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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

(Mark One)

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

For fiscal year ended December 31, 2001

TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

Commission File No. 33-21537-D

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

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

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

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

Securities registered pursuant to Section 12(g) 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 April 10, 2002 is $37,078,868.

As of April 10, 2002, the number of Shares of the Registrant's Common Stock,
$.001 par value, is 65,050,646 issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the registrant's 2002 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Annual Report
on Form 10-K.

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DAUPHIN TECHNOLOGY, INC.

Table of Contents

PART I....................................................................................... 3
Item 1. Description of Business.............................................................. 3
General................................................................................... 3
Strategic Plan............................................................................ 3
Products and Services..................................................................... 4
Markets................................................................................... 5
Sales and Marketing....................................................................... 5
Competition............................................................................... 6
Customer Dependence....................................................................... 6
Research and Development.................................................................. 6
Production................................................................................ 7
Source and Availability of Raw Materials.................................................. 7
Patents, Copyrights and Trademarks........................................................ 7
Employees................................................................................. 7
Item 2. Properties........................................................................... 7
Item 3. Legal Proceedings.................................................................... 8
Item 4. Submission of Matters to Vote of Security Holders.................................... 8

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.............................................................................. 9
Preferred Stock........................................................................... 9
Warrants and Options...................................................................... 9
Transfer Agent and Registrar.............................................................. 9
Item 6. Selected Financial Data.............................................................. 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Results of Operations 2001 Compared to 2000............................................... 10
Fourth Quarter 2001 Compared to Fourth Quarter 2000....................................... 11
Results of Operations 2000 Compared to 1999............................................... 12
Liquidity and Capital Resources........................................................... 12
Risk Factors.............................................................................. 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......................... 21
Item 8. Financial Statements and Supplementary Data.......................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting or Financial Disclosure.. 21

PART III..................................................................................... 22
Item 10. Directors, Executive Officers and Officers of the Registrant........................ 22
Directors and Officers.................................................................... 22
Other: Involvement in Certain Legal Proceedings........................................... 23
Involvement by Management in Public Companies............................................. 23
Item 11. Executive Compensation.............................................................. 23
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 23
Item 13. Certain Relationships and Related Party Transactions................................ 23

PART IV...................................................................................... 23
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................... 23

SIGNATURES................................................................................... 24

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. Business

General

Dauphin Technology, Inc. ("Dauphin" or the "Company") and its subsidiaries
design and market mobile hand-held, pen-based computers and set-top boxes. The
Company is also a provider of private, interactive cable systems to the
extended stay hospitality industry. One of the Company's subsidiaries has
performed design services, specializing in hardware and software development,
to customers in the communications, computer, video and automotive industries.

The Company, an Illinois corporation, was formed on June 6, 1988 and became a
public entity in 1991. The Company employs approximately 50 people consisting
of engineering, sales and marketing, administrative, and other personnel. The
Company's executive offices are at 800 E. Northwest Highway, Palatine, Illinois
and it has two other facilities in northern Illinois, one in central Florida
and a branch office in Piraeus, Greece.

The Company's stock is traded on the over-the-counter market electronic
bulletin board operated by NASD, 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, namely set top boxes, coupled with targeted
acquisitions in the technology sector.

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. In 1999,
the Company terminated the operations of RMS because the entity was not
profitable and used, rather than provided, cash in its operations.

On August 28, 2000 the Company, through a newly formed subsidiary named ADD
Acquisitions Corp., acquired all of the assets of T & B Design, Inc. (f/k/a
Advanced Digital Designs, Inc.), Advanced Technologies, Inc., and 937 Plum
Grove Road Partnership pursuant to an Asset Purchase Agreement. The subsidiary
then changed its

name to Advanced Digital Designs, Inc. ("ADD"). ADD specializes in design
services in the telecommunications
industry, especially wireless and cable-based product development, as well as
multimedia development, including digital video decoding and processing.

To assist the Company in the further development and marketing of its set-top
box products, on July 1, 2001 the Company acquired substantially all of the net
assets of Suncoast Automation, Inc. ("Suncoast"). Suncoast is a provider of
private, interactive cable systems to the extended stay hospitality industry
utilizing the Company's set-top boxes.

In August 2001, the Company signed a sales and marketing agreement with the
Hellenic Telecommunications Organization S.A. (OTE) to sell set-top boxes
through their more than 400 retail shops, as well as to participate in several
vertical projects, meaning with other businesses or governmental agencies, that
OTE is managing. This relationship marks the Company's entry into the consumer
marketplace with its products. As a result of the agreement with OTE and other
similar marketing agreements reached with Orbit Plan and the Dialogue Group of
Companies, we established a European branch office consisting of twelve sales,
marketing, customer service and technical support personnel located in Piraeus,
Greece.

The Company plans to market for consumer use, in conjunction with its three
versions of set-top boxes, a portfolio of complimentary peripheral devices such
as video telephones, displays, home cinema equipment, wireless local area
network (LAN) devices and various conferencing accessories. Specific consumer
markets include retail chains, Internet Service Providers (ISP), and satellite
programming providers.

As a result of the agreements noted above, the Company has become involved in
vertical projects to develop communications solutions for law enforcement,
defense, surveillance and Olympic security utilizing Terrestrial Trunked Radio
(TETRA) technology. As a part of this solution, the Company has begun
development of a next generation Orasis(R) by exploring alternative mobile
hand-held computer products through original equipment manufacturers.

Products and Services

Orasis(R) 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. The Company has not
recognized significant sales of the product to date due to the lack of adequate
marketing and the development of new technologies within the industry. Because
of these new technologies, in 2001 the Company began developing a new version
of the Orasis(R). The new Orasis(R) will have most of the same features as the
original design, but will incorporate new technologies. The scheduled release
of the next generation Orasis(R) is currently planned for 2002-2003.

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. The OraLynx(TM) set-top box processes high-speed
video, provides storage and works with coaxial cable, ADSL and fiber. The
OraLynx(TM) set-top box offers considerable advantages for service providers
and end users. For service providers, the OraLynx(TM) set-top box enables
integration of data, voice, and video over one unified network using one
termination device. For end users, the OraLynx(TM) set-top box serves as a
simple yet sophisticated gateway and access device that can be controlled with
a remote control, keyboard or other mobile handheld device. The OraLynx(TM)
set-top box can be networked to PC's, Internet appliances, and more. The
OraLynx(TM) can provide direct access to interactive TV, video-on-demand and
ATM or IP voiceover phone service. Basic unit features are as follows:

. High quality/high speed user interface (2D graphics)

. Seamless Video-on-Demand Service

. Instant Telephone Access

. IP or ATM voiceover

. Supports standard Internet protocols and various Internet connections
(xDSL, SONET, ATM25, Ethernet)

. Networking and Smart Appliance Interface

. Provides wireless or conventional networking

The Company also designs, constructs, installs and maintains private
interactive entertainment systems, focusing primarily in the extended stay
hospitality industry, utilizing the Company's set-top boxes. The Company
provides all service and maintenance on the entire system. In addition to basic
cable TV, the Company's system offers high speed internet connectivity, tiered
programming, pay-per-view, games, room messaging, folio view, express check-out
and community channels.

During 2001 and 2000, the Company performed design services, specializing in
hardware and software development. In addition, the Company's engineers
consulted with and assisted customers in the development of intellectual
property. The Company's engineers specialize in telecommunications, especially
wireless and cable-based product development, as well as multimedia
development, including digital video decoding and processing. The design
services part of the business has decreased significantly, and in the first
quarter of 2002, the Company laid off the majority of its engineering staff. As
existing contracts with customers expire and are completed, the Company will
not pursue additional orders.

Markets

Based on the latest statistics, the mobile computing devices market is
approximately $110 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(R) competes, is several billion dollars and is growing at approximately
twenty five percent per year.

The set-top box market is a relatively new phenomenon. According to the
research firm, Strategy Analytics, the worldwide installed base of set-top
boxes was a mere 2.2 million in 1998 and was 27.4 million in the year 2000, and
is expected to grow by 35% in 2002. Currently with the market in the early
developing stages, the "set-top box" has not been perfected. Existing designs
do not offer the flexibility or future capacity that Dauphin's customers seek.

Our focus on the timeshare market is based upon current statistics indicating
annual timeshare global sales topping $6 billion and timeshare growth between
16% and 18% a year for the past seven years. Timesharing is the fastest-growing
segment of the global travel and tourism industry. According to the January
1999 issue of Bear, Stearns & Co. Inc.'s Leisure Almanac, "the confluence of
rapidly growing population of income-qualified households and increased
utilization should result in collective revenues of $200 billion between 1995
and 2009." In 1998, the United States accounted for $3.06
billion--approximately half--of the world's timeshare sales revenue, according
to a survey sponsored by the American Resort Development Association. In 2000,
U.S. sales were about $4.1 billion, according to Ragatz Associates. The United
States also leads in the number of resorts (more than 1,600) and owners (nearly
3 million). According to Ragatz Associates, in 1998 there were 4.25 million
timeshare owners living in more than 200 countries and over 5,000 timeshare
resorts in more than 90 countries.

Sales and Marketing

During the year 2001, the Company focused its marketing efforts in Greece, as
it established a strong relationship with the Hellenic Telecommunications
Organization S.A. (OTE). The Company has a sales and marketing agreement with
OTE, whereby the Company's products are marketed through the OTE Commercial
Network

throughout Europe and the Middle East. OTE is a multi-billion dollar company
comprised of well known subsidiaries including CosmOte, OTEnet, OTESAT,
CosmoOne, OTEGlobe, OTEestate, HELLASCOM and other affiliated companies based
in Bulgaria, Yugoslavia, Romania, Armenia, Albania and Jordan. OTE is a listed
company and trades on the Athens Exchange and the New York Stock Exchange. OTE
is a reseller of our products in Greece and other European countries. OTE will
work directly with our Greek based branch marketing and sales office. The
branch office was opened in August 2001. The office is staffed with
approximately twelve sales and marketing personnel. In addition, the Company
has developed a marketing agreement with Orbit Plan S.A., a strategic planning
and business development firm having a presence in more than ten countries, for
assistance in marketing the Company's products into many regions of Europe,
Russia, the Commonwealth of Independent States, China and the Far East. The
Company has also entered into a marketing agreement with the Dialogue Group of
Companies which establishes the framework for joint development of a
communications infrastructure for law enforcement and local public safety
authorities, as well as development of certain related software applications.
The agreement calls for bilateral representation of each respective company's
products. The Dialogue Group of Companies is a Russian/American joint venture
and is among the largest private commercial enterprises in the former Soviet
Union, employing more than 3,500 people with clients that include the Ministry
of Internal Affairs in Russia, the Moscow Police Department and the Federal Tax
Police.

The Company's interactive cable systems are marketed primarily to the extended
stay hospitality industry through advertising and direct contact with the
customer.

Competition

Many competitors exist in the market segments where Dauphin competes. In the
hand held computer market, companies such as Epson, Fujitsu, IBM, and
Mitsubishi are market segment leaders. The companies manufacturing set-top
boxes are equally as impressive, including Motorola and Scientific Atlanta.
However, Dauphin management believes some advantages exist over the competition
including flexibility, adaptability and unique solutions driven designs. Most
of the Company's competitors are large corporations or conglomerates, which may
have greater resources to withstand downturns in the hand-held computer and
set-top box markets, invest in new technology and capitalize on growth
opportunities. These competitors, like the Company, aggressively seek to
improve their yields by way of increased market share and cost reduction.

The Company's interactive cable system competes with cable television
companies, pay-per-view outlets such as On Command and others. Primary
competitive factors in our markets include selection, convenience,
accessibility, customer service and reliability.

We believe we can compete favorably in all of our markets. Most of our
competitors are larger than us and have much greater financial resources. No
assurance can be given that such increased competition will not have an adverse
effect on our business.

Customer Dependence

While the Company continues to market to a variety of companies in many
different industries, two customers accounted for approximately 87% of total
revenues for 2001. Motorola, Inc. accounted for approximately 45% of total
revenue for the year 2001 and approximately 53% of total revenues for the year
2000. This customer has itself suffered a reduction in revenue and as a result
has not been issuing new purchase orders for design services. Because of the
loss of future orders, in the first quarter of 2002, the Company laid off the
majority of its engineering staff. Another customer, Hellenic
Telecommunications Organization S.A. (OTE), accounted for approximately 42% of
total revenues in 2001.

Research and Development

Substantially all of the Company's research and development efforts relate to
the development of handheld computers and set-top boxes. To compete in the
highly competitive hardware markets, the Company must continue to develop
technologically advanced products. The Company's total research and development

expenditures were approximately $2,434,000, $1,427,000 and $510,000 in 2001,
2000 and 1999, respectively. The Company has retained all rights and
intellectual property acquired during the development of their hand-held
products and peripheral devices, and its set-top boxes.

Production

Because the main components of the Company's products are complex, the assembly
of the motherboards is outsourced to various subcontractors located in the
United States and in Southeast Asia. Additionally, final assembly and the first
level of testing are performed by the subcontractors. The Company's proprietary
software is loaded by the subcontractor. The Company does final testing and
modifications.

Source and Availability of Raw Materials

Component parts are obtained from suppliers around the world. Components used
in all designs are state of the art. Components such as the latest mobile Intel
processors, color video controllers and CACHE memory chips are in high demand
and are, thus, available in short supply. However, once production has begun,
management does not anticipate delays in the production schedule.

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(R), 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."

Employees

As of December 31, 2001, the Company had approximately 50 full-time employees.
Many of the Company's employees are highly skilled and the Company's success
depends in part upon its ability to attract and retain such employees. The loss
of key Company personnel could have an adverse effect on the Company's results
of operations. Because of the reduction in orders for design services and the
decision to terminate its operations at the facilities in McHenry, during the
first quarter of 2002, the Company laid off 24 full-time employees and
currently has 26 full-time employees.

Item 2. Properties

The Company's executive offices consist of 7,300 square feet of office space
located at 800 E. Northwest Hwy, Suite 950, Palatine, Illinois 60067. The
Company pays approximately $10,000 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. In
addition, the Company operates a branch office consisting of 2,800 square feet
at II Merarchias 2 Street and Aki Miaouli, 185 35, Piraeus, Greece. The lease
is for 2 years and the monthly rent is approximately $4,300.

RMS facilities are located at 1809 South Route 31, McHenry, Illinois 60050. 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 $16,000 per month. The Company
will not be renewing its lease and will close all operations at RMS in May 2002.

ADD facilities are located at 937 N. Plum Grove Road, Schaumburg, Illinois
60173. The approximately 5,500 square feet of office space is owned by the
Company.

Suncoast Automation Inc. facilities are located at 150 Dunbar Avenue, Oldsmar,
Florida 34677. Suncoast occupies 3,000 square feet of space of which 1,500
square feet is for office space and 1,500 square feet is warehouse. The current
lease expires in July 2002 and is renewable for three years. The rent is
approximately $1,800 per month. The Company believes the space will be adequate
for the foreseeable future.

Item 3. Legal Proceedings

During 2001, the Company was engaged in various legal proceedings of which all
such proceedings were finalized and fully accounted for in the financial
statements. As of the date of this report, the Company is not aware of any
legal proceedings or litigation involving the Company that would have a
material effect on 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 2001.

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 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

1999 2000 2001
------------- -------------- -------------
High Low High Low High Low
------ ------ ------- ------ ------ ------

First Quarter. $1.219 $0.453 $12.563 $0.266 $2.813 $1.063
Second Quarter 0.938 0.391 8.000 2.656 1.990 1.125
Third Quarter. 0.750 0.266 6.750 3.094 1.970 0.900
Fourth Quarter 0.703 0.219 4.438 0.719 1.550 0.660

Holders

The number of shareholders of record of the Company's common stock as of April
10, 2002 as reported by the Company's transfer agent is approximately 22,000. 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 22,000.

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 April 10, 2002 there were 65,050,646
shares of common stock issued and outstanding held by approximately 22,000
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 April 10, 2002 there are a total of 8,265,411 Warrants issued and
outstanding in the hands of approximately 60 investors and consultants,
resulting from fund raising. These Warrants are convertible at any time into
Company's $0.001 par value common stock. The per share strike prices of these
Warrants range from $0.20 to $5.481. These Warrants typically expire three
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' ownership percentage of the Company will be
diluted.

As of April 10, 2002 there are a total of 5,605,562 Options issued and
outstanding in the hands of more than thirty employees and former employees.
These Options are exercisable at any time into the Company's $0.001 par value
common stock. The per share strike prices of these Options range from $0.50 to
$3.875. These Options expire three years from the date of issuance. At the time
such Options are exercised, the common shareholders' ownership percentage of
the Company will be diluted.

Transfer Agent and Registrar

American Stock Transfer and Trust Company, 6201 15th Avenue, Brooklyn, New York
11219.

Item 6. Selected Financial Data

Year Ended December 31
----------------------------------------------------------------
2001 2000 1999 1998 1997
- - ------------ ----------- ----------- ----------- -----------

Net Sales.................. $ 2,620,207 $ 859,837 $ 2,279,058 $ 5,367,514 $ 2,730,035
Net Income (Loss).......... (13,252,360) (7,514,979) (9,306,304) (6,131,557) (3,988,017)
Net Income (Loss) Per Share (0.21) (0.15) (0.20) (0.16) (0.13)
Total Assets............... 3,917,424 11,160,777 3,372,155 6,719,635 7,269,136
Long-Term Debt............. 1,196,777 102,133 185,179 302,951 429,526
Working Capital (Deficit).. 680,392 3,015,210 (917,917) 260,227 4,510,546
Shareholders Equity........ 2,048,891 10,520,864 552,344 2,885,228 5,675,595

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

Forward Looking Statements

The following discussion should be read in conjunction with the consolidated
financial statements. Certain statements contained herein may constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks,
uncertainties and other factors that could cause actual results to differ
materially, as discussed more fully herein.

Results of Operations 2001 Compared to 2000

Revenue for the Company increased from approximately $860,000 in 2000 to
$2,621,000 in 2001. Revenues from the sale of products increased from $64,000
in 2000 to $1,274,000 in 2001. The significant increase is the result of the
Company beginning shipment of its set-top box during the fourth quarter of
2001. Additionally, the Company recognized approximately $135,000 of revenues
from its interactive cable provider subsidiary, Suncoast. These revenues are
only for six months, since the Company acquired the net assets of Suncoast on
July 1, 2001. Design service revenue increased from $796,000 in 2000 to
$1,346,000 in 2001, an increase of 69%. Design service revenues in 2000 were
for four and one-half months, since the date of acquisition of Advanced Digital
Designs, Inc. on August 18, 2000. Design service revenues began declining
during the second half of 2001, as customers began canceling projects and not
beginning new ones. Cost of sales decreased from $2,376,000 in 2000 to
$1,680,000 in 2001. Cost of sales in 2000 included a write down of obsolete
inventory of $1,440,000 and a write down of inventory to its net realizable
value of $510,000. Cost of sales for 2001 includes the costs of the set-top
boxes sold, as well as a write down of obsolete inventory of $490,000. Cost of
services increased from $500,000 in 2000 to $1,137,000 in 2001. Cost of
services for 2000 are included only from the date of acquisition of Advanced
Digital Designs, Inc., representing four and one-half months. Cost of services
consist primarily of payroll and related employee benefits of the engineers
performing the services. Gross profit for design services decreased from 37% in
2000 to 16% in 2001. The decline in gross profit is a result of the decline in
revenues while cost of services did not decrease in proportion to the revenues.

Selling, general and administrative expenses increased to approximately
$4,742,000 for 2001 as compared to $3,630,000 for 2000. Selling, general and
administrative expenses for 2000 consisted of professional fees and financial
service expenses related to the private placement, salaries for administrative
personnel, expenses for the common stock purchase agreement, administrative
costs associated with the design services subsidiary, ADD and costs associated
with exercising the drawdown. For the year 2001, selling, general and
administrative costs were primarily expenses associated with the issuance of
common stock for reimbursement pursuant to a personal guarantee, salaries for
administrative and marketing personnel, expenses in establishing the operations
of the Greek branch office and expenses pertaining to the Suncoast subsidiary.
Included in selling, general and administrative expenses for 2001 are the
operations of the branch office in Greece, amounting to approximately $300,000.
Also included in 2001 are six months of selling, general and administrative
expenses of Suncoast, included since the date of acquisition. These
approximated $490,000.

Research and Development costs increased to approximately $2,434,000 for 2001
as compared to $1,472,000 for 2000. Approximately 84% of Research and
Development in 2001 consisted of costs associated with the development of the
OraLynx(TM) set-top box, with approximately 16% for the development of the new
version of the Orasis(R). Research and Development costs in 2000 were for the
development of the OraLynx(TM) set-top box.

Amortization of goodwill associated with the acquisition of Advanced Digital
Designs, Inc. amounted to $1,100,000, whereas in 2000, only four and one-half
months of amortization are included, which amounted to $412,500.

Asset impairment and other losses for 2001 consisted of the write off of the
remaining goodwill associated with the acquisition of Advanced Digital Designs,
Inc. of $3,987,500 and $290,000 of an investment in non-marketable securities.
During the fourth quarter of 2001 the Company determined that the set-top box
design was completed and the design services business with outside customers
was declining, therefore an impairment of the goodwill associated with the
acquisition of ADD occurred. The Company revised its projections and determined
that the projected results would not support the carrying value of the goodwill
balance. In addition, the Company determined that the carrying value of its
investment in non-marketable securities had been impaired since the investment
had discontinued paying dividends in 2001 and due to the overall poor financial
condition of the issuing company.

Interest expense increased to approximately $274,000 for the year ended
December 31, 2001 from $68,000 for the year ended December 31, 2000. Included
in interest expense in 2001 is three months amortization of the debt discount
associated with the Convertible Note, amounting to $252,000. The remaining
interest is related to capital equipment leases and other borrowings. Interest
expense in 2000 was a result of the capital equipment leases and other
borrowings. Interest on these leases and other borrowings decreased from
$68,000 to $22,000 because the outstanding balances on the capital leases and
borrowings have decreased.

Fourth-Quarter 2001 Compared with Fourth-Quarter 2000

Net sales for the fourth-quarter 2001 were approximately $1,195,000 as compared
to fourth-quarter net sales in 2000 of approximately $30,000. The Company began
shipping set-top boxes in the fourth quarter to OTE, the Hellenic
Telecommunications Organization S.A. which the Company has a sales and
marketing agreement. Also included in the fourth quarter are revenues from the
Suncoast operations, amounting to approximately $70,000. The net assets of
Suncoast were acquired on July 1, 2001. Design services revenue in the
fourth-quarter amounted to $176,000 as compared to $469,000 in the
fourth-quarter of 2000. The decrease in revenue of 62% is a result of the
reduction in engineering projects available in the marketplace. Customers for
our type of services have experienced layoffs and cutbacks within their own
industries, and outside consulting is another area where companies reduced
their costs. Cost of sales in the fourth-quarter of 2001 includes the write-off
of the remaining inventory associated with the Orasis. Cost of sales in the
fourth-quarter of 2000 includes $1,950,000 of write down of inventory and
adjustment to the net realizable carrying value. Because of the above, gross
loss decreased from $1,936,000 in the fourth-quarter of 2000 to $359,000 for
the fourth-quarter of 2001.

Selling, general and administrative expenses for fourth-quarter of 2001 include
the operations of the Suncoast subsidiary as well as the operations of the
branch office in Greece, whereas neither of these two operations existed in
2000. Selling, general and administrative expenses for the fourth-quarter of
2000 include expenses associated with the Comdex2000 trade show, advertising,
expenses associated with exploring foreign markets and the charges to increase
the reserve for bad debts. All other selling, general and administrative
expenses are comparable between the fourth quarter of 2001 and 2000. Research
and Development costs decreased by approximately $325,000 from approximately
$999,000 in the fourth-quarter 2000 to approximately $674,000 in the
fourth-quarter 2001. This is attributable to the completion of the development
of the OraLynx(TM) set-top box in 2001.

Interest expense increased from $4,000 in the fourth-quarter 2000 to
approximately $258,000 in the fourth-quarter of 2001. This increase is
attributable to the amortization of the beneficial conversion feature
associated with the Convertible Note in 2001.

Results of Operations 2000 Compared to 1999

Revenue for the Company decreased from approximately $2,279,000 in 1999 to
$860,000 in 2000. The revenue decreased as a result of the Company's decision
to eliminate contract manufacturing and focusing its efforts on the development
of the set-top box. The Company determined that contract manufacturing was no
longer profitable and did not fit in to the overall business plan of the
Company. Contract manufacturing revenues approximated $2,000,000 in 1999.
Revenue for 2000 was also aided by the design services and consulting of the
Company's subsidiary, Advanced Digital Designs ("ADD"). Gross revenue from ADD
from the date of acquisition of August 18, 2000, amount to approximately
$985,000. Gross profit margins are not comparable for the period due to the
fluctuations in revenue. The gross profit margin for both years were effected
by the write down of obsolete inventory. For the year ended December 31, 2000
the write down of obsolete inventory and the reserve for potential obsolete
Orasis(R) inventory amounted to $1,950,000 as compared to the write-off of
obsolete inventory in the year ended December 31, 1999 of $1,793,000.

Selling, general and administrative expenses decreased to approximately
$4,043,000 for 2000 as compared to $4,173,000 for 1999. The increase in
professional fees and financial service expenses related to the private
placement, common stock purchase agreement and cost associated with exercising
the drawdown, amounting to approximately $985,000, were offset by staff
reductions and other cost cutting measures implemented by management
approximating $1,115,000.

Research and Development costs increased to approximately $1,472,000 for 2000
as compared to $510,000 for 1999. Research and Development in 2000 consisted of
costs associated with the development of the OraLynx(TM) set-top box, whereas
in 1999, these costs were for the continued development of the Orasis(R).

Interest expense decreased to approximately $68,000 for the year ended December
31, 2000 from $2,099,000 for the year ended December 31, 1999. Interest expense
in 1999 was mainly a result of the financing activities associated with the
conversion of debt to common stock as well as the issuance of warrants
associated with the debt.

Liquidity and Capital Resources

The Company has incurred a net operating loss in each year since its founding
and as of December 31, 2001, has an accumulated deficit of approximately
$59,342,000. 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 including its set-top box. 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.

For the year ended December 31, 2001 the Company used $4,213,000 of cash in
operating activities, used $661,000 in investing activities and generated
$2,916,000 of cash from financing activities that produced a decrease in cash
of $1,958,000 for the year. The net loss of $13,252,000 was partially offset by
the non-cash items of depreciation and amortization of $1,630,000, the asset
impairment loss of $4,277,000, write off of assets not used in the business of
$526,000, write off of inventory of $490,000 and the issuance of common stock
for reimbursement pursuant to a personal guarantee for $1,242,000. Investing
activities consisted of the purchase of equipment, which is primarily leasehold
improvements in the establishment of the Company's sales and marketing branch
office in Greece amounting to approximately $316,000 and additions of equipment
at Suncoast. Investing activities consisted primarily of the issuance of
convertible debentures and warrants for $2,500,000, the drawdown against the
equity line of $300,000 and the exercise of warrants and stock options for
$206,000. As of December 31, 2001 the Company had a current asset to current
liabilities ratio of 2.0 as compared to a ratio of 6.6 at December 31, 2000.
The Consolidated Statements of Cash Flows, included in this report, detail the
other sources and uses of cash and cash equivalents.

In the second quarter of 2000, the Company entered into a common stock purchase
agreement, escrow agreement and registration rights agreement with Techrich
International Ltd., ("Techrich"). These agreements provided a $100,000,000
equity line of credit for use by the Company at its discretion. During the
third and fourth quarters of 2000, the Company received $7,000,000 from the
equity line in exchange for the issuance of 2,136,616 of common stock. In the
third quarter of 2001, the Company received an additional $300,000 from the
equity line in exchange for 258,968 shares of common stock.

On September 28, 2001 the Company entered into a $10 million Securities
Purchase Agreement with Crescent International Ltd., ("Crescent") an
institutional investor. Under the Securities Purchase Agreement, the Company
issued a Convertible Note for $2.5 million. Although the Company had the option
to issue further convertible notes to Crescent subject to certain conditions
precedent, such option expired on February 1, 2002 and no additional notes were
issued. In addition, the Company issued warrants exercisable to purchase
700,000 shares of common stock at a price of $1.3064 per share for a five-year
term. The Stock Purchase Agreement further permits the Company to sell to
Crescent up to $7.5 million in common stock of the Company over a 24-month
period. Additionally, the Company agreed not to exercise any drawdowns against
its existing common stock purchase agreement with Techrich International Ltd.,
which expired on January 28, 2002.

The Securities Purchase Agreement permits the Company to sell to Crescent and
requires Crescent to purchase from the Company, at the Company's sole
discretion, common stock of the Company for up to $7.5 million over a 24-month
period. Individual sales are limited to $1.5 million, or a higher amount if
agreed to by the Company and Crescent, and each sale is subject to our
satisfaction of the following conditions precedent (none of which are within
the control of Crescent): (1) the Company's representations and warranties must
be true and complete, (2) the Company must have one or more currently effective
registration statements covering the resale by Crescent of all shares issued in
prior sales to Crescent and issuable upon the conversion of the Convertible
Note, (3) there must be no dispute as to the adequacy of disclosures made in
any such registration statement, (4) such registration statements must not be
subject to any stop order, suspension or withdrawal, (5) the Company must have
performed its covenants and obligations under the Securities Purchase
Agreement, (6) no statute, rule, regulation, executive order, decree, ruling or
injunction may have been enacted, entered, promulgated or adopted by any court
of governmental authority that would prohibit the Company's performance under
the Securities Purchase Agreement, (7) the company's common stock must not have
been delisted from its principal trading market and there must be no trading
suspension of its common stock in effect, and (8) the issuance of the
designated number of shares of common stock with respect to the applicable sale
must not violate the shareholder approval requirements of the Company's
principal trading market. The aggregate amount of all sale shares and
convertible notes issued cannot exceed $10 million. The amount of the sale is
limited to twice the average of the bid price multiplied by the trading volume
during the 22 trading day period immediately preceding the date of sale. When
the total amount of securities issued to Crescent equals or exceeds $5 million,
the Company shall issue to Crescent a subsequent incentive warrant exercisable
to purchase 400,000 shares of common stock at a price equal to the bid price on
the date the incentive warrant is issued.

The Company elected to pursue the above financing arrangements with Crescent
International because the Company's previous financing arrangements with
Techrich contained certain limitations as it related to the market price of our
common stock, the average volume of shares traded on a daily basis and other
such factors which would not generate the greatest benefit to the Company's
shareholders. In addition, the financing arrangement with Techrich expired at
the end of January 2002. Because of the changes in circumstances and the
current economic conditions of the Company, management decided to explore
alternative financing arrangements. Several alternatives were reviewed,
including private placement transactions, various long-term debt arrangements
with different investment bankers and other equity line arrangements similar to
the one with Techrich. Management felt that the arrangement with Crescent was
the best alternative and was in the best interest of the Company and its
shareholders.

The Company expects to rely on the above financing arrangements in order to
continue its development of products and to continue its ongoing operations in
the short-term. The long-term cash needs of the Company will be dependent on
the successful development of the Company's products and their success in the
market place. At the current rate, the Company is not able to internally
generate sufficient funds for operations and will be

required to rely on outside sources for continued funding until such time as
the Company's operations generate a profit and cash is generated from
operations. The Company has historically issued and may continue, if the
circumstances warrant, to issue common stock to vendors and suppliers in lieu
of cash for products and services provided to the Company.

Risk Factors

We operate in a highly competitive and volatile industry. We are faced with
aggressive pricing by competitors; competition for necessary parts, components
and supplies; continually changing customer demands and rapid technological
developments; and risks that buyers may encounter difficulties in obtaining
governmental licenses or approvals, or in completing installation and
construction of infrastructure, necessary to use our products or to offer them
to end users. The following cautionary statements discuss certain important
factors that could cause actual results to differ materially from the projected
results contained in the forward-looking statements contained in this Annual
Report.

Risks Related to Our Financial Results and/or Condition

We have an accumulated deficit due to substantial losses incurred over the last
six years.

Since July 1996 we have operated without substantial sales or revenue and have
an accumulated deficit of $59,594,000 as of December 31, 2001. 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, including
its set-top box. 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. Our financial performance may make it difficult for potential
sources of capital to evaluate the viability of our business to date and to
assess its future viability.

None of our products have achieved widespread distribution or customer
acceptance nor are there any assurances that the Company will be able to
profitably sell its products.

The Orasis(R) is a solution oriented, pen-based, mobile computer system, which
has been produced and marketed only on a limited basis. The Company has not
recognized significant sales of the product. A new version of the Orasis(R) is
under development and scheduled for release in 2002/2003.

We began shipping the OraLynx(TM) set-top box late in the fourth quarter of
2001. We believe the OraLynx(TM) set-top box will address a broad market
demand. There can be no assurance that a market demand will exist or the sales
of the OraLynx(TM) will continue after first being introduced. If a market
demand exists, it may be met with alternative products offered by competitors
or with pricing that we cannot match.

Availability of additional funding under our Securities Purchase Agreement
requires the Company to meet certain conditions precedent, which the Company
may be unable to meet.

On September 28, 2001 the Company entered into a $10 million Securities
Purchase Agreement with Crescent International Ltd., an institutional investor.
Under the Securities Purchase Agreement, the Company issued a Convertible Note
for $2.5 million on October 2, 2001. Although the Company had the option to
issue further convertible notes to Crescent subject to certain conditions
precedent, such option expired on February 1, 2002 and no additional notes were
issued. In addition, the Company issued warrants exercisable to purchase
700,000 shares of common stock at a price of $1.3064 per share for a five-year
term. The Securities Purchase Agreement further permits the Company to sell to
Crescent up to $7.5 million in common stock of the Company over a 24-month
period. Additionally, the Company agreed not to exercise any drawdowns against
its existing common stock purchase agreement with Techrich International Ltd.,
which expired on January 28, 2002.

and Crescent, and each sale is subject to our satisfaction of the following
conditions precedent (none of which are within the control of Crescent): (1)
the Company's representations and warranties must be true and complete, (2) the
Company must have one or more currently effective registration statements
covering the resale by Crescent of all shares issued in prior sales to Crescent
and issuable upon the conversion of the Convertible Note, (3) there must be no
dispute as to the adequacy of disclosures made in any such registration
statement, (4) such registration statements must not be subject to any stop
order, suspension or withdrawal, (5) the Company must have performed its
covenants and obligations under the Securities Purchase Agreement, (6) no
statute, rule, regulation, executive order, decree, ruling or injunction may
have been enacted, entered, promulgated or adopted by any court of governmental
authority that would prohibit the Company's performance under the Securities
Purchase Agreement, (7) the company's common stock must not have been delisted
from its principal trading market and there must be no trading suspension of
its common stock in effect, and (8) the issuance of the designated number of
shares of common stock with respect to the applicable sale must not violate the
shareholder approval requirements of the Company's principal trading market.
The aggregate amount of all sale shares and convertible notes issued cannot
exceed $10 million. The amount of the sale is limited to twice the average of
the bid price multiplied by the trading volume during the 22 trading day period
immediately preceding the date of sale. When the total amount of securities
issued to Crescent equals or exceeds $5 million, the Company shall issue to
Crescent a subsequent incentive warrant exercisable to purchase 400,000 shares
of common stock at a price equal to the bid price on the date the incentive
warrant is issued.

Even though Crescent has no investment discretion with respect to shares of
common stock that the Company may require it to purchase under the Securities
Purchase Agreement, the Company may not be able to satisfy one or more of these
conditions at any time that it desires to raise funds from Crescent.

The initial funding of $2.5 million allowed the Company to pay the
subcontractors for the OTE order, complete two installations at time-share
resorts, complete the opening of the branch office in Piraeus, Greece and fund
operations. Additional funding will need to be secured for the Company to
continue into the second quarter of 2002.

Risks Relating to Our Shares

Shareholders may suffer dilution from the exercise of existing options,
warrants and convertible notes; the terms upon which we will be able to obtain
additional equity capital could be adversely affected.

Our common stock may become diluted if warrants and options to purchase our
common stock are exercised and if Crescent converts our outstanding $2,500,000
convertible note into shares of our common stock. The conversion price of
Crescent's convertible note is the lower of $1.1561 and a price based on a
formula determined at the time of conversion. We have limited rights to delay
conversion for up to 180 days from the date triggering those rights if the
conversion price determined by the formula is below $0.75 per share. At this
price, conversion by Crescent of its convertible note would result in the
issuance of 3,333,333 shares. We are required to register for resale shares
issued upon conversion of the convertible note to the extent they are not
registered. As of April 10, 2002, the conversion price of the convertible note
was $0.5233, which would result in the issuance of 4,777,375 shares. Crescent
has informed us that it has no current intent to convert our convertible note
into shares of our common stock and that any decision as to whether to convert
in full or in part will be based on relevant facts, circumstances and market
conditions existing at the time of the decision.

In addition to the dilution resulting from a conversion of our convertible
note, we could be subject to further dilution upon exercise of a Protective
Warrant, if and when issued to Crescent. The number of shares of our common
stock that can be purchased upon exercise of the protective warrant is equal to
the number of shares of our common stock that is determined by subtracting the
amount paid by Crescent for its initial purchase of the Company's common stock,
i.e. $500,000, divided by the purchase price, from an amount which is equal to
$500,000 divided by the price of the common stock for the Company as computed
on the effective date of the Company's registration statement. Under the terms
of the Protective Warrant, if the price for the Company's common stock as
computed on the effective date of the registration statement filed on behalf of
Crescent is higher than the purchase price for the Company's common stock, as
computed on the date Crescent purchased such shares, the Protective Warrant
does not become exercisable.

Irrespective of whether Crescent exercises its warrants or converts its
convertible note, our common stock is subject to further dilution upon the
issuance of shares of our common stock to Crescent that could occur if we
require Crescent to purchase additional shares of our common stock for up to
$7,500,000. These additional shares would be at a discount to the then current
market price. The purchase price, with respect to the sale of common stock by
us to Crescent, is determined by taking the lower of $1.1561 and 92% of the
average of the lowest three consecutive bid prices during the 22 trading day
period immediately preceding the applicable sale date. Dilution resulting from
issuance of said shares will depend on the trading price at the time the common
stock is sold. Under the terms of our Securities Purchase Agreement with
Crescent, the number of shares to be purchased by Crescent or to be obtained
upon exercise of warrants or conversion of the convertible note held by
Crescent cannot exceed the number of shares that, when combined with all other
shares of common stock and securities then owned by Crescent, would result in
Crescent owning more than 9.9% of our outstanding common stock at any given
point of time. Our agreements with Crescent obligate us to register any shares
of our common stock that we require Crescent to purchase. Neither Crescent nor
any of its affiliates can directly or indirectly engage in any short sale of
the Company's common stock.

These shares, as well as the eligibility for additional restricted shares to be
sold in the future, either pursuant to future registrations under the
Securities Act of 1933, as amended, or an exemption such as Rule 144 under the
Securities Act of 1933, as amended, may have a dilutive effect on the market
for the price of our common stock. The terms upon which we will be able to
obtain additional equity capital could also be adversely affected. In addition,
the sale of common stock, or merely the possibility that these sales could
occur, could have an adverse effect on the market price of our common stock.

Because the amount of securities to be issued to Crescent is based on a formula
that is tied to the market price of our shares, issuance of these securities
could result in significant dilution of the per share amounts of our shares.
The inverse relationship between the price and the amount of securities to be
issued may have the following results:

. the lower the average trading price of our shares at the time we request
Crescent to purchase additional shares, the greater the number of
securities that can be issued, and the greater the risk of dilution caused
by these securities;

. the perceived risk of dilution may cause Crescent or other shareholders to
sell their shares, which could contribute to a downward movement in the
stock price of shares; and

. any significant downward pressure on the trading price of our shares could
encourage stockholders to engage in short sales, which could further
contribute to a price decline of our shares.

It is likely that our shares will be subject to substantial price and volume
fluctuations due to a number of factors, many of which will be beyond our
control.

The securities markets have recently experienced significant price and volume
fluctuations. The market prices and volume of securities of technology and
development-stage companies have been especially volatile. Market volatility
and other market conditions could reduce the market price for our shares
despite operating performance. In addition, if our operating performance falls
below expectations, the market price of our shares could decrease
significantly. In the past, companies that have experienced volatility in the
market price of their stock have been the subject of securities class action
litigation. If we were the subject of such litigation we could experience
substantial litigation costs and diversion of management's attention and
resources.

We have not paid any dividends and have no expectation of paying dividends in
the foreseeable future.

We have not declared, paid, or distributed any cash dividends on our shares in
the past, nor are any cash dividends contemplated in the foreseeable future.
There is no assurance that our operations will generate any profits from which
to pay cash dividends. Even if profits are generated through operations in the
future, our present intent is to retain any such profits for acquisitions,
product development, production and marketing, and for general working capital
requirements.

Our shares are not widely traded.

There is only a limited market for our shares. If a large portion of the shares
eligible for immediate resale after registration were to be offered for public
resale within a short period of time, the current public market would likely be
unable to absorb such shares. This could result in a significant reduction in
current market prices. There can be no assurance that investors will be able to
resell shares at the price they paid for the shares or at any price.

Our shares are subject to special trading rules relating to "penny stocks"
which restrict trading.

Our shares are covered by an SEC rule that imposes additional sales practice
requirements on broker-dealers who sell "penny stock" to persons other than
certain established customers. For transactions covered by the rule, the
broker-dealer must obtain sufficient information from the customer to make an
appropriate suitability determination, provide the customer with a written
statement setting forth the basis of the determination and obtain a signed copy
of the suitability statement from the customer. The rule may affect the ability
of broker-dealers to sell our shares and also may affect your ability to sell
shares in the secondary market.

Risks Related to Our Strategy

We may be unable to identify or acquire additional technologies or products to
diversify our product offering which could reduce our ability to generate
revenues.

One of our goals is to become a leading provider of niche electronic products.
We expect to avoid reliance upon any one given product through acquisition
and/or development of additional technologies and products. However, we may be
unable to identify or acquire technologies or products. In that case, we may
have to rely upon our own resources to develop such technologies and products
internally. We may not have sufficient resources to do this. In addition,
acquisitions involve a number of special risks, such as diversion of
management's attention and financing issues, which may have a negative impact
on operations and financial performance. The Company does not have any current
plans or proposals for any acquisitions at this time.

We may not be able to efficiently integrate any acquired technologies, products
or businesses which may require additional time by senior management and
disrupt our current business.

We will actively look to acquire technologies, products and other businesses to
complement our operations. There can be no assurance that we will be able to
integrate the operations of any other business successfully. Acquisitions we do
undertake will subject us to a number of risks, including the following:

. inability to institute the necessary systems and procedures, such as
accounting and financial reporting systems;

. assumption of debt;

. issuance of additional common stock, thereby diluting current shareholders
ownership;

. reallocation of management's time away from its current activities;

. failure to retain key personnel; and

. assumption of unanticipated legal liabilities and other problems.

In addition, we may acquire technologies or products that prove incompatible to
other products following further development.

Even if we successfully integrate acquired technologies, products or
businesses, the additional strain on management and current resources may
prevent us from effectively managing the growth.

We seek to become profitable by expanding sales of Orasis(R), the OraLynx(TM)
set-top box and any new products that we may develop or acquire. To manage
growth, we may be required to:

. improve existing and implement new operational, production and personnel
systems;

. hire, train and manage additional qualified personnel; and

. establish relationships with additional suppliers and strategic partners
while maintaining existing relationships.

The existing purchase orders received from international companies subjects us
to risks associated with international operation, such as collection of
accounts receivable, foreign currency fluctuations and regulatory requirements .

As we begin shipping under the purchase orders and set-top box agreement, we
risk exposure to international risks, including:

. greater difficulty in accounts receivable collection and longer collection
periods;

. unexpected changes in regulatory requirements;

. foreign currency fluctuations;

. reduced protection of intellectual property rights;

. potentially adverse tax consequences; and

. political instability.

At the present time, the Company is only currently operating in one foreign
country, Greece. However, as the Company continues to grow and develop,
expansion may very well occur in other countries, primarily in Europe.

Risks Related to Development, Production and Marketing of Our Products

The Company has developed two products in five years and the future of the
Company will be affected by the success of these products.

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.

Product development involves substantial expense and resource allocation that
may exceed our capabilities.

We incurred substantial expense in developing the Orasis(R) computer. We expect
to continue to develop enhancements and accessory equipment to meet customer
and market demands. The OraLynx(TM) set-top box is in the final development
stage. Although we anticipate further expense associated with the final stage
of development, it will not be substantial. However, delays in development
arising from insufficient cash or personnel resources will hinder our ability
to bring these products to market before competitors introduce comparable
products. In that case, we will miss the opportunity to capitalize on the
technological advances, which we believe such products may offer.

We depend on outside sources for components and may be harmed by unavailability
of components, excessive prices for components or unexpected delays in
component deliveries.

The Orasis(R) and OraLynx(TM) set-top box use or will use various component
parts, such as PCBs, microchips and fabricated metal parts. We must obtain
these components from manufacturers and third-party vendors. While we do not
anticipate any possible delays or problems in securing parts, our reliance on
those manufacturers and vendors, as well as industry component supply, may
create risks including the following:

. the possibility of a shortage of components;

. increases in component costs;

. variable component quality;

. reduced control over delivery schedules; and

. potential manufacturer/vendor reluctance to extend credit to us.

Additionally, we are currently utilizing the services of a subcontractor for
the manufacture of our OraLynx set-top box. If this subcontractor is unable to
meet our requests for product, or if there is a shortage of component parts or
if the cost of these parts substantially increases, our operations and our
success in the marketplace could be materially and adversely affected. The
Company has secured alternative subcontractors and vendors, should our current
sources be unavailable. However, similar risks are present with these
alternative sources.

Errors or defects in our products could result in customer refund or product
liability claims causing an impact on market penetration, acceptance of our
products, profitability and on the cash flow of the Company.

Because our products are complex, they could contain errors or bugs that can be
detected at any point in a product's life cycle. While we continually test our
products for errors and will work with customers to identify and correct bugs,
errors may be found in the future. Although many of these errors may prove to
be immaterial, any of these errors could be significant. Detection of any
significant errors may result in:

. loss of or delay in market acceptance and sales of our products;

. diversion of development resources;

. injury to our reputation; or

. increased maintenance and warranty costs.

Errors or defects could harm our business and future operating results. With
defective products, our market share would be negatively impacted and the
Company would lose substantial future revenue. Moreover, because our products
will be used in critical computing functions, we may receive significant
liability claims if our products do not work properly. Our agreements with
customers typically do and will contain provisions intended to limit our
exposure to product liability claims. However, these provisions may not
preclude all potential claims. Liability claims could require us to spend
significant time, money and effort in litigation. They also may result in
substantial damage awards. Any such claim, whether or not successful, could
materially damage our reputation, cause a strain on our results of operation
with the lack of revenue and additional expenses, and burden management
resources by focusing efforts on the errors or defects as opposed to product
development and growth.

We will be unable to develop, produce and market our products without qualified
professionals and seasoned management.

Our success depends in large part on our ability to recruit and retain
professionals, key management and operating personnel. We need to complete
development of the OraLynx(TM) set-top box, continue to develop and modify the
Orasis(R) and coordinate production of Orasis(R) computers and the OraLynx(TM)
set-top box. We also need to develop marketing channels to increase market
awareness and sales of our products. Qualified professionals, management and
operating personnel are essential for these purposes. Such individuals are in
great demand and are likely to remain a limited resource in the foreseeable
future. Competition for them is intense and turnover is high. If we cannot
attract and retain needed personnel, we will not succeed.

We believe that our future success will depend on our ability to retain the
services of our executive officers. These officers have developed industry
relationships that are critical to our growth and development. They also will
be essential in dealing with the significant challenges that we expect will
arise from anticipated growth in our operations.

We have an ongoing need to expand management personnel and support staff. The
loss of one or more members of management or key employees, or the inability to
hire additional personnel as needed, could have a material adverse effect on
our operations.

Risks Related to Competition within Our Industry

Competition in our industry is intense and we may not be able to compete
successfully due to our limited resources.

Our industry is highly competitive and dominated by competitors with
substantial resources. Continuous improvement in product pricing and
performance is the key to future success. At all levels of competition, pricing
has become very aggressive. We expect pricing pressure to continue to be
intense. Many of our competitors are larger and have significantly greater
financial, technical, marketing and manufacturing resources. They also have
broader product lines, greater brand name recognition and larger existing
customer bases. As a result, our competitors may be better able to finance
acquisitions or internal growth or respond to technological changes or customer
needs.

Current and potential competitors also have established or may establish
cooperative relationships among themselves or with third parties to increase
their ability to address customer needs. There can be no assurance that we will
be able to compete successfully in developing, manufacturing or marketing our
products. An inability to do so would adversely affect our business, financial
condition and market price of our shares.

Our industry is subject to rapid technological change and we may not be able to
keep up.

Rapid technological change, frequent new product introductions and
enhancements, uncertain product life cycles and changes in customer demands and
evolving industry standards, characterize the computer industry. Our products
could become obsolete if products based on new technologies are introduced or
if new industry standards emerge.

Computer equipment is inherently complex. As a result, we cannot accurately
estimate the life cycles of our products. New products and product enhancements
can require long development and testing periods, which requires retention of
increasingly scarce technically competent personnel. Significant delays in new
product releases or significant problems in installing or implementing new
products can seriously damage our business. In the past, we have experienced
delays in scheduled product introductions and cannot be certain that we will
avoid similar delays in the future. We must produce products that are
technologically advanced and comparable to and competitive with those made by
others. Otherwise, our products may become obsolete or we will fail to achieve
market acceptance.

Our future success depends on our ability to enhance existing products, develop
and introduce new products, satisfy customer requirements and achieve market
acceptance. We cannot be certain that we will successfully identify new product
opportunities and develop and bring new products to market in a timely and
cost-effective manner.

We may sell fewer products if other vendors' products are no longer compatible
with ours or other vendors bundle their products with those of our competitors
and sell them at lower prices.

Our ability to sell our products depends in part on the compatibility of our
products with other vendors' software and hardware products. For example,
Orasis(R) will not sell if it cannot run software, or access resources such as
Internet or telephone services provided by others. The same is true for the
set-top box. Other vendors may change their products so that they will no
longer be compatible with our products. These vendors also may decide to bundle
their products with products of our competitors for promotional purposes and to
discount the sales price of the bundled products. If this were to occur, our
business and future operating results could suffer.

We have limited intellectual property protection and our competitors may be
able to appropriate our technology or assert infringement claims.

Our products are differentiated from those of our competitors by our internally
developed technology that is incorporated into our products. If we fail to
protect our intellectual property, others may appropriate our technology and
sell products with features similar to ours. This could reduce demand for our
products. We rely

on a combination of trade secrets, copyright and trademark laws, non-disclosure
and other contractual provisions with employees and third parties, and
technical measures to protect our proprietary rights in our products. There can
be no assurance that these protections will be adequate or that our competitors
will not independently develop technologies that are substantially equivalent
or superior to ours.

We believe that our products do not infringe upon the proprietary rights of
third parties. However, there can be no assurance that third parties will not
assert infringement claims against us in the future or that a license or
similar agreement will be available on reasonable terms in the event of an
unfavorable ruling on any such claim. In addition, any such claim may require
us to commit substantial time and effort, and to incur substantial litigation
expenses, and may subject us to significant liabilities that could have a
material adverse effect on our financial condition and results of operations.

Our business and operations may be affected by government regulations.

Our products may be subject to various federal, state and other government
regulations. For example, we are required to obtain CE approval and
certification for the set-top box under the set-top box agreement. If we do not
receive such approval and certification within thirty days of application,
production will be postponed. In addition, if we do not receive such approval
and certification within sixty days of application, the buyer may terminate the
agreement. The Company may terminate the agreement if permits to install fiber
optic and other infrastructure equipment are not issued to the buyer. Even if
such permits are issued, delays in issuance will delay set-top box orders and
shipments. Consequently, government regulations may interfere with our business
plans and could have an adverse effect on our ability to develop and market our
products.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

Substantially all of the Company's liquid investments and long-term debt are at
fixed rates; therefore, the fair value of these instruments is affected by
changes in market interest rates. The Company believes that the market risk
arising from its holdings of liquid investments is minimal as substantially all
of the Company's investments mature within one year.

Foreign Currency Exchange Risk

Dauphin is exposed to foreign exchange risks through its branch operation in
Greece. The Company does not believe that the potential exposure is significant
in light of the current size of its operations in Greece. We do not currently
and do not intend in the future to utilize derivative financial instruments for
trading purposes, unless the operations of the branch facility in Greece become
significant. At that time, the Company will initiate a risk management policy
to monitor interest rate and foreign exchange risks.

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

Not applicable.

PART III

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

Directors and Officers

The following table sets forth the name, age, date elected or 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 Present Office
---- --- ---- -------------------------
Andrew J. Kandalepas 50 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 40 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 subsidiaries.
Prior to joining Dauphin in 1999, 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 a Bachelor of Arts in
Criminal Justice/Pre Law from Washington State University.

Harry L. Lukens, Jr. 51 2000 Chief Financial Officer

Mr. Lukens was appointed Chief Financial Officer in May 2000 and named
Assistant Secretary in March 2001. From 1998 until his appointment, he
served as a personal asset manager for an individual investor. From 1993
until 1998, Mr. Lukens was Vice President, Treasurer and Chief Financial
Officer of Deublin Company, a privately owned international manufacturer.
From 1972 until 1993, he was with Grant Thornton LLP, serving as a partner
from 1986 until 1993.

Jeffrey L. Goldberg 50 1995 Secretary, Director

Mr. Goldberg has served as Secretary and a Director since June of 1995. He
is also a member of the Audit Committee. Mr. Goldberg is a principal with
Jeffrey L. Goldberg and Associates, a financial planning firm and is
currently Chief Executive Officer of Stamford International, a Canadian
company. He is a former principal at Essex, LLC., a financial planning and
asset management firm and at FERS Personal Financial LLC, an accounting and
financial planning 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 and CPA.

Gary E. Soiney 61 1995 Director

Mr. Soiney has served as a Director since November of 1995. He is also a
member of the Audit Committee. Mr. Soiney 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.

Name Age Date Present Office
---- --- ---- --------------
Mary Ellen Conti, MD 57 2000 Director

Dr. Conti was appointed to the Board of Directors and to the Audit Committee
in September, 2000. Dr. Conti is a Radiation Oncologist and owns and
operates four Radiation Therapy Clinics in the St. Louis, Missouri area. She
has practiced in the medical field since 1974 and has been a member of the
Planning and Budget Committee of Memorial Hospital in Belleville, Illinois.
Dr. Conti currently serves as a member of the Board of Directors of
Creighton University, FirstStar Bank Health Care Board, Association of
Freestanding Radiation Oncology Centers and the Accreditation Association
for Ambulatory Health Care.

All Directors 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.

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

Mr. Goldberg is Chief Executive Officer and Chairman of the Board of Stamford
International, Inc., which trades on the Canadian Dealer Network. Mr. Goldberg
also served as a Director of Econometrics, Inc. that is traded on the over the
counter market until October 2000. None of the other Directors, Executive
Officers or Officers has had, or presently has, any involvement with a public
company, other than the Company.

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

Certain information concerning the registrant's executive officers is included
under the caption, "Officers and Directors of the Registrant," following Part I
of this report. Other information required by Items 10, 11, 12, and 13 will be
contained in the registrant's Proxy Statement for the 2002 Annual Meeting of
Stockholders (the "Proxy Statement"), a copy of which will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this report.

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 12th day of April, 2002.

DAUPHIN TECHNOLOGY, INC.

/S/ ANDREW J. KANDALEPAS
By:_______________________________

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

/S/ ANDREW J. KANDALEPAS Chairman of the Board of Directors April 12, 2002
------------------------- Chief Executive Officer, President
Andrew J. Kandalepas

/S/ CHRISTOPHER L. GEIER Executive Vice President April 12, 2002
-------------------------
Christopher L. Geier

/S/ HARRY L. LUKENS, JR. Chief Financial Officer and April 12, 2002
------------------------- Assistant Secretary
Harry L. Lukens, Jr.

/S/ JEFFREY L. GOLDBERG Secretary and Director April 12, 2002
-------------------------
Jeffrey L. Goldberg

/S/ GARY E. SOINEY Director April 12, 2002
-------------------------
Gary E. Soiney

/S/ MARY ELLEN CONTI Director April 12, 2002
-------------------------
Mary Ellen Conti, MD

Dauphin Technology, Inc.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Certified Public Accountants.................... F-2
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 2001 AND 2000............... F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31,
2001, 2000 AND 1999................................................. F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1999, 2000 AND 2001.................................... F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
2001, 2000 AND 1999................................................. F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................ F-7

F-1

Report of Independent Certified Public Accountants

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

We have audited the accompanying consolidated balance sheets of DAUPHIN
TECHNOLOGY, INC. (an Illinois corporation) and Subsidiaries, as of December 31,
2001 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for the three years ended December 31,
2001. 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 auditing standards generally
accepted in the United States of America. 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 consolidated financial position of
Dauphin Technology, Inc. and its Subsidiaries as of December 31, 2001 and 2000
and the consolidated results of their operations and their cash flows for the
three years ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
incurred a net loss of $13,252,360 during the year ended December 31, 2001,
and, as of that date, the Company's accumulated deficit is $59,594,075. In
addition, the Company has consistently used, rather than provided, cash in its
operations. These factors, among others, as discussed in Note 2 to the
financial statements, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

As disclosed in Note 20, the accompanying consolidated financial statements for
the year ended December 31, 2000 have been restated.

GRANT THORNTON LLP

Chicago, Illinois
April 9, 2002

F-2

Dauphin Technology, Inc.

CONSOLIDATED BALANCE SHEETS

December 31, 2001 and 2000

2001 2000
------------ ------------
RESTATED

CURRENT ASSETS:
Cash......................................................................... $ 725,364 $ 2,683,480
Accounts receivable--
Trade, net of allowance for bad debt of $50,621 at December 31, 2001
and 2000............................................................... 67,201 321,377
Employee receivables..................................................... 3,248 21,590
Inventory, net of reserves for obsolescence of $2,981,623 and $2,491,216 at
December 31, 2001 and 2000................................................. 518,452 505,749
Prepaid expenses............................................................. 37,883 20,794
------------ ------------
Total current assets.................................................. 1,352,148 3,552,990
INVESTMENT IN RELATED PARTY..................................................... -- 290,000
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $475,899
and $1,127,040 at December 31, 2001 and 2000.................................. 1,824,935 1,477,787
ESCROW DEPOSIT.................................................................. 368,181 752,500
ASSETS NOT USED IN BUSINESS..................................................... 75,017 --
INSTALLATION CONTRACTS, net of accumulated amortization of $22,857 at
December 31, 2001............................................................. 297,143 --
GOODWILL, net of accumulated amortization of $412,500 at December 31,
2000.......................................................................... -- 5,087,500
------------ ------------
Total assets.......................................................... $ 3,917,424 $ 11,160,777
============ ============
CURRENT LIABILITIES
Accounts payable............................................................. $ 477,716 $ 290,474
Accrued expenses............................................................. 103,792 80,433
Current portion of long-term debt............................................ 82,507 113,629
Customer deposits............................................................ 7,741 53,244
------------ ------------
Total current liabilities............................................. 671,756 537,780
LONG-TERM DEBT.................................................................. 43,580 102,133
CONVERTIBLE DEBENTURES.......................................................... 1,153,197 --
------------ ------------
Total liabilities..................................................... 1,868,533 639,913
COMMITMENTS AND CONTINGENCIES................................................... -- --
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;
64,059,813 shares issued and outstanding at December 31, 2001 and
61,652,069 shares issued and outstanding at December 31, 2000.............. 64,061 61,653
Warrants to purchase 9,198,744 and 8,822,572 shares at December 31, 2001
and 2000................................................................... 4,227,499 3,321,810
Paid-in capital.............................................................. 57,351,406 53,479,116
Accumulated deficit.......................................................... (59,594,075) (46,341,715)
------------ ------------
Total shareholders' eqity............................................. 2,048,891 10,520,864
------------ ------------
Total liabilities and shareholders' equity............................ $ 3,917,424 $ 11,160,777
============ ============

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

F-3

Dauphin Technology, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, 2001, 2000 and 1999

2001 2000 1999
------------ ----------- -----------
RESTATED

NET SALES.................................................... $ 1,274,045 $ 63,913 $ 2,279,058
DESIGN SERVICE REVENUE....................................... 1,346,162 795,924 --
------------ ----------- -----------
TOTAL REVENUE............................................. 2,620,207 859,837 2,279,058
COST OF SALES................................................ 1,608,380 2,375,948 4,833,601
COST OF SERVICES............................................. 1,136,619 499,679 --
------------ ----------- -----------
Gross loss................................................ (124,792) (2,015,790) (2,554,543)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................. 4,742,028 3,630,199 3,405,620
RESEARCH AND DEVELOPMENT EXPENSE............................. 2,434,006 1,472,093 510,287
AMORTIZATION OF GOODWILL..................................... 1,100,000 412,500 --
ASSET IMPAIRMENT AND OTHER LOSSES............................ 4,277,500 -- 767,475
WRITE OFF ASSETS NO LONGER USED IN BUSINESS.................. 525,691 -- --
------------ ----------- -----------
Loss from operations...................................... (13,204,017) (7,530,582) (7,237,925)
INTEREST EXPENSE............................................. 274,407 67,753 2,099,179
INTEREST INCOME.............................................. 226,064 83,356 30,800
------------ ----------- -----------
Loss before income taxes.................................. (13,252,360) (7,514,979) (9,306,304)
INCOME TAXES................................................. -- -- --
------------ ----------- -----------
Net loss.................................................. $(13,252,360) $(7,514,979) $(9,306,304)
============ =========== ===========
LOSS PER SHARE:
Basic....................................................... $ (0.21) $ (0.13) $ (0.20)
============ =========== ===========
Diluted..................................................... $ (0.21) $ (0.13) $ (0.20)
============ =========== ===========
Weighted average number of shares of common stock outstanding
Basic..................................................... 63,147,476 58,711,286 46,200,408
Diluted................................................... 63,147,476 58,711,286 46,200,408

The accompanying notes are an integral part of these statements.

F-4

Dauphin Technology, Inc.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

For the years ended December 31, 2001, 2000 and 1999

Common Stock Treasury Stock
------------------ Paid-in ------------------ Accumulated
Shares Amount Capital Warrants Shares Amount Deficit
- - ---------- ------- ----------- ---------- -------- -------- ------------

BALANCE, January 1, 1999...................... 40,000,000 $40,000 $32,343,785 $ 55,181 (138,182) $(33,306) $(29,520,432)
Issuance of common stock in connection with:
Conversions of debt........................ 4,985,358 4,985 3,842,235 287,700 101,673 24,402 --
Private placement.......................... 6,003,529 6,004 1,481,167 895,208 14,963 3,591 --
Settlement of Trade Payables............... 656,322 656 395,243 -- 1,546 371 --
Stock bonuses paid............................ 26,373 26 26,890 -- 20,000 4,942 --
Net loss...................................... -- -- -- -- -- -- (9,306,304)
---------- ------- ----------- ---------- -------- -------- ------------
BALANCE, December 31, 1999.................... 51,671,582 $51,671 $38,089,320 $1,238,089 -- $ -- $(38,826,736)
Issuance of common stock in connection with:
Private placement, restated................ 4,654,613 4,656 6,877,639 419,556 -- -- --
Stock purchase agreement................... 2,136,616 2,137 5,854,991 1,142,872 -- -- --
Warrant exercised.......................... 1,999,602 1,999 1,234,715 (620,641 -- -- --
Consulting fees............................ 500,000 500 312,000 1,103,669 -- -- --
Employee stock compensation................ -- -- 70,622 -- -- -- --
Settlement of trade payables............... 480,000 480 299,520 -- -- -- --
Stock options exercised.................... 2,000 2 998 -- -- -- --
Vendor payments............................ 207,656 208 739,311 38,265 -- -- --
Net loss, restated............................ -- -- -- -- -- -- (7,514,979)
---------- ------- ----------- ---------- -------- -------- ------------
BALANCE, December 31, 2000, restated.......... 61,652,069 $61,653 $53,479,116 $3,321,810 -- $ -- $(46,341,715)
Issuance of common stock in connection with:
Stock purchase agreement................... 258,968 259 280,640 19,101 -- -- --
Beneficial conversion feature and warrants. -- -- 914,279 684,600 -- -- --
Stock Options exercised.................... 35,600 36 28,528 -- -- -- --
Warrants exercised......................... 285,000 285 242,025 (71,236) -- -- --
Acquisition of business.................... 766,058 766 1,125,339 -- -- -- --
Personal guarantee......................... 1,032,118 1,032 1,240,709 -- -- -- --
Vendor payments............................ 30,000 30 40,770 273,224 -- -- --
Net loss...................................... -- -- -- -- -- -- (13,252,360)
---------- ------- ----------- ---------- -------- -------- ------------
BALANCE, December 31, 2001.................... 64,059,813 $64,061 $57,351,406 $4,227,499 -- $ -- $(59,594,075)
========== ======= =========== ========== ======== ======== ============

Total
- - ------------

BALANCE, January 1, 1999...................... $ 2,885,228
Issuance of common stock in connection with:
Conversions of debt........................ 4,159,322
Private placement.......................... 2,385,970
Settlement of Trade Payables............... 396,270
Stock bonuses paid............................ 31,858
Net loss...................................... (9,306,304)
------------
BALANCE, December 31, 1999.................... $ 552,344
Issuance of common stock in connection with:
Private placement, restated................ 7,301,851
Stock purchase agreement................... 7,000,000
Warrant exercised.......................... 616,073
Consulting fees............................ 1,416,169
Employee stock compensation................ 70,622
Settlement of trade payables............... 300,000
Stock options exercised.................... 1,000
Vendor payments............................ 777,784
Net loss, restated............................ (7,514,979)
------------
BALANCE, December 31, 2000, restated.......... $ 10,520,864
Issuance of common stock in connection with:
Stock purchase agreement................... 300,000
Beneficial conversion feature and warrants. 1,598,879
Stock Options exercised.................... 28,564
Warrants exercised......................... 171,074
Acquisition of business.................... 1,126,105
Personal guarantee......................... 1,241,741
Vendor payments............................ 314,024
Net loss...................................... (13,252,360)
------------
BALANCE, December 31, 2001.................... $ 2,048,891
============

The accompanying notes are an integral part of these statements.

F-5

Dauphin Technology, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2001, 2000 and 1999

2001 2000 1999
------------ ----------- -----------
RESTATED

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $(13,252,360) $(7,514,979) $(9,306,304)
Non-cash items included in net loss
Depreciation and amortization....................... 1,630,454 827,348 1,101,616
Inventory reserve................................... 490,407 545,920 1,793,296
Bad debt reserve.................................... -- (377,978) 417,361
Asset impairment losses............................. 4,277,500 -- --
Write off assets not used in business............... 525,691 -- --
Interest expense on convertible debt................ 252,076 -- 2,062,451
Common stock issued for personal guarantee.......... 1,241,741 -- --
Warrants issued in lieu of consulting fees.......... 266,998 680,005 --
Common stock issued to vendors...................... 40,800 1,052,019 --
Employee stock compensation......................... -- 70,622 --
Settlement of trade payables........................ -- (436,478) --
Stock bonus......................................... -- -- 31,858
Changes in--
Accounts receivable.................................
--trade.......................................... 268,845 181,445 147,508
--employee....................................... 18,342 (21,472) 45,869
Inventory........................................... (390,056) 470,217 (361,495)
Prepaid expenses.................................... 7,237 17,985 7,817
Escrow deposits..................................... 384,319 (752,500) --
Accounts payable.................................... 47,128 (1,176,470) (208,909)
Accrued expenses.................................... 23,359 53,714 (188,586)
Customer deposits................................... (45,503) 53,244 --
------------ ----------- -----------
Net cash used in operating activities............ (4,213,022) (6,327,358) (4,457,518)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (661,283) (2,195) (25,680)
Acquisition of business................................. -- (6,025,000) --
Investment.............................................. -- -- 10,000
------------ ----------- -----------
Net cash used in investing activities............ (661,283) (6,027,195) (15,680)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of shares........................ 300,000 14,201,671 2,385,970
Proceeds from exercise of warrants and options.......... 205,864 1,179,182 --
Issuance of convertible debentures and warrants net of
financing............................................. 2,500,000 -- 1,776,614
(Decrease) increase in short-term borrowing............. -- (286,000) 286,000
Repayment of long-term leases and other obligations..... (89,675) (87,907) --
------------ ----------- -----------
Net cash provided by financing activities........ 2,916,189 15,006,946 4,448,584
------------ ----------- -----------
Net increase (decrease) in cash.............. (1,958,116) 2,652,393 (24,614)
CASH, beginning of year.................................... 2,683,480 31,087 55,701
------------ ----------- -----------
CASH, end of year.......................................... $ 725,364 $ 2,683,480 $ 31,087
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid........................................... $ 22,331 $ 36,728 $ 36,728
NONCASH TRANSACTIONS:
Common stock issued in connection with
Settlement of customer deposits and payables........ $ -- $ 300,000 $ 396,270
Conversion of debentures............................ -- -- 4,159,322

The accompanying notes are an integral part of these statements.

F-6

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2001, 2000 and 1999

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION:

Description of Business

Dauphin Technology, Inc. ("Dauphin" or the "Company") and its Subsidiaries
design and market mobile hand-held, pen-based computers, broadband set-top
boxes; provide private, interactive cable systems to the extended stay
hospitality industry; and perform design services, specializing in hardware and
software development, out of three locations in northern Illinois, one in
central Florida and its branch office in Piraeus, Greece. Through one of its
subsidiaries, the Company marketed its contract manufacturing services through
July 1999. The Company, an Illinois corporation, was formed on June 6, 1988 and
became a public entity in 1991.

Basis of Presentation

The consolidated financial statements include the accounts of Dauphin and its
wholly owned subsidiaries, R.M. Schultz & Associates, Inc. ("RMS"), Advanced
Digital Designs, Inc. ("ADD") and Suncoast Automation, Inc. ("Suncoast"). All
significant inter-company transactions and balances have been eliminated in
consolidation.

2. REALIZATION OF ASSETS:

The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplate continuation of the company as a going concern. However, the
company has sustained substantial losses from operations in recent years, and
such losses have continued through the unaudited quarter ended March 31, 2002.
Revenues from the Company's design services have declined. In addition, the
company has used, rather than provided, cash in its operations.

In view of the matters described in the preceding paragraph, recoverability of
a major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the company, which in turn is
dependent upon the company's ability to meet its financing requirements on a
continuing basis, to maintain present financing, and to succeed in its future
operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the company be
unable to continue in existence.

Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue in existence: The Company has concentrated its efforts on
marketing its set-top boxes, halted all further development of the next
generation Orasis and are exploring alternative mobile hand-held computer
products through original equipment manufacturers. In January 2002 the
management of the Company began terminating employees who were not a critical
part of the marketing efforts. The facilities in McHenry, which housed the RMS
operations, has been closed, the majority of the personnel have been terminated
and the remaining inventory and equipment will be auctioned in the second
quarter of 2002.

3. 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, 2001 has an accumulated deficit of $59,594,075. The
Company expects to incur operating losses over the near term. The

F-7

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. RISK AND UNCERTAINTIES--(Continued)

Absence of Operating Profit--(Continued)

Company's ability to achieve profitability will depend on many factors
including the Company's ability to market commercially acceptable products
including its set-top box. 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. In 2001, the Company also began
developing a new version of its hand-held computer. 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 and market its products on a timely basis may
have a material adverse effect on the Company's financial results.

4. 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 primarily consist of purchased parts and
assemblies.

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 twenty-five years for building) and
leasehold improvements over the lesser of the lease term or their useful life.

Goodwill and long-lived assets

Goodwill arising from business acquisitions is amortized on a straight-line
basis ranging from five years to ten years. Goodwill associated with the
acquisition of ADD was being amortized on a straight-line basis over 5 years.
Goodwill associated with the acquisition of RMS was being amortized on a
straight-line basis over 10 years. Installation contracts acquired in the
acquisition of Suncoast are being amortized on a straight-line basis over the
term of the contract, typically seven years. Long-lived assets, including
goodwill and other intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. An impairment loss would be recognized when the
carrying amount of an asset exceeds the estimated undiscounted future cash
flows expected to result from the use of the asset and its eventual
disposition. The amount of the impairment loss to be recorded is calculated by
the excess of the asset's carrying value over its fair value. Fair value is
determined using a discounted cash flow analysis. The Company recorded
$1,100,000 and $412,500 of amortization expense during 2001 and 2000,
respectively. At the end of the year, the Company recorded an impairment loss
of $3,987,500 on goodwill and an impairment loss of $290,000 on its investment
in non-marketable securities (See Notes 6 and 13).

F-8

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. SUMMARY OF MAJOR ACCOUNTING POLICIES--(Continued)

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, set-top boxes and assembled products. Revenue from design
services, consulting and intellectual property development is recognized in the
month the services are performed.

(Loss) Per Common Share

Basic loss per common share is calculated by dividing net loss for the year by
the weighted-average number of shares outstanding during the period, which were
63,147,476, 58,711,286 and 46,200,408 for the years ended December 31, 2001,
2000 and 1999, 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

Concentration of Credit Risk

Financial instruments which potentially subject Dauphin to concentrations of
credit risk consist principally of accounts receivable. Generally, credit risk
with respect to accounts receivable is diversified due to the number of
entities comprising Dauphin's customer base. However, one individual customer
accounted for approximately 50% and 53% of total accounts receivable at
December 31, 2001 and 2000, respectively and the same customer accounted for
approximately 45% and 53% of total revenues for the year ended December 31,
2001 and 2000, respectively. Another customer accounted for approximately 42%
of total revenues for the year ended December 31, 2001.

Use of Estimates

The presentation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States
of America 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.

New Accounting Pronouncements

On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No.141 ("SFAS No. 141"), "Business
Combinations", and Statement of Financial Accounting Standards No. 142 ("SFAS
No. 142"), "Goodwill and Intangible Assets". SFAS No. 141 is effective for all
business combinations completed after June 30, 2001. SFAS No. 142 is effective
for fiscal years beginning after December 15, 2001; however, certain provisions
of such Statement apply to goodwill and other intangible assets acquired
between July 1, 2001, and the effective date of SFAS No. 142. Major provisions
of these Statements and their effective dates for the Company are as follows:

1. All business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling of interest method of
accounting is prohibited except for transactions initiated before
July 1, 2001.

F-9

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. SUMMARY OF MAJOR ACCOUNTING POLICIES--(Continued)

New Accounting Pronouncements--(Continued)

2. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented, or exchanged, either individually or as
part of a related contract, asset, or liability.

3. Goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002,
all previously recognized goodwill and intangible assets with indefinite
lives will no longer be subject to amortization.

4. Effective January 1, 2002, goodwill and intangible assets with
indefinite lives will be tested for impairment annually and whenever
there is an impairment indicator.

5. All acquired goodwill must be assigned to reporting units for purposes
of impairment testing and segment reporting.

The Company has written-off the remaining goodwill as of the end of the year in
accordance with SFAS 121, therefore the provisions of SFAS 141 and SFAS 142
will not effect the Company.

During 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, to address significant implementation issues
related to SFAS 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and to develop a single accounting model
to account for long-lived assets to be disposed of. SFAS 144 carries over the
recognition and measurement provisions of SFAS 121. Accordingly, an entity
should recognize an impairment loss if the carrying amount of a long-lived
asset or asset group (a) is not recoverable and (b) exceeds its fair value.
Similar to SFAS 121, SFAS 144 requires an entity to test an asset or asset
group for impairment whenever events or circumstances indicate that its
carrying amount may not be recoverable. SFAS 144 provide guidance on estimating
future cash flows to test recoverability. SFAS 144 includes criteria that have
to be met for an entity to classify a long-lived asset or asset group as held
for sale. However, if the criteria to classify an asset as held for sale are
met after the balance sheet date but before the issuance of the financial
statements, the asset group would continue to be classified as held and used in
those financial statements when issued, which is a change from current
practice. The measurement of a long-lived asset or asset group classified as
held for sale is at the lower of its carrying amount of fair value less cost to
sell. Expected future losses associated with the operations of a long-lived
asset or asset group classified as held for sale are excluded from that
measurement.

SFAS 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and interim periods within those fiscal
years. However, the provisions of SFAS 144 related to assets to be disposed of
are effective for disposal activities initiated by an entity's commitment to a
plan after the effective date or after the Statement are initially applied.

5. INVENTORY

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

2001 2000
---------- ----------

Finished goods................ $ 359,890 $ 88,211
Work in process............... 156,040 156,040
Raw materials................. 2,984,145 2,752,714
---------- ----------
3,500,075 2,996,965
Less--Reserve for obsolescence 2,981,623 2,491,216
---------- ----------
$ 518,452 $ 505,749
========== ==========

F-10

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. INVENTORY--(Continued)

During the fourth quarter of 2001, the Company determined that its current
inventory could not be used in the production of a new version of the
Orasis(R), when it is completed, and therefore adjusted its remaining raw
materials and work in process inventory to an estimated liquidation value. The
Company plans on liquidating this inventory in the second quarter of 2002. The
amount of the write down was $490,000. During the fourth quarter of 2000, the
Company wrote down approximately $1,440,000 of inventory, consisting primarily
of raw materials, and disposed of certain excess and obsolete inventory which
will not be used in the production of the Orasis(R) or the set top box. In
addition, the Company also set up a reserve for obsolescence of approximately
$510,000 to adjust for the net realizable value of the remaining inventory
associated with the Orasis(R). Upon liquidation and disposal of the inventory,
the reserve for obsolescence will be adjusted.

6. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

2001 2000
---------- ----------

Furniture and fixtures......................... $ 249,007 $ 89,084
Office equipment............................... 480,765 374,732
Manufacturing and warehouse equipment.......... 1,039,282 624,690
Leasehold improvements......................... 131,780 407,186
Plastic molds for the Orasis(R)................ -- 696,862
Building....................................... 400,000 400,000
Automobile..................................... -- 12,273
---------- ----------
2,300,834 2,604,827
Less--Accumulated depreciation and amortization 475,899 1,127,040
---------- ----------
$1,824,935 $1,477,787
========== ==========

During the fourth quarter of 2001, the Company decided to terminate its
operations at the facilities in McHenry, Illinois and liquidate the remaining
assets. The property and equipment at this facility were written down to an
estimated liquidation value. The result was a write down of obsolete assets of
$221,000. In addition, in the fourth quarter the Company concluded that the
plastic molds for the Orasis(R) were deemed unusable in the development and
production of a new version of the Orasis(R) and were written off, resulting in
a charge of approximately $305,000. The remaining liquidation value of the
assets has been reclassified to Assets not used in the Business.

7. 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 was carried on the books at cost. The Company recorded dividend
income of approximately $26,000 in 2000. Dividends were discontinued in 2001.
The Company has determined that due to the discontinuance of dividends and the
poor financial condition of the company, the carrying value has been impaired.
Therefore the Company wrote off the investment in 2001 in the amount of
$290,000 and the expense is included in the asset impairment loss in the
statement of operations.

F-11

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. LONG-TERM DEBT

As of December 31, 2001, the fair value of long-term debt approximates its book
value. At December 31, long-term liabilities consist of:

2001 2000
-------- --------

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 October 1, 2004................................................. $ 69,073 $ 89,508
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 October 15, 2003................... 52,891 92,575
PACJETS Financial Ltd. furniture lease payable in equal monthly installments over 36
months. The lease carries a 23% annual interest rate and was due on November 15,
2000. The lease was collateralized by the furniture and has a one-dollar buy-out option. -- 23,269
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 October 2002 and carry interest rates
ranging from 9% to 18%.................................................................. 4,123 10,410
-------- --------
Total long-term liabilities........................................................ 126,087 215,762
Less short-term.................................................................... 82,507 113,629
-------- --------
Total long-term................................................................. $ 43,580 $102,133
======== ========

Future minimum debt payments are as follows:

Year Amount Due
---- ----------

2002........... $ 82,507
2003........... 24,343
2004........... 19,237
--------
Total long-term debt $126,087
========

9. CONVERTIBLE DEBT AND WARRANTS

F-12

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. CONVERTIBLE DEBT AND WARRANTS--(Continued)

a 24-month period. Individual sales are limited to $1.5 million, or a higher
amount if agreed to by the Company and Crescent, and each sale is subject to
our satisfaction of the following conditions precedent (none of which are
within the control of Crescent): (1) the Company's representations and
warranties must be true and complete, (2) the Company must have one or more
then currently effective registration statements covering the resale by
Crescent of all shares issued in prior sales to Crescent and issuable upon the
conversion of the Convertible Note, (3) there must be no dispute as to the
adequacy of disclosures made in any such registration statement, (4) such
registration statements must not be subject to any stop order, suspension or
withdrawal, (5) the Company must have performed its covenants and obligations
under the Securities Purchase Agreement, (6) no statute, rule, regulation,
executive order, decree, ruling or injunction may have been enacted, entered,
promulgated or adopted by any court of governmental authority that would
prohibit the Company's performance under the Securities Purchase Agreement, (7)
the company's common stock must not have been delisted from its principal
trading market and there must be no trading suspension of its common stock in
effect, and (8) the issuance of the designated number of shares of common stock
with respect to the applicable sale must not violate the shareholder approval
requirements of the Company's principal trading market. The aggregate amount of
all sale shares and convertible notes issued cannot exceed $10 million. The
amount of the sale is limited to twice the average of the bid price multiplied
by the trading volume during the 22 trading day period immediately preceding
the date of sale. When the total amount of securities issued to Crescent equals
or exceeds $5 million, then the Company shall issue to Crescent a subsequent
incentive warrant exercisable to purchase 400,000 shares of common stock at a
price equal to the bid price on the date the incentive warrant is issued.

The Convertible Note was funded on October 2, 2001 and is due September 28,
2004. The Company shall not be required to pay interest on the Convertible Note
unless the Company fails to deliver shares upon conversion. In such event, the
Note will bear an interest rate of 8.0% per annum, payable in quarterly
installments. The Company has recorded a beneficial conversion feature on the
Convertible Note and Warrants based on the fair value of the common stock of
$0.99 per share as of the date of commitment. The Warrants with an exercise
price of $1.3064 per share, are valued using the Black-Scholes valuation
method, and are recorded at $684,600. The beneficial conversion feature is
calculated to be $914,279 and has been recorded as Additional Paid in Capital
and a discount to the Convertible Note. The beneficial conversion feature is
being amortized over three years, the life of the Note. For the year ended
December 31, 2001, the Company recognized $252,076 as interest expense on the
amortization of the beneficial conversion feature. At conversion, the Company
may record an additional beneficial conversion based on the market price of the
stock at the conversion date.

On March 30, 1999, the Company signed an agreement with Augustine Funds, LP
("Augustine"), an accredited investor operated by Augustine Capital Management.
Augustine 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. B) 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.
Augustine 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 1999, the Company received the funds and subsequently deposited an
additional 400,000 shares into an escrow account to compensate for the decline
in share price. In May 1999, the note was converted into common stock and the
escrow account was disbursed to Augustine. The agreement with Augustine was
then cancelled.

F-13

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. STOCK-BASED COMPENSATION

In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation" the
Company has elected to continue to account for stock compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". During 2001 and 2000, the Company issued non-qualified stock
options to purchase 1,496,164 and 3,921,832 shares of common stock,
respectively, to certain key employees at exercise prices ranging from $0.50 to
$3.875 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, 2001 and 2000 pro forma earnings per share
would have been:

December 31, 2001 December 31, 2000
----------------- -----------------

Net loss as reported (000's)................ $(13,252) $ (7,515)
Pro forma net loss for Statement 123 (000's) (15,232) (11,320)
Basic loss per common share as reported..... (0.21) (0.13)
Pro forma basic loss per common share....... (0.24) (0.19)
Diluted loss per common share as reported... (0.21) (0.13)
Pro forma diluted loss per common share..... (0.24) (0.19)

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, 2001 December 31, 2000
----------------- -----------------

Dividend yield......... 0.0% 0.0%
Risk-free interest rate 5.0% 6.0%
Volatility factor...... 433% 224%
Expected life in years. 2.75 2.60

Information regarding these options for 2001 and 2000 is as follows:

2001 2000
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------------- -------- ----------------- --------

Options outstanding beginning of year......... 3,913,332 $1.1658 50,000 $0.6563
Options exercised............................. (35,600) 0.8023 (2,000) 0.5000
Options granted............................... 1,496,164 1.9679 3,921,832 1.1644
Options forfeited............................. -- -- (56,500) 0.6604
----------------- ------- ----------------- -------
Options outstanding at year end............... 5,373,896 $1.3913 3,913,332 $1.1658
Weighted average fair value of options granted
during the year............................. $ 1.9679 $ 1.0316
Options exercisable at year end............... 5,373,896 3,913,332
Option price range at year end................ $0.50 to $4.3125 $0.50 to $4.3125

F-14

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. STOCK-BASED COMPENSATION--(Continued)

The following table summarizes information about the options outstanding at
December 31, 2001 and 2000:

$0.5000........ 1,084,500 1.02 $0.5000 1,084,500 $0.5000
$0.7600........ 3,750 2.92 $0.7600 3,750 $0.7600
$0.7812........ 1,810,000 1.97 $0.7812 1,810,000 $0.7812
$0.8700........ 16,000 2.88 $0.8700 16,000 $0.8700
$0.8900........ 139,066 2.88 $0.8900 139,066 $0.8900
$0.9531........ 25,000 1.98 $0.9531 25,000 $0.9531
$0.9800........ 50,000 2.75 $0.9800 50,000 $0.9800
$1.0000........ 416,000 1.09 $1.0000 416,000 $ 1.000
$1.0500........ 25,000 2.98 $1.0500 25,000 $ 1.050
$1.0800........ 240,000 2.68 $1.0800 240,000 $ 1.080
$1.1562........ 25,000 2.79 $1.1562 25,000 $1.1562
$1.1600........ 50,000 2.84 $1.1600 50,000 $1.1600
$1.1900........ 3,750 2.67 $1.1900 3,750 $1.1900
$1.3100........ 20,000 2.32 $1.3100 20,000 $1.3100
$1.3700........ 10,000 2.75 $1.3700 10,000 $1.3700
$1.4100........ 166,666 2.63 $1.4100 166,666 $1.4100
$1.4600........ 200,000 2.50 $1.4600 200,000 $1.4600
$1.5156........ 25,000 2.23 $1.5156 25,000 $1.5156
$2.7500........ 142,500 2.29 $2.7500 142,500 $2.7500
$3.5938........ 230,000 1.73 $3.5938 230,000 $3.5938
$3.8750........ 666,664 2.00 $3.8750 666,664 $3.8750
$4.3125........ 25,000 1.73 $4.3125 25,000 $4.3125
--------- ---- ------- --------- -------
Total for 2001. 5,373,896 1.84 $1.3913 5,373,896 $1.3913

Options Outstanding Options Exercisable
- --------------------------------------------------------- ------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- --------- ---------------- -------------- --------- --------------
$0.5000........ 1,092,500 2.02 $0.5000 1,092,500 $0.5000
$0.7812........ 1,810,000 2.97 $0.7812 1,810,000 $0.7812
$0.9531........ 25,000 2.99 $0.9531 25,000 $0.9531
$1.0000........ 400,000 2.02 $1.0000 400,000 $1.0000
$2.7500........ 47,500 2.80 $2.7500 47,500 $2.7500
$3.5938........ 180,000 2.61 $3.5938 180,000 $3.5938
$3.8750........ 333,332 2.76 $3.8750 333,332 $3.8750
$4.3125........ 25,000 2.74 $4.3125 25,000 $4.3125
--------- ---- ------- --------- -------
Total for 2000. 3,913,332 2.60 $1.1658 3,913,332 $1.1658

11. WARRANTS

During 2001 and 2000, the Company issued warrants to purchase 983,672 and
6,309,972 shares of common stock, respectively, to certain investors at
exercise prices ranging from $0.20 to $5.481 per share (approximating

F-15

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. WARRANTS--(Continued)

the market price at date of grant). The warrants expire in three to five years.
The warrants issued to consultants are measured at fair value and recorded as
expense, while the warrants issued in capital raising are measured in fair
value and recorded as an allocation of the capital received. The warrants are
recorded at the fair value estimated on the date of grant based on the
Black-Scholes single-option-pricing model:

December 31, December 31,
2001 2000
------------ ------------

Dividend yield......... 0.0% 0.0%
Risk-free interest rate 5.0% 6.0%
Volatility factor...... 433% 224%
Expected life in years. 2.75 2.60

Information regarding these warrants for 2001 and 2000 is as follows:

2001 2000
-------- --------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- - ---------------- -------- ---------------- --------

Warrants outstanding beginning of year........ 8,522,572 $2.0809 4,221,958 $0.7258
Warrants exercised............................ (285,000) 0.6221 (2,009,358) 0.6366
Warrants granted.............................. 983,672 1.3316 6,309,972 2.5264
Warrants expired.............................. (22,500) 1.3896 -- --
---------------- ------- ---------------- -------
Warrants outstanding at year end.............. 9,198,744 $2.0477 8,522,572 $2.0809
Weighted average fair value of options granted
during the year............................. $ 1.3316 $ 2.5264
Warrants exercisable at year end.............. 9,198,744 8,522,572
Warrant price range at year end............... $0.20 to $5.481 $0.20 to $5.481

F-16

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. WARRANTS--(Continued)

The following table summarizes information about the warrants outstanding at
December 31, 2001 and 2000:

Warrants Outstanding Warrants Exercisable
- --------------------------------------------------------- ------------------------
Range of Number of Weighted Avg. Weighted Avg. Number of Weighted Avg.
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------- --------- ---------------- -------------- --------- --------------

$0.2000........ 60,000 0.97 $0.2000 60,000 $0.2000
$0.2300........ 125,000 0.66 $0.2300 125,000 $0.2300
$0.2500........ 924,000 1.01 $0.2500 924,000 $0.2500
$0.3500........ 125,000 2.66 $0.3500 125,000 $0.3500
$0.4600........ 220,100 2.53 $0.4600 220,100 $0.4600
$0.5000........ 877,863 0.77 $0.5000 877,863 $0.5000
$0.5500........ 150,000 0.34 $0.5500 150,000 $0.5500
$0.6000........ 50,000 0.16 $0.6000 50,000 $0.6000
$1.0000........ 840,000 1.21 $1.0000 840,000 $1.0000
$1.3064........ 700,000 4.74 $1.3064 700,000 $1.3064
$1.0312........ 125,000 1.99 $1.0312 125,000 $1.0312
$1.1000........ 200,000 2.20 $1.1000 200,000 $1.1000
$1.1452........ 22,006 2.72 $1.1452 22,006 $1.1452
$1.2500........ 35,000 1.96 $1.2500 35,000 $1.2500
$1.3600........ 70,000 2.31 $1.3600 70,000 $1.3600
$1.5000........ 666,666 1.47 $1.5000 666,666 $1.5000
$2.0000........ 1,806,000 1.04 $2.0000 1,806,000 $2.0000
$3.2668........ 25,714 1.88 $3.2668 25,714 $3.2668
$4.0579........ 51,751 1.62 $4.0579 51,751 $4.0579
$4.2244........ 49,712 1.66 $4.2244 49,712 $4.2244
$4.4369........ 18,932 1.84 $4.4369 18,932 $4.4369
$5.0000........ 1,806,000 1.04 $5.0000 1,806,000 $5.0000
$5.4810........ 250,000 1.27 $5.4810 250,000 $5.4810
--------- ---- ------- --------- -------
Total for 2001. 9,198,744 1.45 $2.0477 9,198,744 $2.0477

$0.2000........ 60,000 1.97 $0.2000 60,000 $0.2000
$0.2300........ 135,000 1.66 $0.2300 135,000 $0.2300
$0.2500........ 924,000 2.01 $0.2500 924,000 $0.2500
$0.3500........ 125,000 3.66 $0.3500 125,000 $0.3500
$0.4600........ 220,100 3.53 $0.4600 220,100 $0.4600
$0.5000........ 1,077,863 1.77 $0.5000 1,077,863 $0.5000
$0.5500........ 150,000 1.34 $0.5500 150,000 $0.5500
$0.6000........ 50,000 1.16 $0.6000 50,000 $0.6000
$1.0000........ 890,000 2.11 $1.0000 890,000 $1.0000
$1.0312........ 125,000 2.99 $1.0312 125,000 $1.0312
$1.1000........ 200,000 3.20 $1.1000 200,000 $1.1000
$1.2500........ 35,000 2.96 $1.2500 35,000 $1.2500
$1.2938........ 15,000 0.36 $1.2938 15,000 $1.2938
$1.5000........ 500,000 1.03 $1.5000 666,666 $1.5000
$1.5813........ 7,500 0.54 $1.5813 7,500 $1.5813
$2.0000........ 1,806,000 2.04 $2.0000 1,806,000 $2.0000
$3.2668........ 25,714 2.88 $3.2668 25,714 $3.2668
$4.0579........ 51,751 2.62 $4.0579 51,751 $4.0579
$4.2244........ 49,712 2.66 $4.2244 49,712 $4.2244
$4.4369........ 18,932 2.84 $4.4369 18,932 $4.4369
$5.0000........ 1,806,000 2.04 $5.0000 1,806,000 $5.0000
$5.4810........ 250,000 2.27 $5.4810 250,000 $5.4810
--------- ---- ------- --------- -------
Total for 2000. 8,522,572 2.05 $2.0809 8,522,572 $2.0809

F-17

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. WARRANTS--(Continued)

In December 2000, the Company re-priced approximately 3,012,000 warrants it had
previously issued to outside consultants. The warrants were originally issued
with an exercise price ranging from $10.00 to $5.00, and were re-priced with
exercise prices ranging from $5.00 to $2.00 per share. The re-pricing created a
charge to earnings of approximately $234,000, which was calculated using the
Black-Scholes pricing model assuming 0% dividend yield, risk free interest rate
of 6%, volatility factor of 224% and an expected life of 2.6 years.

12. 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 years 2001, 2000 and 1999, 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.

13. IMPAIRMENT OF ASSETS

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 there is an indication of impairment, the
carrying amount of the goodwill is reduced to its fair value. During the fourth
quarter of 2001 the Company determined that the set-top box design was
completed and the design services business with outside customers was
declining, therefore an impairment of the goodwill associated with the
acquisition of ADD occurred. The Company revised its projections and determined
that the projected results would not fully support the goodwill balance. In
accordance with the Company policy, management assessed the recoverability of
goodwill using a cash flow projection based on the remaining amortization
period of three and three quarter years. Based on this projection, the
cumulative cash flow over the remaining period was insufficient to fully
recover the goodwill. The Company estimated there was no value and the
remaining goodwill of $3,987,500 was written off.

In addition, the Company determined that the carrying value of its investment
in non-marketable securities had been impaired since the investment had
discontinued paying dividends in 2001 and due to the overall poor financial
condition of the company. Therefore, the Company wrote off its investment in
the amount of $290,000.

During the fourth quarter of 2001, the Company decided to terminate its
operations at the facilities in McHenry, Illinois and liquidate the remaining
assets. The property and equipment at this facility were written down to an
estimated liquidation value. The result was a total write down of obsolete
assets of $221,000. In addition, during the fourth quarter the Company
concluded that the plastic molds for the Orasis(R) were deemed unusable in the
development and production of a new version of the Orasis(R) and the remaining
undepreciated value of approximately $305,000 was written off.

During the third quarter of 1999 the Company experienced an impairment of the
goodwill associated with the acquisition of RMS, when an estimated cash flow
from the operating unit dramatically decreased. The Company recorded $767,475
as an expense during 1999.

14. 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:

2001 2000 1999
----------- ----------- -----------

U.S. federal statutory rate applied to pretax loss $(4,117,158) $(2,379,856) $(2,143,858)
Permanent differences and adjustments............. 25,269 33,112 785,739
Net operating losses not recognized............... 4,091,889 2,346,744 1,358,119
----------- ----------- -----------
Income tax provision....................... $ -- $ -- $ --
=========== =========== ===========

F-18

Dauphine Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

14. INCOME TAXES--(Continued)

As of December 31, 2001 and 2000, the Company had generated deferred tax assets
as follows:

December 31,
------------------------
2001 2000
----------- -----------

Gross deferred tax assets--
Net operating loss (NOL) carryforward. $47,019,457 $33,295,253
Reserves for inventory obsolescence... 2,981,623 2,491,216
Bad debt reserve...................... 50,621 50,621
Depreciation.......................... 86,704 39,349
Goodwill.............................. -- 275,000
Asset Impairment...................... 290,000 --
Assets not used in business........... 525,691 --
Other timing differences.............. 10,200 10,200
----------- -----------
50,964,296 36,161,639
Current federal statutory rate........ 34% 34%
----------- -----------
Deferred tax assets............ 17,327,861 12,294,957
Less valuation allowance.............. 17,327,861 12,294,957
----------- -----------
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. A valuation
allowance of $17,327,861 and $12,294,957 at December 31, 2001 and 2000,
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.

15. BUSINESS SEGMENTS:

The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". During 2001, the Company has three
reportable segments: Dauphin Technology, Inc., ("Dauphin"), Advanced Digital
Designs, Inc. ("ADD") and Suncoast Automation, Inc. ("Suncoast"). During 2000,
the Company had two reportable segments: Dauphin and ADD. During 1999, the
Company had two reportable segments: Dauphin and R.M. Schultz & Associates,
Inc. ("RMS"). Dauphin is involved in design, manufacturing and distribution of
hand-held pen-based computer systems and accessories. ADD is a design
engineering company performing design services, process methodology consulting
and intellectual property development. Suncoast provides private, interactive
cable systems to the hospitality industry. RMS was an electronic contract
manufacturing firm. The operations of RMS were terminated in 1999 because the
entity was not profitable and used, rather than provided, cash in its
operations.

F-19

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

15. BUSINESS SEGMENTS--(Continued)

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).

2001 2000 1999
------------ ------------ -----------

Revenue
Dauphin................... $ 1,138,858 $ 63,913 $ 273,544
RMS....................... -- -- 2,134,563
ADD....................... 2,668,599 984,674 --
Suncoast.................. 135,187 -- --
Inter-company elimination. (1,322,437) (188,750) (129,049)
------------ ------------ -----------
Total................. 2,620,207 859,837 2,279,058
Operating (Loss)
Dauphin................... (13,851,651) (7,523,421) (2,947,396)
RMS....................... -- -- (4,286,231)
ADD....................... (186,196) (195,911) --
Suncoast.................. (488,607) -- --
Inter-company elimination. 1,322,437 188,750 (4,298)
------------ ------------ -----------
Total................. (13,204,017) (7,530,582) (7,237,925)
Assets
Dauphin................... 17,355,029 17,794,438 6,443,079
RMS....................... 106,116 598,782 2,156,937
ADD....................... 2,699,250 6,735,372 --
Suncoast.................. 1,702,791 -- --
Inter-company elimination. (17,945,762) (13,967,815) (5,227,862)
------------ ------------ -----------
Total................. 3,917,424 11,160,777 3,372,154
Capital Expenditures
Dauphin................... 377,590 2,195 18,544
RMS....................... -- -- 7,136
ADD....................... -- -- --
Suncoast.................. 283,693 -- --
------------ ------------ -----------
Total................. 661,283 2,195 25,680

16. COMMITMENTS AND CONTINGENCIES:

The Company conducts its operations from facilities which are rented under
non-cancelable operating leases. The leases on these facilities expire
throughout 2002 and contain renewal options and escalation clauses. Minimum
rental payments for 2002 amount to approximately $210,000, including real
estate taxes. Total rental expense was approximately $376,000, $294,000 and
$300,000 for 2001, 2000 and 1999 respectively.

During 2001 and through the date of this report, the Company has been engaged
in various legal proceedings. Management believes that any existing litigation
would not be material to the overall financial condition of the Company.

F-20

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

17. 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
and development of the new version of the Orasis(R) and assisted the Company in
the design of the set-top box. The Company paid $72,573 in 2001 for such
services.

RMS facilities are leased from Enclave Corporation, a company that is owned by
the former President of RMS whose contract with the Company was terminated on
May 14, 1999. The Company paid $182,337 of rent and $32,380 in real estate
taxes or the property lease in 2001, $179,468 of rent and $30,206 of real
estate taxes for the property lease in 2000 and $179,684 of rent and $24,150 of
real estate taxes for 1999.

18. EQUITY TRANSACTIONS

2001 Transactions

During the first quarter of 2001, the Company received proceeds in the amount
of $102,300 for the exercise of 210,000 warrants. Additionally, employees
exercised 4,000 stock options at a price of $.50 per share.

During the second quarter of 2001, employees exercised 4,000 stock options at a
price of $.50 per share

In April 2001, the Company issued to certain consultants 30,000 shares of
common stock and warrants to purchase 70,000 shares of common stock at an
exercise price of $1.36 per share, as payment for certain promotional and
consulting services. In September 2001, the Company issued additional warrants
to purchase 16,666 shares of common stock at an exercise price of $1.395 per
share to finalize the arrangement with the consultants.

Effective July 1, 2001, the Company completed the acquisition of substantially
all of the assets of Suncoast Automation, Inc., a wholly owned subsidiary of
ProtoSource Corporation, pursuant to an Asset Purchase Agreement. The purchase
price was 766,058 shares of the Company's common stock valued at approximately
$1.1 million based on the closing bid price of $1.47 per share on June 29, 2001.

During the third quarter of 2001, the Company received proceeds in the amount
of $75,000 for the exercise of 75,000 warrants.

On August 14, 2001 the Company issued a drawdown notice in connection with the
common stock purchase agreement with Techrich International for $300,000. Upon
receipt of the funds, the Company issued 258,968 shares of common stock and
warrants to purchase 22,006 shares of common stock at an exercise price of
$1.14516.

On September 13, 2001 the Company filed with the Securities and Exchange
Commission a Form S-3 registration statement relating to 6,964,724 shares of
common stock. The shares were issued by the Company in respect of the
following: (i) 766,058 shares were issued by the Company in connection with the
acquisition of the net assets of Suncoast; (ii) 52,000 shares were issued by
the Company as payment for certain advertising and promotional expenses and
consulting services; and (iii) 6,146,666 shares issuable by the Company to
shareholders upon the exercise by them of issued and outstanding warrants and
options. On September 27, 2001, the Securities and Exchange Commission declared
the registration statement effective.

During the fourth quarter of 2001, employees exercised 27,600 stock options at
a price of $.89 per share.

F-21

Dauphine Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

18. EQUITY TRANSACTIONS--(Continued)

2001 Transactions--(Continued)

In November 2001, the Company issued warrants to purchase 175,000 shares of
common stock at exercise prices ranging from $1.00 to $1.50, as payment for
certain advertising and promotional expenses.

On November 19, 2001 the Company filed with the Securities and Exchange
Commission a Form S-1 registration statement relating to 4,000,000 shares of
common stock to be issued upon the conversion of the Convertible Note (see Note
9). This registration statement is still pending approval by the Securities and
Exchange Commission.

Personal Guarantee

On April 3, 2001, the Company and Estel Telecommunications S.A. cancelled the
performance bond issued on October 26, 2000 and the 1,550,000 shares of
restricted stock held by Best S.A. were returned to the Company. In connection
with the cancellation of the shares, Best S.A. executed the personal guarantee
of Mr. Andrew J. Kandalepas, which he had granted to secure the performance of
the Company's obligation to register the 1,550,000 shares issued in connection
with the performance bond and retained the 1,032,118 shares. The set-top box
agreement with Estel Telecommunications S.A. terminated on July 1, 2001 due to
lack of performance on behalf of Estel. This transaction was entered into on
behalf of the Company and therefore the Company recorded an expense of
$1,241,741, with an offsetting entry to additional paid in capital.

On December 20, 2001, the Board of Directors approved the issuance of 1,032,118
shares to the Chairman of the Board and CEO of the Company to replace the
shares that Best S.A. retained under the personal guarantee. The shares were
valued at $1,241,741 based on the closing price of $1.20 on April 3, 2001.

2000 Transactions

During the first and second quarter of 2000, the Company conducted a private
placement of 4,654,613 common shares and approximately 1,300,000 warrants to a
group of accredited investors in exchange for approximately $7,300,000. The
proceeds were used to settle the majority of trade payables, for day-to-day
operations and to start the development of the set-top box.

In January 2000, the Company issued 480,000 shares to a customer in exchange
for cancellation of $300,000 of customer deposits.

In January 2000, the Company issued warrants to an investment banker, for
services rendered, to purchase 350,000 shares at an exercise price of $1.00.

In January 2000, the Company issued 500,000 shares to a consulting firm for
services rendered in relation to the set-top box agreement with Estel
Telecommunications S.A.
In April 2000, the Company completed its private placement and issued 3,630,000
warrants to an investment banker in lieu of consulting fees.

On April 26, 2000, the Company completed a common stock purchase agreement,
escrow agreement and registration rights agreement with Techrich International
Limited ("Techrich"). These agreements provide a $100,000,000 equity line of
credit as the Company requests over an 18 month period, in return for common
stock

F-22

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

18. EQUITY TRANSACTIONS--(Continued)

2000 Transactions--(Continued)

and warrants to be issued to the investor. Once every 22 days, the Company may
request a draw of up to $10,000,000 of that money, subject to a maximum of 18
draws. The maximum amount the Company actually can draw down upon each request
will be determined by the volume-weighted average daily price of the Company's
common stock for the 22 trading days prior to its request and the average
trading volume for the 45 trading days prior to the request. Each draw down
must be for at least $250,000. Use of a 22 day trading average was negotiated
to reduce the impact of market price fluctuations over any calendar month,
which generally includes 22 trading days. At the end of a 22-day trading period
following the drawdown request, the amount of shares is determined based on the
volume-weighted average stock price during that 22-day period in accordance
with the formulas in the common stock purchase agreement.

On April 28, 2000, the Company filed with the Securities and Exchange
Commission a Form S-1 registration statement relating to 15,332,560 shares of
common stock issued to stockholders in private transactions, 11,958,963 shares
for other stockholders, and 6,000,000 shares to be issued when the Company
requests a drawdown under the common stock purchase agreement referred to above.

On July 28, 2000, the Securities and Exchange Commission declared the
registration statement effective. Pursuant to the common stock purchase
agreement with Techrich, the Company issued as a placement fee warrants to
purchase 250,000 shares of common stock at an exercise price of $5.481.

On July 31, 2000, the Company issued a drawdown notice in connection with the
common stock purchase agreement with Techrich for $5,000,000. Upon receipt of
the funds, the Company issued 1,354,617 shares of common stock and warrants to
purchase 101,463 shares of common stock at exercise prices ranging from $4.06
to $4.22.

In September 2000, the Company issued 73,750 stock options to certain employees
under employment agreements. At the time of issuance, the option price was
below the market price and the Company recorded $70,622 as additional
compensation expense.

On October 17, 2000, the Company issued a drawdown notice in connection with
the common stock purchase agreement with Techrich for $2,000,000. Upon receipt
of the funds, the Company issued 781,999 shares of common stock and warrants to
purchase 44,646 shares of common stock at exercise prices ranging from $3.26676
to $4.4369.

On October 20, 2000 the Company entered into an agreement with Best S.A. to act
as its distributor/agent in Greece. On October 26, 2000 the Company issued
1,550,000 shares of restricted stock to Best S.A. as a performance bond to
assure the Company's compliance with the Set-Top Box Agreement by and between
the Company and Estel S.A. These shares have not been included in the issued
and outstanding shares as of December 31, 2000, as Best S.A. has acknowledged
that they would return the shares to the Company upon satisfactory compliance
with the Set-Top Box Agreement. The agreement with Best S.A. requires the
Company to register these shares with the Securities and Exchange Commission
during 2000. To secure performance of the Company's obligation to register
these shares, Andrew J. Kandalepas, Chairman of the Board and CEO of the
Company, granted to Best S.A. a security interest in 1,032,118 shares of
Company stock owned by him.

In December 2000, the Company issued 22,000 shares of common stock and warrants
to purchase 148,265 shares of common stock at exercise prices ranging from
$1.0312 to $1.25, as payment for certain advertising and promotional expenses
and consulting services related to the establishment of an office in Europe.

F-23

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

18. EQUITY TRANSACTIONS--(Continued)

2000 Transactions--(Continued)

1999 Transactions

In January and April 1999, the Company issued a total of 46,373 shares under an
employment contract with Richard M. Schultz, former President of RMS. 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 Augustine Funds LP
("Augustine"), an accredited investor operated by Augustine Capital Management,
where Augustine 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, Augustine 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 Augustine. The
agreement with Augustine has been cancelled.

F-24

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

18. EQUITY TRANSACTIONS--(Continued)

1999 Transactions--(Continued)

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 Crescent
International Ltd. ("Crescent"), an investment company managed by GreenLight
(Switzerland) SA, which allows the Company and obligates Crescent to purchase
shares from the Company based on terms and conditions outlined in the
agreement. In total Crescent agreed to purchase up to $2,250,000 of the common
stock within the next twenty-four months. Crescent 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 Crescent 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, Crescent 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 Crescent 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 with Crescent.

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

F-25

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

18. EQUITY TRANSACTIONS--(Continued)

1999 Transactions--(Continued)

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.

19. ACQUISITIONS:

On July 1, 2001, the Company acquired substantially all of the assets of
Suncoast Automation, Inc. The purchase price was 766,058 shares of the
Company's common stock valued at $1,126,105 based on the closing bid price of
$1.47 per share on June 29, 2001. The transaction was accounted for under the
purchase method of accounting. The purchase price, was allocated as follows:

Accounts Receivable... $ 14,669
Inventory............. 113,054
Prepaid expenses...... 24,326
Equipment............. 794,170
Installation contracts 320,000
----------
1,266,105
Less Accounts payable. 140,114
----------
Total................. $1,126,105
==========

Pro Forma operating results as if the acquisition had occurred at the beginning
of the respective years ending December 31, 2001 and 2000, as required under
Financial Accounting Standards No. 141, Business Combinations, are as follows:

2001 2000
------------ -----------

Revenue........... $ 2,620,207 $ 1,064,676
Operating loss.... (13,652,231) (8,489,753)
Net loss.......... (13,702,198) (8,365,215)
Net loss per share
Basic.......... $ (0.22) $ (0.14)
Diluted........ $ (0.22) $ (0.14)

F-26

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

19. ACQUISITIONS--(Continued)

On August 28, 2000, the Company acquired T & B Designs, Inc. (formerly known as
Advanced Digital Designs, Inc.), Advanced Technologies, Inc. and 937 Plum Grove
Road Partnership in exchange for $3 million in cash and $3 million to be held
in escrow and disbursed in accordance with the terms and conditions of an
Escrow Agreement. The transaction was accounted for under the purchase method
of accounting. Goodwill was recorded and is to be amortized under the
straight-line method over a 5-year period.

The purchase price, plus direct costs of the acquisition, were allocated as
follows:

Building............................... $ 400,000
Computer equipment..................... 110,000
Other equipment........................ 15,000
Excess of Cost over Net Assets Acquired 5,500,000
----------
Total............................... $6,025,000
==========

Pro Forma operating results as if the acquisition had occurred at the beginning
of the respective years ending December 31, 2000 and 1999, as required under
APB 16 (Accounting Principles Board Opinion number 16, regarding Business
Combinations), are as follows:

2000 1999
----------- -----------

Revenue........... $ 3,548,801 $ 5,513,493
Operating loss.... (7,023,058) (6,594,083)
Net loss.......... (8,253,941) (8,650,289)
Net loss per share
Basic.......... $ (0.14) $ (0.19)
Diluted........ $ (0.14) $ (0.19)

20. RESTATEMENT:

Selling, general and administrative expenses, interest expense, net loss and
per share amounts have been adjusted from previously reported amounts to offset
the difference between the quoted market price and the proceeds from stock
sales under a private placement in the first quarter of 2000 against additional
paid in capital rather than interest expense amounting to $1,302,383 ($0.02 per
share).

F-27

Dauphin Technology, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

21. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

A summary of selected quarterly information for 2001 and 2000 is as follows:

2001 Quarter Ended
-------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
----------- ----------- ----------- -----------

Revenues........... $ 445,154 $ 382,087 $ 421,544 $ 1,371,422
Gross Profit (Loss) 116,569 67,272 50,737 (359,370)
Net Loss........... (1,015,162) (3,070,590)* (1,405,379) (7,761,229)
Net Loss per share
Basic........... $ (0.02) $ (0.05)* $ (0.02) $ (0.12)
Diluted......... $ (0.02) $ (0.05)* $ (0.02) $ (0.12)

2000 Quarter Ended
-------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
----------- ----------- ----------- -----------
Revenues........... $ 4,736 $ 11,305 $ 344,975 $ 498,821
Gross Profit (Loss) 238,886 (346,256) 27,747 (1,936,167)
Net Loss........... (2,312,421)** (1,249,631) (1,173,789)** (4,081,521)
Net Loss per share
Basic........... $ (0.04)** $ (0.02) $ (0.02)** $ (0.07)
Diluted......... $ (0.04)** $ (0.02) $ (0.02)** $ (0.07)

- --------
* Net loss and per share amounts for the quarter ended June 30, 2001 have been
adjusted from previously reported amounts to reflect the issuance of
1,032,118 shares of common stock to the Chairman of the Board and CEO of the
Company to replace shares issued under a personal guarantee amounting to
$1,241,741 (0.02 per share).

** Net loss and per share amounts for the quarters ended March 31, 2000 and
September 30, 2000 have been adjusted from previously reported amounts to
offset the difference between the quoted market price and the proceeds from
stock sales under the private placement against additional paid in capital
rather than interest expense amounting to $1,721,939 ($0.03 per share) for
the quarter ended March 31, 2000 and $343,416 ($0.01 per share) for the
quarter ended September 30, 2000.

F-28

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 Subsidiaries referred to in our report dated
April 10, 2002, which is included on page F-2 of this Form 10-K, we have also
audited Schedule II for the years ended December 31, 2001, 2000 and 1999. In
our opinion, this schedule, when considered in relation to the basic
consolidated financial statements taken as a whole presents fairly, in all
material respects, the information required to be set forth therein.

GRANT THORNTON LLP

Chicago, Illinois
April 9, 2002

F-29

SCHEDULE II

DAUPHIN TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS

Balance at Charged to Balance at
Beginning Costs & End of
Description Of Period Expenses Deductions Period
- ----------- ---------- ---------- ---------- ----------

Year ended December 31, 2001
Allowance for doubtful accounts. $ 50,621 $ -- $ -- $ 50,621
Reserve for obsolete inventory.. 2,491,216 490,407 -- 2,981,623
Year ended December 31, 2000
Allowance for doubtful accounts. $ 428,599 $ 74,342 $ 452,320 $ 50,621
Reserve for obsolete inventory.. 1,945,296 1,950,000 1,404,080 2,491,216
Year ended December 31, 1999
Allowance for doubtful accounts. $ 11,238 $ 417,361 $ -- $ 428,599
Reserve for obsolete inventory.. 152,000 1,793,296 -- 1,945,296

- --------
Notes:

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

F-30