<PAGE>

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

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

                                   FORM 10-KSB


[X]      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
         OF 1934 [Fee Required]


                   For the fiscal year ended December 31, 1998


[  ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
         ACT OF 1934 [No Fee Required]

                         Commission file number: 0-24738

                        LORONIX INFORMATION SYSTEMS, INC.
                        ---------------------------------
                (Name of Registrant as specified in its charter)

<TABLE>
<S>                                                             <C>
                        NEVADA                                               33-0248747
                        ------                                               ----------
   (State or other jurisdiction of incorporation or             (I.R.S. Employer Identification No.)
                    organization)

            820 Airport Road, Durango, CO                                      81301
            -----------------------------                                      -----
       (Address of principal executive offices)                              (Zip Code)

Registrant's telephone number:  (970) 259-6161

Securities registered pursuant to Section 12(b) of the Act:  None
                                                             ----

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, $.001 par value, and Preferred
Share Purchase Rights.                                       --------------------------------------------
----------------------                                                     (Title of class)
</TABLE>

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

Indicate by check mark if disclosure of delinquent filers in response to Item 
405 of Regulation S-B is not contained in this form, and no disclosure will 
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-KSB or any amendment to this Form 10-KSB. [ X ]

The Registrant's revenue for the fiscal year ended December 31, 1998 was: 
$12,710,871.

As of February 24, 1999, 4,762,011 shares of the registrant's Common Stock 
were outstanding and the aggregate market value of such Common Stock held by 
non-affiliates was approximately $13,493,364 based on the closing price of 
$3.813 per share on that date.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for Registrant's Annual Meeting of
Stockholders scheduled to be held on May 24, 1999 have been incorporated by
reference in Part III of this Form 10-KSB.

<PAGE>

                                     PART I

ITEM 1.  BUSINESS

GENERAL

         References made in this Annual Report on Form 10-KSB to "Loronix," 
the "Company" or the "Registrant" refer to Loronix Information Systems, Inc. 
Loronix, CCTVware and ImageSHARE are registered trademarks of Loronix. 
Loronix was incorporated in 1992. Loronix designs, markets and sells a family 
of closed circuit television ("CCTV") digital recording and video management 
products ("CCTVware Products") and digital identification products ("ID 
Products") based on the Company's proprietary software. Loronix uses an open 
architecture design approach that allows compatibility with commercially 
available computer and video hardware and software.

CCTVWARE PRODUCTS

         In August 1995, the Company began developing a new product 
technology named CCTVware. This technology permits (i) digital video 
recording and storage that eliminates the need for video tapes and video 
cassette recorders ("VCRs") in surveillance environments, and (ii) enables 
high-speed access, retrieval and playback of stored video. The Company 
currently markets four products incorporating its CCTVware technology and 
began commercial shipments of certain of these products in the first quarter 
of 1997. All CCTVware products include a full range of image enhancement 
tools and a special feature called video authentication which alerts the user 
if the recorded video has been altered.

         CCTVWARE VISION

         The Vision system is a digital video recorder providing up to six 
inputs of video and audio per system. The Vision system records full-motion 
video at 30 frames per second ("FPS") and can be implemented with existing 
VCR based systems or it can be connected to a computer network for storage 
and playback of the video (which creates a system offering the benefits of 
the CCTVware Enterprise system below). In VCR environments, the Vision system 
provides up to eight hours of continuous loop recording for any existing 
camera(s) selected by the operator or pre-configured cameras triggered by an 
alarm event. In stand-alone configurations, the Vision system is marketed to 
surveillance environments requiring full-motion video recording and playback 
without the networking and archiving capabilities offered by the Enterprise 
system.

         CCTVWARE M SERIES

         The M Series system is a rack-mounted digital video recorder with 
the capability of recording up to 32 camera inputs at up to 7.5 FPS 
simultaneously on all inputs. The M Series system uses continuous loop 
recording and may be configured to connect directly to a CCTVware review 
station for playback of the recorded video. The M Series system, like the 
Vision system, can also be connected to a computer network for storage and 
playback of the video (which creates a system offering the benefits of the 
CCTVware Enterprise system below).

         CCTVWARE ENTERPRISE

         The Enterprise system is comprised of multiple Vision and/or M 
Series recorders. These recorders are combined with various servers including 
communications and tape servers and are connected via a local or wide area 
network. An advanced intelligent digital tape library system is included for 
long-term storage of the recorded video. PC-based playback stations provide 
on-demand playback of the recorded video. The Enterprise system is targeted 
at large, dynamic, sensitive surveillance environments such as government 
facilities, airports, financial institutions, retail operations and casinos.

         CCTVWARE TRANSIT

         The Transit system is a stand-alone digital recording system 
designed to operate in transit environments, such as buses, subways and rail 
cars. This system is capable of recording up to five black


                                      2

<PAGE>

and white or color camera inputs at 1-2 FPS and one audio input. The Transit 
system operates on 12 volt DC power and is designed to withstand shock and 
vibration. The Transit system uses continuous loop recording on a removable 
hard drive which must be removed and installed in a separate CCTVware review 
station for playback of the recorded video.

ID PRODUCTS

         The Company's ID Products consist of the Company's proprietary 
software combined with commercially available hardware components and 
software. ID Products can record and store digital images in computer 
databases, transmit such images to other control systems or printers, and 
retrieve, analyze, reproduce and manipulate these images in a variety of 
ways. The Company's ID Products provide positive identification and 
verification of an individual's identity for access control, security, retail 
point-of-sale, human resource management and other control systems. ID 
Products are designed to enhance or replace existing film-based 
identification systems.

         The Company offers ID Products with a variety of functions and 
features targeted to a wide array of customers, ranging from large 
organizations requiring a multi-location system operating across a local or 
wide area computer network to small organizations requiring a single 
stand-alone system. In many instances, the Company configures its systems to 
fit a particular customer's needs. The Company's principal ID Products are 
the ImageSHARE, ImageSHARE Express and Instant ID.

         IMAGESHARE

         The Company's high-end ID product, the ImageSHARE system, is 
targeted primarily for use by medium to large-sized businesses, institutions 
and government entities. These organizations typically operate local and wide 
area networks, in which multiple users at individual workstations access 
images and data in various applications and information/access control 
systems. The ImageSHARE system enables a user to capture, store, manage and 
transmit photographs, signatures, fingerprints, images and other information 
over these networks, or it can be configured to operate in a stand-alone 
mode. The ImageSHARE system provides significant configuration flexibility 
and can be integrated with the hardware, software and other components in a 
user's existing information/access control system or in an entirely new 
system configuration. Because of its open architecture design, which allows 
compatibility with commercially available hardware and software, the 
ImageSHARE system may be used with a variety of relational database 
management systems ("RDBMS").

         IMAGESHARE EXPRESS

         The Company's low to mid-range ID Product, the ImageSHARE Express 
system, is targeted primarily for use by small to medium-sized businesses, 
institutions and government entities. This system offers customers an 
economical identification system which is pre-configured, color based and 
ready to use. It can be implemented as a stand-alone system or within local 
or wide area networks. The ImageSHARE Express system allows connectivity to 
certain RDMBS, requires minimal customization and may be designed to address 
the specific needs of various vertical market applications. The ImageSHARE 
Express system, which replaced the Company's ImageSHARE-V, IMAGESHARE I and 
Laser I.D. Card Creator systems, can be upgraded easily to the ImageSHARE 
system.

         INSTANT ID

         The Company's low-end ID Product, Instant ID, was released in 
February, 1999 and is primarily targeted for use by small businesses 
requiring the capability to create and issue identification cards 
inexpensively. The Instant ID Product enables users to utilize their existing 
Microsoft Windows 95, 98 and NT Workstation version 4.0 compatible computers 
to capture and store images and textual data in a Microsoft Access Database. 
ID cards can then be printed using Microsoft Windows compatible ink jet, 
laser or plastic card printers.


                                      3

<PAGE>

MARKETING AND CUSTOMERS

         The Company markets its products domestically through a small direct 
sales force, manufacturing representatives and a network of dealers and 
systems integrators.

         In 1998, Dayton Hudson Corporation accounted for 38% of the 
Company's revenue. In 1997, two customers accounted for 47% of the Company's 
revenue.

         Internationally, the Company markets its products through its direct 
sales force, its wholly-owned subsidiary in the United Kingdom and various 
international distributors.

COMPETITION

         The markets for the Company's CCTVware and ID Products are extremely 
competitive. Competitors include a broad range of companies that develop and 
market products for the identification and surveillance markets. Competitors 
in the identification market include: (i) in film-based systems, Polaroid 
Corporation, and (ii) in digital-based systems, Polaroid Corporation, Data 
Card Corporation, Dactek International, Inc., Imaging Technology Corporation, 
G & A Imaging, Goddard Technology Corporation and Laminex, Inc., as well as 
many other organizations. Competitors in the surveillance market include 
numerous VCR suppliers and digital recording suppliers including, among 
others: (i) TVX, Inc. and Prima Facie, Inc. for the Transit product; and (ii) 
Dedicated Micros, Inc., Sensormatic Corporation, Primary Image, Ltd., Alpha 
Systems Lab and NICE Systems, Ltd. for the M Series products. Loronix has not 
yet identified any competitors, other than VCR suppliers, for its Enterprise 
and Vision products.

         The Company believes that the principal competitive factors in its 
markets include: system performance and functionality, price, system 
configuration flexibility, ease-of-use, system maintenance costs, quality, 
reliability, customer support and brand name. Larger, more established 
companies with substantially greater technical, financial and marketing 
resources than the Company, such as Data Card Corporation, Sensormatic 
Corporation and NICE Systems, Ltd., have an enhanced competitive position due 
in part to their established brand name franchises. The Company believes that 
its primary competitive strengths include system performance and 
functionality, system configuration flexibility and ease-of-use.

MANUFACTURING AND SUPPLIERS

         The Company does not manufacture any of the hardware in its systems; 
rather, it assembles its systems by integrating commercially available 
hardware and software together with the Company's proprietary software. The 
Company believes that it can continue to obtain components for its systems at 
reasonable prices from a variety of sources. Although the Company has 
developed certain proprietary hardware components for use in its CCTVware 
products and purchases some components from single source suppliers, the 
Company believes similar components could be obtained from alternative 
suppliers without significant delay. There can be no assurance, however, that 
the Company will be able to obtain needed components at reasonable prices.

INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES

         The Company regards certain features of its products and 
documentation as proprietary and relies on a combination of contract, 
copyright, trademark and trade secret laws and other measures to protect its 
proprietary information. As part of its confidentiality procedures, the 
Company generally (i) enters into confidentiality and invention assignment 
agreements with its employees and mutual non-disclosure agreements with its 
manufacturing representatives, dealers and systems integrators, and (ii) 
limits access to and distribution of its software, documentation and other 
proprietary information. The Company has no patents and, while the existing 
copyright laws afford only limited protection, the Company intends to apply 
for federal copyright registrations for any of its software systems, for 
which it has not yet received federal copyright registration. The Company 
believes that, because of the rapid pace of technological change in the 
computer software industry, trade secret and copyright protection are less 
significant than factors such as the knowledge, ability and experience of the 
Company's employees, frequent product enhancements and


                                      4

<PAGE>

the timeliness and quality of support services. See Legal Proceedings in Item 
3 for information on a patent infringement lawsuit in which the Company is 
involved.

         The Company provides its software to end-users under non-exclusive 
"shrink-wrap" licenses, which generally are nontransferable and have a 
perpetual term. Although the Company does not make source code generally 
available to end-users, it has, from time to time, entered into source code 
escrow agreements with certain customers. The Company has also licensed 
certain software from third parties for incorporation into its products.

RESEARCH AND DEVELOPMENT

         The Company believes its success depends in large part on its 
ability to enhance its current product line, develop new products, maintain 
technological competitiveness and satisfy an evolving range of customer 
requirements. The Company's research and development group is responsible for 
exploring new applications of its core technologies and incorporating new 
technologies into the Company's products. The Company's research and 
development resources have been directed primarily toward (i) developing new 
products, (ii) improving the functionality and performance of the Company's 
proprietary software, and (iii) designing and implementing the device drivers 
necessary to maintain the Company's open architecture.

         In 1998 and 1997, the Company spent, net of capitalized software 
costs, $1,381,000 and $1,526,000, respectively, for research and development.

EMPLOYEES

         As of January 31, 1999, the Company employed 86 persons including 
four persons in part-time positions. The Company's future success depends in 
significant part upon the continued service of its key technical and senior 
management personnel and its continuing ability to attract and retain highly 
qualified technical and managerial personnel in the future.

         The Company has no collective bargaining agreements with any of its 
employees. The Company believes its relations with its employees are good.

ITEM 2.  PROPERTIES

         The Company owns approximately 25 acres of real property adjacent to 
the Durango-La Plata County Airport in Colorado. In October 1995, the Company 
completed construction of a 20,000 square foot facility on approximately five 
of the 25 acres to house administration, marketing, research and development, 
operations and customer support. In October 1998, the Company entered into a 
three-year lease for approximately 2,400 square feet of office space in 
Basingstoke, England for its wholly owned United Kingdom subsidiary. In June 
1996, the Company entered into a three-year lease for approximately 1,600 
square feet of office space in Las Vegas, Nevada for a sales and 
demonstration office. In September 1998, the Company entered into a one-year 
lease for approximately 5,000 square feet of additional product assembly 
space in Durango, Colorado. Depending on the sales volume of its CCTVware 
products, the Company may expand its Durango facility by up to 20,000 square 
feet in 1999.

         In July 1997, the Company entered into a $700,000 mortgage agreement 
for its Durango-La Plata County facility secured by a 1st Deed of Trust.

ITEM 3.  LEGAL PROCEEDINGS

         On October 17, 1997, the Company received notice that it had been named
as a defendant in a patent infringement lawsuit brought by a competitor, Prima
Facie, Inc. ("PFI"), in the U.S. District Court for the District of Maryland.
The lawsuit alleged that the Company's CCTVware Transit product infringed
certain claims of two patents held by PFI and that the Company has interfered
with PFI's business relationships. The claim was amended in June 1998 to allege
infringement by the Company's other CCTVware products. The suit seeks injunctive
relief against further infringement and damages. The


                                      5

<PAGE>

lawsuit also names one of the Company's domestic dealers as a co-defendant. 
The Company believes that these claims are without merit and is defending 
itself vigorously.

         On July 6, 1998, the Company filed counterclaims against PFI. These 
counterclaims include a request for Declaratory Judgment of Patent Invalidity 
and six other counterclaims. The Company and PFI have agreed to separate the 
patent infringement claims from all other claims and resolve the patent 
infringement issues first. To date no trial has been scheduled.

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

         Not applicable.








                                      6

<PAGE>

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Prior to August 25, 1994, the date of the Company's initial public 
offering, there was no public market for the Company's Common Stock. Since 
August 25, 1994, the Company's Common Stock has traded on the Nasdaq National 
Market tier of The Nasdaq Stock Market under the symbol: "LORX." The 
following table sets forth, for each period indicated, the high and low sale 
prices per share of the Company's Common Stock as reported by Nasdaq:

<TABLE>
<CAPTION>
                                                     High              Low
                                                     ----              ---
         <S>                                         <C>               <C>
         1998
             First quarter                           $2.125            $1.375
             Second quarter                          $3.375            $1.531
             Third quarter                           $3.063            $1.938
             Fourth quarter                          $2.938            $1.750

         1997
             First quarter                           $4.750            $3.125
             Second quarter                          $4.156            $2.500
             Third quarter                           $3.563            $2.500
             Fourth quarter                          $2.656            $1.000
</TABLE>

         As of January 15, 1999, there were approximately 94 stockholders of 
record of the Company's Common Stock. The Company estimates that there are 
approximately 900 beneficial owners.

         The Company has never paid cash dividends on its Common Stock and 
anticipates that, for the foreseeable future, it will continue to retain any 
earnings for use in the operation of its business. Payment of cash dividends 
in the future will depend upon the Company's earnings, bank loan covenants, 
financial condition, contractual restrictions, restrictions imposed by 
applicable law, capital requirements and other factors deemed relevant by the 
Company's Board of Directors.

ITEM 6.  MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
         OF OPERATIONS

         The following discussion and analysis should be read in conjunction 
with the Company's audited financial statements and the notes thereto 
included herein.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998, COMPARED TO 1997

         REVENUE

         The Company's revenue is derived from sales of systems, including 
embedded software, and supplies and from maintenance services. Historically, 
systems and supplies have accounted for greater than 90% of total revenue, 
with systems accounting for a substantial majority of total revenue. The 
Company expects this trend to continue for the foreseeable future. Revenue 
increased 36% from $9.4 million in 1997 to $12.7 million in 1998, and 
included approximately $5.9 million and $10.7 million of CCTVware Product 
sales, respectively. Revenue in 1998 included approximately $4.0 million, or 
38%, from a single customer (see DEPENDENCE ON A MAJOR CUSTOMER under the 
caption "Certain Factors Bearing on Future Results"). The Company attributes 
the increase in revenue from 1997 to 1998 primarily to the market's 
acceptance of CCTV digital recording technology.

         COSTS AND EXPENSES

         COST OF PRODUCTS SOLD. The cost of products sold, consisting 
principally of the costs of hardware components, supplies and software 
amortization, increased from $5.1 million in 1997 to $6.8 million in


                                      7

<PAGE>

1998, and represented approximately 54% of revenue in both periods. The 
increase in absolute terms resulted from higher total revenue.

         OPERATIONS AND CUSTOMER SUPPORT. Operations and customer support 
expenses of approximately $1.6 million remained flat from 1997 to 1998, and 
represented 17% and 13% of revenue, respectively. The percentage decrease 
from 1997 to 1998 was the result of a 36% increase in revenue without a 
commensurate increase in expenses.

         SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and 
administrative expenses increased from $3.8 million in 1997 to $5.1 million 
in 1998, and represented 40% of total revenue in both periods. The increase, 
in absolute terms, in such expenses resulted primarily from an increase in 
legal fees associated with Company's patent litigation with PFI and an 
increase in bad debt expense. Approximately $250,000 of the increase in bad 
debt expense relates to the Company's agreement to accept the return of 
products from one of its customers that is experiencing financial difficulty.

         RESEARCH AND DEVELOPMENT. Research and development expenses, net of 
capitalized software costs, decreased from $1.5 million in 1997 to $1.4 
million in 1998, and represented 16% and 11% of revenue, respectively. The 
decrease in such expenses resulted primarily from headcount and 
compensation-related decreases and decreases in travel, telecommunications 
and supplies expense offset somewhat by increases in capitalized software 
supplied by third parties. The Company expects to continue to fund new 
product development in 1999 at or above the dollar levels expended in 1998.

         NET INTEREST INCOME. Net interest income decreased from $121,000 in 
1997 to $67,000 in 1998. This decrease was due to a reduction in the average 
cash available for investment and an increase in interest expense due to an 
increase in the Company's average outstanding debt.

         OTHER EXPENSE. Other expense decreased from $42,400 in 1997 to 
$14,300 in 1998. This decrease resulted primarily from an $18,100 expense in 
1997 resulting from a litigation settlement with the Company's former Vice 
President of Sales and Marketing.

         INCOME TAX. Income tax expense for 1997 of $32,400 was recorded 
despite the pretax loss as a result of increasing the valuation allowance 
related to the Company's deferred income tax asset. The Company recognized 
minimal state income tax expense for 1998 and no benefit was recognized for 
the Company's current year loss due to the current unrealizability of 
deferred tax assets as a result of the history of losses.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

         During the years ended December 31, 1997 and 1998, the Company 
financed its operations primarily from working capital and bank borrowings. 
The Company's principal uses of cash during 1997 and 1998 were to (i) fund 
operating activities; (ii) acquire property and equipment; and (iii) invest 
in the development of its software.

         During 1997, the Company's cash and cash equivalents decreased from 
$6.1 million at December 31, 1996 to $3.3 million at December 31, 1997. Net 
cash used in operating activities of $2.3 million consisted primarily of a 
net loss of $2.5 million plus non-cash charges for depreciation, amortization 
and deferred income taxes of $1.1 million and increases in accounts 
receivable and inventory of $2.1 million, offset by decreases in prepaid 
expenses and other assets, and increases in accounts payable and accrued 
liabilities of $1.1 million. Net cash used in investing activities of $1.2 
million consisted primarily of $766,900 of capital expenditures and $460,500 
of software development costs offset by a decrease in notes receivable of 
$80,800. Net cash generated from financing activities of $695,200 consisted 
primarily of $691,600 in proceeds, net of principal repayments, from the 
mortgage of the Company's Colorado facility.

         During 1998, the Company's cash and cash equivalents decreased from 
$3.3 million at December 31, 1997 to $1.6 million at December 31, 1998. Net 
cash used in operating activities of $720,300 consisted primarily of a net 
loss of $2.2 million plus non-cash charges for depreciation and amortization 
of $1.2 million and an increase in inventory of $612,000, and decreases in 
accounts payable of $169,500 offset by decreases in accounts receivable and 
prepaid expenses of $917,800 and an increase in accrued liabilities of


                                      8

<PAGE>

$30,300. Net cash used in investing activities of $1.4 million consisted 
primarily of $970,500 of capital expenditures and $551,500 of software 
development costs offset by a decrease in notes receivable and deposits and 
other assets of $65,000. Net cash generated from financing activities of 
$456,900 consisted primarily of $500,000 from bank borrowing. The bank 
borrowing consists of a three-year balloon note with a fifteen-year 
amortization schedule with an interest rate of 8.5%.

         As of December 31, 1998, the Company had $4.9 million in net working 
capital, including $2.4 million of trade accounts receivable and $1.9 million 
in inventory. Days sales outstanding, calculated using an average accounts 
receivable balance, were approximately 83 days as of December 31, 1998, 
compared to 98 days for the same period a year ago. The Company has provided 
and may continue to provide payment term extensions to certain of its 
customers from time to time. As of December 31, 1998, the Company had granted 
payment term extensions still outstanding of approximately $350,000.

         The Company's inventory balance at December 31, 1998 and 1997 was 
$1.9 and $1.5 million, respectively. Annualized inventory turns, calculated 
using an average inventory balance, were 3.5 and 3.1 as December 31, 1998 and 
1997, respectively.

         The Company's principal sources of liquidity are its cash and cash 
equivalents and cash generated from operating activities, if any. The Company 
also has available up to $1.0 million on a line of credit based on a 
percentage of the Company's eligible accounts receivable. The line of credit 
expires in May 1999. The Company expects that it will successfully extend the 
line of credit through May 2000. The line of credit has not been used to 
date. The Company anticipates capital expenditures for 1999 of approximately 
$650,000. Depending on the sales volume of its CCTVware products, the Company 
may expand its Durango facility by up to 20,000 square feet in 1999. In such 
event, the Company estimates an additional capital expenditure of $700,000. 
The Company believes that, based on its current financial projections, it has 
sufficient working capital, inclusive of its line of credit facility, to meet 
its capital requirements and fund operations for at least the next twelve 
months.

NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued 
Statement of Financial Accounting Strandards FAS 133, ACCOUNTING FOR 
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which establishes accounting 
and reporting standards for derivative instruments and hedging activities. 
SFAS 133 requires that an entity recognize all derivatives as either assets 
or liabilities in the statement of financial position and measure those 
instruments at fair value. The Statement is effective for all fiscal years 
beginning after June 15, 1999. SFAS 133 is effective for the Company's fiscal 
year ending December 31, 2000 and is not expected to have a material effect 
on the Company's financial position or results of operations.

         In March 1998, the American Institute of Certified Public 
Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software 
Developed or Obtained for Internal Use," which provides guidance on 
accounting for the costs of computer software intended for internal use. SOP 
98-1 must be adopted by the Company effective as of December 31, 1999 and is 
not expected to have a material impact on the Company's consolidated results 
of operations or financial position.

YEAR 2000 CONVERSION

         Many computer systems may experience problems handling dates beyond 
1999. Therefore, some computer hardware and software will need to be modified 
prior to 2000 in order to remain functional. The Company is assessing the 
readiness and compliance of its computer-based products available for sale 
and of its computer-based systems used internally, and the Company expects to 
implement successfully the system and programming changes necessary to 
address year 2000 issues by mid-1999. The Company does not believe that the 
cost of such actions will have a material effect on the Company's results of 
operations or financial condition. There can be no assurance, however, that 
there will not be a delay in, or increased costs associated with, the 
implementation of such changes, and the Company's inability to implement such 
changes on a timely basis could have an adverse effect on future results of 
operations, liquidity or financial condition.


                                      9

<PAGE>

         COMPUTER-BASED PRODUCTS AVAILABLE FOR SALE. The Company has two 
primary product lines available for sale consisting of CCTVware Products and 
ID Products. The Company is currently assessing the state of readiness of 
these products to address year 2000 issues. The Company expects to complete 
its assessment of its state of readiness by May 1999.

         CCTVWARE PRODUCTS. The CCTVware product line consists of two major 
components including: CCTVware Enterprise products and the CCTVware Transit 
product ("Transit"). Recently, the Company created and executed a series of 
tests to determine the possible problems year 2000 might have on the 
operation of the Enterprise products version 1.2. These tests indicated that 
year 2000 did not adversely affect the performance of the Enterprise system, 
and the Company expects that Enterprise products will operate successfully in 
the days leading up to and following the year 2000.

         A key component of determining the Company's year 2000 state of 
readiness is to identify those areas of operation where Enterprise products 
incorporate software and hardware products supplied by third party vendors 
and thus, where year 2000 problems may arise as a result of products supplied 
by third parties. Third party software products include, but are not limited 
to: Microsoft Windows NT 4.0 Server, Microsoft Windows NT 4.0 Workstation, 
Microsoft Windows 95, Microsoft SQL Server 6.5 and Microsoft Visual C++. 
Third party hardware products include, but are not limited to: video capture 
cards, export cards, network switches, motherboards, modems and various 
workstations. Because Enterprise products are dependent, in certain respects, 
on products supplied by third party vendors, an important part of the 
Company's year 2000 effort is to contact those vendors who supply products 
that the Company considers critical to the operation of the Enterprise 
products and gauge their year 2000 compliance efforts. The Company has sent 
letters to various vendors and is in the process of receiving and analyzing 
the responses to determine the year 2000 state of readiness of such vendor 
supplied products. Tests to date indicate that certain third party supplied 
products do not appear to adversely affect the performance of the Enterprise 
products with respect to the year 2000 issue.

         The Company expects to release new versions of the Enterprise 
products in the future. The Company will continue to audit and test 
compliance with year 2000 performance of its internally developed products.

         To date the Company has not completed testing of its Transit product 
for year 2000 compliance. The Company expects to complete year 2000 
compliance testing by April 1, 1999.

         ID PRODUCTS. The Company is creating a series of tests to determine 
the possible problems the year 2000 will have on the operation of those ID 
products which the Company continues to support. Such ID products include: 
ImageSHARE 1.21, 2.5 and 3.1; Instant ID 2.0; ImageSHARE Express; Ready Key 
interface 3.1; Color Card Creator and ImageSHARE 95. The core programs of 
these products support four digit year date formats and if configured 
properly for specific users' applications, the Company does not expect to 
uncover any issues that are material to year 2000 compliance.

         Certain of the Company's ID products also include interfaces to 
various access control applications including: Ccure with Badges 1.66; Ccure 
with ImageSHARE 1.21; Card Key with Badges 1.6x; Casi Rusco with IMAGESHARE 
1.21; Casi Rusco with Badges 1.66+; DAQ with ImageSHARE 1.21; Oracle Based 
DAQ with ImageSHARE 1.21 and ICAM with ImageSHARE 1.21. The interface design 
methodology used to integrate the ID Products are primarily controlled by the 
access control vendors. The Company can make no assurances that these 
interfaces are year 2000 compliant.

         A key component of determining the Company's year 2000 state of 
readiness is to identify those areas of operation where ID Products 
incorporate hardware and software products supplied by third party vendors 
and thus, where year 2000 problems may arise as a result products supplied by 
third parties. Third party hardware products include, but are not limited to: 
computers; network adapter cards; video capture cards; controller cards; 
printers; encoders; cameras and various types of cabling. For older ID 
Product configurations, many of the third party vendor hardware products are 
no longer manufactured or supported by the supplier. The Company can make no 
assurances that these devices are year 2000 compliant. At risk are older 
computers that may have embedded problems in the basic input/output system 
("BIOS") for processing year 2000 dates. Certain routines within the ID 
Products use the BIOS date information to calculate current dates. Computers 
that possess this problem will require the BIOS to be updated and/or


                                      10

<PAGE>

the computer replaced. Third party software products include, but are not 
limited to: Microsoft Windows 3.1 and 3.11; Microsoft Windows NT 4.0 
Workstation; Microsoft Windows 95 and 98; Microsoft SQL Server; Microsoft 
Access; Paradox; Informix; Sybase; IBM DB2; Microsoft Foxpro; Oracle; 
Microsoft Visual C++; Borland 3.1, 4.5 and 5.01; Strategic Reporting's 
ReportSmith and various Open DataBase Connectivity drivers provided by 
Intersolv, Microsoft and IBM. Because ID Products are dependent, in certain 
respects, on products supplied by third party vendors, an important part of 
the Company's year 2000 compliance effort is to contact those vendors who 
supply products that the Company considers critical to the operation of ID 
Products and gauge their year 2000 compliance efforts. The Company has sent 
letters to various vendors and is in the process of receiving and analyzing 
the responses to determine the year 2000 state of readiness of such vendor 
supplied products.

         From 1989 through 1995, the Company developed seven different ID 
Products including: Badges 1.64 - 1.66; Loronix Color Image Management System 
Foxpro Based; Dos Based Foxpro BW Imaging System; ImageSHARE V (Visitor BW, 
Foxpro); ImageSHARE I (Color Foxpro); Laser ID Card Creator and Entry Check. 
In 1996, the Company recognized that the unavailability of peripheral 
replacement equipment from third party vendors and inadequate technical 
resources made it infeasible for the Company to continue to support these 
products. Accordingly, the Company notified its customers that it would no 
longer support these products and made available upgrade options to allow 
customers to migrate to newer products that would be supported by the Company.

         COMPUTER-BASED SYSTEMS USED INTERNALLY. The Company uses various 
computer-based systems to operate its business on a day-to-day basis. These 
systems include, but are not limited to: (i) software programs, including 
Macola (for accounting, customer order processing, purchasing and inventory 
control), CardKey Access Control, Novel Network Operating System, SourceSafe, 
Microsoft Windows and various software application programs, and (ii) 
hardware devices, including servers, hubs, proximity readers, motion 
detectors, phone systems and personal computers.

         In 1998, the Company upgraded its Macola software to the year 2000 
compliant version. The Company is currently assessing its other internal 
computer-based systems to determine their susceptibility to the year 2000 
issue.

         COST OF YEAR 2000 CONVERSION. To date, the Company estimates that it 
has spent less than $18,000 of incremental external spending on the year 2000 
issue and estimates that future external costs associated with its year 2000 
compliance efforts will not exceed $50,000.

         CONTINGENCY PLANS. The Company is currently in the information 
collection phase of addressing year 2000 issues and has not yet completed its 
assessment of the reasonably likely worst case scenario of Non-IT Business 
System and/or IT Systems failures and related consequences. Although the 
Company does not anticipate any significant issues relating to year 2000, it 
intends to create contingency plans as information becomes available 
indicating areas of non-compliance that could have an adverse effect on the 
Company's future results of operations, liquidity or financial condition.

CERTAIN FACTORS BEARING ON FUTURE RESULTS

         The statements in the third sentence of the paragraph under the 
caption "Manufacturing and Suppliers", the third sentence in the first 
paragraph under the caption "Intellectual Property, Proprietary Rights and 
Licenses", the first sentence under the caption "Research and Development" on 
page 5, the last sentence of the first paragraph under the caption 
"Employees", the last sentence of the first paragraph under the caption 
"Properties", the third sentence under the caption "Revenue", the last 
sentence under the caption "Research and Development" on page 8, the fourth, 
sixth, eighth and ninth sentences of the sixth paragraph under the caption 
"Financial Condition, Liquidity and Capital Resources", the last sentence of 
the paragraph under the caption "New Accounting Pronouncements", the third 
and fourth sentences of the first paragraph under the caption "Year 2000 
Conversion", the last sentence under the caption "Computer based products 
available for sale", the last sentence of the first paragraph and the third 
and fourth paragraphs under the caption "CCTVware Products" on page 10, the 
last sentence of the first paragraph under the caption "ID Products", the 
first sentence under the caption "Cost of Year 2000 conversion", the second 
sentence under the caption "Contingency Plans", the first sentence under the 
caption "Capital Requirements" below, the third sentence under the caption 
"Dependence on a Major Customer" below, the


                                      11

<PAGE>

third and sixth sentences under the caption "Year 2000 Issues" below, the 
first and seventh sentences under the caption "Variability of Operation 
Results" below, and first sentence under the caption "Volatility of Stock 
Price" below are forward-looking statements. In addition, the Company may 
from time to time make oral forward-looking statements. The following are 
certain important factors that could cause actual results to differ 
materially from those projected in any such forward-looking statements.

         CAPITAL REQUIREMENTS. The Company believes that, based on its 
current projections, it has sufficient working capital to meet its 
requirements for at least the next 12 months. However, to the extent that the 
Company experiences growth generally, or the Company's CCTVware line of 
products generates high demand, or the Company receives extraordinary large 
orders for certain CCTVware products from large business, institutional or 
government buyers, the Company's capital requirements may exceed the 
Company's available capital resources. Additionally, the Company has suffered 
losses in seven of the past eight quarters, and such losses, which may occur 
in the foreseeable future, would diminish the Company's cash and cash 
equivalents. There can be no assurance that the Company will be able to raise 
equity or debt financing on favorable terms, or at all. If the Company fails 
in such circumstances to raise additional capital as needed, the Company 
would likely be required to reduce the scope of its product development, 
selling and marketing activities and other operations, which would have a 
material adverse effect on the Company's business, operating results and 
financial condition.

         DISTRIBUTION RELATIONSHIPS. The Company believes its success in 
penetrating markets for its ID Products and CCTVware Products depends in part 
on its ability to maintain distribution relationships with manufacturing 
representatives, dealers and systems integrators and to cultivate additional, 
similar relationships. There can be no assurance that the Company will be 
successful in maintaining or expanding its distribution relationships. The 
loss of certain distribution relationships could have a negative impact on 
the Company's revenue stream. Further, there can be no assurance that the 
businesses with whom the Company has developed such relationships, some of 
whom have significantly greater financial and marketing resources than the 
Company, will not develop and market products in competition with the Company 
or will not otherwise discontinue their relationships with the Company.

         COMPETITION. Certain of the Company's current and prospective 
competitors have substantially greater technical, financial and marketing 
resources than the Company. In addition, there can be no assurance that any 
of the Company's products will be competitive in the face of advances in 
product technology developed by the Company's current or future competitors.

         LEGAL PROCEEDINGS. On October 17, 1997, the Company received notice 
that it had been named as a defendant in a patent infringement lawsuit 
brought by a competitor, Prima Facie, Inc. ("PFI"), in the U.S. District 
Court for the District of Maryland. The lawsuit alleges that the Company's 
CCTVware Transit product infringes certain claims of two patents held by PFI 
and that the Company has interfered with PFI's business relationships. The 
claim has been amended to allege infringement by the Company's other CCTVware 
Products. The suit seeks injunctive relief against further infringement and 
damages. The lawsuit also names one of the Company's domestic distributors as 
a codefendant. Although the Company believes these claims are without merit 
and is defending itself vigorously, an adverse result in the litigation could 
have a negative impact on the Company's business, operating results and 
financial condition. More specifically, if the claims of PFI are upheld as 
valid, enforceable and infringed, the Company might be held liable for a 
substantial damage award and would be required to obtain a license from PFI 
or be required to redesign its products to avoid infringement. There can be 
no assurance that a license would be available from PFI, or if available, 
would be available on terms acceptable to the Company or that the Company 
would be able to redesign its products to avoid infringement. Accordingly, an 
adverse determination in the pending judicial proceedings could prevent the 
Company from manufacturing and selling its CCTVware products. Additionally, 
the Company has incurred and continues to incur substantial expenses in its 
litigation with PFI, and there can be no assurance that the Company will not 
continue to incur such expenses for some considerable amount of time.

         INTERNATIONAL SALES. The Company is seeking to expand its 
international presence by developing new distribution channels in certain 
foreign countries where it has not previously had a presence. International 
sales are subject to a number of risks, including political and economic 
instability, unexpected changes in regulatory requirements, tariffs and other 
trade barriers, fluctuating exchange rates and the possibility of greater 
difficulty in accounts receivable collection. There can be no assurance that 
these and


                                      12

<PAGE>

other factors will not have a material adverse effect on the Company's future 
international sales, if any, and, consequently, the Company's business, 
operating results and financial condition.

         DEPENDENCE ON A MAJOR CUSTOMER. In 1998, sales to Dayton Hudson 
Corporation accounted for 38% of the Company's revenue. Dayton Hudson is not 
obligated to purchase any minimum levels of the Company's products, and 
although Dayton Hudson Corporation has placed additional orders with the 
Company subsequent to 1998, there can be no assurance that any further 
business will arise from this customer. Any significant reduction in product 
sales to Dayton Hudson Corporation that can not be replaced with new business 
may materially and adversely affect the Company's business, operating results 
and financial condition.

         YEAR 2000 ISSUES. The "year 2000 issue" arises because most computer 
systems and programs were designed to handle only a two-digit year, not a 
four-digit year. When the year 2000 begins, these computers may interpret 
"00" as the year 1900 and could either stop processing date-related 
computations or could process them incorrectly. The Company has taken steps 
to implement new information systems and migrate to year 2000 compliant 
software for its accounting, customer order processing, purchasing and 
inventory control software, and accordingly, the Company does not currently 
anticipate any internal year 2000 issues from this software. However, the 
Company could be adversely impacted by year 2000 issues related to other 
internally used computer-based systems and issues faced by major suppliers, 
customers, vendors and distributors with which the Company interacts. The 
Company has begun a testing program to gauge the year 2000 compliance of its 
products, and the Company is beginning the process of corresponding with 
certain third parties to determine whether they are year 2000 compliant. The 
Company will then evaluate and follow up on the responses to determine the 
impact that third parties who are not year 2000 compliant may have on the 
operations and products of the Company. As a result of the unprecedented and 
potentially complex nature of the year 2000 issue however, there can be no 
assurance that this issue will not have a material and adverse impact on the 
business, operating results and financial condition of the Company, despite 
the Company's efforts.

         DEPENDENCE ON NEW PRODUCTS. The market for the Company's products is 
characterized by ongoing technological development and evolving industry 
standards. The Company's success will depend upon its ability to enhance its 
current products and to introduce new products which address technological 
and market developments and satisfy the increasingly sophisticated needs of 
customers. For instance, the Company has released several products based on 
its CCTVware technology. There can be no assurance that the Company will be 
successful in developing, marketing and selling sufficient volumes of its new 
CCTVware products or developing and marketing on a timely basis any other 
fully functional product enhancements or new products that respond to the 
technological advances by others. There also can be no assurance that the 
Company's new products will be accepted by customers.

         MANAGEMENT AND EMPLOYEES. The Company's future success depends in 
significant part upon the continued service of its key technical and senior 
management personnel and its continuing ability to attract and retain highly 
qualified technical and managerial personnel in the future. The Company has 
in the past encountered some difficulties in fulfilling its hiring needs in 
the Durango, Colorado employment market, and there can be no assurance that 
the Company will be successful in hiring and retaining qualified employees in 
the future.

         PROPRIETARY RIGHTS. The Company is not aware that its products, 
trademarks or other proprietary rights infringe on the proprietary rights of 
any third parties, except that a claim of infringement has been asserted 
against the Company by Prima Facie, Inc. (see Item 3 - Legal Proceedings and 
"Risk Factors -Legal Proceedings"). The Company has already expended 
considerable resources and funds towards defending itself in this 
infringement litigation and an adverse result in this litigation with Prima 
Facie, Inc. could have a negative impact on the financial position and 
results of operations of the Company. Further, there can be no assurance that 
other third parties will not assert infringement claims against the Company 
in the future with respect to current or future products. As the number of 
software products in the industry increases and the functionality of these 
products further overlaps, the Company believes that software developers may 
become increasingly subject to infringement claims. Any such claims against 
the Company, with or without merit, could result in costly litigation or 
might require the Company to enter into royalty or licensing agreements. Such 
royalty and licensing agreements, if required, may not be available on terms 
acceptable to the Company.


                                      13

<PAGE>

         VARIABILITY OF OPERATING RESULTS. The Company's revenue and 
operating results have fluctuated significantly from quarter to quarter, and 
may continue to fluctuate, due to a combination of factors. These factors 
include relatively long sales cycles for certain products, the timing or 
cancellation of orders from major customers, the timing of new product 
introductions by the Company or its competitors, the Company's use of 
third-party distribution channels, the fulfillment of large one-time orders 
to particular customers and general economic conditions and other factors 
affecting capital spending. For example, a longer than expected sales cycle 
for the CCTVware Products delayed anticipated revenue. Additionally, the 
Company generally ships orders in the quarter in which such orders are 
received, and accordingly, revenue in any quarter is substantially dependent 
on the orders booked and shipped in that quarter. The Company has typically 
recognized a substantial portion of its revenue in the last month of the 
quarter, with much of this revenue concentrated in the last two weeks of the 
quarter. Because the Company's operating expense levels are relatively fixed 
and based, to some extent, on anticipated revenue levels, a small variation 
in revenue can cause significant variations in operating results from quarter 
to quarter and may result in losses. Further, the effect of software 
amortization related to the Company's capitalized software development costs 
at December 31, 1998 on the cost of products sold is expected to increase 
from $419,400 in 1998 to approximately $500,000 in 1999. The Company will 
continue to capitalize software development costs that will be amortized in 
future periods. Due to all of the foregoing, the Company believes that 
period-to-period comparisons of its results of operations are not necessarily 
meaningful and should not be relied upon as indications of future performance.

         PRODUCT OBSOLESCENCE. The Company's current products and products 
under development are limited in number and concentrated primarily in the 
markets for identification and surveillance products. The life cycles of the 
Company's products are difficult to estimate due in large measure to changing 
and developing technology as well as the unknown future effect of products 
introduced by the Company's competition. Price reductions or declines in 
demand for the Company's products, whether as a result of competition, 
technological change or otherwise, would have a materially adverse effect on 
the Company's business, operating results and financial condition.

         VOLATILITY OF STOCK PRICE. The market price of the Company's Common 
Stock has experienced significant volatility, and is likely to continue to be 
significantly affected by factors such as actual or anticipated fluctuations 
in the Company's operating results, the Company's failure to meet or exceed 
published earnings estimates, changes in earnings estimates or 
recommendations by securities analysts, announcements of technological 
innovations, new products or new contracts by the Company or its existing or 
potential competitors, developments with respect to patents, copyrights or 
proprietary rights, adoption of new accounting standards affecting the 
software industry, general market conditions and other factors. In addition, 
the stock market has from time to time experienced significant price and 
volume fluctuations that have particularly affected the market prices for the 
common stock of technology companies which have often been unrelated to the 
operating performance of such companies. These broad market fluctuations may 
materially adversely affect the market price of the Company's common stock. 
There can be no assurance that the trading price of the Company's Common 
Stock will not experience substantial volatility in the future.

ITEM 7.  FINANCIAL STATEMENTS

         Information called for by this item is set forth in the Company's 
Financial Statements contained in this report and is incorporated herein by 
this reference. Specific financial statements can be found at the pages 
listed in the following index.

<TABLE>
<CAPTION>
                                                                       Page No.
                                                                       --------
         <S>                                                           <C>
         Independent Auditors' Report                                      F-2
         Consolidated Balance Sheet at December 31, 1998                   F-3
         Consolidated Statements of Operations for the years ended
            December 31, 1998 and 1997                                     F-4
         Consolidated Statements of Stockholders' Equity
            for the years ended December 31, 1998 and 1997                 F-5
         Consolidated Statements of Cash Flows for the years ended
            December 31, 1998 and 1997                                     F-6
         Notes to Consolidated Financial Statements                        F-8
</TABLE>


                                      14

<PAGE>

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         None










                                      15

<PAGE>

                                    PART III

ITEM 9.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Pursuant to instruction E(3) to Form 10-KSB, the information 
required by Item 9 of Form 10-KSB with respect to identification of directors 
is incorporated by reference to the information contained in the sections 
captioned "PROPOSAL NO. 1 - ELECTION OF DIRECTORS" and "COMPLIANCE WITH 
SECTION 16(a) OF THE EXCHANGE ACT" in the registrant's definitive proxy 
statement for the 1999 annual meeting of stockholders to be filed with the 
Securities Exchange Commission (the "Commission"). Additional information is 
as follows:

<TABLE>
<CAPTION>
         NAME                               AGE      POSITION WITH THE COMPANY
         ----                               ---      -------------------------
         <S>                                <C>      <C>
         Edward Jankowski.                  61       President,  Chief  Executive  Officer and Chairman
                                                     of the Board of Directors
         Jonathan C. Lupia..............    47       Chief Operating  Officer,  Chief Financial Officer
                                                     and Secretary
         Peter A. Jankowski.............    36       Chief Technical Officer
         Timothy S. Whitehead.........      45       Vice President and Officer
         F. James Price...................  61       Vice President and Officer
         Mathiew Bais                       44       Vice President Sales and Marketing
</TABLE>

         Officers are appointed by and serve at the discretion of the Board 
of Directors. The Company has no employment agreements with any of its 
officers.

         Edward Jankowski has served as Chairman of the Board of Directors 
for the Company and the Company's predecessor corporations since August 1987, 
as President from August 1987 to June 1993 and as Chief Executive Officer 
from February 1992 to June 1993. In September 1997, upon the resignation of 
Mr. M. Dean Gilliam, the Company's former President, Chief Executive Officer 
and Director, Mr. Jankowski resumed the responsibilities of President and 
Chief Executive Officer. In February 1998, Mr. Jankowski was appointed 
President and Chief Executive Officer.

         Jonathan C. Lupia joined the Company in February 1994 and assumed 
the positions of Chief Financial Officer and Secretary in April 1994. In June 
1998, Mr. Lupia assumed the additional position of Chief Operating Officer. 
From June 1989 to February 1994, Mr. Lupia served as Vice President of 
Finance and Administration at Swearingen Aircraft, Inc., a company engaged in 
the design, development and manufacture of aircraft.

         Peter A. Jankowski co-founded the Company's predecessor corporation 
in August 1987 and served as Vice President, Research and Development from 
the Company's inception to October 1992 when he was appointed Chief Technical 
Officer. Mr. Jankowski began his career in August 1984 as a systems analyst 
for Quadrex Computer Systems, Inc., a manufacturer of control systems for 
nuclear and petroleum power plants. Mr. Jankowski performed design and 
systems analysis on nuclear and petroleum power plants, created and managed a 
telemarketing operation and assisted with marketing and project management 
decisions. Mr. Jankowski is the son of Edward Jankowski, the Chairman of the 
Board of Directors, President, Chief Executive Officer and co-founder of the 
Company.

         Timothy S. Whitehead joined the Company's predecessor corporation in 
September 1990 as Vice President, Operations and was appointed Vice 
President, Quality in January 1995, Vice President, Special Projects in 
October 1995 and Vice President, Operations in January 1997. From June 1987 
to September 1990, Mr. Whitehead was Manufacturing Manager for Electronic 
Resources, Inc., a subsidiary of Whittaker Corporation, a manufacturer of 
industrial monitoring devices.

         F. James Price joined the Company in October 1994 as Manager, 
Production Operations and was appointed Vice President, Operations in January 
1995 and Vice President, Special Projects in January 1997. From 1979 to 1994, 
Mr. Price worked for various companies involved in real estate development, 
oil production, finance and computer assembly as either Chief Executive 
Officer or Chief Financial Officer.


                                      16

<PAGE>

         Mathiew Bais joined the Company in October 1998 as Vice President, 
Sales and Marketing. From August 1997 to October 1998, Mr. Bais was President 
of IPS Standards, a company engaged in the marketing and distribution of 
security related products. From August 1995 to May 1997, Mr. Bais was a 
Managing Director of Ultrak, Inc., a company engaged in the marketing and 
distribution of security and CCTV related products, where he was involved 
with new product acquisitions and technical marketing for domestic and 
international markets. From January 1989 to August 1995, Mr. Bais was 
President of GPS Standards USA, a company founded by Mr. Bais and 
subsequently sold to Ultrak, Inc. in August 1995, which was involved in the 
manufacture and distribution of security and CCTV related products 
domestically and internationally.

ITEM 10. EXECUTIVE COMPENSATION

         Pursuant to instruction E(3) to Form 10-KSB, the information 
required by Item 10 of Form 10-KSB with respect to executive compensation is 
incorporated by reference to the information contained in the section 
captioned "EXECUTIVE COMPENSATION" in the registrant's definitive proxy 
statement for the 1999 annual meeting of stockholders to be filed with the 
Commission.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Pursuant to instruction E(3) to Form 10-KSB, the information 
required by Item 11 of Form 10-KSB with respect to security ownership of 
certain beneficial owners and management is incorporated by reference to the 
information contained in the section captioned "SECURITY OWNERSHIP OF CERTAIN 
BENEFICIAL OWNERS AND MANAGEMENT" in the registrant's definitive proxy 
statement for the 1999 annual meeting of stockholders to be filed with the 
Commission.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Pursuant to instruction E(3) to Form 10-KSB, the information 
required by Item 12 of Form 10-KSB with respect to certain relationships and 
related transactions is incorporated by reference to the information 
contained in the section captioned "CERTAIN TRANSACTIONS WITH MANAGEMENT" in 
the registrant's definitive proxy statement for the 1999 annual meeting of 
stockholders to be filed with the Commission.


                                      17

<PAGE>

                                    PART IV

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>

(a)      EXHIBITS
         --------
<S>      <C>         <C>
         3.1 (1)     Articles of Incorporation of Registrant, as amended to date.
         3.3 (1)     Bylaws of Registrant, as amended to date.
         4.1 (2)     Specimen Common Stock Certificate of Registrant.
         4.2 (2)     Warrant dated September 1, 1994 issued to Commonwealth Associates.
         4.3 (2)     Settlement Agreement dated August 1993 among Registrant and
                     Commonwealth Growth Fund, Philip L. Fischer, Laura Gordon Fisher,
                     Identification Systems International, Inc. and James Marx, including forms
                     of warrants issued by Registrant in connection therewith.
         10.2 (2)    Series A Preferred Stock Purchase Agreement dated December 31, 1992
                     among Registrant and certain investors.
         10.3 (2)    OEM Agreement dated March 8, 1993 between Registrant and ADT Security
                     Systems, Inc.
         10.4 (2)    Agreement dated December 1, 1993 between Registrant and Diebold
                     Incorporated.
         10.5 (2)    Distributor Agreement dated April 12, 1994 between Registrant and Polaroid
                     Corporation.
         10.7 (2)    1992 Stock Option Plan of Registrant.
         10.10 (3)   1995 Directors Option Plan
         10.11 (4)   Contract for Process Computer Systems dated October 16, 1995 between
                     Registrant and Aramco Services Company.
         10.12 (5)   Preferred Shares Rights Agreement between
                     American Stock Transfer and Trust Company dated
                     January 9, 1997.
         23.1        Independent Auditors' Consent
         24.1        Power of attorney (see page 19)
         27.1        Financial data schedule for the year ended December 31, 1998
         --------------------------------------------------------------------------------------
</TABLE>

         (1)  Incorporated by reference to Registrant's Quarterly Report on 
              Form 10-QSB filed with the Commission on November 11, 1994.
         (2)  Incorporated by reference to Registrant's Registration Statement 
              on Form SB-2 filed on June 9, 1994, as amended.
         (3)  Incorporated by reference to Registrant's definitive Proxy 
              Materials filed with the Commission on April 22, 1995.
         (4)  Incorporated by reference to the revised exhibit filed (in paper 
              format under cover of Form SE) with the Commission on January 9, 
              1997
         (5)  Incorporated by reference to Exhibit 1 filed in connection with 
              the Registrant's Form 8-A which was filed on January 13, 1997.

(b)  REPORTS ON FORM 8-K

         None








                                      18

<PAGE>

                                   SIGNATURES

         In accordance with Section 13 or 15(d) of the Exchange Act, the 
Registrant caused this report to be signed on its behalf by the undersigned, 
thereunto duly authorized.

                               LORONIX INFORMATION SYSTEMS, INC.

                               By:  /s/ Jonathan C. Lupia
                                    ---------------------
                                    Jonathan C. Lupia
                                    Chief Financial Officer, Chief Operating 
                                    Officer, and Secretary

Date:  March 22, 1999

POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature 
appears below constitutes and appoints Jonathan C. Lupia, jointly and 
severally, his or her respective attorney-in-fact, with the power of 
substitution, for each other in any and all capacities, to sign any 
amendments to this Report on Form 10-KSB, and to file the same, with exhibits 
thereto and other documents in connection therewith, with the Securities and 
Exchange Commission, hereby ratifying and confirming all that each of said 
attorneys-in-fact, or his or her respective substitute or substitutes, may do 
or cause to be done by virtue hereof.

         In accordance with the Exchange Act, this report has been signed 
below by the following persons on behalf of the registrant and in the 
capacities and on the dates indicated.


By:  /s/ Edward Jankowski                                  Date:  March 22, 1999
     -------------------------------
     Edward Jankowski, President,
        Chief Executive Officer and
        Chairman of the Board

By:  /s/ Jonathan C. Lupia                                 Date:  March 22, 1999
     ---------------------------------------
     Jonathan C. Lupia, Chief Financial Officer,
         Chief Operating Officer, and Secretary

By:  /s/ George M. Duffy                                   Date:  March 22, 1999
     ---------------------------------------
     George M. Duffy, Director

By:  /s/ Rodney Wilger                                     Date:  March 22, 1999
     ---------------------------------------
     C. Rodney Wilger, Director

By:  /s/ Donald W. Stevens                                 Date:  March 22, 1999
     -------------------------------
     Donald W. Stevens, Director

By:  /s/ Louis E. Colonna                                  Date:  March 22, 1999
     ---------------------------------------
     Louis E. Colonna, Director


                                      19

<PAGE>

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>

          <S>                                                               <C>
          Independent Auditors' Report                                      F-2

          Consolidated Balance Sheet at December 31, 1998                   F-3

          Consolidated Statements of Operations for the years ended
             December 31, 1998 and 1997                                     F-4

          Consolidated Statements of Stockholders' Equity for
             the years ended December 31, 1998 and 1997                     F-5

          Consolidated Statements of Cash Flows for the years ended
             December 31, 1998 and 1997                                     F-6

          Notes to Consolidated Financial Statements                        F-8
</TABLE>

<PAGE>

                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
Loronix Information Systems, Inc.:


We have audited the accompanying consolidated balance sheet of Loronix 
Information Systems, Inc. and subsidiary as of December 31, 1998, and the 
related consolidated statements of operations, stockholders' equity, and cash 
flows for each of the years in the two-year period ended December 31, 1998. 
These consolidated financial statements are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a 
reasonable basis for our opinion. In our opinion, the consolidated financial 
statements referred to above present fairly, in all material respects, the 
financial position of Loronix Information Systems, Inc. and subsidiary as of 
December 31, 1998, and the results of their operations and their cash flows 
for each of the years in the two-year period ended December 31, 1998, in 
conformity with generally accepted accounting principles.

                                      /s/ KPMG LLP




January 29, 1999 
San Diego, California


                                      F-2

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                           Consolidated Balance Sheet

                                December 31, 1998


                                 ASSETS (NOTE 5)
<TABLE>
<S>                                                                                         <C>
Current assets:
     Cash and cash equivalents                                                              $      1,625,259
     Accounts receivable:
        Trade, net of allowance for doubtful accounts of $433,171 (Note 2)                         2,412,319
        Officers and employees                                                                        17,890
     Inventory                                                                                     1,925,050
     Prepaid expenses and other assets                                                               158,506
     Notes receivable, related parties (Note 4)                                                       38,454
                                                                                              ----------------

                 Total current assets                                                              6,177,478

Property and equipment, net (Note 3)                                                               4,085,080
Capitalized software costs, net of accumulated amortization of $1,278,213                            954,949
Notes receivable, related parties (Note 4)                                                            38,451
Accounts receivable - officers and employees                                                         125,787
Deposits and other assets                                                                             36,475
                                                                                              ----------------

                 Total assets                                                               $     11,418,220
                                                                                              ----------------
                                                                                              ----------------

                                           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current installments of long-term debt (Note 5)                                        $         80,733
     Current installments of capital lease obligations (Note 9)                                        8,983
     Accounts payable                                                                                685,085
     Accrued liabilities                                                                             431,960
     Accrued commissions                                                                              87,000
                                                                                              ----------------

                 Total current liabilities                                                         1,293,761

Long-term debt, excluding current installments (Note 5)                                            1,079,965
                                                                                              ----------------

                 Total liabilities                                                                 2,373,726
                                                                                              ----------------

Stockholders' equity (Note 7):
     Preferred stock, $.001 par value.  Authorized 2,000,000 shares; no shares
        issued and outstanding                                                                            --
     Common stock, $.001 par value.  Authorized 20,000,000 shares; issued and
        outstanding 4,646,836 shares                                                                   4,647
     Additional paid-in capital                                                                   15,199,175
     Notes receivable from stockholders (Note 4)                                                    (147,883)
     Accumulated deficit                                                                          (6,011,445)
                                                                                              ----------------

                 Total stockholders' equity                                                        9,044,494

Commitments and contingencies (Notes 9 and 11)
                                                                                              ----------------

                 Total liabilities and stockholders' equity                                 $     11,418,220
                                                                                              ----------------
                                                                                              ----------------
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-3

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                      Consolidated Statements of Operations

                     Years ended December 31, 1998 and 1997


<TABLE>
<CAPTION>
                                                                             1998                  1997
                                                                      -------------------   -------------------
<S>                                                                <C>                      <C>
Systems, supplies and maintenance revenue (Note 2)                 $      12,710,871             9,313,980
Contract revenue                                                                  --                88,650
                                                                      -------------------   -------------------

                 Total revenue                                            12,710,871             9,402,630
                                                                      -------------------   -------------------

Costs and expenses:
     Cost of systems, supplies and maintenance                             6,816,573             5,098,231
     Contract costs                                                               --                18,899
     Operations and customer support                                       1,606,021             1,567,413
     Selling, general and administrative                                   5,121,269             3,750,367
     Research and development                                              1,381,231             1,525,827
                                                                      -------------------   -------------------

                 Total costs and expenses                                 14,925,094            11,960,737
                                                                      -------------------   -------------------

                 Loss from operations                                     (2,214,223)           (2,558,107)
                                                                      -------------------   -------------------

Other income (expense):
     Interest income                                                         142,439               154,702
     Interest expense                                                        (75,453)              (33,730)
     Other expense                                                           (14,342)              (42,391)
                                                                      -------------------   -------------------

                                                                              52,644                78,581
                                                                      -------------------   -------------------

                 Loss before income taxes                                 (2,161,579)           (2,479,526)

Income tax expense (Note 6)                                                     (800)              (32,416)
                                                                      -------------------   -------------------

                 Net loss                                          $      (2,162,379)           (2,511,942)
                                                                      -------------------   -------------------
                                                                      -------------------   -------------------

Basic and diluted net loss per share                               $              (0.47)                (0.54)
                                                                      -------------------   -------------------
                                                                      -------------------   -------------------

Weighted-average shares outstanding                                        4,646,549             4,659,252
                                                                      -------------------   -------------------
                                                                      -------------------   -------------------
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-4

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                 Consolidated Statements of Stockholders' Equity

                     Years ended December 31, 1998 and 1997


<TABLE>
<CAPTION>

                                                 COMMON STOCK,                      NOTES
                                                $.001 PAR VALUE   ADDITIONAL     RECEIVABLE                        TOTAL
                                     --------------------------    PAID-IN          FROM        ACCUMULATED   STOCKHOLDERS'
                                       SHARES        AMOUNT        CAPITAL      STOCKHOLDERS      DEFICIT         EQUITY
                                     ----------    ----------    -----------   --------------   -----------   -------------
<S>                                  <C>           <C>           <C>           <C>              <C>           <C>
Balances at December 31, 1996         4,661,936     $   4,662     15,259,432        (214,981)   (1,337,124)    13,711,989

Exercise of common stock options          1,250             1          3,592              --            --          3,593

Retirement of common stock notes
  receivable from stockholders          (17,000)          (17)       (65,662)         67,098            --          1,419

Net loss                                     --            --             --              --    (2,511,942)    (2,511,942)
                                     -----------   ----------    -----------   --------------   -----------   ------------

Balances at December 31, 1997         4,646,186         4,646     15,197,362        (147,883)   (3,849,066)    11,205,059

Exercise of common stock options            650             1          1,813              --            --          1,814

Net loss                                     --            --             --              --    (2,162,379)    (2,162,379)
                                     -----------   ----------    -----------   --------------   -----------   ------------

Balances at December 31, 1998         4,646,836     $   4,647     15,199,175        (147,883)   (6,011,445)     9,044,494
                                     -----------   ----------    -----------   --------------   -----------   ------------
                                     -----------   ----------    -----------   --------------   -----------   ------------
</TABLE>


See accompanying notes to consolidated financial statements.


                                      F-5


<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                     Years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                          1998                  1997
                                                                                   ------------------    ------------------
<S>                                                                             <C>                      <C>
Cash flows from operating activities:
     Net loss                                                                   $      (2,162,379)           (2,511,942)
     Adjustments to reconcile net loss to net cash
        used in operating activities:
           Depreciation and amortization                                                1,233,989             1,068,309
           Loss on disposal of capital equipment                                           14,538                 8,575
           Loss on foreign currency exchange                                               27,015                10,136
           Provision for deferred income taxes                                                 --                32,416
           Changes in operating assets and liabilities:
              Decrease (increase) in accounts receivable, net                             167,901            (1,127,030)
              Increase in inventory                                                      (612,115)             (934,530)
              Decrease in prepaid expenses and other assets                               749,941               620,780
              Decrease (increase) in accounts payable                                    (169,449)              225,775
              Increase in accrued liabilities and accrued commissions                      30,274               271,089
                                                                                   ------------------    ------------------


                    Net cash used in operating activities                                (720,285)           (2,336,422)
                                                                                   ------------------    ------------------

Cash flows from investing activities:
     Capital expenditures                                                                (970,469)             (766,868)
     Proceeds from disposal of capital equipment                                           11,463                15,000
     Decrease in notes receivable                                                          58,610                80,797
     Decrease (increase) in deposits and other assets                                       6,332               (19,495)
     Capitalized software                                                                (551,462)             (460,540)
                                                                                   ------------------    ------------------

                    Net cash used in investing activities                              (1,445,526)           (1,151,106)
                                                                                   ------------------    ------------------

Cash flows from financing activities:
     Proceeds from bank borrowings                                                        500,000                    --
     Proceeds from facility mortgage                                                           --               700,000
     Payments on bank borrowings                                                           (8,785)                   --
     Payments of facility mortgage                                                        (22,092)               (8,425)
     Payments on capital lease                                                            (13,991)                   --
     Proceeds from exercise of stock options                                                1,814                 3,593
                                                                                   ------------------    ------------------

                    Net cash provided by financing activities                             456,946               695,168
                                                                                   ------------------    ------------------

Net decrease in cash and cash equivalents                                              (1,708,865)           (2,792,360)

Cash and cash equivalents, beginning of year                                            3,334,124             6,126,484
                                                                                   ------------------    ------------------

Cash and cash equivalents, end of year                                          $       1,625,259             3,334,124
                                                                                   ------------------    ------------------
                                                                                   ------------------    ------------------
</TABLE>


                                      F-6

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows

                     Years ended December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                          1998                  1997
                                                                                   -------------------   -------------------
<S>                                                                             <C>                      <C>
Supplemental cash flow information:
     Interest paid                                                              $          75,453                33,730
                                                                                   -------------------   -------------------
                                                                                   -------------------   -------------------

     Income taxes paid                                                          $             800                   800
                                                                                   -------------------   -------------------
                                                                                   -------------------   -------------------
</TABLE>

Noncash investing and financing activities:

     In 1998, the Company transferred inventory valued at $198,113 to 
        property and equipment.

     In 1997, 17,000 shares of common stock were retired in exchange for
        forgiveness of a stockholder note receivable of $67,098.

     In 1997, the Company transferred inventory valued at $416,440 to 
        property and equipment.

     In 1997, the Company entered into a capital lease for property and 
        equipment in the amount of $25,085.


See accompanying notes to consolidated financial statements.


                                      F-7

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS

       (a)        ORGANIZATION AND BUSINESS

              Loronix Information Systems, Inc. (the Company) was incorporated 
              in October 1992 under the laws of the state of Nevada.  The 
              Company was formed in connection with the reincorporation from 
              Colorado to Nevada of GPC, Inc. dba Loronix and Loronix 
              Information Systems, Inc. in October 1992, in which GPC, Inc. 
              merged into the Company.  The Company designs, markets and sells 
              a family of digital identification products and digital CCTV 
              video management surveillance products based on the Company's 
              proprietary software.

       (b)        PRINCIPLES OF CONSOLIDATION

              The consolidated financial statements include the accounts of 
              the Company and its wholly owned United Kingdom subsidiary. All 
              intercompany balances and transactions have been eliminated in 
              consolidation.

       (c)        REVENUE RECOGNITION

              Revenue from sales of systems and supplies is generally 
              recorded upon shipment. A portion of this revenue may be deferred 
              if significant obligations are to be fulfilled in the future, 
              in which case such revenue is recognized when all obligations 
              have been fulfilled. Maintenance revenue is recognized ratably 
              over the term of the contracts, typically one year.

              Long-term contract revenue is recognized using the 
              percentage-of-completion method. Earned revenue is based on the 
              percentage that incurred costs to date bear to total costs 
              after giving effect to the most recent management estimate of 
              total cost, and reflects the original contract price adjusted 
              for agreed-upon change order revenue, if any. The cumulative 
              impact of revisions in total cost estimates during the progress 
              of work is reflected in the year in which these changes become 
              known. Losses expected to be incurred on jobs in process are 
              charged to operations as soon as such losses are known.

       (d)        CASH EQUIVALENTS

              Cash equivalents consist primarily of money market funds and other
              highly rated short-term investments. For purposes of the statement
              of cash flows, the Company considers all highly liquid instruments
              purchased with an original maturity of three months or less to be
              cash equivalents.

       (e)        INVENTORY

              Inventory consists primarily of finished goods and is stated at
              the lower of cost, determined using the first-in, first-out (FIFO)
              method, or market value.

       (f)        PROPERTY AND EQUIPMENT

              Property and equipment are recorded at cost, net of accumulated
              depreciation. Depreciation is calculated using the straight-line
              method over the estimated useful lives of the assets which range
              from 3 to 30 years. Amortization of assets under capital lease is
              recorded using the straight-line method based on the shorter of
              the lease term or the estimated useful lives of the assets.


                                      F-8

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       (g)        CAPITALIZED SOFTWARE COSTS

              The Company has capitalized costs related to the development of
              certain software products which are a component of the Company's
              digital identification and CCTV video management surveillance
              products. In accordance with Statement of Financial Accounting
              Standards (SFAS) No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER
              SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED, capitalization
              of costs begins when technological feasibility has been
              established and ends when the product is available for general
              release to customers. Amortization is computed on an
              individual-product basis using the straight-line method over a
              three-year useful life. Amortization expense for the years ended
              December 31, 1998 and 1997 was $419,474 and $297,745,
              respectively.

       (h)        RESEARCH AND DEVELOPMENT EXPENSES

              Expenditures for research and development costs are expensed in
              the year incurred. In 1998 and 1997, the Company recorded
              expenses, net of capitalized software costs, of $1,381,231 and
              $1,525,827, respectively.

       (i)        INCOME TAXES

              Income taxes are accounted for under the asset and liability
              method. Deferred tax assets and liabilities are recognized for the
              future tax consequences attributable to differences between the
              financial statement carrying amounts of existing assets and
              liabilities and their respective tax bases and operating loss and
              tax credit carryforwards. Deferred tax assets and liabilities are
              measured using enacted tax rates expected to apply to taxable
              income in the years in which those temporary differences are
              expected to be recovered or settled. The effect on deferred tax
              assets and liabilities of a change in tax rates is recognized in
              income in the period that includes the enactment date.

       (j)        BASIC AND DILUTED LOSS PER COMMON SHARE

              The weighted average number of common shares outstanding used in
              computing basic earnings per share (EPS) was 4,646,549 and
              4,659,252 for the years ended December 31, 1998 and 1997,
              respectively. Diluted EPS reflects the potential dilution of
              securities that could share in the earnings of the Company.
              Options and warrants totaling approximately 1,450,473 and
              1,262,000 shares were excluded from the computations of net loss
              per common share for the years ended December 31, 1998 and 1997,
              respectively, as their effect is antidilutive.

       (k)        FAIR VALUE OF FINANCIAL INSTRUMENTS

              SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
              INSTRUMENTS, requires that fair values be disclosed for most of
              the Company's financial instruments. The carrying amounts of cash
              and cash equivalents, accounts receivable, accounts payable,
              accrued liabilities and accrued commissions are considered to be
              representative of their respective fair values because of the
              short maturity of these instruments. For the notes receivable,
              related parties and notes receivable from stockholders, a
              reasonable estimate of fair value is not practicable due to the
              inherent difficulty of evaluating the related party relationship
              and timing of payments. The carrying amount reported for long-term
              debt approximates its fair value because the underlying
              instruments bear interest at rates that are comparable to current
              rates offered to the Company for similar debt instruments.


                                      F-9

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       (l)        IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE 
                  DISPOSED OF

              SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
              AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, requires that
              long-lived assets and certain identifiable intangibles be reviewed
              for impairment whenever events or changes in circumstances
              indicate that the carrying amount of an asset may not be
              recoverable. Recoverability of assets to be held and used is
              measured by a comparison of the carrying amount of an asset to
              future net cash flows expected to be generated by the asset. If
              such assets are considered to be impaired, the impairment to be
              recognized is measured by the amount by which the carrying amount
              of the assets exceeds the fair value of the assets. Assets to be
              disposed of are reported at the lower of the carrying amount or
              fair value less costs to sell.

       (m)        STOCK OPTION PLAN

              Prior to January 1, 1996, the Company accounted for its stock
              option plan in accordance with the provisions of Accounting
              Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
              TO EMPLOYEES, and related interpretations. As such, compensation
              expense would be attributed on the date of grant only if the
              current market price of the underlying stock exceeded the exercise
              price. On January 1, 1996, the Company adopted SFAS No. 123,
              ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to
              recognize as expense over the vesting period the fair value of all
              stock-based awards on the date of grant. Alternatively, SFAS No.
              123 also allows entities to continue to apply the provisions of
              APB Opinion No. 25 and provide pro forma net income and pro forma
              earnings per share disclosures for employee stock option grants
              made in 1996 and future years as if the fair-value-based method
              defined in SFAS No. 123 had been applied. The Company has elected
              to continue to apply the provisions of APB Opinion No. 25 and
              provide the pro forma disclosure provisions of SFAS No. 123.

       (n)        COMPREHENSIVE INCOME

              As of January 1, 1998, the Company adopted Statement of Financial
              Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS
              130). SFAS 130 requires that all components of comprehensive
              income (loss), including net income (loss), be reported in the
              financial statements in the period in which they are recognized.
              The adoption of SFAS 130 did not have an impact on the Company, as
              the Company's net loss is the same as comprehensive loss for the
              years ended December 31, 1998 and 1997.

       (o)        USE OF ESTIMATES

              Management of the Company has made a number of estimates and
              assumptions relating to the reporting of assets and liabilities
              and the disclosure of contingent assets and liabilities at the
              date of the consolidated financial statements and the reported
              amounts of revenue and expenses during the reporting period to
              prepare these consolidated financial statements in conformity with
              generally accepted accounting principles. Actual results could
              differ from those estimates.

       (p)        RECLASSIFICATIONS

              Certain amounts in the 1997 consolidated financial statements have
              been reclassified to conform with the 1998 presentation.


                                      F-10

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


(2)    BUSINESS CONCENTRATION

       For the year ended December 31, 1998, the Company had sales of CCTVware
       products to one customer which accounted for 38% of total revenue.
       Outstanding receivables from this same customer accounted for 3% of trade
       accounts receivable at December 31, 1998. For the year ended December 31,
       1997, the Company had sales of CCTVware products to two customers which
       accounted for 47% of total revenue.

(3)    PROPERTY AND EQUIPMENT

       Property and equipment consists of the following as of December 31, 1998:

<TABLE>
   <S>                                                                 <C>
   Land                                                                $         225,977
   Building                                                                    1,212,520
   Machinery and equipment and third-party software                            3,946,070
   Office equipment and furniture                                                351,510
   Airplane                                                                      772,400
   Automobiles                                                                    16,652
   Capital lease                                                                  21,560
                                                                         -----------------

                                                                               6,546,689
   Less accumulated depreciation and amortization                             (2,461,609)
                                                                         -----------------

                    Total                                              $       4,085,080
                                                                         -----------------
                                                                         -----------------
</TABLE>

(4)    NOTES RECEIVABLE, RELATED PARTIES

       In November and December 1996, the Company granted to various officers,
       directors and an executive, advances for the purchase of automobiles in
       exchange for promissory notes in the amount of $216,312 and had an
       outstanding balance of $76,905 as of December 31, 1998. In addition, the
       Company has outstanding receivables of $143,677 at December 31, 1998 from
       various officers, directors and employees for general advances and loans.

       The Company also has notes receivable from stockholders which were
       received in exchange for the issuance of common stock. These notes are
       secured by the underlying common stock, accrue interest annually at rates
       ranging from 5.34% to 5.78% and mature on various dates through February
       2000.

(5)    LONG-TERM DEBT

       Long-term debt at December 31, 1998 consists of the following:

<TABLE>
  <S>                                                                                   <C>
  9.5% mortgage note payable to bank due in monthly installments with a
     final payment of $562,055 due at maturity in 2002. The note is secured
     by substantially all of the Company's assets                                       $         669,483

  8.5% note payable to bank due in monthly installments through maturity in 2001
                                                                                                  491,215
                                                                                           ------------------
                                                                                                1,160,698
      Less current portion                                                                        (80,733)
                                                                                           ------------------

                    Long-term debt, net of current portion                              $       1,079,965
                                                                                           ------------------
                                                                                           ------------------
</TABLE>


                                      F-11

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       Aggregate maturities of the notes payable for the periods subsequent to
       December 31, 1998 consist of the following:

<TABLE>
<CAPTION>
      YEAR ENDING DECEMBER 31:
      ------------------------
      <S>                                           <C>
                  1999                              $          80,733
                  2000                                         88,144
                  2001                                        406,162
                  2002                                        585,659
                                                       -----------------

                                                    $       1,160,698
                                                       -----------------
                                                       -----------------
</TABLE>

       On July 31, 1997, the Company entered into a loan agreement with a
       lending institution. The loan agreement includes a mortgage note, as well
       as a line of credit agreement under which the Company may borrow up to
       $1,000,000. Interest on amounts outstanding under the line of credit
       agreement accrues at the bank's prime rate plus one point (9.5% at
       December 31, 1998). At December 31, 1998, no amounts were outstanding
       under the line of credit agreement. The loan agreement contains
       restrictive covenants, which include restrictions on working capital,
       tangible net worth, cash flow, the payment of dividends and capital
       expenditures. At December 31, 1998, the Company was in violation of
       certain of these covenants, however, the Company obtained a waiver as of
       December 31, 1998 from the lending institution for the violations.

(6)    INCOME TAXES

       The current year income tax expense consists of the following at 
       December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                        1998                 1997
                                                  ------------------   ------------------
<S>                                            <C>                     <C>
      Current:
          Federal                              $              --                   --
          State                                              800                   --
                                                  ------------------   ------------------

                                                             800                   --
                                                  ------------------   ------------------
      Deferred:
          Federal                                             --               25,216
          State                                               --                7,200
                                                  ------------------   ------------------

                                                              --               32,416
                                                  ------------------   ------------------

                                               $             800               32,416
                                                  ------------------   ------------------
                                                  ------------------   ------------------
</TABLE>


                                      F-12

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       Income tax expense for the years ended December 31, 1998 and 1997 differs
       from the amount computed by applying the federal statutory rate of 34% as
       follows:

<TABLE>
<CAPTION>
                                                                     1998                  1997
                                                               ------------------    -----------------
      <S>                                                   <C>                      <C>
      Computed at federal statutory rate                    $        (734,900)       (843,000)
      State tax                                                       (29,900)       (100,800)
      Change in the valuation allowance                               866,200        958,300
      Nondeductible expenses                                           90,300        98,200
      General business credits                                       (190,900)       (80,284)
                                                               ------------------    -----------------

                                                            $             800        32,416
                                                               ------------------    -----------------
                                                               ------------------    -----------------
</TABLE>

       The tax effects of temporary differences that give rise to significant
       portions of the deferred tax assets and deferred tax liabilities as of
       December 31, 1998 are as follows:

<TABLE>
      <S>                                                                        <C>
      Deferred tax assets:
          Net operating loss carryforwards                                       $       1,663,500
          Research and experimentation credits                                             376,300
          Alternative minimum tax credits                                                   35,000
          Accounts receivable principally due to the allowance
            for doubtful accounts                                                          167,000
          Inventory, principally due to the allowance for obsolescence                      88,500
          Other                                                                             33,500
                                                                                    ------------------

                    Total gross deferred tax assets                                      2,363,800

          Valuation allowance                                                           (1,824,700)
                                                                                    ------------------

                    Net deferred tax assets                                                539,100
                                                                                    ------------------

      Deferred tax liabilities:
          Depreciation                                                                     182,900
          Software development costs                                                       356,200
                                                                                    ------------------

                    Total deferred tax liabilities                                         539,100
                                                                                    ------------------

                    Net deferred income taxes                                    $              --
                                                                                    ------------------
                                                                                    ------------------
</TABLE>


                                      F-13

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       In 1998, the Company recognized an increase in the valuation allowance of
       $866,200. Based upon the level of historical taxable income and
       projections for future taxable income over the periods which the deferred
       tax assets are deductible, management has provided a full valuation
       allowance for the net deferred tax assets as of December 31, 1998. The
       Company has net operating loss carryforwards for federal tax reporting
       purposes, which amounted to approximately $4,267,000 as of December 31,
       1998, which begin to expire in 2008. Additionally, the Company has
       research and development credits for federal tax reporting purposes
       amounting to $376,300, which begin to expire in 2008, and alternative
       minimum tax credits of $35,000, which have no expiration date.

(7)    STOCKHOLDERS' EQUITY

       On January 13, 1997, the Company announced the declaration of a dividend
       distribution to occur on March 14, 1997 of one preferred share purchase
       right for each outstanding share of the Company's common stock. Each
       right entitles stockholders of record on March 14, 1997 to buy one share
       of the Company's Series A participating preferred stock at an exercise
       price of $22.00. The rights will become exercisable following the tenth
       day after the announcement of acquisition of, or tender offer resulting
       in, ownership of 15% or more of the Company's common stock. Prior to the
       tenth day following the announcement, the Company is entitled to redeem
       the rights at $0.01 per right. The rights are designed to assure that
       Loronix stockholders receive fair and equal treatment in the event of any
       proposed takeover of the Company and to guard against partial tender
       offers and other tactics to gain control of Loronix without paying all
       stockholders the fair value of their shares. The rights will expire on
       March 14, 2007.

       (a)        COMMON STOCK WARRANTS

              During 1993 and 1994, the Company issued warrants to purchase
              shares of common stock. At December 31, 1998, there were 240,000
              warrants outstanding at an exercise price of $8.40 per share.
              Warrants are exercisable from the date of grant and expire on
              August 24, 1999.

              The Company determined that the relative fair market value of the
              common stock warrants at issuance was immaterial; accordingly, no
              value was assigned to such warrants.

       (b)        STOCK OPTION PLANS

              In 1992, the Company established a Stock Option Plan (the Plan)
              for employees and consultants. Options granted under the Plan may
              be incentive stock options (ISOs) or nonstatutory stock options
              (NSOs). The Plan was amended in 1996, and the maximum number of
              shares of common stock which may be optioned and sold under the
              Plan is 1,300,000. Options have a term of up to ten years, and
              generally become exercisable over a four-year period beginning one
              year from the date of grant at a price per share equal to the fair
              market value on the date of grant.

              In 1995, the Company adopted a Non-Employee Directors Stock Option
              Plan (Directors Plan). A total of 100,000 shares of common stock
              are reserved for issuance to individuals who serve as non-employee
              members of the Board of Directors. Options under the Directors
              Plan, which have a term of up to ten years, are exercisable at a
              price per share not less than the fair market value on the date of
              grant and vest over four years.

              ISO and NSO option activity from 1996 through 1998 is as follows:


                                      F-14

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


<TABLE>
<CAPTION>
                                                                     RANGE OF           WEIGHTED-AVERAGE
                                                 SHARES           EXERCISE PRICES        EXERCISE PRICE
                                           ------------------   --------------------   -------------------
<S>                                        <C>                  <C>                    <C>
ISO options:
    Outstanding at December 31, 1996
                                                  452,769       $   2.13 - 6.00        $  3.46
    Granted                                       173,099           1.19 - 4.38           3.23
    Exercised                                      (1,250)          2.88 - 2.88           2.88
    Canceled                                     (162,275)          2.66 - 4.88           3.87
                                           ------------------

    Outstanding at December 31, 1997
                                                  462,343           1.19 - 6.00           3.23
    Granted                                       211,400           1.50 - 3.00           2.08
    Exercised                                        (650)          2.66 - 2.88           2.79
    Canceled                                      (45,125)          1.19 - 4.88           2.74
                                           ------------------

    Outstanding at December 31, 1998
                                                  627,968       $   1.50 - 6.00        $  2.88
                                           ------------------   --------------------   -------------------
                                           ------------------   --------------------   -------------------

    Exercisable at December 31, 1997              225,567       $   2.13 - 6.00        $  3.47
                                           ------------------   --------------------   -------------------
                                           ------------------   --------------------   -------------------

    Exercisable at December 31, 1998              288,643       $   1.88 - 6.00        $  3.38
                                           ------------------   --------------------   -------------------
                                           ------------------   --------------------   -------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                            WEIGHTED-
                                                                     RANGE OF            AVERAGE EXERCISE 
                                                SHARES            EXERCISE PRICES             PRICE
                                           ------------------   --------------------   -------------------
<S>                                        <C>                  <C>                    <C>
NSO options:
    Outstanding at December 31, 1996
                                                  437,004       $   3.06 - 5.10        $  4.01
    Granted                                       238,501           3.08 - 3.88           3.57
    Canceled                                     (116,000)          4.88 - 5.10           4.94
                                           ------------------

    Outstanding at December 31, 1997
                                                  559,505           3.06 - 5.10           3.63
    Granted                                        43,000           1.50 - 2.00           1.77
    Canceled                                      (20,000)          5.10 - 5.10           5.10
                                           ------------------

    Outstanding at December 31, 1998
                                                  582,505       $   1.50 - 5.10        $  3.44
                                           ------------------   --------------------   -------------------
                                           ------------------   --------------------   -------------------
    Exercisable at December 31, 1997              367,755       $   3.06 - 5.10        $  3.62
                                           ------------------   --------------------   -------------------
                                           ------------------   --------------------   -------------------

    Exercisable at December 31, 1998              387,505       $   2.00 - 5.10        $  3.52
                                           ------------------   --------------------   -------------------
                                           ------------------   --------------------   -------------------
</TABLE>


              As of December 31, 1998, the range of exercise prices and
              weighted-average remaining contractual lives of ISO and NSO
              options outstanding was $1.50 - $6.00 and 7.3 years, and $1.50 -
              $5.10 and 5.7 years, respectively. The following is a summary of
              stock options outstanding at December 31, 1998:


                                      F-15

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                      -----------------------------------------------------   ----------------------------------
                                            WEIGHTED-
                                             AVERAGE          WEIGHTED-                            WEIGHTED-
       RANGE OF                             REMAINING          AVERAGE                              AVERAGE
       EXERCISE           NUMBER           CONTRACTUAL        EXERCISE             NUMBER           EXERCISE
        PRICES          OUTSTANDING           LIFE              PRICE            EXERCISABLE          PRICE
    ---------------   ----------------   ----------------  ----------------   ----------------   ---------------
   <S>                <C>                <C>               <C>                <C>                <C>
    $  1.00 - 2.00         150,600             9.1         $      1.69               3,025       $    2.00
       2.01 - 3.00         248,125             8.4                2.63              70,100            2.69
       3.01 - 4.00         699,498             5.4                3.41             517,673            3.36
       4.01 - 5.00          96,750             6.1                4.46              69,850            4.58
       5.01 - 6.00          15,500             5.5                5.54              15,500            5.54
                      ----------------                                        ----------------
                         1,210,473                                                 676,148
                      ----------------                                        ----------------
                      ----------------                                        ----------------
</TABLE>


              The Company applies APB Opinion No. 25 in accounting for its
              option plans, and accordingly, no compensation cost has been
              recognized for stock options in the consolidated financial
              statements. If the Company had determined compensation cost based
              on the fair value at the grant date for its stock options under
              SFAS No.123, the Company's net loss and net loss per share would
              have been adjusted to the pro forma amounts as follows:

<TABLE>
<CAPTION>
                                                 1998                                    1997
                                 -------------------------------------   ------------------------------------
                                    AS REPORTED          PRO FORMA           AS REPORTED         PRO FORMA
                                 -----------------   -----------------   ------------------   ---------------
<S>                              <C>                 <C>                 <C>                  <C>
Net loss                         $   (2,162,379)         (2,654,717)          (2,511,942)       (3,064,846)
Net loss per share               $         (.47)               (.57)                (.54)             (.66)
</TABLE>


              Pro forma net loss reflects only options granted after 1994.
              Therefore, the full impact of calculating compensation cost for
              stock options under SFAS No.123 is not reflected in the pro forma
              net loss amounts presented above because compensation cost is
              reflected over the options' vesting period of four years, and
              compensation cost for options granted prior to January 1, 1995 is
              not considered.

              The per share weighted-average fair value of ISO and NSO stock
              options granted during 1998 and 1997, at an exercise price equal
              to the fair market value on the date of grant, was $1.43 and
              $2.41, respectively, using the Black-Scholes option-pricing model.
              The following weighted-average assumptions were used for 1998 and
              1997 grants: expected dividend yield of 0%, risk-free interest
              rate of 5.5%, expected life of four years, and expected volatility
              of 91% and 87%, respectively.

              The Company notes that the effect of applying SFAS No. 123 for
              disclosing compensation cost is not representative of the effects
              on reported net income (loss) for future years.

(8)    OPERATING SEGMENTS

       During 1998, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS
       OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes new
       standards for disclosure of information about operating segments. The
       Company's reportable segments include CCTVware products and ID products.
       The Company has presented information for the prior year for
       comparability purposes.

       The Company's CCTVware products permit the digital recording and storage
       of CCTV video that eliminates the need for video tapes and video cassette
       recorders in surveillance environments and enables high-speed access and
       retrieval of stored video. The Company's ID products can record and store
       digital images in computer databases, transmit such images to other
       control systems or printers,


                                      F-16

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       and retrieve, reproduce and manipulate these images in a variety of 
       ways. ID products are used to provide positive identification and 
       verification of an individual's identity for access control, security, 
       retail point-of-sale and other control systems.

       The Company's reportable segment financial data is as follows:

<TABLE>
<CAPTION>
                     PRODUCTS                              CCTVWARE                  ID                   TOTAL
---------------------------------------------------   --------------------   --------------------   -------------------
<S>                                                   <C>                    <C>                    <C>
1998:
    Sales                                             $   10,711,412              1,999,459             12,710,871
    Cost of goods sold                                     5,785,300              1,031,273              6,816,573
                                                      --------------------   --------------------   -------------------

              Segment gross margin                    $    4,926,112                968,186              5,894,298
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------

    Segment gross margin %                            45.99%                 48.42%                 46.37%
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------

    Additions to capitalized software                 $      518,734                 32,728                551,462
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------

    Software amortization                             $      307,432                112,042                419,474
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------

    Capitalized software                              $    1,272,134                961,028              2,233,162
    Accumulated amortization                                 468,493                809,720              1,278,213
                                                      --------------------   --------------------   -------------------

              Net book value of capitalized
                software costs                        $      803,641                151,308                954,949
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------

1997:
    Sales                                             $    5,882,330              3,520,300              9,402,630
    Cost of goods sold                                     3,540,339              1,576,791              5,117,130
                                                      --------------------   --------------------   -------------------

              Segment gross margin                    $    2,341,991              1,943,509              4,285,500
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------

    Segment gross margin %                            39.81%                 55.21%                 45.58%
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------

    Additions to capitalized software                 $      373,040                 87,500                460,540
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------

    Software amortization                             $      161,705                136,040                297,745
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------

    Capitalized software                              $      753,400                928,300              1,681,700
    Accumulated amortization                                 161,061                697,678                858,739
                                                      --------------------   --------------------   -------------------

              Net book value of capitalized
                software costs                        $      592,339                230,622                822,961
                                                      --------------------   --------------------   -------------------
                                                      --------------------   --------------------   -------------------
</TABLE>


                                      F-17

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       The Company's areas of operations are principally in the United States
and the United Kingdom as follows:

<TABLE>
<CAPTION>
                                                                                   UNITED
                                                        UNITED STATES             KINGDOM                 TOTAL
                                                      -------------------    -------------------    -------------------
<S>                                                   <C>                    <C>                    <C>
1998:
    Sales                                             $   12,039,426                671,445             12,710,871
    Cost of goods sold                                     6,459,838                356,735              6,816,573
                                                      -------------------    -------------------    -------------------

              Gross margin                            $    5,579,588                314,710              5,894,298
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------

    Gross margin %                                          46.34%           46.87%                 46.37%
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------

    Depreciation and amortization                     $    1,192,289                 41,700              1,233,989
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------

    Capital expenditures                              $      933,469                 37,000                970,469
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------

    Total assets                                      $   11,267,020                151,200             11,418,220
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------

1997:
    Sales                                             $    8,846,628                556,002              9,402,630
    Cost of goods sold                                     4,857,530                259,600              5,117,130
                                                      -------------------    -------------------    -------------------

              Gross margin                            $    3,989,098                296,402              4,285,500
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------

    Gross margin %                                          45.09%           53.31%                 45.58%
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------

    Depreciation and amortization                     $    1,024,309                 44,000              1,068,309
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------

    Capital expenditures                              $      766,868                     --                766,868
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------

    Total assets                                      $   13,094,828                168,000             13,262,828
                                                      -------------------    -------------------    -------------------
                                                      -------------------    -------------------    -------------------
</TABLE>


(9)    LEASES

       The Company leases various facilities, automobiles and certain equipment
       under noncancelable operating leases expiring at various dates through
       September 2002. It is expected that leases expiring will be renewed in
       the ordinary course of business.

       The Company is also obligated under a capital lease for certain office
       equipment which expires in 1999. Capital equipment recorded under this
       capital lease was $21,560 and had accumulated amortization of $9,882 as
       of December 31, 1998. Amortization of assets held under capital lease is
       included with depreciation expense.


                                      F-18

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       At December 31, 1998, future minimum lease payments under noncancelable 
       capital and operating leases are as follows:

<TABLE>
<CAPTION>
                                                                        CAPITAL              OPERATING
                   YEARS ENDING DECEMBER 31,                             LEASE                LEASES
----------------------------------------------------------------    -----------------    ------------------
        <S>                                                         <C>                  <C>
        1999                                                        $       9,862           95,462
        2000                                                                   --           58,887
        2001                                                                   --           48,043
        2002                                                                   --           531
                                                                    -----------------    ------------------

          Total minimum lease payments                                      9,862        $  202,923
                                                                                         ------------------
                                                                                         ------------------
Less amount representing interest                                            (879)
                                                                    -----------------

          Present value of obligations under capital lease                  8,983
Less current portion                                                        8,983
                                                                    -----------------

          Long-term capital lease obligations                       $          --
                                                                    -----------------
                                                                    -----------------
</TABLE>


       Rental expense under operating leases was approximately $87,000 and 
       $80,000 for the years ended December 31, 1998 and 1997, respectively.

(10)   RETIREMENT PLAN

       The Company sponsors a 401(k) Retirement Plan which is available to
       substantially all employees after three months of service. Employees may
       contribute from 1% to 15% of their wages subject to limits stated in the
       Internal Revenue Code. The Company may make discretionary contributions
       to the plan, which vest immediately. There were no discretionary
       contributions for the years ended December 31, 1998 and 1997.

(11)   CONTINGENCIES

       On October 17, 1997, the Company received notice that it has been named
       as a defendant in a patent infringement lawsuit brought by a competitor,
       Prima Facie, Inc., in the U.S. District Court for the District of
       Maryland. The lawsuit alleges that the Company's CCTVware products
       infringe certain claims of two patents held by Prima Facie, Inc., and
       that the Company has interfered with Prima Facie, Inc.'s business
       relationships. The lawsuit seeks injunctive relief against further
       infringement and damages. The lawsuit also names one of the Company's
       domestic distributors as a co-defendant. The Company believes the
       allegations of the complaint are without merit and is defending itself
       vigorously in this matter, and believes the ultimate liability will not
       be material to the consolidated financial position or results of
       operations of the Company.

       The Company is involved in various other claims and legal actions arising
       in the ordinary course of business. In the opinion of management, the
       ultimate disposition of these matters will not have a material adverse
       effect on the Company's consolidated financial position, results of
       operations or liquidity.


                                      F-19

<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued


       In July 1996, the Company entered into an agreement with the State of
       Colorado, whereby the State would provide certain infrastructure
       improvements on behalf of the Company in return for commitments from the
       Company to (i) create a certain number of jobs for low to moderate income
       families within two years; and (ii) retain its headquarters in La Plata
       county for a minimum of five years. In the event the Company ceases
       full-time operations or breaches its agreement, it could be liable for
       liquidated damages. Such damages would not exceed $150,418, the amount
       actually spent on infrastructure improvements by the State.

       An outstanding letter of credit, principally related to improvements to
       the airport facility land, amounted to approximately $28,700 at December
       31, 1998. The letter of credit is collateralized by certificates of
       deposit.


                                     F-20