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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                              Washington, DC 20549
                                    FORM 10-K

[X]      Annual Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934 for the Fiscal Year ended December 31, 1997

                                       OR

[ ]      Transition Report Pursuant to Section 13 or 15(d) of the Securities
         Exchange Act of 1934

                         Commission file number 0-6272

                                   DATUM INC.

             (Exact name of Registrant as specified in its charter)

          Delaware                                   95-2512237
(State or other jurisdiction                      (I.R.S. Employer
of incorporation or organization)                 Identification No.)

                    9975 Toledo Way, Irvine, California 92618
                    (Address of principal executive offices)
       Registrant's telephone number, including area code: (714) 598-7500

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

Title of each class                   Name of each exchange on which registered
     None                                              None

           Securities registered pursuant to Section 12(g) of the Act:
                                  COMMON STOCK
                                (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.

Yes    X       No
   ---------      ----------

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock as of March
16,1998, was approximately $62,529,684.

The number of outstanding shares of the Registrant's Common Stock as of March
16, 1998 was 5,348,633.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on June 4, 1998 (to be filed with the Commission within 120 days of
December 31, 1997):
Part III, Items 10-13.



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                                INTRODUCTORY NOTE

This Annual Report on Form 10-K contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 and Datum Inc. ("Datum" or the "Company")
intends that such forward-looking statements be subject to the safe harbors
created thereby. All statements other than statements of historical fact
included in this Report, including, without limitation, the statements under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" regarding: the Company's ability to design, develop,
manufacture and market products; the ability of the Company's products to
maintain commercial acceptance; the Company's ability to achieve new product
commercialization; the anticipated growth of its target markets; its ability to
maintain profitability; and other matters are forward-looking statements.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable at this time, it can give no assurance
that such expectations will prove to have been correct. The Company makes no
undertaking to correct or update any such statements in the future. Important
factors that could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are set forth in "Management's Discussion
and Analysis of Financial Condition or Results of Operations" and "Business".
All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Statements.

                                     PART I
Item 1. BUSINESS.

GENERAL

        Datum designs, manufactures and markets a wide variety of
high-performance time and frequency products used to synchronize the flow of
information in telecommunications networks and in numerous other applications.
Utilizing its more than 29 years of experience with time and frequency
standards, Datum supplies products that can provide accurate time to within a
fraction of one second over 100,000 years. Datum serves the markets for
high-precision time and frequency devices in the telecommunications industry
which is rapidly expanding as a result of the conversion from analog to digital
systems and the expansion of cellular and Personal Communications Services
("PCS") networks. The Company's Efratom subsidiary invented the rubidium
oscillator in 1971 and believes it currently supplies approximately 80% of the
high-precision, rubidium atomic clocks used in cellular and PCS network base
stations in the United States. Datum is a major supplier of extremely precise
cesium standards and Global Positioning System ("GPS") receivers that generate
or capture time and frequency information for use in wireline telecommunications
infrastructures.

        In addition to providing time and frequency products for
telecommunications applications, Datum is a growing supplier of timing products
used to ensure the integrity of information transmitted through enterprise
computing networks. Datum also manufactures time and frequency devices for
satellites, including GPS satellites which utilize the Company's cesium clocks
to provide highly accurate timing and navigation information throughout the
world. Finally, the Company provides time and frequency products and systems for
a wide range of scientific and industrial test and measurement applications,
including missile guidance, geographic mapping and electric utility operations.

MARKETS

    Telecommunications

        The telecommunications system is comprised of numerous interconnected
networks employing many different transmission technologies. The traditional
wireline network is itself a series of networks connected through numerous
switches that allow voice, data and video traffic to be transmitted to their
ultimate destinations. Wireless networks, including cellular and PCS, are also
connected to components of the wireline network through switches. In order for
the overall telecommunications system, and the various components within that
system, to operate efficiently, it is critical that each network be synchronized
and 




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operate within extremely narrow frequency tolerances. Accurate and precise time
and frequency devices are necessary at all levels of the telecommunications
system to ensure proper frequency control and to minimize signal degradation.

        Wireless -- Cellular. Cellular telecommunications networks consist of
numerous cells located throughout a service area, each with its own base station
connected by wire or microwave radio to the wireline network through a network
switch. Originally, cellular networks used analog technology and frequency
division multiple access ("FDMA") to fit more channels into existing frequency
bands. This requires accurate frequency control at the base station level, which
is accomplished through the use of quartz or higher precision rubidium
oscillators. In order to improve transmission quality, increase network capacity
and expand network coverage, many network operators are converting older
networks from analog to digital technology and expanding their digital wireless
networks. Currently, the three leading digital technologies are Time Division
Multiple Access ("TDMA"), Code Division Multiple Access ("CDMA") and Global
System for Mobile Communications ("GSM"). In each of these transmission
protocols, calls are segmented, transmitted over a wider spectrum of bandwidth
than otherwise available under FDMA and reassembled by the applicable receiver
within the network. As a result of the segmentation/reassembling process, signal
degradation from improper synchronization is more likely to result in dropped
calls and loss of data than would occur in analog networks. Dropped calls and
data losses, in turn, require retransmission, thus decreasing network efficiency
and capacity. In order to minimize the problems resultant from improper
synchronization, many cellular operators utilize highly precise timing equipment
located at each base station and its associated network switch.

        Wireless -- PCS. PCS was developed, in part, to provide an improved
quality of wireless service and accommodate the increasing volume of
transmissions utilizing wireless networks. PCS systems operate in a manner
similar to cellular networks, but at a much higher frequency. As a result, PCS
networks require a greater number of lower powered "microcells," located more
closely together. As in cellular networks, time and frequency devices are
necessary to synchronize the flow of voice and data transmissions. The base
station in each PCS microcell and each PCS network switch connected to the
wireline network requires one or more stable, reliable timing devices to ensure
accurate synchronization.

        Wireline. The wireline sector of the telecommunications market has
experienced increased need for high-accuracy timing and frequency equipment
primarily as a result of the upgrading of existing networks from analog to
digital and the installation of new wireline networks. The wireline sector
currently consists of numerous networks and lines, which are connected by
switches that provide a transferring mechanism to route transmissions to their
ultimate destinations. In order to transfer voice, data or video traffic from
one line or network to another, both lines or segments of the network must
operate at the same frequency within a very narrow tolerance. Increased demand
for higher capacity, higher speed and more accurate information flow has
required the transition of wireline networks from analog to digital systems.
Imperfect synchronization in an analog system may result merely in static or
delayed communication. The failure to synchronize the components in digital
networks, however, may result in the loss of information, requiring
re-transmission and thus decreasing network efficiency, and increasing the costs
to the network operator. As a result, digital systems have a greater need for
accurate synchronization which is accomplished through the use of precise timing
devices located throughout the networks.

        The wireline sector of the telecommunications market is also growing as
operators expand their networks in order to meet the growing demand for
telecommunications services. In developing countries, new wireline networks are
being installed to provide basic telephony service. In developed countries,
increased demand for new services and government deregulation has encouraged the
development of expanded networks, particularly in the local exchange and long
distance markets. The expansion of wireline networks has led to an increased
need for timing devices to synchronize the flow of information and maximize the
efficiency of the networks.

    Enterprise Computing

        Enterprise computing networks utilize interconnected computers,
workstations, peripheral devices and application software to provide the
transaction processing and control infrastructure for national and 




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international organizations. Accurate timing of operations throughout a network
is essential to ensure the integrity of the data flowing through the network.
When information is retrieved from multiple locations and forwarded to a central
point for analysis, accurate interpretation of the data may depend on the
ability to properly time sequence both the generation and receipt of the data.

        In order to satisfy these timing requirements, enterprise network
operators utilize timing and frequency devices to ensure network
synchronization. Traditionally, this function has been accomplished using remote
public access time servers as the source of "standard time" and general purpose
computers to acquire and distribute time to the network. This approach, however,
relinquishes control of network timing to remote time servers and local
operators. As a result, inadvertent manipulation of local time servers or their
undetected malfunctioning may result in data distortion or loss with adverse
consequences. To reduce these risks, many enterprise computing networks now
utilize GPS receivers at local computers throughout the network. As each
computer in the network operates under Universal Coordinated Time ("UTC"), as
received from the GPS satellites, the entire network operates on the same
timing.

    Satellites

        The satellite market has experienced recent growth as a result of the
increased use of satellites for commercial purposes. Satellites launched for a
variety of objectives, including communications, navigation, weather forecasting
and astronomy must be able to efficiently transmit data to earth-based
receivers, thus requiring precise frequency control at the satellite. GPS
satellites are designed to transmit extremely precise timing information and use
cesium standards or rubidium oscillators. Other commercial satellite programs
that require less precise timing and frequency equipment utilize quartz
oscillators due to their lower weight and power consumption.

    Test and Measurement

        The test and measurement market represents a broad range of applications
of cesium standards, rubidium oscillators, quartz oscillators and GPS receivers.
Precise timing equipment is used to ensure the synchronization of multiple data
recorders in large field testing applications. Timing equipment also allows for
the determination of where an event occurred by comparing the precise times at
which the event was recorded at multiple sites. For example, electric utility
companies use precision timing devices to locate underground line breaks, thus
minimizing costly line inspection.

TIME AND FREQUENCY TECHNOLOGY

        Three sources of timing and frequency information are generally used in
telecommunications and commercial applications: cesium standards, rubidium
oscillators and quartz oscillators. In addition, GPS receivers capture and
process timing information generated by satellite-based cesium and rubidium
timing devices.

        The most stable and accurate timing devices in widespread use are based
on the resonance of cesium atoms. Cesium standards operate by energizing a
reserve of cesium atoms with microwave energy at a precise frequency. At this
frequency, due to the atomic structure of cesium, some of the cesium atoms
experience a change in energy state. These "excited" atoms are directed to a
collector through the use of focusing magnets, resulting in an increased atomic
flow. Since the flow of atoms does not increase unless the cesium atoms are
excited at exactly the correct frequency, the detection of the increased atomic
flow by the collector indicates that the desired frequency has been obtained.
The highly stable frequency is then captured by the standard's electronics
package and generated as a series of user outputs. Cesium clocks are used as
international primary reference standards and are stable to within a fraction of
one second over 100,000 years.

        Rubidium oscillators combine sophisticated glassware, light detection
devices and electronics packages to generate a highly stable frequency output.
Rubidium, when energized by a specific radio frequency, will absorb less light.
The oscillator's electronics package generates this specific frequency and the
light detection device ensures, through monitoring the decreased absorption of
light by the rubidium 




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and the use of feedback control loops, that this specific frequency is
maintained. This highly stable frequency is then captured by the electronic
package and generated as an output signal. Rubidium oscillators provide atomic
oscillator stability, somewhat less stable than cesium over long durations, but
generally at lower cost and in smaller packages.

        Quartz oscillators utilize the unique physical properties of quartz
crystals. Applying a voltage potential across a properly prepared quartz crystal
causes the crystal to vibrate and generate an electric signal with a relatively
stable frequency. Quartz oscillators consist of specially prepared synthetic
quartz crystals and associated electronics to apply the voltage and generate the
frequency signal. Quartz oscillators provide a less stable frequency than
rubidium oscillators, but are available at a substantially lower cost.

        Stable and accurate timing and frequency information is also obtained
through the use of GPS receivers, which capture timing information from cesium
standards or rubidium oscillators aboard GPS satellites. GPS receivers are
typically used in systems integrated with quartz or rubidium oscillators that
provide consistent timing output in the event the receiver loses the external
satellite-based signal.

        The Company applies its core understanding of timing and frequency
technology and its experience in delivering highly stable and accurate clocking
devices to provide a wide range of timing and frequency products for
telecommunications, enterprise computing and a variety of other commercial
applications. The Company designs, manufactures and markets cesium standards,
rubidium oscillators, quartz oscillators and GPS receivers in numerous
configurations, depending on the desired application. The Company's products are
the result of substantial research and development performed in the areas of
atomic physics, electronics engineering and software design. The Company designs
and manufactures its own physics packages, though which cesium or rubidium is
energized as part of the frequency detection and control process. Datum also
designs the electronics packages for its products, which are necessary to
convert the signal generated by the physics package into highly stable
electronic pulses.

        Datum is a leading supplier of time and frequency products for the
overall telecommunications system, for satellite applications, enterprise
computing networks, and for a variety of other test and measurement
applications. For telecommunications markets, Datum provides rubidium and quartz
oscillators that operate as stand-along frequency sources in cellular and PCS
base stations and network switches or are combined with the Company's GPS
receivers to provide timing information in the event of a loss of signal. In
addition, Datum provides time and frequency cesium standards for network
switches within wireline networks. The Company also supplies cesium standards
for GPS satellites which transmit precise timing information and GPS receivers
that receive and process the satellite timing transmissions throughout wireless
and wireline networks.

        In addition to telecommunications applications, the Company's timing
products help ensure that enterprise computing networks operate in an
synchronized manner. The Company also provides quartz oscillators for a variety
of satellite programs and test and measurement products used for a variety of
applications, including missile guidance, geographic mapping and electric
utility operations.

PRODUCTS

        Datum designs and manufacturers a broad line of time and frequency
products for telecommunications systems, enterprise computing networks,
satellites and a variety of other test and measurement applications. Datum's
products generate highly precise timing and frequency information through the
manipulation of cesium or rubidium atoms or quartz crystals, or by capturing
cesium or rubidium-based signals from GPS satellite transmissions.

    Telecommunications Products

    Wireless-Cellular and PCS Products

        Cellular and PCS networks require both accurate frequency control and
timing information. The 




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Company provides a variety of products to meet these needs.

        Quartz and Rubidium Clocks -- For analog cellular and GSM applications,
the Company provides highly cost-effective quartz oscillator clocking units to
synchronize the transmissions of voice and data traffic at the base-station
level. For customers requiring a more stable timing source, the Company provides
rubidium clocks.

        GPS Disciplined Clocks -- For digital TDMA and CDMA applications,
considerably more stable timing sources are required to maintain the base
station's clocking integrity. To meet this need, the Company provides GPS time
and frequency receivers which capture cesium or rubidium-based time signals
produced by GPS satellites. GPS receivers combine the external cesium or
rubidium-based timing signals with internal rubidium or quartz oscillators to
provide consistent timing output in the event the receiver loses the external
signal.

    Wireline Products

        Wireline telecommunications network synchronization systems involve two
principal components, a primary frequency reference, to provide an accurate
frequency source, and a timing signal generator, to provide control, management
and distribution of the timing signals required for network operations.

        Cesium Beam Primary Reference Sources --Primary Reference Sources
("PRSs") generate the most stable frequency output in general commercial use.
PRSs provide cesium-based stability at the central offices of wireline networks
for distribution of timing and frequency information to other components within
the networks.

        GPS Primary Reference Receivers -- Primary Reference Receivers ("PRRs")
capture and process time and frequency signals from GPS satellites. Integrated
rubidium or quartz oscillators back up the external frequency source to maintain
timing accuracy during periods of loss of signal. Typically, a PRR would be
installed in telecommunications network switches to provide a stable frequency
at the network switch level, thereby allowing transmissions to be efficiently
processed with minimal degradation or retransmission requirements.

        Timing Signal Generators -- Distribution of network synchronization
information is achieved through timing signals embedded within the flow of
network communications which are referenced to the primary frequency source,
such as the Company's PRS at the central office, or to a PRR at the network
switch level. In the event of the loss of the reference frequency, the Company's
timing signal generators can maintain, for extended time periods, switch and
network synchronization quality by using internal high-stability rubidium and
quartz oscillators as "holdover" clocking sources.

        End Office Primary References -- The Company's End Office Primary
References combines a PRR with a timing signal generator in a single
cost-effective unit designed for use where fewer telecommunications lines
require timing inputs.

    Enterprise Computing Products

        The Company's products provide accurate time-stamping of information
flowing through enterprise computing networks.

        GPS Time Servers -- The Company's time servers, which are installed in
enterprise computing networks, acquire UTC time from GPS satellite
transmissions. Worldwide coverage of GPS provides that all server-equipped sites
operate with time data that is uniform to within a few milliseconds, thereby
allowing time-sensitive information input at one location to be meaningfully
analyzed at any other site in the network. In a typical application of this
technology, the Securities Industry Automation Corporation, which supports
member firms of the New York Stock Exchange, uses the Company's time servers to
accurately time-annotate stock transactions.

        Computer Time Modules -- The Company's computer time modules acquire
time from external 




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sources (such as GPS satellites) to perform a variety of timing functions within
the host computer with a high degree of accuracy. The products are physically
packaged as computer plug-in units and chip sets and are functionally configured
to operate under program control as any other data-bus-linked component of the
user's data system. The Company produces modules for IBM PC compatible computers
and computers manufactured by Sun Microsystems and Digital Equipment
Corporation. The Company also produces modules for VME and VXI bus
architectures. The Company markets its computer modules in both fully configured
forms and as board products and chipsets for use by original equipment
manufacturers ("OEMs") and value-added resellers ("VARs"). Computer time modules
are also marketed for use in stand-alone computers and workstations used for
test and measurement applications.

    Satellite Products

        The Company provides time and frequency products for a variety of
satellites used for communications, navigation, television, and military
applications. These products are designed around the Company's core technology
and are highly durable so as to meet the demanding requirements of space.

        Cesium Clocks -- The Company's cesium clocks are installed aboard each
of the twenty-four GPS satellites now operating in space. Because these
satellites have a life expectancy of approximately 7.5 years, it is necessary
that additional units be designed to be available as replenishment. As a result,
the Company has recently been selected as a cesium clock supplier for a series
of satellites, for launch starting approximately in the year 2001.

        Quartz Clocks -- The Company also produces and markets a broad line of
lightweight, highly-stable quartz clocks, particularly suited for space
applications. Space qualified versions of these quartz units are aboard
satellites used for inter-planetary study, missile tracking and weather
monitoring and forecasting, as well as communications and other applications.

    Test and Measurement Products

        The Company's timing and frequency technology was initially developed to
create instrumentation for defense and aerospace applications. This technology
continues to be utilized in test and measurement products for a wide range of
scientific and industrial applications, including missile guidance, precise
geographic mapping and electric utility operation.

    Atomic Frequency Sources

        The Company produces and markets atomic reference frequency sources for
a wide variety of commercial and scientific applications.

        Cesium Frequency Standards -- The Company has developed a broad line of
cesium frequency products for numerous applications that require a constant
frequency reference. Electric utilities use the Company's cesium frequency
standards to set the frequency of electric power. Other uses include master
timing stations for telecommunications networks, global navigation, satellite
communications, missile guidance, and precise geographic mapping for off-shore
oil exploration and accurate placement of off-shore oil drilling platforms. The
Company also supplies spare and replacement cesium tubes for a broad segment of
the industry.

        Rubidium Oscillators -- In addition to their wide-spread use in the
telecommunications industry, the Company's rubidium oscillators have a number of
other specific applications, such as frequency control for television networks,
Doppler radar, satellite tracking and guidance and laboratory instrumentation.
The Company's rubidium oscillator line includes military qualified models
designed for high stability and reliability in adverse environments. The
Company's newer models feature lower profiles and are on standard plug-in
circuit cards specifically designed for ease of integration.

    GPS Time and Frequency Receivers




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        The Company's GPS receivers, in addition to their use in
telecommunications markets, are used in a wide variety of other applications.
Electric utilities use the Company's GPS receivers to determine the exact
geographical location of transmission line faults by comparing the times a which
the fault is detected at various stations in the power distribution network,
eliminating the need to visually search along the right-of-way. Other customers
utilize the Company's GPS receivers to distribute highly accurate time to
multiple sites in order to synchronize the recording of simultaneous test data,
such as during missile testing or astronomical observations. In addition to
fully configured GPS receivers, the Company also manufactures board level
modules for OEM applications.

    Time Code Instrumentation Products

        In addition to the time and frequency standards described above, the
Company manufactures and markets a line of products that process or utilize
basic time and frequency information for various applications. A major portion
of this product line is a family of instruments that derive time from either an
internal or external frequency reference. The time is generated in the form of
digital codes tailored to specific applications, usually to time-annotated data
recording or transmission. To correspond with the time generating equipment
described above, the Company makes devices which "read" the coded time,
transmitting it to computers, displays, or other devices where the recording of
accurate time is required.

    Product Development

        The Company believes that its future success depends in large part on
its ability to maintain its technological leadership through enhancements of
existing products and development of new products that meet a wide range of
customer needs. The Company focuses its research and development efforts on
improving the core physics and electronics packages in its time and frequency
products. Specifically, the Company is conducting research and development in
three areas: developing new time and frequency technologies, improving product
manufacturability, and enhancing software functionality.

        Although the Company maintains an active development program to improve
its product offerings, including specific goals of smaller product size and
lower unit cost, there can be no assurance such efforts will be successful, that
its new products will achieve customer acceptance or that its customers products
will achieve market acceptance. Failure to develop, or introduce on a timely
basis, new products, or product enhancements that achieve market acceptance
could adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be successful in
selecting, developing, manufacturing and marketing new products or enhancing its
existing products on a timely or cost-effective basis. The Company acquired all
the assets of Sigma Tau Standards Corporation, the leading producer of hydrogen
maser clocks, the most accurate timing device available. The acquisition allowed
the Company to broaden its range of advanced timing solutions.

        Research and development expenses totalled $10.7 million, $7.7 million
and $7.1 million in 1997, 1996 and 1995, respectively.

CUSTOMERS

        A small number of customers account for a substantial portion of the
Company's net sales, and the Company expects that a limited number of customers
will continue to represent a substantial portion of the Company's net sales for
the foreseeable future. The Company's largest customer, Lucent Technologies,
Inc. ("Lucent"), accounted for approximately 38% and 36% of net sales for the
years ended December 31, 1997 and 1996, respectively. The Company's second
largest customer, Motorola, Inc., accounted for 10% of net sales in 1997 and
less than 10% of net sales in 1996. Further, the Company's five largest
customers accounted for approximately 58% and 53% of net sales during the same
period. The Company believes that its major customers continually evaluate
whether to purchase time and frequency products from alternate or additional
sources. Accordingly, there can be no assurance that a major customer will not
reduce, delay or eliminate its purchases from the Company. Any such reduction,
delay or loss in orders could have a material adverse effect on the Company's
business and results of operations. Major customers also have significant
leverage and may attempt to change the terms, including pricing, upon 




<PAGE>   9
which the Company and such customers do business, which could materially
adversely affect the Company's business, results of operations and financial
condition.


MARKETING, DISTRIBUTION AND INTERNATIONAL SALES

        The Company's marketing efforts are focused on establishing and
developing long-term relationships with potential customers. Sales cycles for
certain of the Company's products, particularly for its larger
telecommunications timing systems are lengthy, and can range up to 36 months.
Sales are typically made through standard purchase orders which can be subject
to cancellation, postponement or other types of delays. The majority of the
Company's sales occur through independent sales representatives and distributors
that target the specific markets which they serve. Corporate personnel in the
United States and Germany provide additional direct sales and marketing support
for larger accounts.

        Export sales of the Company's products were approximately 19%, 22% and
19% of net sales for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company expects that international revenues will continue to
account for a significant percentage of the Company's total sales for the
foreseeable future. As a result, the Company is subject to various risks, which
include: economic instability in Asia; a greater difficulty of administering its
business globally; compliance with multiple and potentially conflicting
regulatory requirements such as export requirements, tariffs and other barriers;
differences in intellectual property protections; health and safety
requirements; difficulties in staffing and managing foreign operations; longer
accounts receivable cycles; currency fluctuations; restrictions against the
repatriation of earnings; export control restrictions; overlapping or differing
tax structures; political instability and general trade restrictions. There can
be no assurance that any of the foregoing factors will not have a material
adverse effect on the Company's business, results of operations and financial
condition.

        The Company's foreign sales are generally invoiced in U.S. dollars and,
accordingly, the Company does not currently engage in foreign currency hedging
transactions. However, as the Company continues to expand its international
operations, the Company may be paid in foreign currencies and exposure to losses
in foreign currency transactions may increase. The Company may choose to limit
such exposure by the purchase of forward foreign exchange contracts or through
similar hedging strategies. There can be no assurance that any currency hedging
strategy would be successful in avoiding exchange-related losses. In addition,
if the relative value of the U.S. dollar in comparison to the currency of the
Company's foreign customers should increase, the resulting effective price
increase of the Company's products to such foreign customers could result in
decreased sales which could have a material adverse impact on the Company's
business, results of operations and financial condition.

COMPETITION

        Intense competition exists among manufacturers of time and frequency
products, and the Company believes that competition in the Company's markets
from both new and existing competitors will increase in the future. The Company
competes principally in several specialized market segments against a limited
number of companies, some of which are more established, enjoy higher name
recognition and possess far greater financial, technological and marketing
resources that the Company. The Company currently competes principally on the
basis of the performance and quality of its products, including reliability, as
well as on cost and timely manufacture and delivery. While the Company believes
that overall it competes favorably with respect to the foregoing elements, there
can be no assurance that it will continue to be able to do so.

        In the cellular and PCS markets, the Company competes primarily with
Hewlett-Packard Company ("Hewlett-Packard"), and various other quartz oscillator
manufacturers. Hewlett-Packard has recently introduced products with performance
characteristics between quartz and rubidium oscillators with prices similar to
the Company's rubidium oscillators. In the wireline market, the Company competes
primarily with Symmetricom, Inc., Hewlett Packard and Oscilloquartz SA. In the
enterprise computing market, the Company competes primarily with Tech-Sym Corp.,
Odetics, Inc. and True-Time, Inc. In the cesium 




<PAGE>   10
standards market, the Company competes primarily with Hewlett-Packard and
Frequency Electronics, Inc. In the rubidium oscillators market, the Company
competes primarily with Frequency Electronics, Inc. In addition, certain
companies, such as EG&G, Inc. that currently manufacture products exclusively
for use in military applications, could enter commercial markets, and compete
directly with the Company. There can be no assurance that the Company will be
able to complete successfully in the future against existing or new competitors,
that new technologies will not reduce the demand for its products or that it
will be able to adapt successfully to changes in the markets served by its
products. In addition, there can be no assurance that competitive pressures will
not cause the Company to reduce prices, which would negatively affect gross
margins and could have a material adverse effect on the Company's results of
operations and financial condition.

BACKLOG

        The Company's backlog of orders was approximately $34.0 million on
December 31, 1997, compared to approximately $43.7 million a year earlier. The
Company considers as backlog all orders that are expected to be shipped to
customers within a 6-month period. As part of the Company's close working
relationships with its major OEM customers, such customers expect the Company to
respond quickly to changes in the volume and delivery schedule of their time and
frequency product requirements and to inventory products at the Company's
facilities for just-in-time delivery to the OEM customers. Therefore, although
contracts with such customers typically specify aggregate volumes of products to
be purchased over an extended time period, such contracts also provide that
scheduled shipment dates of particular volumes are generally released to the
Company only days or a few weeks prior to the required delivery date to the OEM
customer. As a result of possible changes in product delivery schedules,
cancellations of orders and potential delays in product shipments and orders
received for products shipped in the same quarter, the Company's backlog at any
particular date may not necessarily be representative of actual sales for any
succeeding period.

GOVERNMENT CONTRACTS

        The Company believes that approximately 13% of its sales in 1997 were
made either directly to United States government agencies or indirectly to U.S.
government agencies through subcontracts as compared to approximately 15% in
1996 and 22% in 1995 for these sales. Because several of the Company's customers
are involved in commercial as well as governmental activities, it is difficult
to accurately determine the percentage of its business attributable to the U.S.
government.

        Government-related contracts and subcontracts are subject to standard
provisions for termination at the convenience of the government. In such event,
however, the Company is generally entitled to reimbursement of costs incurred on
the basis of work completed plus other amounts specified in each individual
contract. These contracts and subcontracts are either fixed price or cost
reimbursable contracts. Fixed-price contracts provide fixed compensation for
specified work. Under cost reimbursable contracts, the Company agrees to perform
specified work in return for reimbursement of costs (to the extent allowable
under government regulations) and a specified fee. In general, while the risk of
loss is greater under fixed-price contracts than under cost reimbursable
contracts, the potential for profit under such contracts is greater than under
cost reimbursable contracts.

MANUFACTURING

        The Company manufactures its products at its plants in Irvine and San
Jose, California; Austin, Texas; Beverly, Massachusetts; and Hofolding, Germany.
The Company's Irvine, Austin and Beverly facilities have received ISO 9001
certification, and the Company intends to seek such certification for its San
Jose facility. The manufacturing process involves the assembly of numerous
individual components by technically oriented production personnel. The parts
and materials used by the Company consist primarily of printed circuit boards,
fabricated housings, relays, and small electric circuit components, such as
integrated circuits, semiconductors, resistors and capacitors. The Company also
manufactures the physics packages for its cesium and rubidium oscillators. The
Company manufactures products to fill firm orders and to meet forecasts received
from its major customers. In some cases, as a result of customer 




<PAGE>   11
requirements and the long manufacturing process of certain of the Company's
products, the Company maintains up to four weeks of forecasted amounts in
finished goods inventory and up to an additional eight weeks of forecasted
amounts in work-in-process inventory.

        The Company currently procures various components from single-sources
due to unique component designs as well as certain quality and performance
requirements. If single-sourced components were to become unavailable or were to
become unavailable on terms satisfactory to the Company, the Company would be
required to purchase comparable components from other sources. If for any reason
the Company could not obtain comparable replacement components from other
sources in an timely manner, the Company's business, results of operations and
financial condition could be adversely affected. In addition, many of the
Company's suppliers require long lead-times to deliver requested quantities of
components. If the Company were unable to obtain sufficient quantities of
components used in the manufacture of its time or frequency products, resulting
delays or reductions in product shipments could occur and could have a material
adverse effect on the Company's business, result of operations and financial
condition. Due to rapid changes in semiconductor and other technology, on
occasion one or more of the electronic components used in the Company's products
have become unavailable, resulting in unanticipated redesign and related delays
in shipments. There can be no assurance that the Company will not experience
similar delays in the future, the occurrence of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

INTELLECTUAL PROPERTY RIGHTS

        The Company seeks to protect certain key technologies through U.S. and
foreign patents and by maintaining such technologies as trade secrets. The
Company has licenses under various other patents. While the Company believes
that its patents and licenses have value, it does not regard any such patents or
licenses as essential to its business or to the maintenance of its competitive
position. Accordingly, the Company does not have any material patent protection
on its technology. To the extent that it depends on proprietary information it
primarily relies on the protections afforded to trade secrets. There can be no
assurance that others will not independently develop or otherwise acquire
equivalent technology or that the Company can maintain such technology as trade
secrets. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as the laws of the United
States. The failure of the Company to protect its intellectual property rights
could have a material adverse effect on the business, operating results and
financial condition.

        There can be no assurance that patent or other intellectual property
infringement claims will not be asserted against the Company in the future.
Although patent and intellectual property disputes may be settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms or at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling certain of its products, which would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, should the Company decide to, or be forced to, litigate such claims,
such litigation could be expensive and time consuming, could divert management's
attention from other matters and could have a material adverse effect on the
Company's business, operating results and financial condition, regardless of the
outcome of the litigation.

EMPLOYEES

        The Company had 656 employees at December 31, 1997. None of the Company
employees are represented by a union. The Company believes its relations with
its employees are good.

        The Company's success depends upon the continued services of its key
management personnel. The Company's key personnel, including technical
personnel, would be difficult to replace and are not parties to employment or
noncompetition agreements. The Company's growth and future success will depend
in large part upon its ability to attract and retain additional highly qualified
engineering, sales and marketing personnel. In certain of the Company's
locations, the Company has experienced difficulty in 




<PAGE>   12
attracting and retaining highly qualified technical personnel. The loss of
technical personnel who become known and trusted by customers of the Company can
have an adverse impact on the Company's relationships with such customers. Delay
in adding appropriately trained personnel can lead to program delays, higher
product costs, and customer dissatisfaction.

        Louis B. Horwitz, the Company's President and Chief Executive Officer,
and Chairman of the Company's Board of Directors, will, on April 6, 1998,
relinquish the roles of President and Chief Executive Officer to Mr. Erik H. van
der Kaay who will also assume the role of a member of the Board of Directors.

Item 2. PROPERTIES

        The Company's Irvine, California, manufacturing and executive office
facilities occupy an aggregate of 109,000 square feet in two sites under leases,
each expiring July 31, 2005. The Company also operates at a facility located in
San Jose, California, consisting of a 21,800 square foot engineering and
manufacturing building, under a lease expiring on February 28, 2001. The Company
also operates a facility located in Hofolding, Germany, consisting of an 8,600
square foot manufacturing facility, under a lease expiring in June 1999. The
Company owns its facility in Beverly, Massachusetts, comprised of a 32,000
square foot building located on approximately four acres of land. The Company
also owns its facility in Austin, Texas, comprised of a 50,000 square foot
building, of which 9,000 square feet are leased to an unaffiliated third party,
located on approximately nine acres of land. The Company believes that its
current facilities are adequate for its present level of operations.

Item 3. LEGAL PROCEEDINGS

        In late 1996, the Company received notice from the owner of premises in
Austin, Texas that had previously been occupied by Austron, Inc., the Company's
wireline operation, prior to the Company's acquisition of Austron in 1988. The
property owner claims, among other things, that the soil at the site contains
the same contaminants as were previously remediated by Austron in connection
with its vacating the site in 1983. At the completion of the remediation in
1983, the site was certified as being in compliance with the then applicable
environmental regulations. The Company believes that it will incur some costs in
connection with such claim and the amount of such costs cannot be determined at
this time. Although there can be no assurance that the property owner's claims
or any related governmental action will not have a material adverse effect on
the Company's business, financial condition and results of operations, the
Company does not believe it will have such effect.

        The Company is also a party to ordinary disputes arising in the normal
course of business. The Company does not believe that the outcome of these
matters will have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company's security holders during the
fourth quarter of the fiscal year ended December 31, 1997.

Item 4A.       Executive Officers of the Registrant

The following is a list of the executive officers of the Registrant:


<TABLE>
<CAPTION>
        Name                     Age                 Positions and Offices with the Registrant
        ----------------         ---        ------------------------------------------------------
<S>                              <C>        <C>
        Louis B. Horwitz          70        President and Chairman of the Board of Directors of
                                            the Company since October 1976 and a director of the
                                            Company since May 1975.  Prior to joining the
                                            Company, Mr. Horwitz was an independent management
                                            consultant 
</TABLE>




<PAGE>   13
<TABLE>
<CAPTION>
        Name                     Age                 Positions and Offices with the Registrant
        ----------------         ---        ------------------------------------------------------
<S>                              <C>        <C>
                                            and an Executive Vice President of Xerox
                                            Data Systems, a manufacturer of computers.

        Heinz Badura              60        Vice President of the Company and President of its
                                            Efratom subsidiary since August 1995.  From 1973 to
                                            1995, he held a variety of positions at Efratom, most
                                            recently as Vice President.

        Paul Baia                 45        Vice President of the Company since January 1996 and
                                            President of its Frequency Time Systems subsidiary
                                            since January 1996.  From January 1990 to January
                                            1996 he was General Manager of FTS.  From March 1988
                                            to January 1990 he was Director of Operations for FTS.

        John (Jack) R. Rice       53        Vice President of the Company since April 1994 and
                                            President of the Company's Austron, Inc. subsidiary
                                            since May 1995.  From April 1994 to May 1995 he was
                                            General Sales Manager of the Company.  From 1987 to
                                            1994, he served as Director of North American Sales
                                            and of OEM Sales for Emulex Corporation, a computer
                                            hardware manufacturing company.

        David C. Robinson         57        Vice President of the Company and President of the
                                            Company's Bancomm Division since March 1994.  From
                                            February 1986 to March 1994, he served as General
                                            Manager of the Bancomm Division.  Mr. Robinson became
                                            President of Bancomm Corporation in 1984, which he
                                            served as Vice President of Marketing since May 1978.

        Raymond L. Waguespack     66        Vice President of the Company since 1989 and
                                            Secretary of the Company from October 1993 to July
                                            1994 and Vice President, International Sales since
                                            April 1996.  He has been President of the Company's
                                            Timing Division since October 1993.  From April 1993
                                            to September 1993, he served as International Sales
                                            and Marketing Manager of the Timing Division.  From
                                            September 1989 to March 1993, Mr. Waguespack served
                                            as President of TCXO Enterprises, formerly Spectrum
                                            Technology, Inc., a former subsidiary of the Company,
                                            which manufactured quartz oscillators.

        David A. Young            54        Vice President, Chief Financial Officer, Secretary
                                            and Treasurer of the Company since July 1994.  From
                                            January 1993 to July 1994, he served as Executive
                                            Vice President and Chief Executive Officer of
                                            Blower-Dempsay Corporation, a paper and chemical
                                            company.  From July 1990 to March 1992, he served as
                                            Vice President Finance and Administration, Chief
                                            Financial Officer and Secretary of Alpha
                                            Microsystems, a computer company.
</TABLE>


<PAGE>   14
                                     PART II

Item 5. MARKET FOR THE REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS.

Shares of the Company's common stock are traded on The Nasdaq Stock Market under
the symbol "DATM". The following table sets forth the range of high and low
closing sales price per share of common stock of the Company as reported on The
Nasdaq Stock Market for each quarter of the two most recent fiscal years:


<TABLE>
<CAPTION>
                                                HIGH      LOW
                                                ----      ---
<S>                                             <C>      <C>     
YEAR ENDED DECEMBER 31, 1997
1st Quarter..................................   24-1/2   13-3/4
2nd Quarter..................................   32-5/8   14-1/8
3rd Quarter..................................   49-1/2       30
4th Quarter..................................   40-1/8       12

YEAR ENDED DECEMBER 31, 1996
1st Quarter..................................   11-3/8    8-3/8
2nd Quarter..................................   15-3/4    8-7/8
3rd Quarter..................................   12-1/8    7-1/4
4th Quarter..................................   17-5/8   10-3/8
</TABLE>

        It is the policy of the Company to retain earnings to finance the future
growth and development of its business. Therefore, the Company does not
anticipate paying cash dividends on its common stock in the foreseeable future.
In addition, the Company's existing credit arrangements restrict the Company
from paying cash dividends.


At March 16, 1998, there were 383 stockholders of record.




<PAGE>   15
Item 6. SELECTED FINANCIAL DATA

       The following selected consolidated financial data has been derived from
the financial statements of the Company audited by Price Waterhouse LLP,
independent accountants. The consolidated balance sheet at December 31, 1997 and
1996 and the related consolidated statements of operations and of cash flows for
the three years ended December 31, 1997 and notes thereto appear elsewhere in
this Report.


<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                            ---------------------------------------------------------------------------------------
                                               1997                1996             1995(1)             1994               1993
                                            -----------        -----------        -----------        -----------        -----------
                                             (In thousands, except share and per share data)
<S>                                         <C>                <C>                <C>                <C>                <C>        
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net Sales . . . . . . . . . . . . . . . . . $   114,092        $    91,854        $    67,257        $    30,897        $    24,593
  Costs and expenses:
     Cost of goods sold . . . . . . . . . .      68,235             56,285             40,010             17,491             14,663
     Selling. . . . . . . . . . . . . . . .      15,808             12,182              9,836              5,206              4,461
     Product development. . . . . . . . . .      10,650              7,667              7,087              2,494              1,877
     General and administrative (2) . . . .       9,479             10,127              8,460              3,934              3,294
                                            -----------        -----------        -----------        -----------        -----------
     Operating income (loss). . . . . . . .       9,920              5,593              1,864              1,772                298
                                            -----------        -----------        -----------        -----------        -----------
     Interest expense . . . . . . . . . . .       2,085              2,255              1,667                241                209
     Interest (income). . . . . . . . . . .        (349)                (7)               (17)               (15)                (7)
                                            -----------        -----------        -----------        -----------        -----------
Income before income taxes. . . . . . . . .       8,184              3,345                214              1,546                 96
Income tax provision. . . . . . . . . . . .       3,355              1,371                154                610                 24
                                            -----------        -----------        -----------        -----------        -----------
Net income. . . . . . . . . . . . . . . . . $     4,829        $     1,974        $        60        $       936        $        72
                                            ===========        ===========        ===========        ===========        ===========
Net income per share:
     Basic . . . . . . . . . . . . . . . .  $       .97        $       .49        $       .02        $       .36        $       .03
                                            ===========        ===========        ===========        ===========        ===========

     Diluted . . . . . . . . . . . . . . .  $       .90        $       .46        $       .02        $       .34        $       .03
                                            ===========        ===========        ===========        ===========        ===========

Shares used in per share calculation:
     Basic . . . . . . . . . . . . . . . .    4,973,228          4,061,014          3,713,710          2,628,721          2,558,356
                                            ===========        ===========        ===========        ===========        ===========
     Diluted . . . . . . . . . . . . . . .    5,389,862          4,253,019          3,954,307          2,732,812          2,558,356
                                            ===========        ===========        ===========        ===========        ===========

                                                                                  December 31,
                                            ---------------------------------------------------------------------------------------
                                               1997               1996               1995               1994               1993
                                            -----------        -----------        -----------        -----------        -----------
CONSOLIDATED BALANCE SHEET DATA:
Working capital. . . . . . . . . . . . . .  $    47,482        $    26,029        $    12,310        $     8,684        $     7,299
Total assets . . . . . . . . . . . . . . .       85,746             68,688             66,137             24,578             23,185
Long-term debt . . . . . . . . . . . . . .       17,418             17,318              7,938                 50                 70
Stockholders' equity . . . . . . . . . . .       56,844             34,623             31,313             16,883             15,639
</TABLE>


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

(1)     In March 1995, the Company acquired Efratom Time and Frequency Products,
        Inc. and Efratom Elektronik GmbH. As a result of the acquisition, the
        Company experienced an increase in all categories of sales and expenses.

(2)     Includes $1.5 million, $1.5 million and $1.1 million for 1997, 1996 and
        1995, respectively, of amortized goodwill and increased depreciation
        resulting from the step-up of the assets purchased in the March 1995
        acquisition of Efratom.




<PAGE>   16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

         The following discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Report. Except
for the historical information contained herein, the discussion in this Report
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Report
should be read as being applicable to all related forward-looking statements
wherever they appear in this Report. The Company's actual results could differ
materially from those discussed here.

OVERVIEW

         Datum designs, manufacturers and markets a wide variety of
high-performance time and frequency products used to synchronize the flow of
information in telecommunications networks. The company is also a leading
supplier of precise timing products for enterprise computing networks and a wide
variety of space, scientific and industrial test and measurement applications.

         The Company was formed in 1959 and has grown its operations through
acquisitions and internal product development. In 1983, the Company acquired its
cesium standards operation and, in the process, commenced its evolution from a
company primarily supplying timing equipment for military applications to a
manufacturer of a broad range of time and frequency products for
telecommunications and other applications. In 1986, the Company acquired the
business that is now enterprise computing and in 1988, it acquired its current
wireline business. In March 1995, the Company acquired Efratom Time and
Frequency Products, Inc. and Efratom Elektronik GmbH (collectively "Efratom"),
the inventor and leading manufacturer of rubidium oscillators used in cellular
and PCS networks. As a result of its acquisition of Efratom, the Company now
manufactures each class of time and frequency products in wide-spread commercial
use: cesium standards, rubidium oscillators, quartz oscillators and GPS timing
receivers.

         The Company serves the markets for high-precision time and frequency
devices in the telecommunications industry which is rapidly expanding as a
result of the conversion of analog to digital systems. The Company believes it
currently supplies approximately 80% of the rubidium atomic clocks used in
cellular and PCS network base stations. The Company also provides extremely
stable cesium standards and GPS receivers that generate and capture timing and
frequency products for use in wireline telecommunications networks. In addition
to providing time and frequency standards for telecommunications applications,
the Company is a growing supplier of timing products used to ensure the
integrity of information transmitted through enterprise computing networks. The
Company also manufactures frequency sources for satellites, including GPS
satellites that utilize the Company's cesium clocks to provide highly accurate
timing and navigation information throughout the world. Finally, the Company
provides time and frequency products and systems for a wide range of scientific
and industrial test and measurement applications, including missile guidance,
geographic mapping and electric utility operations.

         A small number of customers account for a substantial portion of the
Company's net sales and the Company expects that a limited number of customers
will continue to represent a substantial portion of the Company's net sales for
the foreseeable future. The Company's largest customer, Lucent, accounted for
approximately 38% and 36% of net sales for the fiscal years ended December 31,
1997 and 1996. The Company's second largest customer, Motorola, Inc., accounted
for 10% of net sales in 1997 and less than 10% of net sales in 1996. Further,
the Company's five largest customers, including Lucent, accounted for
approximately 58% and 53% of net sales during the same periods. See
"Business-Customers."

         The Company has experienced, and expects to continue to experience,
fluctuations in sales and operating results on an annual and quarterly basis. As
a result, the Company believes that period-to-period comparisons of its
operating results are not necessarily meaningful, and that such comparisons
cannot be relied upon as indicators of future performance. In addition, there
can be no assurance that the Company will maintain its current profitability in
the future. A significant component of the fluctuations 




<PAGE>   17
results from rescheduling of orders by the Company's major customers, in some
cases due in part to the customers' attempts to minimize inventories. In 1997,
the Company's major customer shifted their purchasing policy to consignment
inventory, reducing the billable sales for that customer. Other factors that
could cause the Company's sales and operating results to vary significantly from
period to period include: the economic forces in foreign markets; contractual
price reductions on products sold to certain major customers; the time,
availability and sale of new products; changes in the mix of products having
differing gross margins; variations in manufacturing capacities, efficiencies
and costs; the availability and cost of components; warranty expenses; and
variations in product development and other operating expenses. The Company
anticipates sales and net income for the first quarter of 1998 may reflect no
growth from the fourth quarter of 1997. In addition, the sales cycles for many
of the Company's products are often lengthy and unpredictable, and can take up
to 36 months. Further, there can be no assurance that the Company will be
successful in closing large transactions on a timely basis or at all.
Accordingly, the timing of these transactions could cause additional variability
in the Company's operating results. The Company's results of operations are also
influenced by competitive factors, including pricing and availability of the
Company's and competing time and frequency products. A large portion of the
Company's expenses are fixed and difficult to reduce in a short period of time.
If net sales do not meet the Company's expectations, the Company's fixed
expenses would exacerbate the effect of such net sales shortfall. Furthermore,
announcements by the Company or its competitors regarding new products and
technologies could cause customers to defer purchases of the Company's products.
Order deferrals by the Company's customers, delays in the Company's introduction
of new products and longer than anticipated sales cycles for the Company's
products have in the past materially adversely affected the Company's quarterly
results of operations. Due to the foregoing factors, as well as other
unanticipated factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts or
investors. In such event, the price of the Company's Common Stock would be
materially adversely affected.

RESULTS OF OPERATIONS

         The following table sets forth, for the periods indicated, certain
income and expense items expressed as a percentage of the Company's net sales.
These percentages are derived from the Company's financial statements included
elsewhere in this Report.


<TABLE>
<CAPTION>
                                         Percentage of Net Sales
                                   ----------------------------------
                                         Year Ended December 31,
                                   ----------------------------------
                                    1997          1996          1995
                                   ------        ------        ------
<S>                                <C>           <C>           <C>   
Net sales . . . . . . . . . . . .   100.0%        100.0%        100.0%
                                   ------        ------        ------
Costs and expenses
    Cost of goods sold. . . . . .    59.8%         61.3%         59.5%
  Selling . . . . . . . . . . . .    13.9%         13.3%         14.6%
  Product development . . . . . .     9.3%          8.3%         10.5%
  General and administrative. . .     8.3%         11.0%         12.6%
  Interest, net . . . . . . . . .     1.5%          2.5%          2.5%
                                   ------        ------        ------
Income before income taxes. . . .     7.2%          3.6%          0.3%
Income tax provision. . . . . . .     2.9%          1.5%          0.2%
                                   ------        ------        ------
Net income. . . . . . . . . . . .     4.2%          2.1%          0.1%
                                   ======        ======        ======
</TABLE>


Years Ended December 31, 1997 and December 31, 1996

Net Sales. The Company's net sales are derived primarily from the sale of time
and frequency products for use in telecommunications networks, enterprise
computing networks, satellites and in a variety of other test and measurement
applications. The Company's net sales increased 24.2% from $91.9 million in 1996
to $114.1 million in 1997. This increase was primarily the result of increased
sales into each of the 




<PAGE>   18
Company's principal markets. In particular, net sales were positively impacted
as a result of increased sales of rubidium oscillators into the cellular and PCS
wireless telecommunications markets. The Company's sales in the enterprise
computing market also showed significant growth, largely due to increased
international business.

        Direct and indirect sales to the United States government increased 8.6%
from $13.9 million in 1996 to $15.1 million in 1997, constituting approximately
15.1% and 13.2% of net sales, respectively. Government-related contracts and
subcontracts are subject to standard provisions for termination at the
convenience of the government. In such event, however, the Company is generally
entitled to reimbursement of costs incurred on the basis of work completed plus
other amounts specified in each individual contract.

Gross Margins. Gross margins are derived from net sales and cost of goods sold,
which consists primarily of raw materials, labor, overhead and warranty costs.
Gross margins were 40.2% and 38.7% in 1997 and 1996, respectively. The increase
in gross margins in 1997 was primarily the result of an increased percentage of
the Company's net sales in wireless telecommunications products, along with
productivity improvements. Gross margins can be adversely affected by a number
of factors, including pricing pressure from the Company's customers and the
difficulty of reducing fixed expenses in connection with the rescheduling of
customers' orders.

Selling Expense. Selling expense consists primarily of sales commissions paid to
the Company's third-party representatives and distributors and salaries and
other expenses for its sales and marketing personnel. Selling expense as a
percentage of net sales was 13.9% and 13.3% in 1997 and 1996, respectively. The
increase in selling expense resulted from increased commissions and increased
costs in 1997 for international sales. Selling expense increased by 29.8% from
$12.2 million in 1996 to $15.8 million in 1997, primarily as a result of
increased net sales and the creation of the Company's international sales
division in 1996.

Product Development. Product development expense consists primarily of salary,
applied overhead, materials and third-party design services. Product development
expense increased 38.9% from $7.7 million in 1996 to $10.7 million in 1997,
representing 8.3% and 9.3% of net sales, respectively. The dollar increase
resulted from the commencement of development programs in 1997 to improve
certain products through new chip designs and software development.

        Although the Company maintains an active development program to improve
its product offerings, there can be no assurance that such efforts will be
successful, that its new products will be developed on a timely basis and will
achieve customer acceptance. Failure to develop, or introduce on a timely basis,
new products or product enhancements that achieve market acceptance could
adversely affect the Company's business, operating results and financial
condition.

General and Administrative. General and administrative expense consists
primarily of salaries and other expenses for management, finance, accounting and
human resources, as well as amortization of goodwill and depreciation charges.
General and administrative expense decreased by 6.4% from $10.1 million in 1996
to $9.5 million in 1997, and decreased as a percentage of net sales from 11.0%
in 1996 to 8.3% in 1997. Such expenses include $1.5 million and $1.5 million for
1997 and 1996, respectively, of amortized goodwill and increased depreciation
resulting from the step-up of the assets purchased in the March 1995 acquisition
of Efratom.

Interest, Net. Interest decreased 22.8% from $2.2 million in 1996 to $1.7
million in 1997, primarily as a result of the reduction of debt with proceeds
from the follow-on public offering completed April 2, 1997 of approximately one
million shares at $15 per share.



Years Ended December 31, 1996 and December 31, 1995




<PAGE>   19
        Introductory Note. Results of operations of the Company in 1995 include
only 41 weeks of operations of Efratom which was acquired in March 1995. Due to
the acquisition, the Company experienced significant increases (in absolute
terms) in net sales, cost of goods sold, selling expense, product development
expense, and general and administrative expense, in the year ended December 31,
1996 from the year ended December 31, 1995.

        Net Sales. The Company's net sales increased 36.6% from $67.3 million in
1995 to $91.9 million in 1996. This increase was primarily the result of the
acquisition of Efratom and increased sales into each of the Company's principal
markets. In particular, net sales were positively impacted as a result of
increased sales of rubidium oscillators into the cellular and PCS wireless
telecommunications markets. The Company's sales in the wireline network market
also showed significant growth, largely due to increased international sales.

        Direct and indirect sales to the United States government decreased 6.5%
from $14.8 million in 1995 to $13.9 million in 1996, constituting approximately
22% and 15% of net sales, respectively.

        Gross Margins. Gross margins were 40.5% and 38.7% in 1995 and 1996,
respectively. The decrease in gross margins in 1996 was primarily the result of
Lucent accounting for an increased percentage of the Company's net sales and
price reductions on certain products purchased by Lucent pursuant to the terms
of its supply agreement with the Company. The decrease was partially offset by
increased margins on certain of the Company's other product lines.

        Selling Expense. Selling expense as a percentage of net sales was 14.6%
and 13.3% in 1995 and 1996, respectively. The decrease in selling expense as a
percentage of net sales between 1995 and 1996 resulted from increased sales to
Lucent and other OEM customers which involve substantially lower commission
rates. Selling expense increased by 23.9% from $9.8 million in 1995 to $12.2
million in 1996, primarily as a result of increased net sales and the creation
of the Company's international sales division in 1996.

        Product Development. Product development expense increased 8.2% from
$7.1 million in 1995 to $7.7 million in 1996, and decreased as percentage of net
sales from 10.5% in 1995 to 8.3% in 1996. The dollar increase resulted from the
commencement of development programs in 1996 to improve certain products through
new chip designs and software development.

        General and Administrative. General and administrative expense increased
by 19.7% from $8.5 million in 1995 to $10.1 million in 1996, and decreased as a
percentage of the net sales from 12.6% in 1995 to 11.0% in 1996. Includes $1.5
million and $1.1 million for 1996 and 1995, respectively, of amortized goodwill
and increased depreciation resulting from the step-up of the assets purchased in
the March 1995 acquisition of Efratom. In addition, 1995 general and
administrative expense was adversely affected by employee relocation,
termination costs and moving expenses relating to the Company's 1995
consolidation of its timing and GPS receiver product lines.

        Interest, Net. Interest expense increased 36.2% from $1.7 million in
1995 to $2.2 million in 1996, primarily as a result of a full year of interest
in 1996 versus a partial year of interest in 1995 associated with indebtedness
incurred in connection with the acquisition of Efratom in March 1995.

LIQUIDITY AND CAPITAL RESOURCES

        The Company finances its operations primarily through a combination of
cash provided from operations, a commercial bank line of credit and long-term
debt. In addition, on April 2, 1997, the Company completed a follow-on public
offering of 1,035,000 shares of its common stock, raising net proceeds of
approximately $14.2 million. Cash used for operating activities was
approximately $4.9 million in 1997, compared to cash provided by operations of
approximately $6.7 million in 1996 and cash used for operations of approximately
$140 thousand in 1995. Cash flows in 1997 were adversely affected by increasing
inventories due to lower than planned revenues. The increase in cash provided by
operations



<PAGE>   20
for the year ended December 31, 1996 was primarily the result of increased
profitability and a decrease in inventory.

        Capital expenditures were approximately $4.5 million, $2.7 million and
$2.9 million in 1997, 1996 and 1995, respectively. The increase from 1996 to
1997 was primarily the result of the need to provide manufacturing test
equipment for the increased volumes produced in 1997. The 1998 year for capital
expenditures should be comparable to the prior year.

        At December 31, 1997, the Company had working capital of $48.4 million
and a current ratio of 6.4:1, compared to working capital of $26.0 million and a
current ratio of 2.9:1 at December 31, 1996. The increase in working capital is
primarily the result of the approximately $15.0 million follow-on public
offering concluded by the Company on April 2, 1997. The Prudential credit
facility consists of: (I) $6.0 million of Series A Senior Secured promissory
notes to mature September 27, 2000, bearing interest at the rate of 9.07% on the
unpaid principal, payable quarterly, with the principal repaid in equal
installments of $1.5 million on March 27 and September 27 of each year,
commencing March 27, 1999, and (ii) $12.0 million of Series B Senior Secured
promissory notes to mature September 27, 2003, bearing interest at the rate of
10.25% on the unpaid principal, payable quarterly, with the principal repaid in
equal installments of $2.0 million on March 27 and September 27 of each year,
commencing March 27, 2001. In addition, the Company issued to Prudential common
stock warrants for the purchase of 175,000 shares of common stock at an exercise
price per share of $11.50. Subsequently, in 1997, Prudential sold these common
stock warrants to Swiss Bank Corporation.

        Under the Company's line of credit with Wells Fargo Bank, the Company
has a two-year revolving line of credit not to exceed the principal amount of
$12.0 million bearing interest at the Bank's prime rate or at LIBOR plus 2.25%.
The Company is not currently utilizing the line of credit, which will expire in
September 1998. The Company expects to renew the line of credit for a two-year
period with Wells Fargo. The Wells Fargo credit facility and the Prudential
credit facility provide the Company with an aggregate borrowing capacity of $30
million.

        Under the promissory notes and the credit agreement, the Company is
required to maintain certain financial ratios, limit other indebtedness and may
not pay dividends. Other restrictions include limitations on the amounts of
leases and capital expenditures that may be incurred. The Company currently is
in compliance with all such covenants and restrictions.

READINESS FOR THE YEAR 2000

        The Company has taken actions to understand the nature and extent of the
work required to make its systems, products and infrastructure Year 2000
compliant. This year the Company began to prepare its products and review its
computer based systems for the Year 2000, including replacing or updating
existing systems. The Company continues to evaluate the estimated costs
associated with these efforts based on actual experience. While these efforts
will involve additional costs, the Company believes, based on available
information, that it will be able to manage its total Year 2000 transition
without any material adverse effect on its business operations, products or
financial condition.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

        The consolidated financial statements and report of independent
accountants thereon are filed with this Annual Report on Form 10-K as shown on
the Index to Consolidated Financial Statements covered by Report of Independent
Accountants.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

        None.




<PAGE>   21
                                    PART III


Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        There is hereby incorporated by reference the information appearing
under the captions "Election of Directors" and "Compliance with Section 16(a) of
the Securities Exchange Act of 1934" from the Company's definitive proxy
statement for the Annual Meeting of the Stockholders to be held June 4, 1998 to
be filed with the Commission on or before April 30, 1998. Information as to the
Company's executive officers is included in Item 4A of Part I of this Annual
Report on Form 10-K.

Item 11.  EXECUTIVE COMPENSATION

        There is hereby incorporated by reference information appearing under
the caption "Executive Compensation" from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held June 4, 1998 to be
filed with the Commission on or before April 30, 1998.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        There is hereby incorporated by reference the information appearing
under the caption "Security Ownership of Certain Beneficial Owners and
Management" from the Company's definitive proxy statement for the Annual Meeting
of Stockholders to be held June 4, 1998 to be filed with the Commission on or
before April 30, 1998.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        There is hereby incorporated by reference the information appearing
under the caption "Executive Compensation" from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held June 4, 1998 to be
filed with the Commission on or before April 30, 1998.




<PAGE>   22
                                     PART IV


Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a)         The following documents are filed as part of this report:

      (1)   Financial Statements

            The list of financial statements contained in the accompanying Index
            to Consolidated Financial Statements covered by Report of
            Independent Accountants is herein incorporated by reference.

      (2)   Financial Statement Schedules

            The list of financial statement schedules contained in the
            accompanying Index to Consolidated Financial Statements covered by
            Report of Independent Accountants is herein incorporated by
            reference.

All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

      (3)   Exhibits

            The list of exhibits on the accompanying Exhibit Index is herein
            incorporated by reference.

(b) Reports on Form 8-K.

      The Company filed no Current Reports on Form 8-K during the last quarter
of the period covered by this Report.




<PAGE>   23
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, at
Irvine, California this 24th day of March, 1998.

                                   DATUM INC.

                                         By   Louis B. Horwitz
                                           -------------------------------
                                              Louis B. Horwitz
                                              President and Director

                                POWER OF ATTORNEY

The undersigned directors and officers of Datum Inc. constitutes and appoints as
their true and lawful attorney and agent with power of substitution, to do any
and all acts and things in our name and behalf in our capacities as directors
and officers and to execute any and all instruments for us and in our names in
the capacities indicated below, which said attorney and agent, may deem
necessary or advisable to enable said corporation to comply with the Securities
Exchange Act of 1934, as amended and any rules, regulations and requirements of
the Securities and Exchange Commission, in connection with this Annual Report on
Form 10-K, including specifically but without limitation, power and authority to
sign for us or any of us in our names in the capacities indicated below, any and
all amendments (including post-effective amendments) hereto: and we do hereby
ratify and confirm all that said attorney and agent, shall do or cause to be
done by virtue hereof.

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


<TABLE>
<S>                              <C>                                             <C> 
 /s/ Louis B. Horwitz            President and Director                          March 24, 1998
----------------------------
Louis B. Horwitz                 (Principal Executive Officer)

 /s/ David A. Young              Chief Financial Officer                         March 24, 1998
----------------------------
David A. Young                   (Principal Financial and Accounting Officer)

 /s/ G. Tilton Gardner           Director                                        March 24, 1998
----------------------------
G. Tilton Gardner

 /s/ Dan L. McGurk               Director                                        March 24, 1998
----------------------------
Dan L. McGurk

 /s/ Edward A. Money             Director                                        March 24, 1998
----------------------------
Edward A. Money

 /s/ Michael M. Mann             Director                                        March 24, 1998
----------------------------
Michael M. Mann

 /s/ R. David Hoover             Director                                        March 24, 1998
----------------------------
R. David Hoover
</TABLE>




<PAGE>   24
                                   DATUM INC.

               Index To Consolidated Financial Statements Covered
                      By Report of Independent Accountants

                              Item 14(a)(1) and (2)


<TABLE>
<CAPTION>
                                                                                 Page references

                                                                                       Form
                                                                                       10-K
                                                                                       ----
<S>                                                                                    <C>
The information under the following captions, is included herein:

     Financial Statements

     Report of independent accountants..................................................F-1

     Consolidated balance sheet at December 31,
       1997 and 1996   .................................................................F-2

     Consolidated statement of operations for each
       of the three years in the period ended
       December 31, 1997................................................................F-3

     Consolidated statement of stockholders' equity
       for each of the three years in the period
       ended December 31, 1997..........................................................F-4

     Consolidated statement of cash flows for each
       of the three years in the period ended
       December 31, 1997................................................................F-5

     Notes to consolidated financial statements.........................................F-6


     Financial Statement Schedules

     VIII - Valuation and Qualifying Accounts...........................................S-1
</TABLE>




<PAGE>   25
                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Datum Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Datum Inc.
and its subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

Costa Mesa, California
February 12, 1998


                                       F-1


<PAGE>   26
                          DATUM INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                                      DECEMBER 31,
                                                                                                ------------------------
                                                                                                  1997            1996
                                                                                                --------        --------
<S>                                                                                             <C>             <C>     
ASSETS
Current assets
  Cash and cash equivalents .............................................................       $  5,819        $  1,389

  Accounts receivable, less allowance for doubtful accounts of $71 and
     $107 ...............................................................................         15,043          16,816
  Inventories ...........................................................................         31,219          19,270
  Prepaid expenses ......................................................................            363             425
  Deferred income taxes .................................................................          2,648           2,007
  Income tax refund receivable ..........................................................          1,321              --
                                                                                                --------        --------
          Total current assets ..........................................................         56,413          39,907
Land, buildings and equipment, net ......................................................         16,791          15,255
Excess of purchase price over net assets acquired, net of accumulated
  amortization of $2,951 and $2,056 .....................................................         12,126          13,020
Other assets ............................................................................            416             506
                                                                                                --------        --------
                                                                                                $ 85,746        $ 68,688
                                                                                                ========        ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Accounts payable ......................................................................       $  3,343        $  7,542
  Accrued salaries and wages ............................................................          3,298           2,693
  Accrued warranty ......................................................................            990           1,434
  Other accrued expenses ................................................................          1,277           1,119
  Income taxes payable ..................................................................             --           1,049
  Current portion of long-term debt .....................................................             23              41
                                                                                                --------        --------
          Total current liabilities .....................................................          8,931          13,878
                                                                                                --------        --------
Long-term debt ..........................................................................         17,418          17,318
                                                                                                --------        --------
Post-retirement benefits ................................................................            602             446
                                                                                                --------        --------
Other long-term liabilities .............................................................            128           1,428
                                                                                                --------        --------
Deferred income taxes ...................................................................          1,823             995
                                                                                                --------        --------
Stockholders' equity--
  Preferred stock, par value $.25 per share
     Authorized - 1,000,000 shares
     Issued - none
  Common stock par value $.25 per share
     Authorized-- 10,000,000 shares
     Issued - 5,332,860 shares in 1997 and 4,091,291 shares in 1996 .....................          1,333           1,023
     Additional paid-in capital .........................................................         43,231          25,845
     Retained earnings ..................................................................         12,785           7,956
     Cumulative translation adjustment ..................................................           (505)           (201)
                                                                                                --------        --------
          Total stockholders' equity ....................................................         56,844          34,623
Commitments (Notes C and I)
                                                                                                --------        --------
                                                                                                $ 85,746        $ 68,688
                                                                                                ========        ========
</TABLE>
                 See Notes to Consolidated Financial Statements

                                      F-2


<PAGE>   27
                           DATUM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                   -------------------------------------------------
                                       1997               1996               1995
                                   -----------        -----------        -----------
<S>                                <C>                <C>                <C>        
Net sales ..................       $   114,092        $    91,854        $    67,257
                                   -----------        -----------        -----------

Costs and expenses:
  Cost of goods sold .......            68,235             56,285             40,010
  Selling ..................            15,808             12,182              9,836
  Product development ......            10,650              7,667              7,087
  General and administrative             9,479             10,127              8,460
  Interest expense .........             2,085              2,255              1,667
  Interest (income) ........              (349)                (7)               (17)
                                   -----------        -----------        -----------
                                       105,908             88,509             67,043
                                   -----------        -----------        -----------
Income before income taxes .             8,184              3,345                214
Income tax provision .......             3,355              1,371                154
                                   -----------        -----------        -----------
Net income .................       $     4,829        $     1,974        $        60
                                   ===========        ===========        ===========
Net income per share:
  Basic ....................       $       .97        $       .49        $       .02
                                   ===========        ===========        ===========
  Diluted ..................       $       .90        $       .46        $       .02
                                   ===========        ===========        ===========
Shares used in per share
calculation: ...............         4,973,228          4,061,014          3,713,710
                                   ===========        ===========        ===========
  Basic
  Diluted ..................         5,389,862          4,253,019          3,954,307
                                   ===========        ===========        ===========
</TABLE>


See Notes to Consolidated Financial Statements


                                      F-3


<PAGE>   28
                           DATUM INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                        (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                    ADDITIONAL                           CUMULATIVE
                                                     COMMON STOCK                     PAID-IN          RETAINED         TRANSLATION
                                            ------------------------------
                                              SHARES              AMOUNT              CAPITAL          EARNINGS          ADJUSTMENT
                                            -----------        -----------          -----------       -----------       -----------
<S>                                         <C>                <C>                  <C>               <C>               <C>
Balances at December 31, 1994 .......         2,668,224        $       667          $    10,294       $     5,922                --
  Issuance of common stock under
     401(k) plan                                 30,328                  8                  347
  Exercise of stock options .........            42,638                 11                  360
  Acquisition of Efratom ............         1,277,778                319               13,417
  Cumulative translation adjustment .                                                                                   $       (92)
  Net income ........................                                                                          60
                                            -----------        -----------          -----------       -----------       -----------
Balances at December 31, 1995 .......         4,018,968              1,005               24,418             5,982               (92)
  Issuance of common stock under
     401(k) plan                                 44,610                 11                  453
  Exercise of stock options .........            27,713                  7                  189
  Issuance of common stock warrants .                                                       785
  Cumulative translation adjustment .                                                                                          (109)
  Net income ........................                                                                       1,974
                                            -----------        -----------          -----------       -----------       -----------
Balances at December 31, 1996 .......         4,091,291              1,023               25,845             7,956              (201)
  Issuance of common stock under
    401(k) plan                                  26,520                  6                  622 
  Issuance of common stock under ESP
    plan ............................             5,224                  1                   66
  Exercise of stock options .........           174,825                 44                1,155
  Income tax benefit from stock .....                                                     1,646
    options exercised
  Issuance of common stock, net of
    costs incurred ..................         1,035,000                259               13,897
  Cumulative translation adjustment .                                                                                          (304)
  Net income ........................                                                                       4,829
                                            -----------        -----------          -----------       -----------       -----------
Balances at December 31, 1997 .......         5,332,860        $     1,333          $    43,231       $    12,785       $      (505)
                                            ===========        ===========          ===========       ===========       ===========
</TABLE>


See Notes to Consolidated Financial Statements


                                      F-4


<PAGE>   29
                           DATUM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                                ----------------------------------------
                                                                  1997            1996            1995
                                                                --------        --------        --------
<S>                                                             <C>             <C>             <C>     
Cash flows from operating activities:
  Net income ............................................       $  4,829        $  1,974        $     60
                                                                --------        --------        --------
  Adjustments to reconcile net income to net cash
      provided by (used for) operating activities:
       Depreciation and amortization ....................          3,152           3,040           2,393
       Amortization of goodwill .........................            894             894             616
       Contribution of shares of common stock to the
           Company's 401(k) plan ........................            628             464             355
  Changes in assets and liabilities, net of acquisition:
     (Increase) decrease in accounts receivable .........          1,773          (3,178)         (1,486)
     (Increase) decrease in inventories .................        (11,949)            891          (5,678)
     (Increase) decrease in prepaid expenses ............             62            (225)           (422)
     Decrease in income tax refund receivable ...........             --             109             107
     (Increase) decrease in deferred income taxes .......            187            (175)         (1,111)
     (Increase) decrease in other assets ................            (26)           (491)             12
     Increase (decrease) in accounts payable ............         (4,199)          2,387           2,361
     Increase (decrease) in accrued expenses ............            320             (89)          2,222
     Increase (decrease) in income taxes payable ........           (724)            944             105
     Increase (decrease) in other long-term liabilities .            (30)             40             188
     Increase in post-retirement benefits ...............            156             156             138
                                                                --------        --------        --------
  Total reconciling items ...............................         (9,756)          4,767            (200)
                                                                --------        --------        --------
  Net cash provided by (used for) operating activities ..         (4,927)          6,741            (140)
                                                                --------        --------        --------
Cash flows from investing activities:
  Book value of equipment disposals .....................             50              98              20
  Capital expenditures ..................................         (4,494)         (2,685)         (2,937)
  Payment for acquisition, net of cash acquired .........         (1,270)             --         (15,246)
  Other .................................................           (292)            (99)           (190)
                                                                --------        --------        --------
  Net cash used in investing activities .................         (6,006)         (2,686)        (18,353)
                                                                --------        --------        --------
Cash flows from financing activities:
  Proceeds from (reductions of) line of credit ..........            (21)        (10,442)          7,442
  Proceeds from long-term debt and notes payable ........             --          17,736          12,596
  Repayment of long-term debt and notes payable .........            (38)        (11,528)         (1,550)
  Proceeds from issuance of common stock ................         14,156              --              --
  Proceeds from exercise of stock options ...............          1,199             196             371
  Proceeds from ESP plan ................................             67              --              --
  Proceeds from issuance of common stock warrants .......             --             785              --
                                                                --------        --------        --------
  Net cash provided by (used for) financing activities ..         15,363          (3,253)         18,859
                                                                --------        --------        --------
Net increase in cash and cash equivalents ...............          4,430             802             366
Cash and cash equivalents at beginning of year ..........          1,389             587             221
                                                                --------        --------        --------
Cash and cash equivalents at end of year ................       $  5,819        $  1,389        $    587
                                                                ========        ========        ========
</TABLE>


See Notes to Consolidated Financial Statements


                                      F-5


<PAGE>   30
                           DATUM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995

                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE A-- DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
         POLICIES

   Description of the Company: Datum designs, manufactures and markets a wide
variety of high-performance time and frequency products used to synchronize the
flow of information in telecommunications networks. The Company is also a
leading supplier of precise timing products for enterprise computing networks
and a wide variety of space, scientific and industrial test and measurement
applications.

   Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries, all of which are wholly-owned.
All significant intercompany transactions and accounts have been eliminated.

   Revenue Recognition: Most revenues are recorded when products are shipped.
However, in 1997, a major customer enacted a consignment inventory policy
requiring finished goods to be kept at the customer's location. Revenues from
the sale of these products in consigned inventory are recognized when the
customer uses the product.

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

   Inventory Valuation: Inventories are stated at lower of cost or market; cost
is determined on a first-in, first-out basis.

Inventories comprise the following:


<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                    ----------------------------
                                                     1997                 1996
                                                    -------              -------
<S>                                                 <C>                  <C>    
Purchased parts ......................              $10,523              $ 7,074
Work-in-process ......................               12,833                9,096
Finished products ....................                7,863                3,100
                                                    -------              -------
                                                    $31,219              $19,270
                                                    =======              =======
</TABLE>


   Land, Buildings and Equipment: Land, buildings and equipment, which are
recorded at cost and depreciated where appropriate by the straight-line method,
consist of the following:


<TABLE>
<CAPTION>
                                             DECEMBER 31,    
                                        ---------------------         DEPRECIABLE
                                          1997         1996               LIFE
                                        -------       -------       ---------------
<S>                                     <C>           <C>           <C>
Land ............................       $ 2,040       $ 2,040
Buildings .......................         4,564         4,494       30 to 40 years
Equipment .......................        19,306        15,685       3 to 10 years
Leasehold improvements ..........         1,013           930       5 to 10 years
                                        -------       -------
                                         26,923        23,149
Less accumulated depreciation and
  amortization ..................        10,132         7,894
                                        -------       -------
                                        $16,791       $15,255
                                        =======       =======
</TABLE>

   Expenditures for maintenance and repairs are charged directly to income, and
betterments and major renewals are capitalized.


                                      F-6


<PAGE>   31
   Excess of Acquisition Costs Over Fair Value of Net Assets of Businesses
Acquired: The excess of the purchase price of businesses or assets acquired over
the fair value of the net assets is amortized over varying periods ranging from
15 to 40 years. At each balance sheet date, the Company reviews the
recoverability of long-lived assets and certain intangible assets, including
goodwill. In the event the sum of expected undiscounted future cash flows
resulting from the use of the asset is less than the carrying amount of the
asset, an impairment loss equal to the excess of the asset's carrying value over
its fair value is recorded.

   Income Taxes: The Company uses the liability method of accounting for income
taxes. Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse. Deferred tax expense is calculated as the change in
net deferred liabilities or assets.

   Consolidated Statement of Cash Flows: For purposes of the consolidated
statement of cash flows, cash equivalents include highly liquid investments,
with an original maturity of less than three months. Cash paid for interest
totaled $ 2,019, $2,109 and $1,508 in 1997, 1996 and 1995, respectively. Cash
paid for income taxes totaled $3,935, $580 and $909 in 1997, 1996 and 1995,
respectively. Significant non-cash transactions in 1997 affecting the Company's
accounts consisted of tax benefits from the exercise of common stock options of
$1,646. In connection with the acquisition of Efratom in 1995, the Company
issued 1,277,778 shares of common stock valued at $13,736.

   Stock Options and Awards: The Company accounts for employee stock-based
compensation in accordance with Accounting Principles Bulletin No. 25. See the
disclosures in accordance with Statement of Financial Accounting Standards No.
123 (FAS 123) in Note F.

   Net Income Per Share: Effective in the fourth quarter of 1997, the Company
adopted Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (FAS 128). FAS 128 requires dual presentation of Net Income per share -
Basic and Net Income per share - Diluted. Net Income per share - Basic excludes
dilution and is computed by dividing net income by the weighted average number
of common shares outstanding during the reported period. Net Income per share -
Diluted reflects the potential dilution that could occur if stock options were
exercised. Net income per share is calculated as follows:


<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                     --------------------------------------------
                                        1997             1996             1995
                                     ----------       ----------       ----------
<S>                                  <C>              <C>              <C>       
Net income ...................       $    4,829       $    1,974       $       60
                                     ==========       ==========       ==========
Shares outstanding - Basic ...        4,973,228        4,061,014        3,713,710
Effect of dilutive securities:
    Warrants .................           89,200            2,846               --
     Stock options ...........          327,434          189,159          240,597
                                     ----------       ----------       ----------
Shares outstanding - Diluted .        5,389,862        4,253,019        3,954,307
                                     ==========       ==========       ==========
Net income per share - Basic .       $      .97       $      .49       $      .02
                                     ==========       ==========       ==========
Net income per share - Diluted       $      .90       $      .46       $      .02
                                     ==========       ==========       ==========
</TABLE>


Options to purchase 133,750 shares of common stock at prices of $21.00 to $37.00
per share were not included in the computation of Net income per share - Diluted
because the options' exercise price was greater than the average market price of
common shares.

   Disclosures About Fair Value of Financial Instruments: The carrying values of
cash, cash equivalents, accounts receivable, accrued liabilities and notes
payable approximate their fair values because of the short maturity of these
instruments. The carrying value of long-term debt approximates its fair value.

   Foreign Currency Translation: Assets and liabilities of the Company's German
subsidiary are translated at current exchange rates, while revenue and expenses
are translated at average rates prevailing during the year. Translation
adjustments are reported as components of stockholders' equity.

   Reclassifications: Certain reclassifications have been made to the
consolidated financial statements for prior years to conform to the 1997
presentation.

NOTE B-- ACQUISITION


                                      F-7


<PAGE>   32
   On March 16, 1995 the stockholders of the Company approved the purchase of
all the outstanding capital stock of Efratom Time and Frequency Products, Inc.,
a Colorado corporation, and Ball Efratom Elektronik GmbH, a corporation
organized under the laws of the Republic of Germany (collectively, Efratom). The
purchase price consisted of $15,000 cash and 1,277,778 shares of Datum common
stock. The final purchase price was subject to a post-closing adjustment of
$1,270 based on a comparison of the working capital and fixed assets of Efratom
as of August 7, 1994 and as of March 17, 1995. The post closing adjustment was
included in goodwill and other long-term liabilities. The acquisition, which has
been accounted for as a purchase, closed March 17, 1995.

   The unaudited pro forma combined results of operations of the Company and
Efratom for the year ended December 31, 1995, presuming the acquisition had
taken place on January 1, 1995, after giving effect to certain pro forma
adjustments are as follows:


<TABLE>
<S>                                           <C>     
      Net sales............................   $ 76,552
                                              ========
      Net income...........................   $    442
                                              ========
      Net income per share - Diluted.......   $    .11
                                              ========
</TABLE>


   The condensed pro forma combined financial information is provided for
informational purposes only and does not purport to be indicative of the future
results or financial position of the Company or what the results of operations
or financial position would have been had the acquisition been effective on the
dates indicated. This information should be read in conjunction with these
audited consolidated financial statements.


                                      F-8


<PAGE>   33
NOTE C-- LONG-TERM DEBT

   Long-term obligations outstanding are as follows:

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                       ------------------------
                                                                         1997            1996
                                                                       --------        --------
<S>                                                                    <C>             <C>  
$12,000 Revolving Line of Credit, expires November 1, 1998, with
  interest payable at prime or at LIBOR plus 2.25%, (8.5% at
  December 31, 1997), secured by all assets ....................       $     --        $     21

$6,000 Series A Senior Secured Notes (net of discount of $203),
  principal due semi-annually beginning March 27, 1999, to
  September 27, 2000, with interest payable quarterly at 9.07%,
  secured by all assets ........................................          5,797           5,750

$12,000 Series B Senior Secured Notes (net of discount of $407),
  principal due semi-annually beginning March 27, 2001, to
  September 27, 2003, with interest payable quarterly at 10.25%,
  secured by all assets ........................................         11,593          11,500

Capital equipment leases for various machinery and equipment
with ...........................................................             51              88
                                                                       --------        --------
  interest at 10.26% to 11.46% maturing at various dates

Total debt .....................................................         17,441          17,359

  Less current portion .........................................            (23)            (41)
                                                                       --------        --------

Long-term debt, less current portion ...........................       $ 17,418        $ 17,318
                                                                       ========        ========
</TABLE>


   Aggregate maturities of long-term debt before debt discount at December 31,
1997 are as follows:


<TABLE>
<S>                                                                     <C>    
1998 .................................................                   $    23
1999 .................................................                     3,025
2000 .................................................                     3,002
2001 .................................................                     4,001
2002 .................................................                     4,000
Thereafter ...........................................                     4,000
                                                                         -------
          Total ......................................                   $18,051
                                                                         =======
</TABLE>

   The Company issued common stock warrants in connection with the Series A and
Series B Senior Secured Notes allowing for the purchase of up to 175,000 shares
of common stock at an exercise price of $11.50 per share. The common stock
warrants, which were valued by the Company at $785, have been reflected as debt
discount and amortized as additional interest expense. The value of the common
stock warrants is included in additional paid-in capital.

   The current credit agreements impose operating and financial restrictions on
the Company, including a requirement to maintain certain financial ratios and a
certain profitability level. Such restrictions affect, and in some respects
limit or prohibit, among other things, the ability of the Company to incur
additional indebtedness, repay certain indebtedness prior to its stated
maturity, create liens, engage in mergers and acquisitions, transfer assets,
make certain capital expenditures and pay dividends.


                                       F-9


<PAGE>   34
NOTE D-- INCOME TAXES

   The income tax provision comprises the following:


<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                    ------------------------
                                                      1997     1996     1995
                                                    -------  -------  ------
<S>                                                  <C>      <C>      <C>  
                   Provision for income taxes:
                     Current:
                        Federal..................... $2,587   $1,081   $ 702
                        State.......................    537      445     168
                        Foreign.....................     44       20     105
                                                     ------   ------   -----
                                                      3,168    1,546     975
                                                     ------   ------   -----

                     Deferred:
                        Federal.....................    223     (155)   (683)
                        State.......................    (36)     (20)   (138)
                                                     ------   ------   -----
                                                        187     (175)   (821)
                                                     ------   ------   -----
                                                     $3,355   $1,371   $ 154
                                                     ======   ======   =====
</TABLE>


   The tax benefits associated with the exercise of non-qualified stock options
reduced taxes currently payable as shown above by $1,646 in 1997. Such benefit
was credited to additional paid in capital.

   The income tax provision differs from the amount computed by applying the
statutory federal income tax rate to income before taxes as follows:


<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                               -----------------------------------------------------------------------------
                                                        1997                         1996                         1995
                                               --------------------         --------------------         -------------------
                                                              Pretax                       Pretax                      Pretax
                                                Amount        Income         Amount        Income          Amount      Income
                                               -------         ----         -------         ----         -------        ----
<S>                                            <C>            <C>           <C>            <C>           <C>           <C>  
Computed expected tax expense ..........       $ 2,809         35.0%        $ 1,171         35.0%        $    73        34.0%
State income tax, net of federal income
  tax effect ...........................           326          4.0%            272          8.1%             11         5.1%
Amortization of excess of purchase price
  over net assets acquired .............            27           .3%             31          1.0%             31        14.5%
Foreign earnings taxed at different
  rates ................................           (12)         (.2%)            20           .6%             26        12.2%
Other ..................................           205          2.5%           (123)        (3.7)%            13         6.2%
                                               -------         ----         -------         ----         -------        ----
                                               $ 3,355         41.0%        $ 1,371         41.0%        $   154        72.0%
                                               =======         ====         =======         ====         =======        ====
</TABLE>



   The primary components of temporary differences which give rise to the
Company's net deferred tax asset are as follows:


<TABLE>
<CAPTION>
                                          DECEMBER 31,
                                      -------------------
                                       1997         1996
                                      ------       ------
<S>                                   <C>          <C>   
Deferred tax assets:
  Inventory ...................       $1,887       $1,001
  Accruals and reserves .......        1,022        1,201
                                      ------       ------
                                       2,909        2,202

Deferred tax liabilities:
  Property, plant and equipment        2,037        1,171
  Other .......................           47           19
                                      ------       ------
                                       2,084        1,190
                                      $  825       $1,012
                                      ======       ======
</TABLE>


                                      F-10


<PAGE>   35
NOTE E-- POST-RETIREMENT BENEFITS

   Post-retirement benefits are recognized over the employee's service period
based on the expected costs of providing such benefits to the employee and the
employee's beneficiaries after retirement. The Company elected to recognize the
transition obligation over a 20-year period.

   The Company's post-retirement benefit program comprises two plans, the life
insurance plan and the health care plan. Any permanent full-time employee is
eligible upon retirement after age 62 and with 12 years of service. The health
care plan is a contributory plan.

   The following sets forth the Company's post-retirement program's status
reconciled with amounts reported in the consolidated balance sheet:


<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                                 ----------------------
                                                                   1997          1996
                                                                 -------        -------
<S>                                                              <C>            <C>    
Accumulated post-retirement benefit obligation:
  Retirees ...............................................       $   380        $   343
  Fully eligible active plan participants ................           169            150
  Other active plan participants .........................           699            667
                                                                 -------        -------
  Total accumulated post-retirement benefit obligations ..         1,248          1,160
  Plan assets at fair value ..............................            --             --
                                                                 -------        -------
  Accumulated post-retirement benefit obligation in excess
     of plan assets ......................................         1,248          1,160
  Unrecognized transition obligation .....................          (453)          (484)
  Unrecognized net loss ..................................          (193)          (230)
                                                                 -------        -------
  Accrued post-retirement benefit obligation .............       $   602        $   446
                                                                 =======        =======
</TABLE>


   Net periodic post-retirement benefit cost includes the following components:


<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                            ----------------------------
                                            1997        1996        1995
                                            ----        ----        ----
<S>                                         <C>         <C>         <C> 
Service cost ........................       $ 71        $ 71        $ 68
Interest cost .......................         70          71          68
Amortization of transition obligation         31          30          30
                                            ----        ----        ----
Net periodic postretirement expense .       $172        $172        $166
                                            ====        ====        ====
Discount rate .......................        7.0%        7.0%        7.0%
                                            ====        ====        ====
</TABLE>


NOTE F-- COMMON STOCK RESERVED

   In June 1994, the stockholders of the Company approved the 1994 Incentive
Stock Plan providing for the granting of options or restricted shares of the
Company's common stock to the Company's officers, directors and employees and
also to consultants, business associates and others with important business
relationships with the Company. The initial number of shares available under the
Plan for issuance is 250,000 and will increase by 50,000 shares on the last day
of each calendar year. The exercise price of the options shall not be less than
100% of the fair market value of the underlying common stock on the date of the
grant. Options granted are exercisable in such amounts and at such intervals as
the Board of Directors determined in granting the options. This plan replaces
the 1984 Stock Option Plan and Restricted Stock Award Plan that expired in
1994. The stockholders of the Company approved amendments of the 1994 Stock
Incentive Plan, providing for 200,000 additional option shares in March 1995,
and 200,000 additional option shares in June 1997, to be reserved for issuance
thereunder. The following table summarizes activity under the 1994 Incentive
Stock Plan during the years ended December 31, 1997 and 1996 and 1995:


                                      F-11


<PAGE>   36

<TABLE>
<CAPTION>
                                       NUMBER     WEIGHTED AVERAGE
                                      OF SHARES   EXERCISE PRICE
                                       -------        ------
<S>                                   <C>         <C>
Outstanding, December 31, 1994...       86,800        $ 4.50
Issued during 1995 ..............      219,250        $11.00
Exercised during 1995 ...........       (6,313)       $ 4.38
Cancelled during 1995 ...........      (30,500)       $ 9.79
                                       -------
Outstanding, December 31, 1995...      269,237        $ 9.13
Issued during 1996 ..............      132,500        $10.17
Exercised during 1996 ...........       (6,388)       $ 8.10
Cancelled during 1996 ...........      (41,625)       $ 9.73
                                       -------
Outstanding, December 31, 1996...      353,724        $ 9.75
Issued during 1997 ..............      170,750        $21.82
Exercised during 1997 ...........      (94,563)       $ 9.44
Cancelled during 1997 ...........      (14,375)       $17.88
                                       -------
Outstanding, December 31, 1997
  (weighted average contractual
   life of 8.9 years) ...........      415,536        $14.32
                                       =======
Exercisable:
   December 31, 1997 ............       80,775        $ 8.66
                                       =======
   December 31, 1996 ............       78,701        $ 8.30
                                       =======
   December 31, 1995 ............       19,075        $ 4.65
                                       =======
</TABLE>


As of December 31, 1997, 1996 and 1995, 327,200, 233,575, and 274,450 option
shares, respectively, were available for grant under the 1994 Plan.

   The following table summarizes activity under the 1984 Stock Option Plan for
the years ended December 31, 1997, 1996 and 1995:


<TABLE>
<CAPTION>
                                        NUMBER     WEIGHTED AVERAGE
                                       OF SHARES   EXERCISE PRICE
                                        -------        -----
<S>                                    <C>         <C>  
Outstanding, December 31, 1994 .        283,275        $4.10
Exercised during 1995 ..........        (36,325)       $3.39
Cancelled during 1995 ..........         (4,875)       $4.88
                                        -------
Outstanding, December 31, 1995 .        242,075        $4.19
Exercised during 1996 ..........        (21,325)       $3.49
                                        -------
Outstanding, December 31, 1996 .        220,750        $4.25
Exercised during 1997 ..........        (80,262)       $3.82
Cancelled during 1997 ..........             (1)       $3.00
                                        -------
Outstanding, December 31, 1997
   (weighted average contractual
    life of 5.4 years ..........        140,487        $4.50
                                        =======
Exercisable:
   December 31, 1997 ...........        116,918        $4.45
                                        =======
   December 31, 1996 ...........        163,238        $4.05
                                        =======
   December 31, 1995 ...........        155,807        $3.82
                                        =======
</TABLE>


   No further option shares will be granted under the 1984 Stock Option Plan.

   In June 1997, the stockholders of the Company approved the Employee Stock
Purchase Plan, which authorizes the Company to issue and reserve for the
Purchase Plan, or purchase up to an aggregate of 250,000 shares of common stock
in open market transactions for the benefit of participating employees during
the term of the Purchase Plan. The purchase price per share for which shares of
common stock are purchased in an offering period under the Purchase Plan is the
lessor of 90% of the fair market value of a share of common 


                                      F-12


<PAGE>   37
stock on the grant date or 90% of the fair market value of a share of common
stock on the purchase date. In 1997, 5,224 shares of common stock were issued at
a price of $12.88 per share.

    Had compensation cost been determined on the basis of fair value pursuant to
FAS 123 net income (loss) and net income (loss) per share would have been as
follows:


<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                                  -----------------------------------------
                                     1997            1996           1995
                                  ---------       ---------       ---------
<S>                               <C>             <C>             <C>      
Net income (loss)
  As reported .............       $   4,829       $   1,974       $      60
                                  =========       =========       =========
  Pro forma ...............       $   4,330       $   1,824       $    (186)
                                  =========       =========       =========
Net income (loss) per share
  As reported - Diluted ...       $     .90       $     .46       $     .02
                                  =========       =========       =========
  Pro forma - Diluted .....       $     .80       $     .43       $    (.05)
                                  =========       =========       =========
</TABLE>


   The fair value of each option grant is estimated on the date of grant using
the Black-Scholes model with the following assumptions used for grants during
both periods: risk free interest rates of 6.37% in 1997, 5.97% in 1996 and 6.94%
in 1995, expected volatility of 77% in 1997, 48% in 1996 and 49% in 1995, and an
expected option life of 5 years and no expected dividends in 1997, 1996 and
1995.

NOTE G-- SAVINGS AND RETIREMENT PLAN

   Effective July 1, 1984, the Company adopted a savings and retirement plan
which covers all eligible employees. The plan provides for matching by the
Company of 100% of the first 3% of employee deferral. Employer matching
contributions are made in the form of shares of the Company's common stock.
Total retirement expense under the Plan amounted to $741, $497, and $408 for the
years ended December 31, 1997, 1996 and 1995, respectively.

NOTE H-- U.S. GOVERNMENT, FOREIGN SALES AND SIGNIFICANT CUSTOMERS

   Direct and indirect sales to the United States government aggregated
approximately $15,074, $13,856 and $14,812 in 1997, 1996 and 1995, respectively.
Direct sales to the United States government aggregated approximately $5,254,
$5,668 and $5,167 in 1997, 1996 and 1995, respectively. Foreign sales in 1997,
1996 and 1995 amounted to $21,745, $20,151 and $13,033, respectively. Two
customers accounted for 38% and 10% of net sales in 1997. One customer accounted
for 36% and 30% of net sales in 1996 and 1995, respectively.

NOTE I-- COMMITMENTS

   Total rental expense for operating leases amounted to $1,454, $1,735 and
$1,031 in 1997, 1996 and 1995, respectively. The future minimum rental
commitments under all non-cancelable operating leases, exclusive of property
taxes and certain occupancy costs, are as follows:


1998 ..........................    $ 1,438
1999 ..........................      1,381
2000 ..........................      1,309
2001 ..........................      1,223
2002 ..........................      1,159
Thereafter ....................      3,723
                                   -------
Total minimum lease payments...    $10,233
                                   =======


                                      F-13


<PAGE>   38
                           DATUM INC. AND SUBSIDIARIES

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                          BALANCE AT                                                                        BALANCE
                                          BEGINNING                                                          OTHER         AT END OF
              DESCRIPTION                 OF PERIOD      ADDITIONS       DEDUCTIONS     ACQUISITIONS       DEDUCTIONS*      PERIOD
   -----------------------------------    ---------      ---------       ----------     ------------       -----------      ------
<S>                                       <C>            <C>             <C>            <C>                <C>             <C>  
   YEAR ENDED DECEMBER 31, 1997
   Allowance for doubtful accounts....     $  107           $  70           $  106                                            $  71
   Reserve for inventories............      2,084           2,394              741                                            3,737
   Accumulated amortization of                                                                                             
   acquired intangible assets.........      2,056             895                                                             2,951
   YEAR ENDED DECEMBER 31, 1996                                                                                            
   Allowance for doubtful accounts....         68             121               36                            $   46            107
   Reserve for inventories............      1,952           1,309            1,177                                            2,084
   Accumulated amortization of                                                                                             
   acquired intangible assets.........      1,162             894                                                             2,056
   YEAR ENDED DECEMBER 31, 1995                                                                                            
   Allowance for doubtful accounts....         93              53               86          $   49                41             68
   Reserve for inventories............        854           1,124            1,024             998                            1,952
   Accumulated amortization of                                                                                             
   acquired intangible assets.........        546             616                                                             1,162
</TABLE>

   * Aacom note payments received.


                                      S-1


<PAGE>   39
                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
                                                                                         SEQUENTIALLY
EXHIBIT                                                                                   NUMBERED
NUMBER            DESCRIPTION                                                               PAGE
------            -----------                                                               ----
<S>               <C>                                                                    <C>
 2.1              Purchase Agreement dated as of October 20, 1994 by and among Ball
                  Corporation, Efratom Holding, Inc. and the Registrant (incorporated
                  by reference to Exhibit 10.31 to the Company's Quarterly Report on
                  Form 10-Q for the quarter ended September 30, 1994).                       --

 3.1              Certificate of Incorporation of Datum Inc., a Delaware corporation,
                  as amended to date (incorporated by reference to the same numbered
                  exhibit on Form 10-Q for the quarter ended June 30, 1996).                 --

 3.2              Bylaws of Datum Inc. as amended to date (incorporated by reference
                  to the same numbered exhibit on Form 10-K for the year ended
                  December 31, 1994).                                                        --

10.4              1984 Stock Option Plan, as amended to date (incorporated by
                  reference to Registrant's Registration Statements on Form S-8
                  Registration numbers 2-96564, 33-10335 and 33-41709).                      --

10.6              Executive Agreement dated March 7, 1986 with Louis B. Horwitz,
                  (incorporated by reference to same numbered exhibit to Registrant's
                  Annual Report on Form 10-K for the year December 31, 1991).                --

10.10             Form of Indemnification Agreement dated May 27, 1987 as entered
                  into with certain directors and officers of Registrant
                  (incorporated by reference to same numbered exhibit to Registrant's
                  Annual Report on Form 10-K for the year ended December 31, 1991).          --

10.19             Savings and Retirement Plan, as amended to date (incorporated by
                  reference to same numbered exhibit to Registrant's Annual Report on
                  Form 10-K for the year ended December 31, 1991).                           --

10.21             Consulting Agreement dated October 9, 1992 with Louis B. Horwitz
                  (incorporated by reference to same numbered exhibit to Registrant's
                  Annual Report on Form 10-K for the year ended December 31, 1992).          --

10.21.1           First Amendment to Consulting Agreement, dated as of March 1, 1996,
                  between Louis B. Horwitz and the Registrant (incorporated by
                  reference to the same numbered exhibit to Registrant's Quarterly
                  Report on Form 10-Q for the quarter ended September 30, 1996).             --

10.29             1994 Stock Incentive Plan (incorporated by reference to
                  Registrant's registration statement on Form S-8 Registration
                  #33-79772).                                                                --

10.29.1           Amendment to 1994 Stock Incentive Plan, effective March 17, 1995.
                  (incorporated by reference to the same numbered exhibit on Form
                  10-K for the year ended December 31, 1994).                               --
</TABLE>




<PAGE>   40
<TABLE>
<CAPTION>
                                                                                         SEQUENTIALLY
EXHIBIT                                                                                   NUMBERED
NUMBER            DESCRIPTION                                                               PAGE
------            -----------                                                               ----
<S>               <C>                                                                    <C>
10.29.2           Second Amendment to 1994 Stock Incentive Plan, effective June
                  5, 1997 (incorporated by reference to Registrant's
                  registration statement on Form S-8 Registration #33-79772).                --

10.30.5           Amended and Restated Credit Agreement dated as of September 27,
                  1996, by and between the Registrant and Wells Fargo Bank, N.A.
                  (incorporated by reference to the same numbered exhibit to the
                  Registrant's Quarterly Report on Form 10-Q for the quarter ended
                  September 30, 1996).                                                       --

10.32             Lease Agreement dated September 15, 1986 by and between The Irvine
                  Company and Efratom Division, Ball Corporation, for Efratom Time
                  and Frequency Products, Inc.'s facility at 3 Parker, Irvine,
                  California. (incorporated by reference to the same numbered exhibit
                  on Form 10-K for the year ended December 31, 1994).                        --

10.32.1           First Amendment to Lease dated March 15, 1995 by and between The
                  Irvine Company and Efratom Division, Ball Corporation for Lease
                  Agreement dated September 15, 1986 (Exhibit 10.32) (incorporated by
                  reference to the same numbered exhibit on Form 10-K for the year
                  ended December 31, 1994).                                                  --

10.32.2           Amendment to Leases dated May 11, 1995 between the Irvine Company
                  and the Registrant (incorporated by reference to the same numbered
                  exhibit on Form 10-Q for the quarter ended June 30, 1995).                 --

10.32.4           Second Amendment to Lease dated May 11, 1995 for 3 Parker
                  (incorporated by reference to the same numbered exhibit on Form
                  10-Q for the quarter ended June 30, 1995).                                 --

10.34             Industrial Lease dated May 11, 1995 between the Irvine Company and
                  the Registrant (incorporated by reference to the same numbered
                  exhibit to the Registrant's Form 10-Q for the quarter ended June
                  30, 1995).                                                                 --

10.35             Lease Agreement dated January 4, 1996, by and between Berg & Berg
                  Developers and the Registrant relating to Registrant's Facility at
                  6781 Via Del Oro, San Jose, California (incorporated by refernece
                  to the same numbered exhibit to the Registrant's Form 10-K for the
                  year ended December 31, 1995.                                              --

10.36             Note and Warrant Purchase Agreement, dated as of September 27,
                  1996, by and between The Prudential Insurance Company of America
                  and the Registrant (incorporated by reference to the same numbered
                  exhibit to the Registrant's Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 1996.                                         --
</TABLE>




<PAGE>   41
<TABLE>
<CAPTION>
                                                                                         SEQUENTIALLY
EXHIBIT                                                                                   NUMBERED
NUMBER            DESCRIPTION                                                               PAGE
------            -----------                                                               ----
<S>               <C>                                                                    <C>
10.37             Common Stock Purchase Warrant, dated September 27, 1996
                  (incorporated by reference to the same numbered exhibit to the
                  Registrant's Quarterly Report on Form 10-Q for the quarter ended
                  September 30, 1996).                                                      --

10.38             Series A Senior Secured Notes, dated September 27, 1996, in favor
                  of The Prudential Insurance Company of America (incorporated by
                  reference to the same numbered exhibit to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended September 30,
                  1996).                                                                    --

10.39             Series B Senior Secured Notes, dated September 27, 1996, in favor
                  of The Prudential Insurance Company of America (incorporated by
                  reference to the same numbered exhibit to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended September 30,
                  1996).                                                                    --

10.40             Agreement dated June 12, 1995 between the Company and AT&T Corp.
                  (Portions of this Exhibit are omitted and were filed separately
                  with the Secretary of the Commission pursuant to the Company's
                  application requesting confidential treatment under Rule 406 of the
                  Securities Act of 1933) (incorporated by reference to the Company's
                  Registration Statement No. 333-22177 on Form S-2 filed February 21,
                  1997)                                                                     --

10.41             Employee Stock Purchase Plan (incorporated by reference to
                  registrant's proxy statement for its Annual Meeting of
                  Stockholders on June 5, 1997, filed with the Commission on 
                  May 1, 1997)

21                List of Subsidiaries                                                      --

23                Consent of Independent Accountants

27.4              Financial Data Schedule 
                  Year Ended 1997

27.5              Financial Data Schedule 
                  Restated Quarterly and Year Ended 1996

27.6              Financial Data Schedule 
                  Restated Quarterly 1997

</TABLE>




<PAGE>   42
                                   DATUM INC.

                            FORM 10-K - ITEM 14(A)(3)

                  EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS


<TABLE>
<S>               <C>
10.4              1984 Stock Option Plan, as amended to date (incorporated by
                  reference to Registrant's Registration Statements on Form S-8
                  Registration numbers 2-96564, 33-10335 and 33-41709).

10.6              Executive Agreement dated March 7, 1986 with Louis B. Horwitz,
                  (incorporated by reference to same numbered exhibit to
                  Registrant's Annual Report on Form 10-K for the year ended
                  December 31, 1991).

10.10             Form of Indemnification Agreement dated May 27, 1987 as
                  entered into with certain directors and officers of Registrant
                  (incorporated by reference to same numbered exhibit to
                  Registrant's Annual Report on Form 10-K for the year ended
                  December 31, 1991).

10.21             Consulting Agreement dated October 9, 1992 with Louis B.
                  Horwitz (incorporated by reference to same numbered exhibit to
                  Registrant's Annual Report on Form 10-K for the year ended
                  December 31, 1992).

10.21.1           First Amendment to Consulting Agreement, dated as of March 1,
                  1996, between Louis B. Horwitz and the Registrant
                  (incorporated by reference to the same numbered exhibit to
                  Registrant's Quarterly Report on Form 10-Q for the quarter
                  ended September 30, 1996).

10.29             1994 Stock Incentive Plan (incorporated by reference to
                  Registrant's registration statement on Form S-8 Registration
                  #33-79772).

10.29.1           Amendment to 1994 Stock Incentive Plan, effective March 16,
                  1995 (incorporated by reference to the same numbered exhibit
                  to Registrant's Form 10-K for the year ended December 31,
                  1994).

10.29.2           Second Amendment to 1994 Stock Incentive Plan, effective June
                  5, 1997 (incorporated by reference to Registrant's
                  registration statement on Form S-8 Registration #33-79772).

10.41             Employee Stock Purchase Plan (incorporated by reference to
                  registrant's proxy statement for its Annual Meeting of
                  Stockholders on June 5, 1997, filed with the Commission on 
                  May 1, 1997)

</TABLE>