach for the
things that only a few years ago we read about in science fiction books. We
also read about constant improvements in digital and cellular technology in
order to allow anyone to constantly "stay connected".

Based on the latest statistics, the mobile computing devices market is
approximately $80 billion in annual revenue. Sales of laptop and notebook
computers represent a large portion of this market. However, the growth rate
of hand-held pen-based devices exceeds that of laptops and notebooks. Based
on the latest Frost and Sullivan studies, total pen-tablets market, in which
Orasis competes, is several billion dollars and is growing at approximately
twenty five percent per year. Dauphin's management estimates that market may
be growing even faster than latest predictions.

Unlike several years ago, the pen-based computer market is more defined and
is ready for a product such as Orasis. The total mobile market includes more
than sixty products that fall within the Personal Digital Assistant ("PDA")
category of the pen-based market. These devices include electronic
organizers, mobile fax machines and electronic notepads. Most of these
devices are palm-top size, requiring either pen or keyboard input. In
addition to PDA's, there are approximately twenty devices that would qualify
as computers or pen tablets. Orasis belongs in the latter category.

Until the introduction of Orasis, pen based devices were no match for the
laptops. The processor speed, limited expandability and memory limitations
of hand-held computers made notebooks and laptops much more popular with the
mobile workforce. Orasis bridges the gap between notebook or laptop
computers and pen-based computers. Added features and flexibility of the
unit may also attract public attention, thereby growing the overall category.

Sales and Marketing
Orasis( is a niche product. Dauphin targets vertical markets for the
distribution of Orasis. In order to deliver its mobile product to the
market, in April of 1998, Dauphin hired six mobile industry experts, Channel
Managers, to target various industries. In particular, the industries these
individuals target are medical, government, sales field automation,
transportation, utilities and education.

Each Channel Manager's job is to find a number of software solution providers
to a particular industry and partner with them to offer a final electronic
solution to the end user. During 1998, approximately 60 VAR's signed Orasis
distribution agreements. Dauphin also relies on direct sales to large
national accounts and cross selling opportunities with other products as a
means to distribute Orasis. In addition to the domestic VAR's and
integrators, the Company signed an international distribution agreement with
BulFon S.A., a Bulgarian company. Management anticipates that many more
domestic as well as international agreements will be signed in 1999 and
beyond.

Competition
A dozen manufacturers including Epson, Fujitsu, IBM, Mitsubishi and Kalidor
produce "pen tablets". The list of competitors may be imposing, but Dauphin
management feels that Orasis has advantages over the competition including
flexibility, adaptability and compactness. Based on the opinions of industry
experts such as Pen Computing magazine, units produced by these firms are
less capable than Orasis. Such units are generally designed with a
single processor and become obsolete as soon as new processors or faster
software is introduced. Also, due to the fact that major components of
Orasis are upgradable, the life expectancy of the product is estimated to be
5 years. Over time, return on investment of Orasis should be much higher
than any existing computer.

In order for the Company to have a competitive edge, it must continue to
offer leading technology and market driven products. When new products are
introduced, there is a small window of opportunity before clones are
developed. However, being a small company, Dauphin's strength is in its
flexibility to meet industry demands and to partner with solution providers
to jointly offer unique solutions for problems that customers encounter.

Customer Dependence
The Company is not dependent on any one customer.

Research and Development
Due to the relatively small size of the Mobile Group, most of the Orasis
development was done in cooperation with three contract engineering firms.
Approximately $1,576,000 was spent on research and development in 1998 and
approximately $400,000 more will be spent by the end of May 1999. Dauphin
retained all rights and intellectual property acquired during the development
of Orasis.

The Company is planning to continue research and development of electronic
products to complement Orasis. In addition to peripheral devices such as a
office and mobile docking station, the Company is planning to work on various
scaled down, higher-tech devices than Orasis.

Production
Because the main components of Orasis are complex, the assembly of the
motherboard is outsourced. SMT Unlimited supplies RMS with the ready
assembled and tested motherboards for final assembly. SMT is capable of
producing hundreds of boards per day.

RMS assembles, tests and ships the final product to Dauphin customers. All
manufacturing support for the product is performed by RMS. At the present
rate of production, RMS is capable of assembling two hundred Orasis units
per day. With additional staffing, production of Orasis can double or
triple.

Source and Availability of Raw Materials
Component parts are obtained from suppliers around the world. Since the
development of Orasis commenced late in 1997 and throughout 1998, all
components used in the design are state of the art and are Year 2000
compliant. Components such as the latest mobile Intel processors (200, 233
and 266 MHz), color video controllers and CACHE memory chips are in high
demand. Such components are available in short supply. However, management
does not anticipate any delays in production.

Software Licensing Agreements
The Company is leasing BIOS (basic input/output software) for Orasis from
Phoenix Technologies Ltd. ("Phoenix"). Phoenix designs, develops, markets and
licenses proprietary software products for original equipment manufacturers
and related software for personal computers. A Master License Agreement was
signed for the right of distribution of Phoenix software. The Company pays
$4 per unit sold for this license.

The Company has entered into a Pen Products Original Equipment Manufacturing
Distribution License Agreement and Sub-license Agreement for Dedicated
Systems with Annabooks Software LLC ("Annabooks"), the supplier of products
offered by Microsoft Corporation ("Microsoft"). Microsoft is the third-party
beneficiary under these agreements. Under the terms of these agreements, the
Company is authorized to install Microsoft's DOS, Windows 3.11, Windows 95,
98 and NT, and Windows for Pen, among others, on the computers it sells. For
this right, the Company must pay Annabooks royalties for each unit sold,
although quantity discounts are available. The Company paid approximately
$78 per license for each machine it sold.

Patents, Copyrights and Trademarks
In view of rapid technological and design changes inherent to the
computer industry, the Company does not believe that, in general, patents
and/or copyrights are an effective means of protecting its interests.
However, due to the unique configuration of the Orasis, the Company did
patent its mechanical design and processor upgradability concepts. The
Company also attempts to maintain its proprietary rights by trade secret
protection and by the use of non-disclosure agreements. It is possible that
the Company's products could be duplicated by competitors and duplication and
sale could therefore adversely affect the Company. However, management
believes that the time spent by competitors engineering the product would be
too long for the rapidly changing computer industry.

In 1997 the Company applied for and received a trademark on the name
"Orasis."

R.M. Schultz & Associates, Inc.

Services
Using automatic assembly equipment, RMS is capable of assembling large
quantities of electronic products. The majority of the work performed by RMS
since its inception has been in a through-hole or large component electronic
assembly. Since the RMS acquisition the Company spent more than $750,000 to
build a 5,000 square foot environmentally controlled room inside the RMS
facility and to acquire surface mount equipment. Surface mount assembly
equipment allows for high-speed/high-tech component placement on a printed
circuit board, a newer method of product assembly. In the past, RMS had to
employ services of other firms to incorporate surface mount portions of the
final product. In combination, the through-hole and surface mount capability
will allow RMS to target over ninety percent of electronic products
manufactured today.

The capabilities of the engineering staff at RMS encompass a wide range of
microprocessor, analog, digital, and control disciplines. Each RMS engineer
has a specific product for which he/she is responsible. By assigning a key
person on the engineering staff to each production project, an effective
liaison with the client is created. Engineers are responsible for helping to
develop the product as well as the production process and all workstation
tools and fixtures. RMS also provides consulting services on many product
development and improvement projects.

Markets
The contract manufacturing market exploded in the early 1990s when large
companies began to shed their captive manufacturing plants and engineering
staffs. That trend became even more prevailing in the electronic
manufacturing industry. Technological advancements were too frequent and too
dramatic for an individual company to absorb. Instead, many companies saw
the opportunity to reduce the cost of capital expenditures and labor by
outsourcing the work to specialty shops like RMS. In the latest Frost &
Sullivan studies, released in 1997, the electronic contract manufacturing
industry is expected to grow from $22 billion in 1997 to an estimated $110
billion in 2004. Management estimates RMS's growth rate at 20% per year.

Sales and Marketing
In January 1998, RMS hired a sales manager who, in conjunction with the
existing sales force, concentrates his efforts on direct sales.

Competition
RMS has a number of competitors in the Midwest and around the country. Some
of these firms, including Morey Corporation or Solectron Corporation, are
well established and well capitalized. However the majority of these firms
are not located in the Midwest. In addition, many of RMS' competitors do not
have in-house engineering capability. Management believes that the growth
rate of the electronics industry, the fragmentation of competitors in the
Midwest coupled with the engineering capacity of RMS pose an opportunity to
capture larger portion of this market.

Customer Dependence
Three customers represent over seventy percent of revenue for RMS. The
management is planning to increase sales efforts and to bring additional
customers to RMS.

Patents, Copyrights and Trademarks
RMS regularly assists their customers in the registration of patents on
designs created by RMS staff. In such cases, RMS engineers are the inventors
or co-inventors with rights assigned to the customer. The RMS logo is both a
registered trade and service mark.

Item 2. Properties
The Company's executive offices consist of 7,300 square feet of office space
and 2,700 square feet of warehouse space located at 800 E. Northwest Hwy.,
Suite 950, Palatine, Illinois 60067. The Company pays approximately $8,000
per month to rent the facilities. The lease, signed in May 1996, has a
three-year term. In December 1998, in conjunction with upgrading the
facilities, Dauphin signed a five-year lease extension. The lease calls
for increased rent, but provided for reconstruction of facilities to better
suit the Company's needs. The Company believes the space will be adequate
for the foreseeable future.

RMS facilities are located at 1809 South Route 31, McHenry, Illinois 60050.
The facilities are leased from Enclave Corporation, a company that is owned
by Richard M. Schultz, President of RMS. RMS occupies 53,000 square feet of
space, of which 7,000 square feet is for office space and 5,000 square feet
is surface mount portion of production. The lease has a five-year term
starting on June 6, 1997 with an optional extension for an additional five
years. The rent is approximately $14,000 per month. The Company believes
the space will be adequate for RMS operations for the foreseeable future.

Item 3. Legal Proceedings
The Company is involved in a wrongful discharge lawsuit brought by an ex-
employee/officer. The suit was filed on April 11, 1998 in the Circuit Court
of Cook County, Illinois and as of the date hereof four out of five claims
have been dismissed. Management believes that the Company has several
defenses to the remaining claim and has made adequate provisions in the
financial statements for any potential liability that may result from the
disposition of the lawsuit. Any such unfavorable disposition will not be
material to the Company's results of operations or financial position.

On March 26, 1999 Addison Engineering, Inc. filed a complaint in the Circuit
Court of Cook County, Illinois against R.M. Schultz & Associates, Inc.
alleging breach of a contract and claiming $51,140.53 due for outstanding
invoices and additional materials allegedly developed for future production.
Management feels that it has several defenses to this claim and has made
adequate provisions in its financial statements for any potential liability
that may result from the disposition of the lawsuit. Any such unfavorable
disposition will not be material to the Company's results of operations or
financial position.

Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.

PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holders
Matters

Market Price of Common Stock
The Company's common stock is traded on a limited basis on the over-the-
counter market and is quoted in the National Quotation Bureau's Pink Sheets.
The following table shows the range of representative bid prices for the
common stock. The prices represent quotations between dealers and do not
include retail mark-up, markdown, or commission, and do not necessarily
represent actual transactions:

Bid Prices
<TABLE>
1996 1997 1998
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $1.625 $.0875 $1.625 $1.187 $1.625 $1.016
Second Quarter 1.719 1.125 1.219 0.750 1.391 0.875
Third Quarter 1.625 1.125 1.172 0.875 2.031 0.875
Fourth Quarter 2.000 0.938 2.590 1.063 0.906 0.500
</TABLE>

Holders
The number of shareholders on record of the Company's common stock as of
March 27, 1999 as reported by the Company's transfer agent is approximately
5,500. A number of the Company's shareholders on record are brokerage firms
or stock clearing agencies. Therefore, the Company believes the total number
of beneficial shareholders is greater than 5,500.

Dividend Policy
The Company has not paid any cash dividends to date and does not anticipate
or contemplate paying dividends in the foreseeable future. It is the present
intention of management to utilize all available funds for the development of
the Company's business.

Common Stock
The authorized capital stock of the Company consists of 100,000,000 shares of
common stock, $.001 par value. As of March 30, 1999 there were 42,174,379
shares of common stock issued and 42,128,322 shares outstanding held by
approximately 5,500 stockholders of record. The holders of common stock are
entitled to one vote for each share held of record on all matters submitted
to a vote of the stockholders. Subject to preferences that may be applicable
to any then outstanding preferred stock, holders of common stock are entitled
to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor (see "Market Price of
Common Stock" and "Dividend Policy"). In the event of a liquidation,
dissolution or winding up of the Company, holders of the common stock are
entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of common stock have no right to convert their common stock
into any other securities and have no cumulative voting rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and non-assessable.

On February 6, 1996 the Company entered into an agreement with Victor Baron,
Savely Burd and Interactive Controls, Inc., an Illinois corporation
("Intercon"). Mr. Baron's employment with the Company terminated on February
24, 1998. Mr. Burd continues to serve as an employee and Chief Financial
Officer of the Company. On December 29, 1998 the Board of Directors voted
unanimously to terminate the Intercon agreement and to accept Mr. Burd's
resignation from Intercon and all positions he held in Intercon.

Preferred Stock
No preferred shares have been issued to date. The Company is authorized to
issue up to 10,000,000 shares of preferred stock, $.01 par value. The
preferred stock may be issued in one or more series, the terms of which may
be determined at the time of issuance by the Board of Directors, without
further action by stockholders, and may include voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and liquidation, conversion and redemption rights and sinking fund
provisions. No preferred stock is currently outstanding and the Company has
no present plans for the issuance thereof. However, the issuance of any such
preferred stock could affect the rights of the holders of common stock, and,
therefore, reduce the value of the common stock. In particular, specific
rights granted to future holders of preferred stock could be used to restrict
the Company's ability to merge with or sell its assets to a third party,
thereby preserving control of the Company by present owners.

Transfer Agent and Registrar
American Stock Transfer and Trust Company, 40 Wall Street, New York, New
York, 10005

Item 6. Selected Financial Data

Year Ended December 31

<TABLE>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Net Sales $ 5,367,514 $ 2,730,035 $ 93,946 $ 183,083 $ 9,603,021
Extraordinary Item - - 38,065,373 - -
Net Income (Loss) (6,131,557) (3,988,017) 36,668,669 (794,812) (49,172,584)
Net Income (Loss) Per Share (0.16) (0.13) 1.52 (0.06) (3.41)
Total Assets 6,719,635 7,269,136 3,402,860 426,493 298,094
Long -Term Debt 302,951 429,526 43,196 - -
Working Capital(Deficit) 260,227 4,510,546 3,020,558 (50,979,877) (50,167,342)
Shareholders Equity (Deficit) 2,885,228 5,675,595 3,092,900 (50,910,187) (50,027,710)
</TABLE>

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

Results of Operations 1998 Compared to 1997 and 1996
The Company and its subsidiary are primarily engaged in electronic product
engineering, development and sales, and contract manufacturing services. All
of these activities are highly competitive and sensitive to many factors
outside of the control of the Company, including general economic conditions
affecting the Company's clients and availability of components.

Dauphin Technology, Inc. ("Mobile Group")
Revenue for Dauphin Technology, Inc. increased from $72,000 in 1997 and
$94,000 in 1996 to $386,000 in 1998, increasing sales more than 5 times from
1997 levels. The revenue increased with shipment of Orasis beginning in the
third and the fourth quarter of 1998.

The gross profit margins are not comparable for the periods due to the
inventory write downs and fluctuation in sales. During 1997 and 1998, the
Company wrote down all DTR inventory, including the semi-finished DTR-2
units. The Company no longer supports DTR line of products. Originally,
such inventory was to be used in the design of Orasis, but the introduction
of new components and newer design methods rendered such inventory obsolete.

Selling, general and administrative expenses increased to approximately $2.55
million in 1998 from $1.25 million in 1997 and $1.01 million in 1996. The
increase from 1997 to 1998 was due to additional staffing in sales and
marketing departments and expense related to product demonstrations. The
Company supplied its sales force with 200 Orasis demonstration units, at an
average cost of $2,500 per unit, to present the product at trade shows and
sales opportunities. Also, the Company advertised its flagship product
Orasis in several trade magazines. Further, internal operations were
enhanced with additional personnel. The increase from 1996 to 1997 is
attributed to an increase in trade shows, and advertising expenses.

R.M. Schultz & Associates, Inc.
Revenue for RMS increased from $2.7 million in 1997 to $5.6 million in 1998,
including intercompany transactions, doubling from 1997 levels. Full year of
operations and higher demand for electronic products contributed to the year-
to-year increase.

The gross profit margin for RMS has gone down from 9% in 1997 to 6% in 1998
due to an increase in reserve for obsolescence and startup inefficiencies in
manufacturing of Orasis.

Selling, general and administrative expenses increased in 1998 to
approximately $712,000 from $233,000 in 1997. The increase from 1997 to 1998
was primarily due to full year of operations under Dauphin umbrella.

The net operating loss, increased to approximately $530,000 in 1998 from
$39,000 in 1997. The increase in net loss was due to an increase in sales,
general and administrative expenses and additional inventory write-down.

Other Expenses and Net Loss
The net operating loss, before extraordinary item, increased to approximately
$6.1 million in 1998 from $4.0 million in 1997 and $1.4 million in 1996. The
increase in the net loss was due to an increase in research and development
expense from $827,000 in 1997 to $1.6 million in 1998, an increase in sales
and marketing expense, an increase of interest expense from $76,000 to $1
million in 1998 and additional inventory write-downs. The Company spent in
excess of $2.4 million on the development and an additional $676,000 on
tooling for Orasis.

In 1996, due to debt forgiveness related to corporate restructuring and
closing of the bankruptcy proceedings, the Company recognized a one time
extraordinary income item of over $38 million.

Liquidity and Capital Resources

Absence of Operating Profit
The Company has incurred a net operating loss in each year since its founding
and as of December 31, 1998 has an accumulated deficit of $29,520,432. The
Company expects to incur operating losses over the near term. The Company's
ability to achieve profitability will depend on many factors including the
Company's ability to manufacture and market commercially acceptable products.
There can be no assurance that the Company will ever achieve a profitable
level of operations or if profitability is achieved, that it can be
sustained.

Early Stage of Development of the Company's Products
From June of 1997 through December of 1998, the Company was principally
engaged in research and development activities. Currently, the Company is in
the early stages of marketing its Orasis product. As a result, the
Company's Orasis products have been sold in limited quantities and there can
be no assurance that a significant market will develop for such products.
Therefore, the Company's inability to manufacture and market Orasis on a
timely basis can have a material adverse effect on the Company's financial
results.

Financing Considerations
Currently, the Company is working to ensure it has appropriate funding to
finance future operations. On March 30, 1999 management signed a term sheet
with a current investor, which offers to assist the Company in accordance
with the proposal described in Note 16. Management is seeking additional
financing and is negotiating final terms and conditions with another current
investor. Last, management has introduced Orasis. With the combination of
financing and sales of Orasis, management believes they will be able to
generate enough cash to sustain future operations.

Inflation and Seasonality
Due to the nature of the Company's products and current market trends, an
increase in the volume of production should generally result in a reduction
of cost per unit. Management does not anticipate any major shifts in this
trend in a foreseeable future. Also, due to the fact that the Company
targets industrial customer and not retail outlets, the Company should not be
effected by the seasonal nature of consumer purchasing.

Other
"Year 2000" refers to the issue surrounding the compatibility of computers
and other technology based systems with dates beyond December 31, 1999. This
section will include an assessment of the Company's state of readiness, the
cost to address the issues, the risks the issue represents and the Company's
contingency plan.

State of Readiness
During the last year, management assessed the impact of a potential Year 2000
problem. Management believes that it is aware of the risk areas facing the
Company regarding Year 2000 and has broken those areas into six categories.
The six categories are: (1) the Company's main operating system, (2) the
Company's financial reporting and customer tracking software, (3) individual
workstation hardware and software applications, (4) telephone and peripheral
equipment, (5) the Company's products, and (6) the state of readiness of the
Company's customers and vendors.

The Company's main operating system, financial and customer contact
application software have been upgraded in 1998 to Year 2000 compliant
software. Subsidiary operating system and reporting software shall be
upgraded during the summer of 1999.

The Company individual workstation hardware and software applications
assessment is ongoing at both Dauphin and RMS. The Company is in the process
of creating an inventory of all desktop hardware and software applications.
Once completed, the Company anticipates that internal staff will perform all
necessary upgrades. The renovation plan is expected to begin in the second
quarter of 1999, and validation phase is expected to be completed by
September 30, 1999.

The Company believes all of its telephone and peripheral equipment has been
assessed. The amount of time for renovation and validation, if any, has not
been determined.

The Company's main electronic product, Orasis, as well as all other
electronic devices produced by RMS have been assessed. The validation phase
on all products was completed in 1998.

The Company has identified two categories of key third parties with which the
Company has material relationships that should be assessed. Those categories
are: (1) significant customers, and (2) key component vendors. The Company
believes, due to the nature of its industry, that both, its major customers
and vendors will be Year 2000 compliant by the end of 1999.

Costs
In 1998, the Company expensed approximately $25,000 related to Year 2000
compliance. The Company expects to spend an additional $60,000 to $75,000
through summer of 1999 to modify the remaining information management
systems. These costs include not only the amounts paid to outside parties but
also the payroll costs of those employees spending significant amount of time
on Year 2000 issues. The Company estimates it will spend approximately
$100,000 in total related to Year 2000 compliance. The Company expects to
continue to fund these costs through cash flow from operations.

Risk
Management believes that its most likely worst case scenario is a complete
shut down of the Company and its products. The Company believes that these
risks, as well as other risks addressed herein could have a material adverse
effect on the Company's results of operations, financial conditions and
liquidity.

Contingency Plan
The Company has not yet developed a formal written contingency plan. The
creation of the contingency plan will be ongoing process that should be
completed by September of 1999.

Item 8. Financial Statements and Supplementary Data
The Company's financial statements are included in Item 14 (a).

Item 9. Changes in and Disagreements with Accountants on Accounting or
Financial Disclosure
There were no changes in or disagreement with accountants on accounting or
financial disclosure.

PART III
Item 10. Directors, Executive Officers and Officers of the Registrant

Directors and Officers
The following table sets forth the name, age, date appointed as Director,
Executive Officer or Officer position with the Company, present principal
occupation and employment history for the past five years of each person who
is a Director, Executive Officer or Officer.

Name Age Date Appointed Present Office
Andrew J. Kandalepas 47 1995 Chairman of the Board of Directors
Chief Executive Officer, President
Mr. Kandalepas joined Dauphin as Chairman of the Board in February 1995. He
was named CEO and President of Dauphin in November of 1995. In addition, Mr.
Kandalepas is the founder and President of CADserv. Mr. Kandalepas graduated
from DeVry Institute in 1974 with a Bachelor's Degree in Electronics
Engineering Technology. He then served as a product engineer at GTE for two
years. Mr. Kandalepas left GTE to serve ten years as a supervisor of PCB
design for Motorola prior to founding CADserv in 1986.

Savely Burd 35 1996 Chief Financial Officer

Mr. Burd was appointed Chief Financial Officer in 1996. After graduation from
the University of Illinois in 1987, Mr. Burd began his career as a staff
auditor at Arthur Andersen LLP. After several promotions and a career move,
Mr. Burd was hired as a Controller for Clarklift of Chicago North, Inc., a
materials handling equipment dealer. Before his appointment with Dauphin, Mr.
Burd was employed by Merrill Lynch. Mr. Burd, a CPA, is also a graduate of J.
L. Kellogg Graduate School of Management.

Jeffrey L. Goldberg 46 1995 Secretary, Director

Mr. Goldberg has served as Secretary and a Director since June of 1995. Mr.
Goldberg is a partner at FERS, an international accounting firm. Mr.
Goldberg was formerly the President of Financial Consulting Group, LTD., a
lawyer at the Chicago law firm, Goldberg and Goodman, and prior to that, was
a tax senior with Arthur Andersen LLP. He is an attorney, CPA and certified
financial planner.

Gary E. Soiney 58 1995 Director

Mr. Soiney has served as a Director since November of 1995. He graduated from
the University of Wisconsin in Milwaukee with a degree in Business
Administration. He is currently a 75% owner in Pension Design & Services,
Inc., a Wisconsin corporation, which performs administrative services for
qualified pension plans to business primarily in the Mid-West.

Douglas P. Morris 42 1995 Director

Mr. Morris has been a Director since November of 1995. He is the President of
Celtic Investment, Inc., a publicly traded residential mortgage broker and an
asset based lender. Mr. Morris received his Masters Degree in Public
Administration at the University of Southern California in 1982, and his
Bachelor of Arts Degree in Judicial Administration from Brigham Young
University in 1978.

Andrew Prokos 36 1995 Director

Mr. Prokos has served as a Director since February 1995. He is also vice-
president of CADserv since 1995. Mr. Prokos is a graduate of DeVry Institute
with an Associate Degree in Electronics.

Dean F. Prokos 34 1995 Director

Mr. Prokos has served as a Director since August 1995. He is the Regional
Manager for the Secretary of State Drivers Services Department. He attended
Loyola University in Business Management and has been previously involved
with management of various food establishments.

All Directors and Executive Officers are elected annually and hold office
until the next annual meeting of the stockholders of the Company or until
their successors have been elected and qualified.

Family Relationship
Both Andrew Prokos and Dean F. Prokos are cousins of Andrew Kandalepas,
Chairman of the Board of Directors. Andrew Prokos and Dean F. Prokos are
siblings.

Other: Involvement in Certain Legal Proceedings
There have been no events under any bankruptcy act, no criminal proceedings
and no judgments or injunctions material to the evaluation of the ability and
integrity of any Director or Executive Officer during the past five years.

Involvement by Management in Public Companies
With the exception of Douglas P. Morris, none of the other Directors,
Executive Officers or Officers has had, or presently has, any involvement
with a public company, other than the Company. Mr. Morris is currently an
Officer and Director of Celtic Investment Inc., an Officer and Director of
Emerald Capital Investments, Inc., and a Director of Beacon Capital
Investment, Inc.

Item 11. Executive Compensation
At the Board of Directors meeting held on December 29, 1998, the Board
established two committees, Audit and Compensation. The Securities and
Exchange Commission regulations mandate disclosure of all compensation
including salary, bonus and stock options, paid to executive officers and
directors that exceeds $100,000. No Executive Officer or Director was paid
compensation exceeding $100,000 during 1996, 1997 or 1998.

Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding shares of common
stock of the Company owned beneficially as of March 29, 1999, by (i) each
Officer and Director of the Company, (ii) all Officers and Directors as a
group, and (iii) each person known by the Company to beneficially own more
than 5% of the common stock of the Company:

<TABLE>

Amount and Nature of
Name of Beneficial Owner Position Beneficial Shares Owned Percent of Class
<S> <C> <C> <C>
Andrew J. Kandalepas Chairman, Chief 3,326,837 7.8%
Executive Officer & President

Savely Burd Chief Financial Officer 49,500 0.1%

Jeffrey L. Goldberg Secretary, Director 0 0.0%

Gary E. Soiney Director 0 0.0%

Douglas P. Morris Director 291,167 (1) 0.7%

Andrew Prokos Director 204,000 0.6%

Dean F. Prokos Director 0 0.0%

H & M Capital Investments, Inc. ------ 11,167 (1) 0.0%

Hyacinth Resources, Inc. ------ 280,000 (1) 0.7%

Morgan Stanley, Dean Witter & Co.
As trustees for Bank Lyonnais ------ 7,133,500 16.9%
---------- -----
Officers and Directors and
5% Beneficial Owners (as a group) 12,980,004 26.1%

</TABLE>

(1) Douglas P. Morris is President of H & M Capital Investments, Inc. and
Hyacinth Resources, Inc.

Item 13. Certain Relationships and Related Party Transactions
CADserv, an engineering services company based in Schaumburg, Illinois,
controlled by an Officer and a major shareholder, has contributed to the
design, packaging and manufacturing of Dauphin's DTR and Orasis product
lines and will likely continue in this capacity in the future. The Company
paid $140,192 during 1998 for such services.

As of December 31, 1998, the Company extended approximately $32,000 of loans
to members of management. In January of 1999, these loans were repaid.

In September of 1998, the Company paid $300,000 for 3,000 shares of
restricted Convertible Preferred stock in Celtic Investment Inc., a company
that is managed by one of the members of Dauphin board of directors. On
January 10, 1999 the Company sold 100 shares of such securities to an
accredited investor.

In January 1999 the Company borrowed $135,000 from two members of the Board
of Directors. The loans mature in six months and with accrued interest.

RMS facilities are leased from Enclave Corporation, a company that is owned
by Richard M. Schultz, President of RMS. The Company paid $165,660 of rent
and $22,500 of real estate taxes for the property lease.

PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K

The Company did not file a report on Form 8-K during the fourth quarter of
the recently completed fiscal year.

Signatures
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunder duly authorized, in the
City of Palatine and State of Illinois, on the 31st day of March, 1999.

DAUPHIN TECHNOLOGY, INC.

BY: /Savely Burd/
Savely Burd, Chief Financial Officer

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

Signature Title Date

/Andrew J. Kandalepas/
Chairman of the Board of Directors March 31, 1999
Andrew J. Kandalepas Chief Executive Officer, President

/Jeffrey J. Goldberg/
Secretary March 31, 1999
Jeffrey L. Goldberg

/Savely Burd/
Chief Financial Officer March 31, 1999
Savely Burd

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1998 AND 1997 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7

Report of Independent Public Accountants

To the Board of Directors and Shareholders of
Dauphin Technology, Inc. and Subsidiary:

We have audited the accompanying consolidated balance sheets of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiary, as of December 31,
1998 and 1997, and the related consolidated statements of operations,
consolidated shareholders' equity and consolidated cash flows for each of the
three years in the period ended December 31, 1998. 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 audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dauphin
Technology, Inc. and Subsidiary as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

The accompanying consolidated financial statements have been prepared
assuming that 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 and has insufficient cash on hand to sustain future
operations that raises substantial doubt about the entity's ability to
continue as a going concern. The Company has received certain funding
subject to the terms and conditions outlined in Note 16. Management's plans
in regards to these matters are described in Notes 2 and 16. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.

ARTHUR ANDERSEN LLP

Chicago, Illinois
March 31, 1999 (except with respect to the matters
discussed in Note 16, as to which the date is April 15, 1999)

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1998 AND 1997

1998 1997
-------------- --------------
CURRENT ASSETS:
Cash $ 55,701 $ 3,620,880
Accounts receivable-
Trade, net of allowance for bad debt
of $11,238 and $7,500 at December
31, 1998 and 1997 689,713 462,821
Employee receivables 45,987 20,195
Inventory, net of reserve for
obsolescence of $152,000 and $2,143,934
at December 31, 1998 and 1997 2,953,686 1,531,464
Prepaid expenses 46,596 39,201
-------------- --------------
Total current assets 3,791,683 5,674,561

INVESTMENT IN RELATED PARTY 300,000 -
PROPERTY AND EQUIPMENT, net of
accumulated depreciation of $378,051
and $176,318 at December 31, 1998 and 1997 1,673,901 739,556
DEFERRED FINANCING COST, net of
accumulated amortization of $29,128 at
December 31, 1998 186,576 -
GOODWILL, net of accumulated amortization
of $107,971 and $20,427 at December 31,
1998 and 1997 767,475 855,019
-------------- --------------
Total assets $ 6,719,635 $ 7,269,136
============== ==============

CURRENT LIABILITIES:
Accounts payable $ 2,103,572 $ 790,784
Accrued expenses 215,305 285,837
Current portion of long-term debt 113,436 83,782
Short-term borrowings, net of discount
of $3,845 at December 31, 1998 246,155 87,394
Convertible debentures, net of
discount of $47,012 852,988 -
-------------- --------------
Total current liabilities 3,531,456 1,247,797

LONG-TERM DEBT 302,951 345,744
COMMITMENTS AND CONTINGENCIES - -
-------------- --------------
Total liabilities $ 3,834,407 $ 1,593,541

SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value,
10,000,000 shares authorized but
unissued - -
Common stock, $0.001 par value,
100,000,000 shares authorized;
40,000,000 shares issued and 39,861,818
outstanding at December 31, 1998 and
37,035,673 shares issued and 36,305,096
outstanding at December 31, 1997 40,000 37,036
Treasury stock, at cost, 138,182 and
730,577 shares at December 31, 1998
and 1997 (33,306) (255,702)
Warrants 55,181 -
Paid-in capital 32,343,785 29,283,136
Accumulated deficit (29,520,432) (23,388,875)
-------------- --------------
Total shareholders' equity 2,885,228 5,675,595

Total liabilities and
shareholders' equity $ 6,719,635 $ 7,269,136
============== ==============

The accompanying notes are an integral part of these balance sheets.

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- ------------
REVENUES $ 5,367,514 $ 2,730,035 $ 93,947
COST OF SALES 5,757,889 4,345,315 279,232
------------- ------------- ------------
Gross profit (loss) (390,375) (1,615,280) (185,285)

SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,273,132 1,484,979 1,007,309
RESEARCH AND DEVELOPMENT EXPENSE 1,576,477 827,843 76,711
------------- ------------- ------------
Loss from operations (5,239,984) (3,928,102) (1,269,305)

INTEREST EXPENSE 968,414 75,988 2,310
INTEREST INCOME 76,841 16,073 9,997
------------- ------------- ------------
Loss before reorganizational items,
income taxes and extraordinary item (6,131,557) (3,988,017) (1,261,618)

REORGANIZATIONAL ITEMS:
Professional fees - - 135,086
------------- ------------- ------------

Loss before income taxes and
extraordinary item (6,131,557) (3,988,017) (1,396,704)

INCOME TAXES - - -
------------- ------------- ------------

Loss before extraordinary item (6,131,557) (3,988,017) (1,396,704)
------------- ------------- ------------

EXTRAORDINARY ITEM, forgiveness of debt
net of income taxes of $0 - - 38,065,373
------------- ------------- ------------

Net income (loss) $ (6,131,557) $ (3,988,017) $ 36,668,669
============= ============= ============

BASIC and DILUTED EARNINGS (LOSS) PER SHARE:
Before extraordinary item $(0.16) $(0.13) $(0.06)
Extraordinary item - - 1.58
------------- ------------- ------------

Earnings (loss) per share $ (0.16) $ (0.13) $ 1.52
============= ============= ============

Weighted average number of shares of
common stock outstanding 37,287,432 30,734,045 24,076,301

</TABLE>

The accompanying notes are an integral part of these statements.

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
Common Stock Paid-in Treasury Stock Accumulated
Shares Amount Capital Warrants Shares Amount Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
------------ -------- ----------- -------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1995 14,408,354 $ 14,408 $ 5,144,932 $ - - $ - $(56,069,527) $(50,910,187)
Issuance of common stock in connection with:
Bankruptcy conversion 11,650,000 11,650 13,036,350 - - - - 13,048,000
Purchase of inventory 2,600,000 2,600 2,909,400 - - - - 2,912,000
Private placement 1,948,043 1,948 1,790,077 - - - - 1,792,025
Settlement of note payable 1,100,000 1,100 768,900 - - - - 770,000
Purchase of treasury stock - - - - (2,159,286) (1,187,607) - (1,187,607)
Net income - - - - - - 36,668,669 36,668,669
------------ -------- ----------- -------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1996 31,706,397 $ 31,706 23,649,659 $ - (2,159,286) $ (1,187,607) $(19,400,858) $ 3,092,900
Issuance of common stock in connection with:
Private placement 4,872,520 4,873 4,582,294 - - - - 4,587,167
Commissions to placement agent 131,756 132 (132) - - - - -
Purchase of a subsidiary 220,000 220 232,980 - - - - 233,200
Escrow shares 105,000 105 - - - - - 105
Purchase of treasury stock - - - - (891,626) (341,369) - (341,369)
Issuance of treasury stock - - 812,085 - 2,307,835 1,266,399 - 2,078,484
Stock bonuses paid - - 6,250 - 12,500 6,875 - 13,125
Net loss - - - - - - (3,988,017) (3,988,017)
------------ -------- ----------- -------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1997 37,035,673 $ 37,036 $29,283,136 $ - (730,577) $ (255,702) $(23,388,875) $ 5,675,595
Issuance of common stock in connection with:
Conversions of debt 2,705,391 2,705 2,743,811 - 542,272 205,903 - 2,952,419
Commissions to broker 172,700 173 178,745 - - - - 178,918
Purchase of fixed assets 60,000 60 67,440 - - - - 67,500
Issuance of warrants in connection
with debt issuance - - - 55,181 - - - 55,181
Stock bonuses paid 26,236 26 70,653 - 50,123 16,493 - 87,172
Net loss - - - - - - (6,131,557) (6,131,557)
------------ -------- ----------- -------- ----------- ------------ ------------ ------------
BALANCE, December 31, 1998 40,000,000 $ 40,000 $32,343,785 $ 55,181 (138,182) $ (33,306) $(29,520,432) $ 2,885,228
============ ======== =========== ======== =========== ============ ============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (6,131,557) $ (3,988,017) $ 36,668,669
Non-cash items included in net income (loss)-
Loss on disposition of property and equipment - - 1,850
Depreciation and amortization 318,405 93,671 33,459
Extraordinary item - - (38,065,373)
Interest expense on convertible debt 814,882 - -
Stock bonus 87,172 13,125 -
Changes in-
Accounts receivable
- trade (226,892) 129,519 3,781
- employee (25,792) (20,195) 167,266
Inventory (1,422,222) 1,893,655 22,807
Prepaid expenses (7,395) (14,396) (12,251)
Accounts payable 1,312,788 (532,866) 24,335
Accrued expenses (70,532) (21,410) (9,799)
------------- ------------- -------------
Net cash used in operating activities (5,351,143) (2,446,914) (1,165,256)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,068,578) (201,965) (81,210)
Investment in related party (300,000) - -
------------- ------------- -------------
Net cash used in investing activities (1,368,578) (201,965) (81,210)

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received in acquisition - 31,162 -
Short-term borrowings (payments) 162,606 (706,390) 375,000
Purchase of treasury stock - (341,369) (1,187,607)
Issuance of convertible debentures and
warrants net of financing costs 2,991,936 - 795,044
Proceeds from issuance of common stock - 6,665,756 1,792,025
------------- ------------- -------------
Net cash provided by financing activities 3,154,542 5,649,159 1,774,462

Net increase (decrease) in cash (3,565,179) 3,000,280 527,996

CASH, beginning of year 3,620,880 620,600 92,604
------------- ------------- -------------
CASH, end of year $ 55,701 $ 3,620,880 $ 620,600
============= ============= =============

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 153,532 $ 75,988 $ 2,310
Reorganization item - - 135,086
============= ============= =============

NONCASH TRANSACTIONS:
Common stock issued in connection with -
Bankruptcy settlement $ - $ - $ 13,048,000
Purchase of inventory - - 2,912,000
Purchase of fixed assets 67,500 - -
Settlement of notes payable - - 770,000
Conversion of debentures 2,952,419 - -
Commissions to broker/dealer 178,918 - -
Acquisition of R.M. Schultz & Associates -
Assumption of liabilities - 2,197,058 -
Issuance of stock - 233,200 -
Capital equipment leased - 347,189 -
============= ============= =============

</TABLE>

The accompanying notes are an integral part of these statements

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:

Description of Business
Dauphin Technology, Inc. ("Dauphin") designs, manufactures and markets mobile
hand-held and pen-based computers, components and accessories. Dauphin
markets its products through a network of value added resellers and software
integrators to the commercial and government market segments.

On June 6, 1997, Dauphin acquired all issued and outstanding shares of R.M.
Schultz & Associates, Inc., ("RMS") an electronics contract manufacturing
firm located in McHenry, Illinois. RMS is involved in electronics design,
development and production of products for manufacturers located in Illinois
and Wisconsin.

Basis of Presentation
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiary, RMS (the "Company"). All significant intercompany
transactions and balances have been eliminated in consolidation.

On January 3, 1995, the Company filed a petition for relief under Chapter 11
of the Federal Bankruptcy Code. During 1995 and the first six months of 1996,
the Company operated under Chapter 11. On May 9, 1996, the Company's Third
Amended Plan of Reorganization was approved by the majority of creditors and
shareholders and confirmed by the Court. On July 23, 1996, the Court
discharged the Company as a Debtor-in-Possession and the bankruptcy case was
closed.

2. RISK AND UNCERTAINTIES:

Early Stage of Development of the Company's Products
From June of 1997 through December of 1998, the Company was principally
engaged in research and development activities. Currently, the Company is in
the early stages of marketing its Orasis( product. As a result, the
Company's Orasis( products have been sold in limited quantities and there can
be no assurance that a significant market will develop for such products.
Therefore, the Company's inability to manufacture and market Orasis( on a
timely basis can have a material adverse effect on the Company's financial
results.

Financing Considerations
Currently, the Company is working to ensure it has appropriate funding to
finance future operations. On March 30, 1999 management signed a term sheet
with a current investor, which offers to assist the Company in accordance
with the proposal described in Note 16. Management is seeking additional
financing and is negotiating final terms and conditions with another current
investor. Last, management has introduced Orasis(. With the combination of
financing and sales of Orasis(, management believes they will be able to
generate enough cash to sustain future operations.

3. SUMMARY OF MAJOR ACCOUNTING POLICIES:

Inventory
Inventory is stated at the lower of cost or market. Cost is determined on the
first-in, first-out (FIFO) basis. Inventory is comprised of material, labor
and overhead and consists of the following at December 31:

1998 1997
------------- ------------
Finished goods $ 310,766 $ 22,343
Work in process 1,333,147 191,872
Raw materials 1,461,773 651,990
DTR semi-finished units - 168,420
DTR accessories, components and supplies - 2,640,773
------------- ------------
3,105,686 3,675,398
Less - Reserve for Obsolescence (152,000) (2,143,934)
------------- ------------
$ 2,953,686 $ 1,531,464

In the fourth quarter of 1997, in conjunction with the final stages of
development of Orasis( and its introduction at the fall 1997 COMDEX show,
some of the inventory previously acquired for the production of the DTR
product line became obsolete. Originally the Company intended to use all
parts of the DTR line in the design and production of Orasis(. As a result,
in the fourth quarter of 1997 the Company wrote down approximately $1.7
million of inventory comprised primarily of DTR line batteries, power cords,
digitizer panels and LCD screens. In the third quarter of 1998, due to
humidity and high temperature damage, the Company wrote down approximately
$565,000 of inventory. Also in the third quarter of 1998, as a result of the
increased popularity of Orasis(, the DTR units in inventory, approximately
$83,000, were written down to net realizable value. As of December 31, 1998
all DTR inventory previously reserved for as obsolete or damaged has been
disposed of.

Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided using
straight-line methods over the estimated lives of the related assets, which
range between three and seven years. The estimated lives of leasehold
improvements are amortized over the remaining term of the facilities leased,
which is four years. Plastic molds are being amortized over the number of
estimated parts to be produced (approximately 100,000) estimated to be within
3 years. Property and equipment consist of the following:

1998 1997
------------- ------------
Furniture and fixtures $ 89,084 $ 40,950
Office equipment 228,618 174,659
Manufacturing and warehouse equipment 618,904 427,791
Leasehold improvements 405,836 260,201
Plastic molds for the Orasis( 697,237 -
Automobile 12,273 12,273
------------- ------------
2,051,952 915,874
Less - Accumulated depreciation
and amortization (378,051) (176,318)
------------- ------------
$ 1,673,901 $ 739,556
============= ============

Goodwill
Goodwill is being amortized on a straight-line basis over 10 years. On an
ongoing basis, the Company estimates the future undiscounted cash flows
before interest of the operating unit to which the goodwill relates in order
to evaluate impairment. If impairment exists, the carrying amount of the
goodwill is reduced by the estimated shortfall of cash flows. The Company
has not experienced any impairment of goodwill. The Company recorded $87,544
and $20,427 of amortization expense during 1998 and 1997, respectively.

Deferred Financing
Financial costs related to the issuance of convertible debentures have been
capitalized and are being amortized over the three-year maturity period of
debt.

Revenue Recognition
The Company recognizes revenue on the sale of mobile computers, computer
accessories and assembled products. Revenues from sales of computer-related
products are recognized upon shipment. Revenue from the fulfillment of
manufacturing contracts, generally less then year in length, is recognized
upon shipment of the finished assembly.

Earnings (Loss) Per Common Share
Basic earnings per common share are calculated on income available to common
stockholders divided by the weighted-average number of shares outstanding
during the period, which were 37,287,432, 30,734,045, and 24,076,301 for the
years ending December 31, 1998, 1997 and 1996, respectively. Diluted
earnings per common share are adjusted for the assumed conversion of
convertible debentures and exercise of stock options and warrants unless such
adjustment would have an anti-dilutive effect. Approximately 2.5 million
additional shares would be outstanding if all convertible debentures were
converted into common shares and stock options and warrants were exercised as
of December 31, 1998. Refer to Note 16 for dilution subsequent to December
31, 1998.

Use of Estimates
The presentation of the Company's consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the consolidated financial statements,
and the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.

4. BUSINESS DEVELOPMENT

R. M. Schultz & Associates, Inc.
On June 6, 1997, the Company acquired all outstanding common stock of R. M.
Schultz & Associates, Inc., ("RMS") for $2,430,258, consisting of the
issuance of the Company's common stock valued at $233,200 and an assumption
of $2,197,058 of liabilities. The transaction was accounted for as a
purchase. The purchase price was allocated to accounts receivable
($590,330), inventory ($772,658), other current assets ($43,716), property
and equipment ($148,108), with the remaining amount ($875,446) being
allocated to goodwill.

Under the terms of the acquisition, RMS shareholders received 220,000 shares
of Dauphin common stock, with an additional 105,000 shares deposited into an
escrow to be released equally over the next three years if certain financial
goals of RMS are achieved. Upon issuance of the shares, there will be an
additional element of cost related to the transaction that will be recorded
as goodwill and amortized over the remaining goodwill life. Due to the fact
that the performance goals were not achieved, no additional shares were
released to the former RMS owners in 1998.

Results of the operations of RMS are included within the consolidated
financial statements commencing June 6, 1997. Unaudited pro forma results as
if the transaction occurred on January 1, 1996 are as follows (unaudited):

Twelve Months Ended December 31,
1997 1996
--------------- -------------
Revenues $ 4,614,121 $ 5,290,490
(Loss) before extraordinary item (4,418,852) (1,556,273)
Net income (loss) (4,418,852) 36,509,100
Basic and diluted earnings (loss) per
share before extraordinary item $ (0.14) $ (0.07)
Basic and diluted earnings (loss) per share (0.14) 1.52
Weighted average shares outstanding 30,734,045 24,076,301

Such pro forma information is not necessarily indicative of the results of
future operations.

5. SHORT-TERM BORROWINGS:

Short-term borrowings consist of the following at December 31:

1998 1997
--------------- -------------
LaSalle Bank Cash Collateral Account $ - $ 71,421
DCCA Loan - 5,634
Advacom/Adler & Associates - 10,339
Short-term note, net of discount of $3,845 246,155 -
--------------- -------------
Total short-term borrowings $ 246,155 $ 87,394
=============== =============

On December 17, 1998, the Company borrowed $250,000 from an investor through
a note that matured on January 17, 1999. Interest accrues at 3 percent per
month. The note is unsecured, however in the event of default the note can
be converted into a Convertible Subordinated Debenture substantially on the
same terms as described in Note 7. In addition to interest, the holder is
entitled to a detachable warrant, which allows the holder to purchase up to
25,000 shares of common stock at an exercise price of $0.79 per share. The
warrant was valued at $3,845 using the Black-Scholes securities valuation
model assuming, among other things, a 7% risk free interest rate, $0 dividend
yield, 3 year life and 0.28 volatility. The warrants expire in three years
and are exercisable immediately. On March 29, 1999, this note, including
$7,500 of interest, was converted into 472,667 shares of the Company's common
stock as a result of default.

LaSalle Bank Cash Collateral Account is a revolving line of credit with
accounts receivable, inventory and unencumbered fixed assets as collateral.
The loan carried a 16% annual interest rate. As of February 1, 1998, the
LaSalle Bank Cash Collateral Account has been paid. All assets that were
posted as collateral for this loan have been released.

6. LONG-TERM DEBT:

As of December 31, 1998, the fair value of long-term debt approximates its
book value. At December 31, long-term liabilities consist of:

1998 1997
--------------- -------------

McHenry County Department of Planning and
Development loan for expansion of RMS,
payable in equal monthly installments over
84 months with 6% interest. This loan is
unsecured and is due on 10/1/2004. $ 127,607 $ 145,655

PACJETS Financial Ltd. equipment lease,
payable in equal monthly installments over
60 months. The lease is collateralized
by the equipment and has a one-dollar
buy-out option. The lease carries 12%
interest and is due on 10/15/2003. 128,153 148,501

PACJETS Financial Ltd. furniture lease
payable in equal monthly installments
over 36 months. The lease carries a 23%
annual interest rate and is due on
11/15/2000. The lease is collateralized
by the furniture and has a one-dollar
buy-out option. 54,214 54,262

Forest Financial Corporation computer
equipment lease payable in equal monthly
installments over 60 months. The lease
carries a 16.38% annual interest rate and
is due on 01/01/2003. The lease is
collateralized by the equipment and has
a one-dollar buy-out option. 25,417 -
Other - Capital leases for certain vehicles,
machinery and equipment and certain priority
tax claims due and payable in equal monthly
installments over 36 to 72 months. All
debts, collateralized by the equipment,
are due starting in June 2000 through
October 2002 and carry interest rates
ranging from 9% to 18%. 80,996 81,108
--------------- -------------
Total long-term liabilities $ 416,387 $ 429,526
=============== =============

Future minimum debt payments are as follows:

Year Amount Due
---------- --------------
1999 $ 113,436
2000 111,870
2001 75,029
2002 70,150
2003 26,664
Thereafter 19,238
--------------
Total long-term debt $ 416,387
==============

7. CONVERTIBLE DEBT AND WARRANTS

On May 13, 1998 the Company issued 8% Convertible Subordinated Debentures -
2001 ("2001 Debentures") to four accredited investors in an aggregate
principal amount of $1,000,000 which is due and payable on or about May 13,
2001. Interest is payable on an annual basis. Both interest and principal
can be paid in either cash or common stock. The holders of the Debentures
have the right to convert 100% of the principle and interest, at any time,
into common stock, based on a conversion formula as defined. The formula for
the conversion price fluctuates based on a discount from the closing bid
price of the Company's common stock. The discount from the closing bid price
of the stock increases every thirty days from a minimum of 10% to a maximum
of 30%. This discount has been accrued as interest expense in the
accompanying statement of operations. Debenture holders also received
detachable warrants, allowing them to purchase up to 150,000 shares of common
stock at exercise prices ranging from $1.06 to $1.73 per share. The warrants
are exercisable immediately and expire in three years. Warrants to purchase
200,000 shares of common stock, including 50,000 warrants issued to the
placement agent, were valued at $51,336 using the Black-Scholes securities
valuation model, assuming among other things, a 7% risk free interest rate,
$0 dividend yield, 3 year life and 27% volatility. The Company paid 8.25% of
the principle amount ($34,400) of the Debentures, and issued 35,891 common
shares as placement fees. These fees are recorded as deferred financing
costs on the balance sheet. Through October 1998, all of the Convertible
Subordinated Debentures - 2001, including $8,016 of interest, have been
converted into 1,141,411 common shares.

On August 1, 1998 the Company issued 8% Convertible Subordinated Debentures -
2001A ("2001A Debentures") to the same four accredited investors in an
aggregate principal amount of $2,000,000, which is due and payable on or
about August 1, 2001. Interest is payable on an annual basis. Both interest
and principal can be paid in either cash or common stock. The holders of the
Debentures have the right to convert 100% of the principle and interest, at
any time, into common stock, based on a conversion formula as defined. The
formula for the conversion price fluctuates based on a discount from the
closing bid price of the Company's common stock. The discount from the
closing bid price of the stock increases every thirty days from a minimum of
10% to a maximum of 30%. This discount has been accrued as interest expense
in the accompanying statement of operations. The Company paid 7% of the
principle amount of the Debenture as a placement fee. The Company also
issued 136,809 shares as placement fees. These fees are recorded as deferred
financing costs on the balance sheet and are being amortized over 3 years.
Through December 31, 1998 a total of $1.1 million of these debentures,
including $13,054 of interest, were converted into 2,106,252 shares of the
Company's common stock. As of March 1999, additional $660,000 plus interest,
of these debentures have been converted into 1,430,815 shares of Company's
common stock.

8. STOCK-BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 provides an alternative to Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APBO 25") and requires additional disclosures. The Company issued non-
qualified stock options to purchase 233,000 shares of common stock to certain
key employees at exercise prices ranging from $0.56 to $1.22 per share. The
options vest immediately and expire in three years. Had the Company
accounted for its stock options in accordance with Statement 123, at December
31, 1998 pro forma earnings per share would have been:

December 31, 1998
-----------------
Net income as reported (000's) $ (6,132)
Pro forma net income for Statement 123 (000's) (6,232)
Basic and diluted earnings per common share as reported (0.16)
Pro forma basic and diluted earnings per common share (0.17)

Pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest
over several years, pro forma compensation expense is recognized as the
options vest and additional awards may be granted.

For purposes of determining the pro forma effect of these options, the fair
value of each option is estimated on the date of grant based on the Black-
Scholes single-option pricing model:

December 31, 1998
-----------------
Dividend yield 0.0%
Risk-free interest rate 7.0%
Volatility factor .2935
Expected life in years 2.67

Information regarding these options for 1998 is as follows:

1998
-----------------------------
Weighted Average
Shares Exercise Price
---------- ---------------
Options outstanding beginning of year 0 $ 0
Options exercised 0 0
Options granted 263,000 0.8076
Options forfeited (30,000) 1.0625
---------- ---------------
Options outstanding at year end 233,000 $ 0.7748
Weighted average fair value of options
granted during the year $ 0.39

Options exercisable at year end 233,000

Option price range at year end $0.5625 to $1.2188

The following table summarizes information about the options outstanding at
December 31, 1998:

<TABLE>

Options Outstanding Options Exercisable
- --------------------------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- ---------- ------------------- -------------- ---------- ----------------
$ 1.0625 70,000 2.5 $ 1.0625 70,000 $ 1.0625
$ 1.2188 13,000 2.75 $ 1.2188 13,000 $ 1.2188
$ 0.5625 80,000 2.88 $ 0.5625 80,000 $ 0.5625
$ 0.6250 20,000 2.88 $ 0.6250 20,000 $ 0.6250
$ 0.6563 50,000 2.88 $ 0.6563 50,000 $ 0.6563
--------- -------- ------------- --------- --------------
233,000 2.78 $ 0.7748 233,000 $ 0.7748

<TABLE\>

9. EMPLOYEE BENEFITS PLAN

The Company maintains a salary deferral 401(k) plan covering substantially
all employees who meet specified service requirements. Contributions are
based upon participants' salary deferrals and compensation and are made
within Internal Revenue Service limitations. For the fiscal years 1998, 1997
and 1996, the Company did not make any matching contributions. The Company
does not offer post-employment or post-retirement benefits. The Company does
not administer this plan, and contributions are determined in accordance with
provisions of the plan.

10. RISK CONCENTRATION

Significant Customers
Three customers represent $2,281,000 or 43%, $1,114,000 or 21% and $617,000
or 11% of the Company's revenue during 1998. These percentages were
consistent during 1998 and 1997.

Significant Suppliers
On January 1, 1999, RMS entered into a manufacturing agreement with a
manufacturing company for the manufacture of motherboards for Orasis(.
Dauphin guarantees RMS's performance under this contract. The agreement
requires 20,000 units of production over a three-year period with a cost of
$820 per motherboard.

An electronic engineering and development firm designed hardware and software
for the Orasis(. The Company relies on future support from this firm for
improvements in the current as well as the development of future generations
of the product.

11. INCOME TAXES:

A reconciliation of the income tax expense on income at the U.S. federal
statutory rate to the reported income tax expense follows:

1998 1997 1996
----------- ----------- ----------
U.S. federal statutory rate
applied to pretax income $(2,084,729) $(1,355,926) $ (502,395)
Permanent differences and adjustments 120,802 31,906 6,270
Tax assets including net operating
loss carryforward 1,963,927 1,324,020 496,125
----------- ----------- ----------
Income tax provision $ - $ - $ -
=========== =========== ==========

As of December 31, 1998 and 1997, the Company had generated deferred tax
assets as follows:

December 31,
1998 1997
------------ ------------
Gross deferred tax assets-
Net operating loss (NOL) carryforward $ 16,962,154 $ 7,779,866
Reserves for inventory obsolescence 152,000 2,068,734
Bad debt reserve 11,238 7,500
Vacation Accrual - 58,377
Depreciation 44,260 37,053
Other timing differences 9,075 -
------------ ------------
17,178,727 9,951,530
Current federal statutory rate 34% 34%

Deferred tax assets 5,840,767 3,383,520

Less- SFAS 109 valuation allowance (5,840,767) (3,383,520)
------------ ------------
Net deferred tax asset $ - $ -
============ ============

Deferred income taxes include the tax impact of NOL carryforwards.
Realization of these assets, as well as other assets listed above, is
contingent on future taxable earnings by the Company. In accordance with the
provisions of SFAS 109, a valuation allowance of $(5,840,767) and
$(3,383,520) at December 31, 1998 and 1997, respectively, has been applied to
these assets. During 1995, there was an ownership change in the Company as
defined under Section 382 of the Internal Revenue Code of 1986, which
adversely affects the Company's ability to utilize the NOL carryforward.

12. BUSINESS SEGMENTS:

The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". The Company has two reportable segments:
Dauphin Technology, Inc. or ("Mobile Group") and R.M. Schultz & Associates,
Inc. ("RMS"). The mobile group is involved in design, manufacturing and
distribution of hand-help pen-based computer systems and accessories. RMS is
an electronic contract-manufacturing firm.

The reportable segments are managed separately because each business has
different customer requirements, either as a result of the regional
environment of the country or differences in products and services offered.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intangible assets are
included in each segment's reportable assets and the amortization of these
intangible assets is included in the determination of a segment's operating
profit or loss. The Company evaluates performance based on profit or loss
from operations before income taxes, interest, and non-operating income
(expenses).

1998 1997 1996
----------- ----------- ------------
Revenue
Mobile Group $ 385,739 $ 71,834 $ 93,947
RMS 5,637,574 2,658,201 -
Inter-company elimination (655,799) - -
----------- ----------- ------------
Total 5,367,514 2,730,035 93,947

Operating (Loss)
Mobile Group (4,707,321) (3,929,690) (1,269,305)
RMS (499,885) 1,588 -
Inter-company elimination (32,778) - -
----------- ----------- ------------
Total (5,239,984) (3,928,102) (1,269,305)

Assets
Mobile Group 4,991,346 6,073,910 3,402,860
RMS 5,078,453 2,979,143 -
Inter-company elimination (3,350,164) (1,783,917) -
----------- ----------- ------------
Total 6,719,635 7,269,136 3,402,860

Capital Expenditures
Mobile Group 748,131 9,145 81,210
RMS 387,947 540,009 -
----------- ----------- ------------
Total 1,136,078 549,154 81,210

13. COMMITMENTS AND CONTINGENCIES:

Minimum annual rental commitments at December 31, 1998, under non-cancelable
operating leases, principally for real estate, are payable as follows:

Dauphin RMS
------------- -------------
1999 $ 102,474 $ 190,660
2000 114,701 190,660
2001 120,438 190,660
2002 51,190 81,025
------------- -------------
$ 388,803 $ 653,005

Total rental expense was approximately $276,000, $162,000 and $84,000 for
1998, 1997 and 1996 respectively. The leases contain renewal options and
escalation clauses.

The Company is involved in a lawsuit with an ex-employee/officer that has
claimed that the Company wrongfully discharged him. The lawsuit is seeking
specific performance under the contract and any reasonable relief that Court
deems just. The suit was filed on April 11, 1998 and as of April 13, 1999
four out of five claims in the lawsuit have been dismissed. Management
believes that the Company has several defenses to the claim remaining and
made adequate provisions in the financial statements for any expected
liability that may result from the disposition of the lawsuit. It is the
opinion of management that the ultimate liability, if any, will not be
material to the Company's results of operations or financial position.

14. RELATED-PARTY TRANSACTIONS:

CADserv, an engineering services company based in Schaumburg, Illinois,
controlled by an Officer and a major shareholder, has contributed to the
design, packaging and manufacturing of Dauphin's DTR and Orasis( product
lines and will likely continue in this capacity in the future. The Company
paid $140,192 during 1998, $75,000 in 1997and $0 in 1996 for such services.

As of December 31, 1998, the Company extended approximately $32,000 of loans
to members of management. In January of 1999, these loans were repaid.

In September of 1998, the Company paid $300,000 for 3,000 shares of
restricted Convertible Preferred stock in Celtic Investment Inc., ("Celtic")
a company that is managed by one of the members of Dauphin board of
directors. On January 10, 1999 the Company sold 100 shares of such
securities in a private transaction to an accredited investor. The shares
can not be liquidated in the open market for a year and there may be a
significant decrease in the value of the investment at the time of
liquidation. Celtic's common stock is publicly traded and at December 31,
1998 was trading at $1.25 and on March 30, 1999 was trading at $0.57.

In January 1999 the Company borrowed $135,000 from two members of the Board
of Directors. The loans mature in six months and accrue interest at 1%.

RMS facilities are leased from Enclave Corporation, a company that is owned
by Richard M. Schultz, President of RMS. The Company paid $165,660 of rent
and $25,267 of real estate taxes for the property lease in 1998 and $82,830
of rent and $16,400 of real estate taxes for the second half of 1997.

15. EQUITY TRANSACTIONS:

1998 Transactions
On January 5, March 5, June 5 and September 5, 1998, under an employment
contract relating to the RMS acquisition, the Company issued 12,500 shares on
each date to Richard M. Schultz. Under the contract, Mr. Schultz is entitled
to purchase 50,000 common shares per year for the duration of his employment
contract at $1.00 below the market value on the date immediately preceding
the date of exercise. The common shares issued in connection with this
transaction were treasury shares. On March 6, 1998, Mr. Schultz returned
7,901 shares to treasury as repayment of his obligation to the Company and on
July 6, 1998 the Company issued additional 1,260 shares to Mr. Schultz to
compensate for the decrease in price of the stock on the day of issuance.

On March 3, 1998, for services performed, the Company issued 30,000 shares to
Mr. Mikolai Prociuk, an employee of the Company, as a bonus.

On March 31, 1998 the Company registered with Securities and Exchange
Commission 4,523,608 shares issued to accredited investors in a private
placement that concluded in December 1997. In addition to the shares issued
in the private placement, the Company registered 2,964,327 shelf shares for
use, if needed, for future acquisitions, to raise capital, to fund production
of Orasis( hand-held computer or RMS contract manufacturing operations.

On May 8, 1998, the Company issued 60,000 common shares to Family Tools, Inc.
for industrial molds used in the production of Orasis( hand-held computer.
The shares were valued at $1.125, closing bid price on that day.

On June 24, 1998, for services performed, the Company issued 3,000 shares to
Ms. Nina O'Connor, an employee of the Company, as a bonus.

Since May of 1998, 2,705,391 shares that were previously registered as shelf
shares and 542,272 treasury shares were issued in exchange for $1 million of
principal of 2001 Debentures and $1.1 million of principle of 2001A
Debentures and $21,070 of interest. $34,400 and 172,700 shares in lieu of
$178,918 in fees, were issued to brokers for the 2001 Debentures and 2001A
Debentures (Note 7).

1997 Transactions
During 1997, the Company, through several private transactions with
accredited investors, sold approximately 2.8 million of common stock for
approximately $2.7 million or approximately $0.98 per share. Of the shares
issued, 2.3 million were issued from treasury shares. As a result of these
transactions, the Company raised in excess of $2.6 million for its working
capital, implementation of the Company's acquisition strategy and research
and development.

On July 16, 1997, the Company repurchased 745,126 shares held by Alan S.K.
Yong, former founder and President of Dauphin, for $260,794 or $0.35 per
share. Simultaneously, Dauphin accepted Mr. Yong's resignation from the
Board of Directors.

On September 5, 1997, under the employment contract, the Company issued
12,500 shares to Richard M. Schultz. Under the contract, Mr. Schultz is
entitled to purchase 50,000 common shares per year for the duration of his
employment contract at $1.00 below the market value on the date immediately
preceding the date of exercise. The common shares issued in connection with
this transaction were treasury shares.

In the fourth quarter, the Company conducted a private placement of 4,391,852
shares of common stock at $1.00 per share. All shares issued were previously
unissued and unregistered. In total, $4,391,852 was raised. As of December
31, 1997, the Company closed this private placement. As part of the
transaction, a lead broker/dealer received $439,185 or ten (10%) percent cash
compensation and 131,756 common shares or three (3) shares for each 100
shares placed as commission for the amount raised. The broker also has an
option to purchase additional 175,674 shares or four (4) shares for each 100
shares placed at a $1.00 each within one year from the close of this
transaction.

16. SUBSEQUENT EVENTS:

In March of 1999, the Company issued 92,125 treasury shares and 1,430,815
restricted shares in exchange for $660,000 of principal and $17,123 of
interest on Convertible Debentures - 2001A. In addition, the short-term loan
from an investor in the amount of $250,000 together with $7,500 of interest
was converted into 472,667 restricted shares.

On January 5, 1999, the Company issued 13,792 shares under an employment
contract relating to the RMS acquisition to Richard M. Schultz.

In February 1999, the Company factored certain receivables with a factoring
company and pledged approximately $350,000 of its receivables. In exchange,
the factoring company receives 1% for every 10 days a receivable is
outstanding and an exit fee of $40,000.

In March of 1999 the Company issued warrants to an investment banker to
purchase 50,000 shares at an exercise price of $0.60 exercisable after the
market bid price of the Company's stock reaches above $1.00 for 15
consecutive trading days. Also in March of 1999 the Company issued warrants
to the same investment banker to purchase 50,000 shares at an exercise price
of $0.50 exercisable after the market bid price of the Company's stock
reaches above $2.00 for 15 consecutive trading days.

In March, the Company issued 507,160 restricted shares to five accredited
investors in exchange for $364,795. In addition to the shares, the Company
issued warrants to purchase 300,000 shares of common stock at an exercise
price of $1.10 per share. The warrants are exercisable immediately and
expire in five years.

On March 26, 1999, Addison Engineering, Inc. filed a complaint in the Circuit
Court of Cook County, Illinois against R.M. Schultz & Associates, Inc. for
non-compliance under specific contract. In total the amount claimed is
$51,140, which consists of some outstanding bills and additional materials
allegedly developed for future production. Management feels that it made
adequate provisions in its financial statements for any loss that may result
from the disposition of the lawsuit. It is the opinion of management that
the ultimate liability, if any, will not be material to the Company's results
of operations or financial position.

Funding Agreement
On March 30, 1999, Dauphin signed a proposal with an accredited investor
("Investor") which offers to assist the Company in accordance with the
following proposal: 1. The investor agreed to commit up to $6 million
according to the following conditions. A) The first closing for $1 million
will occur upon execution of agreed upon documentation as well as a deposit
of 2 million freely trading common shares (which shall be pledged by current
shareholders) in escrow. This tranche will take the form of an 8% promissory
note convertible into stock beginning sixty days after closing. The
conversions will be at a 15% discount from the closing bid price of the
Company's common stock. Alternatively, the Company has the right to redeem
the note at a premium ranging from a minimum of 8% to a maximum of 15% that
fluctuates based on the number of days after closing ranging from 15 to 60
days. If the Company's stock value decreases, under the 5/8 bid for two
consecutive days the Company must replenish the escrow account with
additional shares until the escrow value is greater than $1.5 million. B) At
the earlier of 90 days or liquidation of the first tranche, the Investor may
fund in additional $500,000 increments for a period of up to twelve months
thereafter in terms identical to the first tranche (including additional
warrants and freely trading common shares) with each subsequent tranche
callable upon the liquidation of the previous tranche or earlier with mutual
consent. The investor will receive warrants to purchase 100,000 common
shares of stock at an exercise price of $1.00 per share for the commitment.
In addition the Investor will receive warrants to purchase 50,000 shares of
common stock for every $1 million increment funded. The exercise price is
125% of the closing bid the day previous to closing.

On April 15, 1999, the Company received $1 million in connection with the
first tranche as specified under the agreement.

</TABLE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 55,701
<SECURITIES> 300,000
<RECEIVABLES> 700,951
<ALLOWANCES> (11,238)
<INVENTORY> 2,953,686
<CURRENT-ASSETS> 3,791,683
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0
0
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