DAUPHIN TECHNOLOGY INC, 10-K, 2000-03-31

DAUPHIN TECHNOLOGY INC
10-K, 2000-03-31
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, 1999.

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.

The aggregate market value of the voting Common Stock held by non-affiliates
of the Registrant as of March 28, 2000 is $306,897,136.

As of March 28, 2000, the number of Shares of the Registrant's Common Stock,
$.001 par value, is 53,935,308 issued and outstanding.

DAUPHIN TECHNOLOGY, INC.

Table of Contents
PART I 3
Item 1. Description of Business 3
Overview 3
Strategic Plan 3
Dauphin Technology, Inc. 3
R.M. Schultz & Associates, Inc. 7
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 8
Warrants and Options 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 10
Results of Operations 1999 Compared to 1998 and 1997 10
Liquidity and Capital Resources 11
Inflation and Seasonality 11
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") and its subsidiary
design, manufacture and market mobile hand-held, pen-based computers, as well
as other electronic devices for home and business use out of its two
locations in northern Illinois. The Company, an Illinois corporation, was
formed on June 6, 1988 and became a public entity in 1991. The Company
employs approximately 15 people consisting of engineering, sales and
marketing, administrative, and other 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 was
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 an initial focus on the hand-held mobile computer
market. In particular, it 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
producing and marketing other electronic devices. Coupled with targeted
acquisitions in the technology sector, the Company seeks to become a
technology holding company with synergistic, self-managed wholly owned
subsidiaries. The subsidiaries are intended to share resources and cross-
market products, engineering and product development services.

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

Dauphin Technology, Inc.
Products
Orasis( is a 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 memory and hard disc,
various modules and mobile devices to satisfy the needs of various
industries. Basic unit features are as follows:

* The unit weight is approximately 3 pounds
* The battery operating life is from 2 to 8 hours
* The unit 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 memory upgradable to 128 MEG
of RAM
* Standard two type II or a single type III PCMCIA slot
* 2.1 GB expandable to 6.4 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
* Electro-magnetic pen, voice activation, and an Infra Red keyboard for data
input
* 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 95/98/2000, Windows NT and Linux 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.

During the later part of 1999 the Company was engaged in negotiations and
eventually on February 17, 2000 signed a contract to develop and produce set-
top boxes. In conjunction with continued development of Orasis( and the
recent shift in focus away from contract manufacturing, the Company began
design and development of such boxes. A set-top box is an electronic device
that converts digital signals into a user acceptable format via other
electronic devices such as television sets, telephones and computers. As a
result of recent events the Company is rewriting its Marketing and Sales
plans to include a strategy for the set-top box.

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 $95 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, the 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.

The set-top box market is a relatively new phenomenon. According to
International Data Corporation, the worldwide installed base of set-top boxes
was a mere 2.2 million in 1998 and is expected to exceed 14.8 million boxes
in the year 2000, growing to over 35.5 million in 2002. Currently with the
market in its infancy, the "set-top box" has not been perfected. Existing
designs do not offer the flexibility or future capacity that Dauphin's
customers seek.

Sales and Marketing
Orasis( is a niche product. Dauphin targets vertical markets for the
distribution of Orasis(. To deliver its mobile product to the market, in
April of 1998, Dauphin hired six mobile industry experts, Channel Managers,
to target various industries. Each Channel Manager's job was 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. In particular, the
industries these individuals targeted were medical, government, sales field
automation, transportation, utilities and education. During 1998,
approximately 60 VAR's signed Orasis( distribution agreements. During 1999,
changes in the Company strategy resulted in the termination of all Channel
Managers. Currently, all VAR relationships and sales inquiries are handled
internally by the Company's sales and customer service personnel.

Due to the fact that the set-top box contract was signed just recently,
management is still determining the scope of the marketing effort and sales
strategy.

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, consumers' return on investment of Orasis( should be much higher
than any existing computer.

For the Company to be competitive, 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 Dauphin, most of the product development
was in cooperation with three contract engineering firms. Approximately
$1,576,000 was spent on research and development in 1998 and approximately
$510,000 more was spent in 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
office and mobile docking station, the Company is planning to work on various
scaled down, higher-tech devices than Orasis(.

In connection with negotiating the set-top box contract, in the third quarter
of 1999, the Company began researching and designing certain set-top boxes to
satisfy provisions in the recently signed contract.

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 Unlimited is
capable of producing hundreds of motherboards per day.

RMS assembles, tests and ships the final product to Dauphin customers. All
manufacturing support for the product is performed by RMS. With additional
staffing, RMS is capable of assembling 200 Orasis( units per day.

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, 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 DOS, Windows 95, 98, 2000 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 pays approximately $78 per license for
each computer it sells.

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. It also expects to
patent its set-top box design following development. 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.
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 used
services of other firms to incorporate surface mount portions of the final
product. It may now complete this function itself.

During 1999, the Company refocused its direction away from contract
manufacturing to research and development of electronic devices. As a result,
RMS production will focus on the assembly of Orasis( units, set-top boxes and
other products, which may be developed in the future by the Company.

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 $12,000
per month to rent the facilities. In December 1998, in conjunction with
upgrading the facilities, Dauphin signed a five-year lease extension. The
lease called 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, past 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. Management is of the opinion that any such
unfavorable disposition will not be material to the Company's results of
operations or financial position.

The Company is involved in a breach of contract lawsuit with the Enclave
Corporation, current landlord of RMS. The suit was filed on January 5, 2000
in the Nineteenth Judicial Circuit Court, McHenry Illinois. The suit is
claiming $5,200 damages and other non-monetary breaches. The Company believes
that it has several defenses and intends to vigorously defend its position.
Management is of the opinion that any such unfavorable disposition will not
be material to the Company's results of operations or financial position.

During 1999 and through the date of this report, the Company has been engaged
in various other legal proceedings. Management believes that all material
events have been fully accounted for in the financial statements attached
hereto. Further resolution of any existing litigation would not be material
to the overall financial condition of the Company.

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 1999.

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
1997 1998 1999
High Low High Low High Low
--------- -------- --------- --------- --------- ---------
First Quarter $ 1.625 $ 1.187 $ 1.625 $ 1.016 $ 1.219 $ 0.453
Second Quarter 1.219 0.750 1.391 0.875 0.938 0.391
Third Quarter 1.172 0.875 2.031 0.875 0.750 0.266
Fourth Quarter 2.590 1.063 0.906 0.500 0.703 0.219

Holders
The number of shareholders on record of the Company's common stock as of
March 27, 2000 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, $0.001 par value. As of March 27, 2000 there were 53,935,308
shares of common stock issued and outstanding held by approximately 5,500
shareholders 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
shareholders. 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.

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, $0.01 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 shareholders, 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.

Warrants and Options
As of March 27, 2000 there are a total of 5,511,211 Warrants issued and
outstanding in the hands of approximately 30 investors. These Warrants are
convertible at any time into Company's $0.001 par value common stock. The
strike prices of these Warrants range from $0.20 to $2.00. These Warrants
expire between three and five years from the date of issuance. The Warrants
include a change of form provision in them, whereby if a change in the form
of the common stock occurs due to stock splits, stock dividends, or mergers,
the holders are entitled to receive a pro-rata increase of shares at a
discounted price. However, the holders of the Warrants do not have any voting
rights and are not entitled to receive any cash or property dividends
declared by the Board of Directors until they convert the Warrants into
common shares. At the time such Warrants are exercised, the common
shareholders of the Company's pro-rata share of the Company will be diluted.
If such Warrants are not exercised within allotted time, they expire.

As of March 27, 2000 there are a total of 3,630,500 Options issued and
outstanding in the hands of certain consultants resulting from funding raised
by such consultants. These Options are convertible at any time into the
Company's $0.001 par value common stock of which 18,000 Options shall be
converted at a $1.00 strike price, and the remainder shall be converted at a
$10.00 strike price per share. These options expire between three and five
years from the date of issuance. Additionally, there are 1,941,000 Options
issued and outstanding in the hands of more than twenty employees and former
employees. These Options are exercisable at any time into the Company's
$0.001 par value common stock. The strike prices of these Options range from
$0.50 to $1.00. These Options expire between three and five years from the
date of issuance. At the time such Options are exercised, the common
shareholders of the Company's pro-rata share of the Company will be diluted.
If such Options are not exercised within the allotted time, they expire.

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>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Sales $ 2,279,058 $ 5,367,514 $ 2,730,035 $ 93,946 $ 183,083
Extraordinary Item - - - 38,065,373 -
Net Income (Loss) (9,306,304) (6,131,557) (3,988,017) 36,668,669 (794,812)
Net Income (Loss) Per Share (0.20) (0.16) (0.13) 1.52 (0.06)
Total Assets 3,372,155 6,719,635 7,269,136 3,402,860 426,493
Long -Term Debt 185,179 302,951 429,526 43,196 -
Working Capital(Deficit) (917,917) 260,227 4,510,546 3,020,558 (50,979,877)
Shareholders Equity(Deficit) 552,344 2,885,228 5,675,595 3,092,900 (50,910,187)
<TABLE/>

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

Results of Operations 1999 Compared to 1998 and 1997
The Company and its subsidiary are primarily engaged in electronic product
engineering, development and sales. Contract manufacturing services were
conducted through the second quarter of 1999, at which time such activities
ceased. 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.
Revenue for Dauphin Technology, Inc. increased from $72,000 in 1997 to
$386,000 in 1998 and then decreased to $274,000 in 1999. The revenue decrease
from 1998 to 1999 was a result of financial constraints on the Company, which
prohibited the purchase of components necessary to complete the production of
Orasis( units.

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 obsolete inventory. 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 $2.63
million in 1999 from $2.55 million in 1998 and $1.25 million in 1997. The
increase from 1998 to 1999 was due to increase in professional and consulting
fees incurred as a result of capital raising efforts. During the third and
fourth quarters of 1999 the Company began cost reduction measures managing to
reduce certain expenses by as much as fifty percent. 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.

R.M. Schultz & Associates, Inc.
Revenue for RMS increased from $2.7 million in 1997 to $5.6 million in 1998,
but decreased to $2.13 million in 1999 due to management's change in
corporate strategy moving away from contract manufacturing and towards new
product design and development.

The gross profit from 1998 to 1999 is not comparable due to the inventory
write down and the decrease in revenue. 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 1999 to
approximately $1.5 million from $712,000 in 1998 and $233,000 in 1997. The
increase in 1999 from 1998 was primarily due to impairment of goodwill and
cost associated with cost reductions. The increase from 1997 to 1998 was
primarily due to full year of operations under the Dauphin umbrella.

Other Expenses and Net Loss
The net operating loss increased to approximately $9.3 million in 1999 from
$6.1 million in 1998 and $4.0 million in 1997. The increase in net loss from
1998 to 1999 was due to all items mentioned in the RMS sections above. The
increase in the net loss from 1997 to 1998 was due to an increase in research
and development expense from $827,000 to $1.6 million, 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(.

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, 1999 has an accumulated deficit of $38,826,736. 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 June of 1999, the Company was principally engaged
in research and development activities involving the hand-held computer.
Since then, the Company has been working on new technologies, in particular
the design and development of the set-top boxes. The Company's products have
been sold in limited quantities and there can be no assurance that a
significant market will develop for such products in the future. Therefore,
the Company's inability to develop, manufacture and market its products on a
timely basis may 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. During the first quarter of 2000, through private
placements, management raised in excess of $7.5 million. As of the date
hereof the Company has approximately $5 million of cash on deposit in the
bank. Management is seeking additional financing and is negotiating final
terms and conditions with several potential funding sources. Management
believes the combination of existing funds, additional financing and future
sales of its products will generate sufficient capital 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
affected by the seasonal nature of consumer purchasing.

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
During the 1999, Arthur Andersen, LLP, which previously audited the Company's
financial statements, resigned as the independent public accountants for the
Company. There were no disputes between the Company and Arthur Andersen, LLP.
Grant Thornton LLP was appointed as the new auditors.

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 48 1995 Chairman of the Board of Directors
Chief Executive Officer

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, engineering services
firm. 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.

Christopher L. Geier 37 1999 Executive Vice President

Mr. Geier is Executive Vice President reporting directly to Dauphin's CEO.
Mr. Geier leads Dauphin's overall organization, including its subsidiary
business. Prior to joining Dauphin, Mr. Geier founded and managed several
multimillion-dollar private corporations, as well as a $100 million region of
a large retail distribution company. Mr. Geier earned an MBA from the
University of Chicago Graduate School of Business and received a Bachelor of
Arts in Criminal Justice/Pre Law from Washington State University.

Jeffrey L. Goldberg 47 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 formerly served as the President of Financial Consulting Group,
LTD., a lawyer at the Chicago law firm of 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 59 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.

Andrew Prokos 37 1995 Director

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

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

Family Relationship
Andrew Prokos, a Director, is a cousin of Andrew Kandalepas, Chairman of the
Board of Directors.

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
None of the Directors, Executive Officers or Officers has had, or presently
has, any involvement with a public company, other than the Company.

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 1997, 1998 or 1999. The Company's
Chairman, Chief Executive Officer and President, Andrew Kandalepas, received
compensation in amount of $84,000 for the year ending December 31, 1999.

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 27, 2000, 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:

Amount and Nature
Name of Beneficial Owner Position of Beneficial Percent
Shares Owned of Class
- ------------------------ ------------------ ------------- --------
Andrew J. Kandalepas Chairman, Chief 3,826,837 (1) 7.1%
Executive Officer & President

Christopher L. Geier Executive Vice President 500,000 (2) 0.9%

Jeffrey L. Goldberg Secretary, Director 497,800 (3) 0.9%

Gary E. Soiney Director 50,000 (4) 0.1%

Andrew Prokos Director 314,000 (5) 0.6%

Morgan Stanley, Dean Witter & Co.
As trustees for Bank Lyonnais ------ 7,133,500 13.2%
- ------------------------ ------------------ ------------- --------
Officers and Directors and
5% Beneficial Owners (as a group) 12,322,137 (6) 22.8%

(1) Includes options to purchase 500,000 shares under immediately exercisable
options.
(2) Includes options to purchase 500,000 shares under immediately exercisable
options.
(3) Includes options to purchase 50,000 shares under immediately exercisable
options.
(4) Includes options to purchase 50,000 shares under immediately exercisable
options.
(5) Includes options to purchase 50,000 shares under immediately exercisable
options.
(6) Includes options to purchase 1,150,000 shares under immediately
exercisable options.

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 product lines and will
likely continue in this capacity in the future. The Company paid $0 during
1999, $140,192 in 1998.

On February 6, 1996 the Company entered into an agreement with Victor Baron,
Savely Burd and Interactive Controls, Inc., an Illinois corporation
("Intercon"). On December 29, 1998 the Board of Directors voted unanimously
to terminate the Intercon agreement. The Company no longer employs Messrs.
Baron and Burd.

In 1999 the Company borrowed $286,000 from related entities including two
members of the Board of Directors. The loans accrue interest at 1% per month
until maturity. As of the date of this report all loans including interest
have been paid off.

RMS facilities are leased from Enclave Corporation, a company that is owned
by Richard M. Schultz, former President of RMS. The Company paid $179,684 of
rent and $24,150 of real estate taxes for the property lease in 1999 and
$165,660 of rent and $22,500 of real estate taxes for the property lease for
1998.

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 29th day of March, 2000.

DAUPHIN TECHNOLOGY, INC.

BY: /Andrew J. Kandalepas/

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 29, 2000
Andrew J. Kandalepas Chief Executive Officer, President

/Christopher L. Geier/ Executive Vice President March 29, 2000
Christopher L. Geier acting Chief Financial Officer

/Jeffrey L. Goldberg/ Secretary March 29, 2000
Jeffrey L. Goldberg

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Certified Public Accountants....................F-2

Report of Independent Public Accountants............................. F-3

CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1999 AND 1998...............F-4

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997........................F-5

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997................F-6

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997........................F-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................F-8

Report of Independent Certified Public Accountants

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

We have audited the accompanying consolidated balance sheet of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiary, as of December 31,
1999, and the related consolidated statements of operations, consolidated
shareholders' equity and consolidated cash flows for the year ended December
31, 1999. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Dauphin
Technology, Inc. and its Subsidiary as of December 31, 1999 and the results
of their operations and their cash flows for the year ended December 31,
1999, in conformity with accounting principles generally accepted in the
United States.

GRANT THORNTON LLP

Chicago, Illinois
March 26, 2000

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 sheet of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiary, as of December 31,
1998, and the related consolidated statements of operations, consolidated
shareholders' equity and consolidated cash flows for each of the two 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 the results of
their operations and their cash flows for each of the two 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 the first five sentences of
paragraph five of Note 17. Management's plans in regards to these matters
are described in Note 2. 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 the first five sentences of paragraph five of Note 17, as to
which the date is April 15, 1999)

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1999 AND 1998

1999 1998
-------------- ---------------
CURRENT ASSETS:
Cash $ 31,087 $ 55,701
Accounts receivable-
Trade, net of allowance
for bad debt of $428,599
and $11,238 at December
31, 1999 and 1998 124,844 689,713
Employee receivables 118 45,987
Inventory, net of reserve
for obsolescence of $1,945,296
and $152,000 at December 31,
1999 and 1998 1,521,886 2,953,686
Prepaid expenses 38,779 46,596
-------------- ---------------
Total current assets 1,716,714 3,791,683

INVESTMENT 290,000 300,000

PROPERTY AND EQUIPMENT, net
of accumulated depreciation
of $712,192 and $378,051 at
December 31, 1999 and 1998 1,365,440 1,673,901

DEFERRED FINANCING COST, net
of accumulated amortization
of $29,128 at December 31, 1998 - 186,576

GOODWILL, net of accumulated
amortization of $107,971 at
December 31, 1998 - 767,475
-------------- ---------------
Total assets $ 3,372,154 $ 6,719,635
============== ===============

CURRENT LIABILITIES
Accounts payable $ 1,894,663 $ 2,103,572
Accrued expenses 26,719 215,305
Current portion of long-term debt 127,249 113,436
Customer deposits 300,000 -
Short-term borrowings, net of
discount of $3,845 at
December 31, 1998 286,000 246,155
Convertible debentures, net
of discount of $47,012 - 852,988
-------------- ---------------
Total current liabilities 2,634,631 3,531,456

LONG-TERM DEBT 185,179 302,951

COMMITMENTS AND CONTINGENCIES - -
-------------- ---------------
Total liabilities 2,819,810 3,834,407

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;
51,671,582 shares issued and
outstanding at December 31,
1999 and 40,000,000 shares
issued and 39,861,818 outstanding
at December 31, 1998 51,671 40,000
Treasury stock, at cost, 138,182
shares at December 31, 1998 - (33,306)
Warrants to purchase 4,211,958
and 200,000 shares at December
31, 1999 and 1998 1,238,089 55,181
Paid-in capital 38,089,320 32,343,785
Accumulated deficit (38,826,736) (29,520,432)
-------------- ---------------
Total shareholders' equity 552,344 2,885,228
-------------- ---------------
Total liabilities and
shareholders' equity $ 3,372,154 $ 6,719,635

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, 1999, 1998 AND 1997

1999 1998 1997
REVENUES $ 2,279,058 $ 5,367,514 $ 2,730,035
COST OF SALES 4,833,601 5,757,889 4,345,315
----------- ----------- -----------
Gross loss (2,554,543) (390,375) (1,615,280)

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 4,173,095 3,273,132 1,484,979

RESEARCH AND DEVELOPMENT EXPENSE 510,287 1,576,477 827,843
----------- ----------- -----------
Loss from operations (7,237,925) (5,239,984) (3,928,102)

INTEREST EXPENSE 2,099,179 968,414 75,988

INTEREST INCOME 30,800 76,841 16,073
----------- ----------- -----------

Loss before income taxes (9,306,304) (6,131,557) (3,988,017)

INCOME TAXES - - -
----------- ----------- -----------
Net loss $(9,306,304) $(6,131,557) $(3,988,017)
=========== =========== ===========

BASIC and DILUTED LOSS PER SHARE:
Loss per share $ (0.20) $ (0.16) $ (0.13)
=========== =========== ===========

Weighted average number of shares
of common stock outstanding 46,200,408 37,287,432 30,734,045

The accompanying notes are an integral part of these statements.

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

</TABLE>
<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, 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
broker/dealer 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
placement agent 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
Issuance of common stock in connection with:
Conversions of debt 4,985,358 4,985 3,842,235 287,700 101,673 24,402 - 4,159,322
Private placement 6,003,529 6,004 1,481,167 895,208 14,963 3,591 - 2,385,970
Settlement of
Trade Payables 656,322 656 395,243 - 1,546 371 - 396,270
Stock bonuses paid 26,373 26 26,890 - 20,000 4,942 - 31,858
Net loss - - - - - - (9,306,304) (9,306,304)
---------- --------- ------------ ----------- ---------- ------------ ------------- -----------
BALANCE,
December 31, 1999 51,671,582 $ 51,671 $ 38,089,320 $ 1,238,089 - $ - $ (38,826,736) $ 552,344
========== ========= ============ =========== ========== =========== =============

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, 1999, 1998 AND 1997

</TABLE>
<TABLE>

1999 1998 1997
<S> <C> <C> <C>
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,306,304) $ (6,131,557) $ (3,988,017)
Non-cash items included in net loss
Depreciation and amortization 1,101,616 318,405 93,671
Inventory reserve 1,793,296 - -
Bad debt reserve 417,361 - -
Interest expense on convertible debt 2,062,451 814,882 -
Stock bonus 31,858 87,172 13,125
Changes in-
Accounts receivable
- trade 147,508 (226,892) 129,519
- employee 45,869 (25,792) (20,195)
Inventory (361,495) (1,422,222) 1,893,655
Prepaid expenses 7,817 (7,395) (14,396)
Accounts payable (208,909) 1,312,788 (532,866)
Accrued expenses (188,586) (70,532) (21,410)
------------ ------------- ------------
Net cash used in operating activities (4,457,518) (5,351,143) (2,446,914)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (25,680) (1,068,578) (201,965)
Investment 10,000 (300,000) -
------------ ------------- ------------
Net cash used in investing activities (15,680) (1,368,578) (201,965)

CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received in acquisition - - 31,162
Short-term borrowings (payments) 286,000 162,606 (706,390)
Purchase of treasury stock - - (341,369)
Issuance of convertible debentures
and warrants net of financing costs 1,776,614 2,991,936 -
Proceeds from issuance of common stock 2,385,970 - 6,665,756
------------ ------------- ------------
Net cash provided by financing activities 4,448,584 3,154,542 5,649,159
------------ ------------- ------------
Net increase (decrease) in cash (24,614) (3,565,179) 3,000,280

CASH, beginning of year 55,701 3,620,880 620,600
------------ ------------- ------------
CASH, end of year $ 31,087 $ 55,701 $ 3,620,880
============ ============= ============

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 36,728 $ 153,532 $ 75,988
------------ ------------- ------------

NONCASH TRANSACTIONS:
Common stock issued in connection with
Purchase of fixed assets $ - $ 67,500 $ -
Settlement of trade payables 396,270 - -
Conversion of debentures 4,159,322 2,952,419 -
Commissions to placement agent - 178,918 -
Acquisition of R.M. Schultz & Associates -
Assumption of liabilities - - 2,197,058
Issuance of stock - - 233,200
Capital equipment leased - - 347,189
------------ ------------- ------------

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") and its Subsidiary designs, manufactures
and markets mobile hand-held, pen-based computers as well as other electronic
devices for home and business use. Dauphin markets its products through a
network of value added resellers and software integrators to the commercial
and government market segments throughout the United States. Through its
subsidiary, the Company marketed its contract manufacturing services through
July 1999.

Basis of Presentation
The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiary, R.M. Schultz & Associates, Inc. (the "Company"). All
significant inter-company transactions and balances have been eliminated in
consolidation.

2. RISK AND UNCERTAINTIES:

Absence of Operating Profit
The Company has incurred a net operating loss in each year since it's
founding and as of December 31, 1999 has an accumulated deficit of
$38,826,736. 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.

Financing Considerations
Currently, the Company is working to ensure it has appropriate funding to
finance future operations. During the first quarter of 2000, through private
placements, management raised in excess of $7.5 million. As of the date
hereof the Company has approximately $5 million of cash on deposit in the
bank (Refer to Note 18). Management is seeking additional financing and is
negotiating final terms and conditions with several potential funding
sources. With the combination of existing funds, additional financing and
future sales of its products, Management believes the Company will have
sufficient capital to sustain future operations.

3. SUMMARY OF MAJOR ACCOUNTING POLICIES:

Cash and Cash Equivalents
Cash and cash equivalents include all cash and liquid investments that mature
three months or less from when they are purchased. The carrying amount
approximates the fair value due to short maturity of these investments.

Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-
out basis) or market and include material, labor and factory overhead.

Property and Equipment
Property and equipment are stated at cost. Depreciation is being computed
using the straight-line methods over the estimated useful lives (principally
three to seven years for machinery and equipment) and leasehold improvements
over the lesser of the lease term or their useful life.

Intangible Assets
Debt issue costs are amortized to interest expense over the term of the
related debt. Other intangibles are amortized by the straight-line method
over their respective estimated lives. Goodwill is amortized over ten years.

Long-lived assets including goodwill and other intangible assets are reviewed
for impairment whenever events or change in circumstances indicate that the
carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the related assets'
carrying value is compared to the undiscounted estimated future cash flows
from the related operations.

Income Taxes

Deferred tax liabilities and assets are recognized for the expected future
tax consequences of events that have been included in the financial
statements and tax returns. Deferred tax liabilities and assets are
determined based on the difference between the financial statement basis and
tax basis of assets and liabilities (excluding non-deductible goodwill) and
using enacted tax rates in effect for the years in which the differences are
expected to become recoverable or payable.

Revenue Recognition
The Company recognizes revenue upon shipment of mobile computers, computer
accessories and assembled products. 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 loss per common share is calculated on income available to common
stockholders divided by the weighted-average number of shares outstanding
during the period, which were 46,200,408, 37,287,432 and 30,734,045 for the
years ending December 31, 1999, 1998 and 1997, respectively. Diluted loss
per common share is adjusted for the assumed exercise of stock options and
warrants unless such adjustment would have an anti-dilutive effect.
Approximately 4.2 million additional shares would be outstanding if all stock
options and warrants were exercised as of December 31, 1999. Refer to Note
18 for dilution subsequent to December 31, 1999.

Concentration of Credit Risk
The majority of the Company's receivables arise from sales of contract
manufacturing services. The Company maintains reserves for potential losses
on receivables from these customers.

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. INVENTORY
Inventory is comprised of material, labor and overhead and consists of the
following at December 31:

1999 1998
Finished goods $ 93,955 $ 310,766
Work in process 625,450 1,333,147
Raw materials 2,747,777 1,461,773
------------- ------------
3,467,182 3,105,686
Less - Reserve for Obsolescence 1,945,296 152,000
------------- ------------
$ 1,521,886 $ 2,953,686
============= ============

In the third quarter of 1999, as a result of curtailing operations at RMS due
to reductions in customer orders the Company wrote down approximately
$1,793,000 of inventory, which consists of $1,168,000 of raw materials and
$625,000 of work-in-process. This inventory was acquired to produce
assemblies for RMS clients only.

5. PROPERTY AND EQUIPMENT
Plastic molds are being amortized over the number of estimated parts to be
produced (approximately 100,000) or three years whichever is less. Property
and equipment consist of the following:

1999 1998
Furniture and fixtures $ 89,084 $ 89,084
Office equipment 247,537 228,618
Manufacturing and warehouse equipment 624,690 618,904
Leasehold improvements 407,186 405,836
Plastic molds for the Orasis( 696,862 697,237
Automobile 12,273 12,273
------------- ------------
2,077,632 2 ,051,952
Less - Accumulated depreciation and amortization 712,192 378,051
------------- ------------
$ 1,365,440 $ 1,673,901
============= ============
6. INVESTMENT
During the third quarter of 1998, the Company invested in non marketable
securities of a company that was managed by a former director of Dauphin. The
investment is carried on the books at cost.

7. SHORT-TERM BORROWINGS:
Short-term borrowings consist of the following at December 31:

1999 1998
Due to affiliates $ 286,000 $ -
Short-term note, net of discount of $3,845 - 246,155
------------- ------------
Total short-term borrowings $ 286,000 $ 246,155
============= ============

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 % per month.
The note was unsecured and on January 17, 1999 was converted into a
Convertible Subordinated Debenture substantially on the same terms as
described in Note 9. In addition to interest, the holder received 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 28% volatility. The warrant expires in three years and is
exercisable immediately. On March 29, 1999, this note, including $7,500 of
interest, was converted into 427,667 shares of the Company's common stock.

During 1999, the Company borrowed $286,000 from related affiliates with an
interest accrued at 1% per month till the day of payment. Subsequent to
December 31, 1999 all such borrowings including interest have been paid off.

8. LONG-TERM DEBT
As of December 31, 1999, the fair value of long-term debt approximates its
book value. At December 31, long-term liabilities consist of:

1999 1998
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. $ 113,149 $ 127,607
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. 111,881 128,153
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. 27,176 54,214
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. 11,016 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%. 49,206 80,996
---------- ----------
Total long-term liabilities 312,428 416,387
Less short-term 127,249 113,436
---------- ----------
Total long-term $ 185,179 $ 302,951
========== ==========

Future minimum debt payments are as follows:

Year Amount Due
2000 $ 127,249
2001 73,581
2002 65,696
2003 26,664
2004 19,238
-----------
Total long-term debt $ 312,428
===========

9. 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. 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. 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. 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. All of these debentures have
been converted into 1,672,600 shares of Company's common stock.

On March 30, 1999, the Company signed an agreement with an accredited
investor ("Investor") for financing as follows: 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 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. If the
Company's stock value is below 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. The Investor received a warrant to
purchase 100,000 shares of common stock at an exercise price of $1.00 per
share for the commitment. In April, the Company received the funds and
subsequently deposited additional 400,000 shares into an escrow account to
compensate for the decline in share price. In May, the note was converted
into common stock and the escrow account was disbursed to the Investor. As of
December 31, 1999 the 41,414 shares still due to the Investor have not been
delivered. However, such shares have been considered outstanding as of the
conversion date.

10. 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. During 1998, 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 (approximating the market price at date of grant). The options vest
immediately and expire in three years if the individual is still employed
with the Company. Had the Company accounted for its stock options in
accordance with Statement 123, at December 31, 1999 and 1998 pro forma
earnings per share would have been:

December 31, December 31,
1999 1998
Net loss as reported (000's) $ (9,232) $ (6,132)
Pro forma net loss for Statement 123 (000's) (9,245) (6,232)
Basic and diluted loss per common share as reported (0.21) (0.16)
Pro forma basic and diluted loss per common share (0.21) (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, December 31,
1999 1998
Dividend yield 0.0% 0.0%
Risk-free interest rate 6.0% 7.0%
Volatility factor 120% 29%
Expected life in years 1.95 2.67

Information regarding these options for 1999 and 1998 is as follows:

</TABLE>
<TABLE>
1999 1998
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Options outstanding beginning of year 233,000 $ 0.7748 0 $ 0.0000
Options exercised 0 0.0000 0 0.0000
Options granted 0 0.0000 263,000 0.8076
Options forfeited (183,000) 0.8073 (30,000) 1.0625
--------- ------------ -------- -------------
Options outstanding at year end 50,000 $ 0.6563 233,000 $ 0.7748
Weighted average fair value of
options granted during the year $ - $ 0.39
Options exercisable at year end 50,000 233,000
Option price range at year end $ 0.6563 $ 0.5625 to $1.2188

The following table summarizes information about the options outstanding at
December 31, 1999 and 1998:

</TABLE>
<TABLE>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------- ---------------------------
Range of Number Weighted Avg. Weighted Avg. Number Weighted Avg.
Exercise Prices of Shares Contractual Life Exercise Price of Shares Exercise Price
<S> <C> <C> <C> <C> <C>
- ---------------- -------------- ---------------- -------------- ----------- -------------
$ 1.0625 70,000 2.50 $ 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
------------- ---------------- -------------- ----------- -------------
Total for 1998 233,000 2.78 $ 0.7748 233,000 $ 0.7748

$ 0.6563 50,000 1.95 $ 0.6563 50,000 $ 0.6563
------------- ---------------- -------------- ----------- -------------
Total for 1999 50,000 1.95 $ 0.6563 50,000 $ 0.6563

TABLE/>

11. EMPLOYEE BENEFIT 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 1999, 1998
and 1997, 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.

12. IMPAIRMENT OF ASSETS
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 its impairment. If impairment exists, the carrying amount of the
goodwill is reduced by the estimated shortfall of cash flows. During the
third quarter of 1999 the Company experienced an impairment of goodwill, when
an estimated cash flow from the operating unit dramatically decreased. The
Company recorded $767,475 as an amortization expense during 1999.

13. INCOME TAXES:
A reconciliation of the income tax benefit on losses at the U.S. federal
statutory rate to the reported income tax expense follows:

</TABLE>
<TABLE>

1999 1998 1997
<S> <C> <C> <C>
U.S. federal statutory rate applied to pretax loss $ (2,143,858) $(2,084,729) $(1,355,926)
Permanent differences and adjustments 785,739 120,802 31,906
Tax assets including net operating loss carryforward 1,358,119 1,963,927 1,324,020
------------ ----------- -----------
Income tax provision $ - $ - $ -
============ =========== ===========

As of December 31, 1999 and 1998, the Company had generated deferred tax
assets as follows:

December 31,
1999 1998
Gross deferred tax assets-
Net operating loss (NOL) carryforward $ 24,680,762 $ 16,962,154
Reserves for inventory obsolescence 1,945,296 152,000
Bad debt reserve 428,599 11,238
Depreciation 5,567 44,260
Other timing differences 10,200 9,075
------------- --------------
27,070,424 17,178,727
Current federal statutory rate 34% 34%
------------- --------------
Deferred tax assets 9,203,944 5,840,767
Less- SFAS 109 valuation allowance 9,203,944 5,840,767
------------- --------------
Net deferred tax asset $ - $ -
============= =============

Deferred income taxes include the tax impact of net operating loss (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
$9,203,944 and $5,840,767 at December 31, 1999 and 1998, 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.

14. 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. and R.M. Schultz & Associates, Inc. ("RMS"). Dauphin
is involved in design, manufacturing and distribution of hand-held 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).

1999 1998 1997
------------- ------------ ------------
Revenue
Dauphin $ 273,544 $ 385,739 $ 71,834
RMS 2,134,563 5,637,574 2,658,201
Inter-company elimination (129,049) (655,799) -
------------- ------------ ------------
Total 2,279,058 5,367,514 2,730,035

Operating (Loss)
Dauphin (2,947,396) (4,707,321) (3,929,690)
RMS (4,286,231) (499,885) 1,588
Inter-company elimination (4,298) (32,778) -
------------- ------------ ------------
Total (7,237,925) (5,239,984) (3,928,102)

Assets
Dauphin 6,443,079 4,991,346 6,073,910
RMS 2,156,937 5,078,453 2,979,143
Inter-company elimination (5,227,862) (3,350,164) (1,783,917)
------------- ------------ ------------
Total 3,372,154 6,719,635 7,269,136

Capital Expenditures
Dauphin 18,544 748,131 9,145
RMS 7,136 387,947 540,009
------------- ------------ ------------
Total 25,680 1,136,078 549,154

15. COMMITMENTS AND CONTINGENCIES:
Minimum annual rental commitments at December 31, 1999, under non-cancelable
operating leases, principally for real estate, are payable as follows:

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

Total rental expense was approximately $300,000, $276,000 and $162,000 for
1999, 1998 and 1997 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. 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.

The Company is involved in a breach of contract lawsuit with the Enclave
Corporation, current landlord of RMS. The suit was filed on January 5, 2000
in the Nineteenth Judicial Circuit Court, McHenry Illinois. The suit is
claiming $5,200 damages and other non-monetary breaches. The Company feels
that it has several defenses and intends to vigorously defend its position.
In any event, any unfavorable disposition will not be material to the
Company's results of operations or financial position.

During 1999 and through the date of this report, the Company has been engaged
in various legal proceedings. Management believes that all material events
have been fully accounted for in the financial statements attached hereto.
Further resolution of any existing litigation would not be material to the
overall financial condition of the Company.

16. 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 product lines and will
likely continue in this capacity in the future. The Company paid $0 during
1999, $140,192 in 1998 and $75,000 in 1997 for such services.

In 1999 the Company borrowed $286,000 from related affiliates, including two
members of the Board of Directors. The loans accrue interest at 1% per month
until maturity. As of the date of this report all loans including interest
have been paid off.

RMS facilities are leased from Enclave Corporation, a company that is owned
by Richard M. Schultz, former President of RMS. The Company paid $179,684 of
rent and $24,150 of real estate taxes for the property lease in 1999 and
$165,660 of rent and $25,267 of real estate taxes for the second half of
1998.

17. EQUITY TRANSACTIONS:
1999 Transactions
In January and April 1999, the Company issued a total of 46,373 shares under
an employment contract with Richard M. Schultz. As of May 14, 1999, the
Company no longer employs Richard M. Schultz.

In February and March 1999, the Company issued a total of 87,380 treasury
shares and 1,570,927 shares in exchange for $660,000 of principal, $17,123 of
interest and $32,909 of original issue discount amortization on Convertible
Debentures - 2001A. In addition, in March the short-term loan from an
investor in the amount of $250,000 together with $7,500 of interest was
converted into 427,667 shares.

In March 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 exceeds $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 exceeds $2.00
for 15 consecutive trading days. The warrants were valued at $48,000 using
the Black-Scholes securities valuation model, assuming among other things, a
6% risk free interest rate, 0% dividend yield, 1 and 2 year life respectively
and 120% volatility.

In March 1999, the Company issued 507,160 shares to five accredited investors
in exchange for $403,492. 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 exercisable immediately. The warrants were valued at $165,600
using the Black-Scholes securities valuation model, assuming among other
things, a 7% risk free interest rate, 0% dividend yield, 5 year life and 120%
volatility.

On March 30, 1999, Dauphin signed an agreement with an accredited investor
("Investor") where the Investor agreed to commit up to $6 million. The first
closing for $1 million occurred on April 15, 1999 when the parties executed
agreed upon documentation and Dauphin deposited 2 million common shares in
escrow. This tranche was in the form of an 8% promissory note convertible
into stock beginning sixty days after closing. The conversion was at 15%
discount from the closing bid price of the Company's common stock. The
contract also called for the adjustment in escrowed shares in case stock
value decreases, under the 5/8 bid for two consecutive days. As specified on
the contract, on April 22 due to decline in market price of the stock, the
Company deposited additional 400,000 shares in an escrow account to replenish
the $1.5 million value in the account. As an incentive, the Investor received
a warrant to purchase 100,000 common shares of stock at an exercise price of
$1.00 per share. The warrant was valued at $52,200 using Black-Scholes
securities valuation model, assuming among other things, a 6% risk free
interest rate, 0% dividend yield, 1 and 2 year life respectively and 120%
volatility. On May 24, 1999 $1 million funded under the note, together with
accrued interest, was converted into 2,441,414 shares of common stock of
which 2,400,000 common shares were disbursed to the Investor. As of the date
of this report, the remaining shares have not been issued.

In May 1999, the Company issued 150,000 shares to two accredited investors in
exchange for $82,500. In addition to the shares the Company issued warrants
to purchase 150,000 shares of common stock at an exercise price of $0.55 per
share. The warrants are exercisable immediately and expire in three years.
The warrants were valued at $53,250 using the Black-Scholes securities
valuation model, assuming among other things, a 6% risk free interest rate,
0% dividend yield, 5 year life and 120% volatility.

In May 1999, the company issued 586,764 common shares in exchange for
$240,000 of the remaining principal of the Convertible Debentures-2001A. That
closed out all debts the Company had in relation to the Convertible
Debentures.

On May 28, 1999 the Company signed a Stock Purchase Agreement with another
accredited investor ("Investor"), which allows the Company and obligates the
Investor to purchase shares from the Company based on terms and conditions
outlined in the agreement. In total the Investor agreed to purchase up to
$2,250,000 of the common stock within the next twenty-four months. The
Investor agreed to purchase from the Company shares based on ninety percent
of the daily average trading value, which is computed by multiplying the
closing bid price by the daily volume of the Company's common stock traded
average over the twenty days prior to closing. In connection therewith the
Company sold to the Investor 1,048,951 shares for $450,000 at an average
price of $0.43 per share including $58,000 of closing fees. The Company has
the right to sell additional shares with an interval of 25 business days with
a minimum of $100,000 per sale and a maximum of $500,000 based on the average
daily value as described above. In addition to the stock, the Investor
received an Incentive Warrant to purchase 750,000 common shares at a price of
$0.6435 per share. The Warrants were valued at $235,500 using Black-Scholes
securities valuation model assuming among other things 6% risk free rate, 0%
dividend yield, five years life and 120% volatility.

In connection with the Stock Purchase Agreement signed by the Company on May
28, 1999, the Company sold to the Investor 350,000 shares for $148,050 at an
average price of $0.423 per share, including $2,961 of closing fees.

In the third quarter of 1999, the Company issued 14,963 treasury shares and
2,086,540 common shares to a group of accredited investors in exchange for
$598,817 or an average of $0.29 per share. In addition to the shares the
Company issued warrants to purchase 1,651,600 shares of common stock at an
average exercise price of $0.47 per share. The warrants are exercisable
immediately and expire in three to five years. The Warrants were valued at
$443,622 using Black-Scholes securities valuation model assuming among other
things 6% risk free rate, 0% dividend yield, five years life and 120%
volatility.

During the third quarter, the Company agreed to issue a total of 407,868
shares to satisfy certain payables in the cumulative amount of $223,825 or
approximately $0.55 per share.

In September 1999, a Warrant for a total of 100,000 shares that was issued in
July 1999 was exercised at $0.53 per share. The Company received a total of
$53,000 from such exercise.

On October 26 1999, the Company issued 93,358 shares in exchange for $29,643
or $0.32 per share net of $605 of closing fees in accordance with the Stock
Purchase Agreement signed by the Company on May 28, 1999.

On October 27, 1999 in connection with the Stock Purchase Agreement signed by
the Company on May 28, 1999, the Company sold to the Investor 447,012 shares
for $141,935 at an average price of $0.32 per share, including $2,897 of
closing fees.

In November 1999, the Company issued 457,650 shares to three accredited
investors in exchange for $156,500 or $0.33 per share.

During the third quarter of 1999 a Warrant for 302,858 shares at $0.20 was
exercised. The Company received a total of $60,285 for the shares. As of the
date of this report, these shares have not been issued.

In November 1999, in exchange for services rendered, the Company issued
300,000 shares to a consultant.

In December 1999, the Company converted $70,000 of short-term notes
including $5,000 of interest from an affiliate into 350,000 shares.

In December 1999, the Company issued 362,858 shares in exchange for $72,572
from two accredited investors. In addition to shares, the Company issued two
Warrants for the total of 362,858 common shares to the investors with a
strike price of $0.20. The Warrants were valued at $68,637 using Black-
Scholes securities valuation model assuming among other things 6% risk free
rate, 0% dividend yield, five years life and 120% volatility.

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 principal 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. 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.

18. SUBSEQUENT EVENTS:
During the first quarter of 2000, the Company has sold 4,943,252 shares in
exchange for $7,524,235, or $1.52 per share to two groups of accredited
investors. Along with the shares some of the investors received Warrants to
purchase 624,520 shares at $0.25. The placement agents shall receive
3,630,000 options convertible into the Company's common stock of which 18,000
options shall be converted at a $1 strike price and the remainder shall be
converted at a $10.00 strike price per share.

In January 2000, the Company granted 1,941,000 options to purchase common
stock at prices equal to or greater than the market price on the date of the
grant to directors, employees and former employees. These options expire
between three and five years from the date of issuance. The compensation
expense associated with the grants to former employees was not significant.

During the first quarter of 2000, with the funds that it raised in the
private placement, the Company settled approximately $1.5 million of
outstanding payables with approximately $875,000.

On February 15, 2000 the Company signed a contract with a European Union firm
to provide the high bandwidth xDSL Set-Top Box for its telecommunications
project. Dauphin's Set-Top Box will be an integral part to the firm's Fiber
Optics Infrastructure. The contract is part of a multi-year program that will
provide unprecedented bandwidth and other IT capabilities in that European
Union nation.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

ON SCHEDULE II

Board of Directors
Dauphin Technology, Inc.

In connection with our audit of the consolidated financial statements of
Dauphin Technology, Inc., and its Subsidiary referred to in our report dated
March 26, 2000, which is included on page F-2 of this Form 10-K, we have also
audited Schedule II for the year ended December 31, 1999. In our opinion,
this schedule presents fairly, in all material respects, the information
required to be set forth therein.

GRANT THORNTON LLP

Chicago, Illinois
March 26, 2000

DAUPHIN TECHNOLOGY, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS

</TABLE>
<TABLE>

Balance at Charged to Balance at
Beginning Costs & End of
Description Of Period Expenses Deductions Period
<S> <C> <C> <C> <C>
- ----------------------------------- ------------- ------------- ----------- ---------
Year ended December 31, 1999
Allowance for doubtful accounts $ 11,238 $ 417,361 $ 0 $ 428,599

Notes: (a) Deductions for the allowance for doubtful accounts consists
of accounts written off net of recoveries.

</TABLE>

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 31,087
<SECURITIES> 290,000
<RECEIVABLES> 553,433
<ALLOWANCES> 428,599
<INVENTORY> 1,521,886
<CURRENT-ASSETS> 1,716,714
<PP&E> 2,077,632
<DEPRECIATION> 712,192
<TOTAL-ASSETS> 3,372,154
<CURRENT-LIABILITIES> 2,634,631
<BONDS> 0
0
0
<COMMON> 51,671
<OTHER-SE> 500,673
<TOTAL-LIABILITY-AND-EQUITY> 3,372,154
<SALES> 2,279,058
<TOTAL-REVENUES> 2,279,058
<CGS> 4,833,601
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<INCOME-PRETAX> (9,306,304)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,306,304)
<EPS-BASIC> (0.20)
<EPS-DILUTED> (0.20)

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