<PAGE>   1

                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, 1998

                                       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: (949) 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
17, 1999, was approximately $36,920,411.

The number of outstanding shares of the Registrant's Common Stock as of March
17, 1999 was 5,528,266.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on June 10, 1999 (to be filed with the Commission within 120 days of
December 31, 1998): Part III, Items 10-13.

                               Page 1 of ___ Pages
     Exhibit Index is Located on Sequential Numbered Page __ of this Report.

<PAGE>   2

                                INTRODUCTORY NOTE

This Annual Report on Form 10-K (this "Report") 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 and 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 30 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. The Company also 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.
The Company is exploring the developing market for encrypted trusted time. The
hardware and software we believe necessary for a market for legal,
non-repudiable electronic business transactions to grow is in development by the
Company.

         In Note G to the Consolidated Financial Statements of the Company
contained elsewhere in this Report, the Company provides sales and earnings
information segmented by geographic location.

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 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.


                                       2
<PAGE>   3

         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 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.

         The Company has entered into alliances to develop advanced digital
security for transmitting highly sensitive documents across the Internet. We
believe these alliances will lead to the development of the ability to provide
GPS-based time stamps, referenced to UTS (NIST) that can be encapsulated into
transactions and documents in a cryptographically protected manner and
transmitted as e-mail, FTP, CD or cassette.


                                       3
<PAGE>   4

    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 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


                                       4
<PAGE>   5

and manufactures its own physics packages, through 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 that 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 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.


                                       5
<PAGE>   6

         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 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. The Company
is a cesium clock supplier for a series of satellites scheduled to be launched
starting 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.


                                       6
<PAGE>   7

         Rubidium Oscillators -- In addition to their widespread 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

         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. The time is
generated from either an internal or external frequency reference 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 totaled $11.9 million, $10.7 million
and $7.7 million in 1998, 1997 and 1996, 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 34% and 38% of net sales for the
years ended December 31, 1998 and 1997, respectively. The Company's second
largest customer, Motorola, Inc., accounted for less than 10% of net sales in
1998 and 10% of net sales in 1997. Further, the Company's five largest customers
accounted for approximately 52% and 58% 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 which the Company and
such customers do business, which could materially 


                                       7
<PAGE>   8

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 24%, 19% and
22% of net sales for the years ended December 31, 1998, 1997 and 1996,
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. See "Quantitative and
Qualitative Disclosures About Market Risk."

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 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.


                                       8
<PAGE>   9

BACKLOG

         The Company's backlog of orders was approximately $20.8 million on
December 31, 1998, compared to approximately $34.0 million a year earlier. The
decrease was primarily due to a slowdown in the wireless market. 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 12% of its sales in 1998 were
made either directly to United States government agencies or indirectly to U.S.
government agencies through subcontracts as compared to approximately 13% in
1997 and 15% in 1996 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 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.


                                       9
<PAGE>   10

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.

         From time to time the Company has received communications from third
parties asserting that features of certain of its products may infringe upon the
intellectual property rights of such third parties. Although the Company makes
reasonable efforts to ensure that its products do not violate the intellectual
property rights of others, 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 553 employees at December 31, 1998. 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 and Erik van der Kaay, its President and a
Director, have entered into an employment agreement with an indefinite term. The
Company's other 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 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.

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 is currently negotiating to renew this lease. 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.


                                       10
<PAGE>   11

Item 3.  LEGAL PROCEEDINGS

         In late 1996, the Company received notice of potential environmental
contamination from the owner of premises in Austin, Texas that had previously
been occupied by Austron, Inc., the Company's wireline operation ("Austron"),
prior to the Company's acquisition of Austron in 1988. Although Austron had
remediated the site pursuant to then-existing environmental regulations in
connection with vacating the site in 1983, the applicable environmental
regulations were modified after 1983, providing the basis for the property
owner's claim that the soil at the site contains the same contaminants that were
the focus of Austron's previous remediation efforts. In compliance with current
law, the Company has established the extent of the site contamination, which
contamination extends to adjoining properties owned by third parties. The
Company believes that it will continue to incur monitoring costs in connection
with the site contamination and may be subject to claims from adjoining
landowners in addition to the claim for remediation discussed above, and the
amount of such costs and the extent of the Company's exposure to such claims
cannot be determined at this time. Although there can be no assurance that the
remediation efforts, the property owners' claims or any related governmental
action will not singly or in the aggregate have a material adverse effect on the
Company's business, financial condition and results of operations, the Company
does not believe the aggregated potential liability will have such an 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, 1998.

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>
Erik H. van der Kaay        58              President and Chief Executive Officer since April 1998.
                                            Prior to joining Datum, he served as Allen Telecom's
                                            Executive Vice President from 1997 to 1998 and a variety
                                            of senior positions from 1990 to 1997. He was President
                                            and Chief Executive Officer of Millitech Corporation
                                            from 1988 to 1990. He currently serves on the Boards of
                                            RF Micro-Devices and TranSwitch Corporation.

Louis B. Horwitz            71              Chairman of the Board of Directors of the Company since
                                            October 1976 and a director of the Company since May
                                            1975. President and Chief Executive Officer from 1976 to
                                            1998. Prior to joining the Company, He was an
                                            independent management consultant and an Executive Vice
                                            President of Xerox Data Systems, a manufacturer of
                                            computers.

D. Ronald Duren             56              Vice President of the Company since April 1998. Prior to
                                            joining the Company, he was with Telecom Solutions
                                            serving as their President and Chief Operating Officer
                                            from August 1990 to April 1997, as Vice President of
                                            Sales from August 1988 to August 1990, and as Director
                                            of Marketing and Sales from July 1986 to August 1988.
                                            From 1983 through July 1986, he served as Vice
                                            President, Telco Sales for Granger Associates.
                                            Previously, Mr. Duren served in various management
                                            positions with AT&T for seventeen years.

Paul Baia                   46              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.
</TABLE>


                                                 11
<PAGE>   12

<TABLE>
<S>                        <C>              <C>
John (Jack) R. Rice         54              Vice President of the Company since April 1994 and
                                            President of the Company's Austron, Inc. subsidiary
                                            since May 1995. He also served as President of the
                                            Company's Efratom Time & Frequency Products, Inc.
                                            subsidiary from April 1998 to March 1999. 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           58              Vice President of the Company and President of the
                                            Company's Bancomm-Timing 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       67              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              55              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>


                                       12
<PAGE>   13

                                     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, 1998
1st Quarter...................................................  18-1/2       12
2nd Quarter...................................................  18-1/8       13
3rd Quarter...................................................  18-1/8    6-1/4
4th Quarter...................................................   9-3/4   5-5/16

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
</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 17, 1999, there were 372 stockholders of record.


                                       13
<PAGE>   14

Item 6. SELECTED FINANCIAL DATA

        The following selected consolidated financial data has been derived from
the financial statements of the Company audited by PricewaterhouseCoopers LLP,
independent accountants. The consolidated balance sheet at December 31, 1998 and
1997 and the related consolidated statements of operations and of cash flows for
the three years ended December 31, 1998 and notes thereto appear elsewhere in
this Report.

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                               --------------------------------------------------------------------
                                                 1998          1997           1996          1995(1)         1994
                                               ---------     ---------      ---------      ---------      ---------
                                                         (In thousands, except share and per share data)
<S>                                            <C>           <C>            <C>            <C>            <C>       
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net Sales    ...............................   $101,233       $114,092      $  91,854      $  67,257      $  30,897
   Costs and expenses:
      Cost of goods sold....................     65,172         68,235         56,285         40,010         17,491
      Selling...............................     15,003         15,808         12,182          9,836          5,206
      Product development...................     11,903         10,650          7,667          7,087          2,494
      General and administrative (2)........      9,946          9,479         10,127          8,460          3,934
                                               ---------     ---------      ---------      ---------      ---------
      Operating income (loss)...............       (791)         9,920          5,593          1,864          1,772
                                               ---------     ---------      ---------      ---------      ---------
      Interest expense......................      2,051          2,085          2,255          1,667            241
      Interest income.......................       (434)          (349)            (7)           (17)           (15)
                                               ---------     ---------      ---------      ---------      ---------
Income (loss) before income taxes...........     (2,408)         8,184          3,345            214          1,546
Income tax provision (benefit)..............       (951)         3,355          1,371            154            610
                                               ---------     ---------      ---------      ---------      ---------
Net income (loss)...........................   $ (1,457)     $   4,829      $   1,974      $      60      $     936
                                               =========     =========      =========      =========      =========
Net income (loss) per share:
      Basic  ...............................   $   (.27)     $     .97      $     .49      $     .02      $     .36
                                               =========     =========      =========      =========      =========
      Diluted...............................   $   (.27)     $     .90      $     .46      $     .02      $     .34
                                               =========     =========      =========      =========      =========
Shares used in per share calculation:
      Basic  ...............................   5,414,075     4,973,228      4,061,014      3,713,710      2,628,721
                                               =========     =========      =========      =========      =========
      Diluted...............................   5,414,075     5,389,862      4,253,019      3,954,307      2,732,812
                                               =========     =========      =========      =========      =========
</TABLE>

<TABLE>
<CAPTION>
                                                                           December 31,
                                               --------------------------------------------------------------------
                                                 1998          1997           1996           1995           1994
                                               ---------     ---------      ---------      ---------      ---------
<S>                                            <C>           <C>            <C>            <C>            <C>       
CONSOLIDATED BALANCE SHEET DATA:
Working capital.............................   $  46,089     $  47,482      $  26,029      $  12,310      $   8,684
Total assets                                      86,920        85,746         68,688         66,137         24,578
Long-term debt..............................      14,533        17,418         17,318          7,938             50
Stockholders' equity........................      56,978        56,844         34,623         31,313         16,883
                                               =========     =========      =========      =========      =========
</TABLE>


-----------------
(1)  In March 1995, the Company acquired Efratom Time and Frequency Products,
     Inc. and Datum GmbH (formerly 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, $1.5 million and $1.1 million for
     1998, 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.


                                       14
<PAGE>   15

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.

OVERVIEW

         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.

RESULTS OF OPERATIONS

         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. A significant
component of these fluctuations may result from rescheduling of orders by the
Company's major customers. Due to these and other unanticipated factors, it is
likely that in some future quarters the Company's operating results may be below
the expectations of public market analysts or investors.

         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. Net sales for the Company decreased by 11.3% from
$114.1 million in 1997 to $101.2 million in 1998. Continued softness in the
cellular and PCS wireless telecommunications market throughout 1998 accounted
for the reduction. However, it was partially offset by the growth of nearly 40%
in the Company's wireline telecommunications sales. 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 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 in 1997 over 1996, largely due to
increased international business.

         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 Technology,
accounted for approximately 34%, 38%, and 36% of net sales for the fiscal years
ended December 31, 1998, 1997 and 1996, respectively. Further, the Company's
five largest customers, including Lucent, accounted for approximately 52%, 58%,
and 53% of net sales during the same periods. The reduction in orders by, or
loss of any major customer could adversely affect the Company's business,
financial condition and results of operations.

         Direct and indirect sales to the United States government decreased
16.6% from $15.1 million in 1997 to $12.6 million in 1998, constituting
approximately 13.2% and 12.4% of net sales. 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 35.6% and 40.2% in 1998 and 1997,
respectively. The decrease in gross margin in 1998 was primarily the result of
decreased sales in the wireless telecommunications market and continual price
pressures on these products. 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
were adversely affected in each year as a 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 the supply agreement with
the Company. 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.


                                       15
<PAGE>   16

         Selling Expense. Selling expense consists primarily of salaries and
other expenses of its sales and marketing personnel, along with sales
commissions paid to the Company's third-party representatives and distributors.
Selling expense as a percentage of net sales was 14.8% and 13.9% in 1998 and
1997, respectively. Selling expense decreased by 5.1% to $15.0 million in 1998
from $15.8 million in 1997, primarily from the reduction in commissions on
decreased net sales.

         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 11.8% from $10.7 million in 1997 to $11.8 million
in 1998, representing 9.3% and 11.8% respectively. The dollar increase reflects
the continual emphasis on new product design and enhancement of current
products. 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 expenses increased by 4.9% from $9.5 million to $9.9
million in 1998, and increased as a percentage of net sales from 8.3% in 1997 to
9.8% in 1998. Hiring and moving costs along with overlapping transition salaries
for two CEO's accounted for the increased costs in 1998. 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 $2.1 million, $2.1 million and $1.5
million for 1998, 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 5.9% from $1.7 million in 1997 to $
1.6 million in 1998, as a result of increased cash investment balances in 1998.
Interest decreased 26.0% from $2.3 million in 1996 to $1.7 million in 1997,
primarily as a result of the reduction of debt with proceeds from the follow-on
offering completed April 2, 1997 of approximately one million shares at $15 per
share.

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 provided by operations of approximately $6.4
million in 1998, compared to cash used for operating activities of approximately
$4.9 million in 1997, and cash provided by operations of approximately $6.7
million in 1996. The increase in cash for the year ended December 31, 1998, was
primarily the result of a decrease in inventory offset by a net loss for the
year. Cash flows in 1997 were adversely affected by increasing inventories due
to lower than planned revenues. The increase in cash provided by operations for
the year ended December 31, 1996 was primarily the result of increased
profitability and a decrease in inventory.

         Capital expenditures were approximately $2.7 million, $4.5 million, and
$2.7 million in 1998, 1997, and 1996, respectively. The decrease from 1998 to
1997 was primarily the result of the larger than average expenditures of 1997
and the lower than planned sales of 1998. 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.

         At December 31, 1998, the Company had working capital of $46.1 million
and a current ratio of 4.6:1, compared to working capital of $48.4 million and a
current ratio of 6.3:1, at December 31, 1997. The decrease in working capital is
primarily 


                                       16
<PAGE>   17

the result of the decrease in inventories of approximately $6.7 million in 1998,
offset by an increase in cash of approximately $4.5 million.

         The Company's credit facility includes: (i) $6.0 million of Series A
Senior Secured promissory notes maturing 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 maturing 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, in connection with the
issuance of these promissory notes, the Company issued to The Prudential
Insurance Company of America ("Prudential") common stock warrants for the
purchase of 175,000 shares of common stock at an exercise price per share of
$11.50.

          The maturity date of the revolving component of the Company's line of
credit with Wells Fargo Bank has been extended to June 15, 1999 in a principal
amount not to exceed $10.0 million and bearing interest at Wells Fargo's prime
rate or at LIBOR plus 2.75%. Under both the Wells Fargo credit facility and the
Prudential promissory notes, 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 or has
received waivers on all such covenants and restrictions.

FORWARD-LOOKING STATEMENTS

         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 strategies, plans, objectives and
expectations, the Company's exposure to quarterly fluctuations, the Company's
future capital needs, the anticipated growth of its target markets 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. Important factors that could cause actual results to differ materially
from the Company's expectations ("Cautionary Statements") are set forth in this
Section as well as in "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.

READINESS FOR YEAR 2000

         The Company is aware that some significant portion of existing
electronic equipment, including computers, software and embedded technology, was
not designed to correctly process dates after December 31, 1999. These systems
store dates as having two digit, rather than four digit years, which could
potentially cause erroneous data results for program failures in the year 2000.
The Company is currently assessing the impact of such Year 2000 (Y2K) issues on
the Company's internal computer systems, non-computer systems, and products as
well as on the Company's vendors, service providers, and significant customers.

         Internally, the Company has developed a plan to inventory critical
systems at each of its five operating locations and develop solutions, with
further contingency plans where possible. The Company has identified two of its
five information systems locations as not Y2K compliant. While the Company could
upgrade these two locations without incurring material expense, the Company has
instead decided to implement a Company-wide enterprise information system, which
is scheduled for completion in September 1999. The new system is expected to
improve information systems operating performance and will be fully Y2K
compliant. The Company has not identified any other significant areas of
non-compliance in internal computer systems or non-computer systems, or
products. The Company has reviewed its products and does not expect to incur any
material expense related to product non-compliance. The Company believes
additional, though immaterial, revenue may be realized if customers decide to
upgrade their older products.

         The Company believes the greatest risk of significant adverse effects
on the Company relates to third party failure to appropriately address their Y2K
non-compliance. Y2K failures in key suppliers' systems, or their respective
suppliers' or customers' systems, could effect their ability to supply material
or services to the Company, and therefore affect the Company's ability to
produce and ship products. Y2K failures at the Company's significant customers,
including the United States government, could effect such customers' ability to
order, accept and pay for the Company's products. External Y2K failures could
therefore have a material adverse effect on the Company's revenues and financial
condition. The Company is in the process of securing letters of compliance from
those vendors and service providers that are critical to the operations of the
Company. The 


                                       17
<PAGE>   18

Company plans to secure alternative suppliers for those who cannot assure the
Company of their Y2K readiness. The Company also plans to survey its significant
customers regarding their plans to identify and address Y2K issues. The Company
has already been assured by its two largest customers, Lucent and Motorola, that
they expect to be Y2K compliant. External Y2K risks will be addressed as the
survey of key customers and suppliers is completed. Although the Company expects
cooperation from the suppliers and customers it is surveying, the Company also
relies on services such as telephones and utilities, whose Y2K compliance is
outside of the Company's control. Therefore, the Company may be unable to
accurately assess the Y2K readiness of third parties, and the impact of such
third party non-compliance on the Company's operations.

         The Company plans to continue to identify, assess and to resolve all
material Y2K issues by the end of 1999. The Company is developing contingency
plans to address significant internal and external Y2K issues as they are
identified. These contingency plans are expected to be complete by the end of
1999. The Y2K problem involves pervasive complex interrelationships, both
internal and external to the Company. As a result, no assurance can be given
that the Company will identify and successfully resolve all Y2K issues.

         The Company has not incurred any material expense to date in addressing
Y2K issues. Although the Company has not completed its assessment of Y2K
readiness, the Company believes no material expenses will be incurred in the
future.

READINESS FOR GPS WEEK ROLLOVER

         All current Global Positioning system (GPS) satellites, which are
operated by the United States government, report time in the form of a GPS week
number and a time offset. The week number is accumulated in a 10 bit counter
with a range of 0 to 1023. The counter began at 0 on January 6, 1980, and is
scheduled to roll from 1023 back to 0 on August 21, 1999. This rollover may
cause equipment to erroneously interpret dates causing satellite positions to be
miscalculated producing inaccurate data. The Company has identified its products
that are non-compliant. The Company's liability is limited to those products
considered under warranty. The Company does not expect to incur any material
expense in upgrading these products. For products not considered under warranty,
the Company expects to realize additional revenue, although not material, in
upgrading these older non-compliant products.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         The Company is primarily exposed to market risks that relate to changes
in foreign currency fluctuations. The Company's foreign sales are generally
invoiced in U.S. dollars, and the Company does not presently enter into foreign
currency forward exchange contracts. The Company generally does not enter into
derivative financial instrument transactions for speculative purposes.
Additional information for this item is contained under the captions
"Disclosures About Fair Value of Financial Instruments" and "Foreign Currency
Translation" in Note A, "Description of the Company and Summary of Significant
Accounting Policies" in Notes to the Consolidated Financial Statements set forth
elsewhere in this Report.

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.


                                       18
<PAGE>   19

                                    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 10, 1999 to
be filed with the Commission on or before April 30, 1999. 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 10, 1999 to be
filed with the Commission on or before April 30, 1999.

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 10, 1999 to be filed with the Commission on or
before April 30, 1999.

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 10, 1999 to be
filed with the Commission on or before April 30, 1999.


                                       19
<PAGE>   20

                                     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.


                                       20
<PAGE>   21

                                   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, 1999.

                                               DATUM INC.

                                               By   /s/ Erik H. van der Kaay
                                                  ------------------------------
                                                    Erik H. van der Kaay
                                                    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/ Erik H. van der Kaay                President and Director                            March 24, 1999
------------------------------------    (Principal Executive Officer)
Erik H. van der Kaay                    

/s/ David A. Young                      Chief Financial Officer                           March 24, 1999
-----------------------------------     (Principal Financial and Accounting Officer)
David A. Young                     

/s/ Louis B. Horwitz                    Director and Chairman                             March 24, 1999
-----------------------------------
Louis B. Horwitz

 /s/ G. Tilton Gardner                  Director                                          March 24, 1999
-----------------------------------
G. Tilton Gardner

 /s/ Dan L. McGurk                      Director                                          March 24, 1999
-----------------------------------
Dan L. McGurk

 /s/ Edward A. Money                    Director                                          March 24, 1999
-----------------------------------
Edward A. Money

 /s/ Michael M. Mann                    Director                                          March 24, 1999
-----------------------------------
Michael M. Mann

 /s/ R. David Hoover                    Director                                          March 24, 1999
-----------------------------------
R. David Hoover
</TABLE>


                                       21
<PAGE>   22

                           DATUM INC. AND SUBSIDIARIES

               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,
        1998 and 1997       .............................................................F-2

      Consolidated statement of operations for each of the three years in the
        period ended December 31, 1998 ..................................................F-3

      Consolidated statement of stockholders' equity
        for each of the three years in the period
        ended December 31, 1998..........................................................F-4

      Consolidated statement of cash flows for each of the three years in the
        period ended December 31, 1998 ..................................................F-5

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


      Financial Statement Schedules

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


                                       22
<PAGE>   23

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Datum Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Datum Inc.
and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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.

PRICEWATERHOUSECOOPERS LLP

Costa Mesa, California
February 25, 1999


                                      F-1
<PAGE>   24

                          DATUM INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                                ----------------------
                                                                                  1997          1998
                                                                                --------      --------
<S>                                                                             <C>           <C>     
ASSETS
Current assets:
  Cash and cash equivalents                                                     $ 10,307      $  5,819
  Accounts receivable, less allowance for doubtful accounts of $153 and $71       19,327        15,043
  Inventories                                                                     24,555        31,219
  Prepaid expenses                                                                   479           363
  Deferred income taxes                                                            3,056         2,648
  Income tax refund receivable                                                     1,190         1,321
                                                                                --------      --------
          Total current assets                                                    58,914        56,413
Land, buildings and equipment, net                                                16,048        16,791
Excess of purchase price over net assets acquired, net of accumulated
  amortization of $3,845 and $2,951                                               11,231        12,126
Other assets                                                                         727           416
                                                                                --------      --------
                                                                                $ 86,920      $ 85,746
                                                                                ========      ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                              $  4,241      $  3,343
  Accrued salaries and wages                                                       2,485         3,298
  Accrued warranty                                                                 1,498           990
  Other accrued expenses                                                           1,287         1,277
  Income taxes payable                                                               289            --
  Current portion of long-term debt                                                3,025            23
                                                                                --------      --------
          Total current liabilities                                               12,825         8,931
                                                                                --------      --------
Long-term debt                                                                    14,533        17,418
                                                                                --------      --------
Post-retirement benefits                                                             818           602
                                                                                --------      --------
Other long-term liabilities                                                          144           128
                                                                                --------      --------
Deferred income taxes                                                              1,622         1,823
                                                                                --------      --------
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 - 5,505,843 shares in 1998 and 5,332,860 shares in 1997                1,376         1,333
  Additional paid-in capital                                                      44,941        43,231
  Retained earnings                                                               11,328        12,785
  Unamortized stock compensation                                                    (368)           --
  Accumulated other comprehensive income                                            (299)         (505)
                                                                                --------      --------
          Total stockholders' equity                                              56,978        56,844
                                                                                --------      --------
Commitments (Notes C and H)                                                     $ 86,920      $ 85,746
                                                                                ========      ========
</TABLE>


                 See Notes to Consolidated Financial Statements


                                      F-2
<PAGE>   25

                           DATUM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                          ---------------------------------------------
                                              1998            1997             1996
                                          -----------      -----------      -----------
<S>                                       <C>              <C>              <C>        
Net sales.............................    $   101,233      $   114,092      $    91,854
                                          -----------      -----------      -----------
Costs and expenses:
  Cost of goods sold..................         65,172           68,235           56,285
  Selling.............................         15,003           15,808           12,182
  Product development.................         11,903           10,650            7,667
  General and administrative..........          9,946            9,479           10,127
  Interest expense....................          2,051            2,085            2,255
  Interest income.....................           (434)            (349)              (7)
                                          -----------      -----------      -----------
                                              103,641          105,908           88,509
                                          -----------      -----------      -----------
Income (loss)  before income taxes....         (2,408)           8,184            3,345
Income tax provision (benefit)........           (951)           3,355            1,371
                                          -----------      -----------      -----------
Net income (loss).....................    $    (1,457)     $     4,829      $     1,974
                                          ===========      ===========      ===========
Net income (loss) per share:
  Basic...............................    $      (.27)     $       .97      $       .49
                                          ===========      ===========      ===========
  Diluted.............................    $      (.27)     $       .90      $       .46
                                          ===========      ===========      ===========
Shares used in per share calculation:
  Basic...............................      5,414,075        4,973,228        4,061,014
                                          ===========      ===========      ===========
  Diluted.............................      5,414,075        5,389,862        4,253,019
                                          ===========      ===========      ===========
</TABLE>



                 See Notes to Consolidated Financial Statements


                                      F-3
<PAGE>   26

                           DATUM INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                        ACCUMULATED
                                            COMMON STOCK       ADDITIONAL               UNAMORTIZED       OTHER
                                         --------------------   PAID-IN     RETAINED       STOCK       COMPREHENSIVE
                                          SHARES      AMOUNT    CAPITAL     EARNINGS    COMPENSATION      INCOME         TOTAL
                                          ------      ------    -------     --------    ------------      ------         -----
<S>                                      <C>          <C>      <C>          <C>         <C>            <C>            <C>       
Balances at December 31, 1995 .........  4,018,968    $ 1,005    $ 5,982    $24,418                       $ (92)      $   31,313
  Issuance of common stock under
   401(k) plan ........................     44,610         11                   453                                          464
  Exercise of stock options ...........     27,713          7                   189                                          196
  Issuance of common stock warrants ...                                         785                                          785
  Comprehensive income:
    Cumulative translation adjustment .                                                                    (109)            (109)
    Net income ........................                            1,974                                                   1,974
                                                                                                                         -------
  Total comprehensive income ..........                                                                                    1,865
                                         ---------    -------    -------    -------          -------      -----          -------
Balances at December 31, 1996 .........  4,091,291      1,023      7,956     25,845               --       (201)          34,623
  Issuance of common stock under
   401(k) and ESP plans ...............     31,744          7                   688                                          695
  Exercise of stock options ...........    174,825         44                 1,155                                        1,199
  Income tax benefit from stock
   options exercised ..................                                       1,646                                        1,646
  Issuance of common stock, net of
   costs incurred .....................  1,035,000        259                13,897                                       14,156
  Comprehensive income:
    Cumulative translation adjustment .                                                                    (304)            (304)
    Net income ........................                            4,829                                                   4,829
                                                                                                                         -------
  Total comprehensive income ..........                                                                                    4,515
                                         ---------    -------    -------    -------          -------      -----          -------
Balances at December 31, 1997 .........  5,332,860      1,333     12,785     43,231               --       (505)          56,844
  Issuance of common stock under
   401(k) and ESP plans ...............    100,733         25                   970                                          995
  Exercise of stock options ...........     42,250         11                   208                                          219
  Income tax benefit from restricted
   stock issued and stock options
   exercised ..........................                                         127                                          127
  Issuance of restricted stock ........     30,000          7                   405          $  (412)                         --
  Amortization of stock compensation ..                                                           44                          44
  Comprehensive income:
    Cumulative translation adjustment .                                                                     206              206
    Net loss ..........................                           (1,457)                                                 (1,457)
                                                                                                                         -------
  Total comprehensive income ..........                                                                                   (1,222)
                                         ---------    -------    -------    -------          -------      -----          -------
Balances at December 31, 1998 .........  5,505,843    $ 1,376    $11,328    $44,941          $  (368)     $(299)         $56,978
                                         =========    =======    =======    =======          =======      =====          =======
</TABLE>


See Notes to Consolidated Financial Statements



                                      F-4
<PAGE>   27

                           DATUM INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                                    --------------------------------------
                                                                      1998           1997           1996
                                                                    --------       --------       --------
<S>                                                                 <C>            <C>            <C>     
Cash flows from operating activities:
  Net income (loss) ..........................................      $ (1,457)      $  4,829       $  1,974
                                                                    --------       --------       --------
  Adjustments to reconcile net income (loss) to net cash
    provided by (used for) operating activities:
       Depreciation and amortization .........................         3,636          3,152          3,040
       Amortization of goodwill ..............................           894            894            894
       Contribution of shares of common stock to the Company's
          401(k) plan ........................................           706            628            464
       Amortization of stock compensation ....................            44             --             --
  Changes in assets and liabilities:
     (Increase) decrease in accounts receivable ..............        (4,284)         1,773         (3,178)
     (Increase) decrease in inventories ......................         6,664        (11,949)           891
     (Increase) decrease in prepaid expenses .................          (116)            62           (225)
     Decrease in income tax refund receivable ................           258             --            109
     (Increase) decrease in deferred income taxes ............          (609)           187           (175)
     Increase in other assets ................................          (416)           (26)          (491)
     Increase (decrease) in accounts payable .................           899         (4,199)         2,387
     Increase (decrease) in accrued expenses .................          (297)           320            (89)
     Increase (decrease) in income taxes payable .............           289           (724)           944
     Increase (decrease) in other long-term liabilities ......            16            (30)            40
     Increase in post-retirement benefits ....................           216            156            156
                                                                    --------       --------       --------
  Total reconciling items ....................................         7,900         (9,756)         4,767
                                                                    --------       --------       --------
  Net cash provided by (used for) operating activities .......         6,443         (4,927)         6,741
                                                                    --------       --------       --------
Cash flows from investing activities:
  Book value of equipment disposals ..........................            55             50             98
  Capital expenditures .......................................        (2,699)        (4,494)        (2,685)
  Payment for acquisition ....................................            --         (1,270)            --
  Other ......................................................           203           (292)           (99)
                                                                    --------       --------       --------
  Net cash used in investing activities ......................        (2,441)        (6,006)        (2,686)
                                                                    --------       --------       --------
Cash flows from financing activities:
  Reductions of line of credit ...............................            --            (21)       (10,442)
  Proceeds from long-term debt and notes payable .............            --             --         17,736
  Repayment of long-term debt and notes payable ..............           (22)           (38)       (11,528)
  Proceeds from issuance of common stock .....................            --         14,156             --
  Proceeds from exercise of stock options and ESP plans ......           508          1,266            196
  Proceeds from issuance of common stock warrants ............            --             --            785
                                                                    --------       --------       --------
  Net cash provided by (used for) financing activities .......           486         15,363         (3,253)
                                                                    --------       --------       --------
Net increase in cash and cash equivalents ....................         4,488          4,430            802
Cash and cash equivalents at beginning of year ...............         5,819          1,389            587
                                                                    --------       --------       --------
Cash and cash equivalents at end of year .....................      $ 10,307       $  5,819       $  1,389
                                                                    ========       ========       ========
</TABLE>


See Notes to Consolidated Financial Statements


                                      F-5

<PAGE>   28

                           DATUM INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1998, 1997 AND 1996

                 (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,
                                     ------------------------
                                       1998             1997
                                     -------          -------
<S>                                  <C>              <C>    
          Purchased parts .......    $ 7,156          $10,523
          Work-in-process .......     10,524           12,833
          Finished products .....      6,875            7,863
                                     -------          -------
                                     $24,555          $31,219
                                     =======          =======
</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
                                                      1998             1997                LIFE
                                                     -------          -------          --------------
<S>                                                  <C>              <C>              <C>
          Land ............................          $ 2,040          $ 2,040
          Buildings .......................            5,060            4,564          30 to 40 years
          Equipment .......................           20,450           19,306          3 to 10 years
          Leasehold improvements ..........            1,149            1,013          5 to 10 years
                                                     -------          -------
                                                      28,699           26,923
          Less accumulated depreciation and
            amortization ..................           12,651           10,132
                                                     -------          -------
                                                     $16,048          $16,791
                                                     =======          =======
</TABLE>

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



                                      F-6

<PAGE>   29

    Excess of Purchase Price 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 ("goodwill") 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 $1,805, $ 2,019 and $2,109 in 1998, 1997 and 1996, respectively. Cash
paid for income taxes totaled $315, $3,935 and $580 in 1998, 1997 and 1996,
respectively. Significant non-cash transactions affecting the Company's accounts
consisted of tax benefits from the exercise of common stock options of $127 and
$1,646 in 1998 and 1997, respectively.

    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. In 1998, the Company did not include potential common stock in
the calculation of Net income per share -- Diluted as such inclusion would have
an anti-dilutive effect. Net income per share is calculated as follows:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                      ---------------------------------------------
                                                         1998              1997             1996
                                                      ----------        ----------       ----------
<S>                                                   <C>               <C>              <C>       
          Net income (loss) ...................       $   (1,457)       $    4,829       $    1,974
                                                      ==========        ==========       ==========
          Shares outstanding - Basic ..........        5,414,075         4,973,228        4,061,014
          Effect of dilutive securities:
              Warrants ........................               --            89,200            2,846
              Stock options ..................                --           327,434          189,159
                                                      ----------        ----------       ----------
          Shares outstanding - Diluted ........        5,414,075         5,389,862        4,253,019
                                                      ==========        ==========       ==========
          Net income (loss) per share - Basic .       $     (.27)       $      .97       $      .49
                                                      ==========        ==========       ==========
          Net income (loss) per share - Diluted       $     (.27)       $      .90       $      .46
                                                      ==========        ==========       ==========
</TABLE>

    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.

    Comprehensive Income. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (FAS 130), "Reporting Comprehensive Income." FAS
130 establishes standards for the reporting and displaying of comprehensive
income and its components. The adoption of FAS 130 did not affect the results of
operations or financial position but did affect the disclosure of comprehensive
income in the statement of stockholders' equity. Comprehensive income is defined
as a change in equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources.

    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 in other comprehensive income.

    Reclassifications: Certain reclassifications have been made to the
consolidated financial statements for prior years to conform to the 1998
presentation.


                                       F-7
<PAGE>   30

    Post-retirement Benefits: In 1998, the Company adopted Statement of
Financial Accounting Standards No. 132 (FAS 132), "Employers' Disclosures about
Pensions and Other Post-retirement Benefits." FAS 132 revises disclosures about
other post-retirement benefit plans. The adoption of FAS 132 did not affect the
results of operations or financial position but did affect the disclosure of
post-retirement benefit information (Note D).

    Segment and Related Information: In 1998, the Company adopted Statement of
Financial Accounting Standards No. 131 (FAS 131), "Disclosures about Segments of
an Enterprise and Related Information." FAS 131 supersedes FAS 14, "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. FAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of FAS 131 did not
affect results of operations or financial position but did affect the disclosure
of segment information (Note G).


                                      F-8
<PAGE>   31

NOTE B - DEBT

    Long-term obligations outstanding are as follows:

<TABLE>
<CAPTION>
                                                                                                       DECEMBER 31,  
                                                                                                 ------------------------
                                                                                                  1998              1997
                                                                                                 -------          -------
<S>                                                                                              <C>              <C>
               $6,000 Series A Senior Secured Notes (net of discount of $157),
                 principal due semi-annually beginning March 27, 1999, to
                 September 27, 2000, with interest payable quarterly at 9.07%,
                 secured by all assets......................................................      $5,843          $ 5,797
               $12,000 Series B Senior Secured Notes (net of discount of $313),
                 principal due semi-annually beginning March 27, 2001, to
                 September 27, 2003, with interest payable quarterly at 10.25%,
                 secured by all assets......................................................      11,687           11,593
               Capital equipment leases for various machinery and equipment with
                 interest at 10.26% to 11.59% maturing at various dates.....................          28               51
                                                                                                 -------          -------
               Total debt...................................................................      17,558           17,441
                 Less current portion.......................................................     (3,025)              (23)
                                                                                                 -------          -------
               Long-term debt, less current portion.........................................     $14,533          $17,418
                                                                                                 =======          =======
</TABLE>

    Aggregate maturities of long-term debt before debt discount at December 31,
1998 are as follows:

<TABLE>
<S>                                                    <C>   
               1999................................    $3,025
               2000................................     3,002
               2001................................     4,001
               2002................................     4,000
               2003................................     4,000
                                                      -------
                         Total.....................   $18,028
                                                      =======
</TABLE>

    The Company's current two-year revolving line of credit has been extended to
June 15, 1999 at an amount not to exceed $10,000. Interest is payable at prime
or at LIBOR plus 2.75% (7.75% at December 31, 1998). The line is secured by all
assets of the Company. No amounts were outstanding under this line at December
31, 1998 and 1997.

    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. At December 31, 1998, the
Company was not in compliance with the line of credit agreement due to a
financial ratio covenant related to profitability level. The Company has
received a waiver for the non-compliance.


                                      F-9
<PAGE>   32

NOTE C -INCOME TAXES

    The income tax provision (benefit) comprises the following:

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                    ------------------------------
                                                     1998        1997        1996
                                                    -----       ------      ------
<S>                                                 <C>         <C>         <C>   
    Provision (benefit) for income taxes:
      Current:
         Federal............................        $(682)      $2,587      $1,081
         State..............................          210          537         445
         Foreign............................          130           44          20
                                                    -----       ------      ------
                                                     (342)       3,168       1,546
                                                    -----       ------      ------
      Deferred:
         Federal............................         (336)         223        (155)
         State..............................         (273)         (36)        (20)
                                                    -----       ------      ------
                                                     (609)         187        (175)
                                                    -----       ------      ------
                                                    $(951)      $3,355      $1,371
                                                    =====       ======      ======
</TABLE>

    The tax benefits associated with the exercise of non-qualified stock options
reduced taxes currently payable as shown above by $127 and $1,646 in 1998 and
1997, respectively. Such benefit was credited to additional paid in capital.

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

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                     --------------------------------------------------------------------
                                                            1998                    1997                      1996
                                                     ------------------       ------------------       ------------------
                                                                 Pretax                   Pretax                   Pretax
                                                     Amount      Income       Amount      Income       Amount      Income
                                                     ------      ------       ------      ------       ------      ------
<S>                                                 <C>          <C>         <C>           <C>        <C>           <C>  
     Computed expected tax expense (benefit) ..     $  (819)     (34.0%)     $ 2,809       35.0%      $ 1,171       35.0%
     State income tax (benefit), net of federal
       income tax effect ......................         (63)      (2.6%)         326        4.0%          272        8.1%
     Amortization of excess of purchase price
       over net assets acquired ...............          31        1.2%           27         .3%           31        1.0%
     Foreign earnings taxed at different
       rates ..................................          28        1.2%          (12)       (.2%)          20         .6%
     Research and development tax credits .....        (123)      (5.1%)        (150)      (1.8%)        (204)      (6.1%)
     Other ....................................          (5)      (0.2%)         355        4.3%           81        2.4%
                                                    -------       ----       -------       ----       -------       ----
                                                    $  (951)     (39.5%)     $ 3,355       41.0%      $ 1,371       41.0%
                                                    =======      =====       =======       ====       =======       ====
</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,
                                                             -----------------------
                                                              1998             1997
                                                             ------           ------
<S>                                                          <C>              <C>   
     Deferred tax assets:
       Inventory........................................     $2,018           $1,887
       Accruals and reserves............................      1,698            1,022
                                                             ------           ------
                                                              3,716            2,909
                                                             ------           ------
     Deferred tax liabilities:
       Property, plant and equipment....................      2,235            2,037
       Other............................................         47               47
                                                             ------           ------
                                                              2,282            2,084
                                                             ------           ------
                                                             $1,434           $  825
                                                             ======           ======
</TABLE>


                                      F-10

<PAGE>   33
3
NOTE D - 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,
                                                               --------------------
                                                                1998         1997
                                                               -------      -------
<S>                                                            <C>          <C>    
     Accumulated post-retirement benefit obligation:
         Benefit obligation at beginning of year .........     $ 1,248      $ 1,160
            Service cost .................................         127           71
            Interest cost ................................          86           70
            Actuarial gains ..............................        (192)          (8)
            Expected benefits paid .......................         (30)         (45)
                                                               -------      -------
         Benefit obligation at end of year ...............       1,239        1,248
         Plan assets at fair value .......................          --           --
                                                               -------      -------
         Accumulated post-retirement benefit obligation in
            excess of plan assets ........................       1,239        1,248
         Unrecognized transition obligation ..............        (422)        (453)
         Unrecognized net gain (loss) ....................           1         (193)
                                                               -------      -------
         Accrued post-retirement benefit obligation ......     $   818      $   602
                                                               =======      =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                               ------------------------
                                               1998      1997      1996
                                               ----      ----      ----
<S>                                            <C>       <C>       <C> 
     Service cost ........................     $127      $ 71      $ 71
     Interest cost .......................       86        70        71
     Amortization of transition obligation       30        31        30
     Amortization of actuarial loss ......        3        --        --
                                               ----      ----      ----
     Net periodic postretirement expense .     $246      $172      $172
                                               ====      ====      ====
     Discount rate .......................     6.75%     7.00%     7.00%
                                               ====      ====      ====
</TABLE>

     For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was assumed
to decrease gradually to 4.75% for 2007 and remain at that level thereafter. The
effect of one percentage point increase in the assumed health care cost trend
rate would increase the total of the service and interest cost components by $7
and increase the post-retirement benefit obligation by $32. A one percent
decrease in the assumed trend rate would decrease the total of the service and
interest components by $7 and decrease the post-retirement benefit obligation by
$27.


                                      F-11
<PAGE>   34

NOTE E - COMMON STOCK RESERVED

    In June 1994, the stockholders of the Company approved the 1994 Incentive
Stock Plan. This plan provides for the granting of incentive or nonqualified
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 exercise
price of the shares covered by each nonqualified option granted and purchase
price of restricted shares is determined by the Administrator. The exercise
price of common stock covered by each incentive option cannot be less than the
fair market value of such shares on the date of grant. As of December 31, 1998
there have been no nonqualified options issued less than the market value on the
date of grant and there have been no incentive options granted. Generally,
options vest in 25% increments over four years and have a 10-year term. The
initial shares available under the Plan for issuance was 250,000 with annual
increases of 50,000 on the last day of each calendar year. The stockholders of
the Company approved amendments of the Plan, providing for 200,000 additional
option shares in March 1995, June 1997, and June 1998, to be reserved for
issuance thereunder. In June 1998, the stockholders also approved an amendment
to change the annual increase from 50,000 to 2% of the number of shares
outstanding as of the Company's fiscal year end. As of December 31, 1998,
1,160,117 shares have been reserved for the Plan. This plan replaced the prior
stock plan and Restricted Stock Award Plan that expired in 1994.

    The stock option activity includes the cancellation of options for 170,750
shares in November 1998 and the corresponding grant of new options for 170,750
shares in November 1998 at an exercise price of $10.76, an amount greater than
the fair market value on the date the new options were granted. This option
repricing was made available to employees only and excluded directors and
officers. The new options vest in annual installments of 25%, 25% and 50% from
the date of grant and expire 10 years from the date of grant.

    The stock option activity also includes 30,000 shares of restricted stock
awarded in April 1998. These shares were issued with a purchase price less than
the market value of shares on the date of grant. The shares vest over seven
years with provisions to accelerate vesting if certain financial milestones are
met.

Stock option activity for years ended December 31, 1998, 1997 and 1996 is as
follows:

<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING
                                          ---------------------------
                                           NUMBER    WEIGHTED AVERAGE
                                          OF SHARES   EXERCISE PRICE
                                          ---------  ----------------
<S>                                        <C>          <C>      
     Outstanding at December 31, 1995      511,312      $    6.79
         Granted                           132,500      $   10.17
         Exercised                         (27,713)     $    4.55
         Cancelled                         (41,625)     $    9.73
                                          --------      ---------
     Outstanding at December 31, 1996      574,474      $    7.64
         Granted                           170,750      $   21.82
         Exercised                        (174,825)     $    6.86
         Cancelled                         (14,376)     $   17.88
                                          --------      ---------
     Outstanding at December 31, 1997      556,023      $   11.84
         Granted                           564,250      $   12.36
         Exercised                         (72,250)     $    3.03
         Cancelled                        (225,875)     $   17.73
                                          --------      ---------
     Outstanding at December 31, 1998      822,148      $   11.35
                                          ========      =========
</TABLE>

    The number of options exercisable and the related weighted average exercise
price were 276,022 shares at $8.16 at December 31, 1998, 197,693 shares at $6.17
at December 31, 1997 and 241,939 shares at $5.43 at December 31, 1996.

    As of December 31, 1998, 1997 and 1996, there were 298,942, 327,200 and
233,575 shares, respectively, available for grant under the 1994 Incentive Stock
Plan.



                                      F-12
<PAGE>   35

    Additional information regarding options outstanding at December 31, 1998 is
as follows:

<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING                               OPTIONS EXERCISABLE
                          ----------------------------------------------------------     ----------------------------------
                                  NUMBER        WEIGHTED AVERAGE            WEIGHTED             NUMBER            WEIGHTED
RANGE OF                     OUTSTANDING               REMAINING             AVERAGE        EXERCISABLE             AVERAGE
EXERCISE PRICES           AS OF 12/31/98        CONTRACTUAL LIFE      EXERCISE PRICE     AS OF 12/31/98      EXERCISE PRICE
---------------           --------------        ----------------      --------------     --------------      --------------
<S>                          <C>                     <C>                 <C>                <C>                  <C>   
 $ 3.00 - $ 5.13             148,023                 4.86                $ 4.54             148,023              $ 4.54
 $ 6.63 - $10.75             185,875                 7.06                $10.22              97,062              $10.41
 $10.76 - $10.76             170,750                 9.85                $10.76                   0              $ 0.00
 $13.13 - $13.88             211,500                 9.19                $13.79               3,000              $13.16
 $14.50 - $16.25              48,500                 8.51                $15.65              13,000              $15.58
 $21.00 - $27.38              57,500                 8.21                $21.69              14,937              $21.91
                             -------                                                        -------
$  3.00 - $27.38             822,148                 7.96                $11.35             276,022              $ 8.16
                             =======                                                        =======
</TABLE>

     In June 1997, the stockholders of the Company approved the Employee Stock
Purchase Plan ("the Purchase Plan"), which authorized 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
stock on the grant date or 90% of the fair market value of a share of common
stock on the purchase date. Shares issued under the Plan were 34,931 in 1988 and
5,244 shares in 1997 at a weighted average price of $8.31 and $12.88,
respectively.

    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,
                                     ------------------------------
                                      1998         1997       1996
                                     -------      ------     ------
<S>                                  <C>          <C>        <C>   
     Net income (loss)
       As reported                   $(1,457)     $4,829     $1,974
                                     =======      ======     ======
       Pro forma                     $(2,497)     $4,330     $1,824
                                     =======      ======     ======
     Net income (loss) per share
       As reported - Diluted         $  (.27)     $  .90     $  .46
                                     =======      ======     ======
       Pro forma - Diluted           $  (.46)     $  .80     $  .43
                                     =======      ======     ======
</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 4.94% in 1998, 6.37% in 1997 and 5.97%
in 1996, expected volatility of 79% in 1998, 77% in 1997 and 48% in 1996, and an
expected option life of 5 years and no expected dividends in 1998, 1997 and
1996.

NOTE F - 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 $728, $741 and $497 for the
years ended December 31, 1998, 1997 and 1996, respectively. Employees vest in
increments of 20% for each year of service and are fully vested after 5 years.



                                      F-13
<PAGE>   36

NOTE G - SEGMENT AND RELATED INFORMATION

     The Company has five reportable segments: Irvine, CA, Austin, TX, Beverly,
MA, San Jose, CA and Hofolding, Germany. The Irvine, CA segment produces product
primarily for the wireless telecommunication market. At the Austin, TX segment,
products are primarily produced for the wireline telecommunication market. The
San Jose, CA segment produces product for both the enterprise computing and test
and measurement markets. At the Beverly, MA segment, cesium standards are
produced for both test and measurement and satellite markets. The Hofolding,
Germany segment produces product for the wireless and wireline
telecommunications and test and measurement markets.

     The accounting policies for the segments are the same as those described in
the "Summary of Significant Accounting Policies." The Company evaluates the
performance of its segments and allocates resources to them based on earnings
before interest and taxes (EBIT). Segment net sales includes sales to external
customers and to other Company segments (intersegment sales). Segment EBIT does
not include corporate expenses, amortization of goodwill, and intersegment
profit elimination. Identifiable assets include accounts receivable,
inventories, and land, building and equipment and does not include cash, income
tax refund receivable and deferred income taxes, prepaid expenses, goodwill and
other long-term corporate assets.

     The Company accounts for intersegment sales and transfers at terms that
allow a reasonable profit to the seller.

     The Company's reportable segments are strategic business units that offer
different product and services. They are managed separately because each
business utilizes different technology and requires different marketing
strategies. All of the businesses were acquired as a unit, and the management
teams at the time of the acquisitions were retained.

     The table below presents information about reported segments for the years
ended December 31:

<TABLE>
<CAPTION>
                               IRVINE,       AUSTIN,     BEVERLY,    SAN JOSE,   HOLFOLDING,
                                 CA            TX          MA           CA         GERMANY       TOTAL
                               -------       -------     --------    ---------   -----------    --------
<S>                           <C>           <C>          <C>          <C>          <C>          <C>     
1998
          Net sales           $ 48,339      $ 25,309     $ 14,882     $ 14,128     $  6,249     $108,908
          EBIT                  (2,565)        5,083        1,117          188          536        4,359
          Identifiable assets   22,722        14,765        9,867        6,027        2,251       55,632
          Capital expenditures   1,177           538          772          115           97        2,699

1997
          Net sales           $ 65,934      $ 18,586     $ 12,016     $ 20,863     $  4,275     $121,674
          EBIT                   9,398         1,525          669        2,532          205       14,329
          Identifiable assets   32,032        10,225        7,192        6,339        1,972       57,760
          Capital expenditures   3,420           351          286          313           44        4,414

1996
          Net sales           $ 50,656      $ 17,705     $  8,986     $ 14,827     $  4,358     $ 96,532
          EBIT                   4,822         3,178          995        1,176          104       10,275
          Identifiable assets   21,703         7,717        7,601        6,234        1,959       45,214
          Capital expenditures   1,778           210          263          256           40        2,547
</TABLE>

     A reconciliation of total segment net sales, EBIT, identifiable assets and
capital expenditures to total consolidated amounts, for the years ended December
31 is as follows:


                                      F-14
<PAGE>   37

<TABLE>
<CAPTION>
                                                 1998           1997           1996
                                               ---------      ---------      ---------
<S>                                            <C>            <C>            <C>      
NET SALES
     Total segment net sales .............     $ 108,908      $ 121,674      $  96,532
     Elimination of intersegment revenue .        (7,675)        (7,582)        (4,678)
                                               ---------      ---------      ---------
         Consolidated net sales ..........     $ 101,233      $ 114,092      $  91,854
                                               =========      =========      =========
EBIT
     Total EBIT for segment sales ........     $   4,359      $  14,329      $  10,275
     Corporate expense ...................        (3,242)        (2,705)        (2,878)
     Amortization of goodwill ............        (1,634)        (1,634)        (1,704)
     Intercompany profit .................          (274)           (69)          (100)
     Interest, net .......................        (1,617)        (1,737)        (2,248)
                                               ---------      ---------      ---------
         Consolidated EBIT ...............     $  (2,408)     $   8,184      $   3,345
                                               =========      =========      =========
IDENTIFIABLE ASSETS
     Total segment assets ................     $  55,632      $  57,760      $  45,214
     Goodwill ............................        16,131         17,764         19,400
     Cash ................................        10,307          5,819          1,389
     Income tax receivable and
         deferred income taxes ...........         4,287          3,969          2,007
     Other assets ........................           563            435            678
                                               ---------      ---------      ---------
         Consolidated assets .............     $  86,920      $  85,747      $  68,688
                                               =========      =========      =========
CAPITAL EXPENDITURES
     Total segment capital expenditures ..     $   2,699      $   4,414      $   2,547
     Other additions .....................            --             80            138
                                               ---------      ---------      ---------
         Consolidated capital expenditures     $   2,699      $   4,494      $   2,685
                                               =========      =========      =========
</TABLE>

     International sales were $24,357, $21,745 and $20,151 in 1998, 1997 and
1996, respectively. The following table sets forth the geographical components
of international sales for the years ended December 31:

<TABLE>
<CAPTION>
INTERNATIONAL SALES          1998            1997             1996
                           -------          -------          -------
<S>                        <C>              <C>              <C>    
          Canada.......    $ 5,280          $ 2,320          $ 1,491
          Germany......      3,190            1,738            2,304
          China .......      2,782               45              464
          France.......      2,418            1,257              853
          Other .......     10,687           16,385           15,039
                           -------          -------          -------
                           $24,357          $21,745          $20,151
                           =======          =======          =======
</TABLE>

     Sales from one customer of the Company's Irvine, CA segment represented
34%, 38% and 36% of the Company's consolidated net sales in 1998, 1997 and 1996,
respectively. In addition, one customer of the Company's Irvine, CA segment
represented 10% of the Company's consolidated net sales in 1997.


                                      F-15
<PAGE>   38

NOTE H - COMMITMENTS

    Total rental expense for operating leases amounted to $1,866, $1,454 and
$1,735 in 1998, 1997 and 1996, respectively. The future minimum rental
commitments under all non-cancelable operating leases, exclusive of property
taxes and certain occupancy costs, are as follows:

<TABLE>
<S>                                                  <C>   
           1999 ...........................          $1,425
           2000 ...........................           1,493
           2001 ...........................           1,365
           2002 ...........................           1,264
           2003 ...........................           1,233
           Thereafter .....................           1,738
                                                     ------
               Total minimum lease payments          $8,518
                                                     ======
</TABLE>



                                      F-16
<PAGE>   39

                           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, 1998                                                                                       
   Allowance for doubtful accounts............       $   71      $  119      $   37                                      $  153
   Reserve for inventories....................        3,737       2,275       1,476                                       4,536
   Accumulated amortization of acquired               
       intangible assets......................        2,951         894                                                   3,845

   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
</TABLE>


   * Aacom note payments received.



                                      S-1
<PAGE>   40

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                                                              SEQUENTIALLY
EXHIBIT                                                                                                         NUMBERED
NUMBER             DESCRIPTION                                                                                    PAGE
------             -----------                                                                                ------------
<C>                <S>                                                                                        <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 No.'s 2-96564, 33-10035 and
                   33-41709).                                                                                      --

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 No. 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>   41

<TABLE>
<CAPTION>
                                                                                                              SEQUENTIALLY
EXHIBIT                                                                                                         NUMBERED
NUMBER             DESCRIPTION                                                                                    PAGE
------             -----------                                                                                ------------
<C>                <S>                                                                                        <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 No.
                   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 reference 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>   42

<TABLE>
<CAPTION>
                                                                                                              SEQUENTIALLY
EXHIBIT                                                                                                         NUMBERED
NUMBER             DESCRIPTION                                                                                    PAGE
------             -----------                                                                                ------------
<C>                <S>                                                                                        <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).                                                                                          --

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

10.42              Employee Agreement, dated March 27, 1998, between the Company and Erik H. van der Kaay
                   (incorporated by reference to the same numbered exhibit to the Registrant's Quarterly
                   Report on Form 10-Q for the quarter ended March 31, 1998).                                      --

10.43              Non-qualified stock option agreement, dated April 6, 1998, between the Company and
                   Erik H. van der Kaay (incorporated by reference to the same numbered exhibit to the
                   Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.                 --

10.44              Restricted stock grant agreement, dated April 6, 1998, between the Company and Erik H.
                   van der Kaay (incorporated by reference to the same numbered exhibit to the
                   Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.                 --

10.45              Agreement with Lucent Technologies Inc., signed July 2, 1998. (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.)                                                                 --

21                 List of Subsidiaries                                                                            --

23                 Consent of Independent Accountants                                                              --

27.4               Financial Data Schedule Year Ended 1998                                                         --
</TABLE>

<PAGE>   43

                                   DATUM INC.

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

                  EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

<TABLE>
<C>                <S>
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, 33-10035 and
                   33-41709).

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 No. 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 No.
                   33-79772).

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

10.42              Employment Agreement, dated March 27, 1998, between the Company and Erik H. van der
                   Kaay (incorporated by reference to the same numbered exhibit to the Registrant's
                   Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).

10.43              Non-qualified stock option agreement, dated April 6, 1998, between the Company and
                   Erik H. van der Kaay (incorporated by reference to the same numbered exhibit to the
                   Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).

10.44              Restricted stock grant agreement, dated April 6, 1998, between the Company and Erik H.
                   van der Kaay (incorporated by reference to the same numbered exhibit to the
                   Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
</TABLE>