<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, 1997


[  ] 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)
                                          
               NEVADA                               33-0248747
   -------------------------------               -------------------
   (State or other jurisdiction of               (I.R.S. Employer
    incorporation or organization)                Identification No.)
 
     
        820 Airport Rd., 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)

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, 1997 
was:  $9,402,630.

As of February 9, 1998, 4,646,186 shares of the registrant's common stock were
outstanding and the aggregate market value of such common stock held by
non-affiliates was approximately $7,353,465 based on the closing price of $2.125
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 27, 1998 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 trademarks of Loronix.  Loronix was
incorporated in 1992.  Loronix designs, markets and sells a family of digital
CCTV 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 digital video recording and storage that
eliminates the need for video tapes and video cassette recorders ("VCRs") in
surveillance environments and enables high-speed access and retrieval of stored
video.  The Company has developed six products incorporating this technology and
began commercial shipments of certain of these products in 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 four inputs
of video and audio per system.  Vision 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
(see the CCTVware Enterprise system below).  In VCR environments Vision 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 targeted at 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 16 camera inputs at 1.5-2 FPS.  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 (see 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.  A digital audio tape jukebox is included for long-term storage of the
recorded video.  PC-based playback stations are employed to review the recorded
video on demand.  The Enterprise system is targeted at large, dynamic, sensitive
surveillance environments such as government facilities, airports, financial
institutions 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 & white or color camera inputs
at .5-2 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 

                                       2
<PAGE>

recording on a removable hard drive which must be removed and
installed in a separate CCTVware review station for playback of the recorded
video.

     CCTVWARE SOLO

     The Solo system is a stand-alone, 110 volt digital recording system with
features similar to the Transit system without the capability of operating
within a mobile environment.  The Solo system is targeted at small businesses
requiring a stand-alone recording unit for up to five cameras.

     CCTVWARE SOLO REMOTE

     The Solo Remote system is a digital recording system with up to eight
camera inputs.  It has the capability of sending live or recorded video to a
central site via telephone or ISDN (Integrated Services Digital Network) lines. 
The Solo Remote can be configured for video motion detection, alarm events and a
point of sale interface.  This product is targeted at surveillance environments
requiring central site monitoring.

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 are used to 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, and 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 and ImageSHARE
Express.

     IMAGESHARE

     The Company's high-end ID product, the ImageSHARE system, is targeted
primarily for use by medium to large size 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, ImageSHARE Express, was released
in late 1996 and is targeted primarily for use by small to medium size
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.  ImageSHARE Express requires minimal customization and may
be designed to address the specific needs of various vertical market
applications.  Its open database connectivity feature allows connectivity to
certain RDBMS which may exist within the customer's system environment. 
ImageSHARE Express, which replaced the Company's ImageSHARE-V, ImageSHARE I and
Laser I.D. Card Creator systems, can be easily upgraded to the ImageSHARE
system.

                                       3
<PAGE>

     OPTIONAL FEATURES

     The Company also offers several optional features to enhance its ID
Products including: remote-site image capture, which enables a customer to
capture video images off-site and import them into the on-site system; signature
and fingerprint image input, which enables a customer to include a signature and
fingerprint image with each record in a database and print the images on an
identification card; magnetic stripe encoders and readers, which enables a
customer to record and automatically display information; and bar code input,
which enables a customer to create a multi-use identification card by printing a
bar code on the card.


MARKETING AND CUSTOMERS

     The Company markets its products domestically through a small direct sales
force, manufacturing representatives and a network of dealers, systems
integrators and distributors.  The Company's ImageSHARE Express product is also
marketed through Sam's Club.

     Historically, the Company has also marketed its ID Products through
original equipment manufacturers ("OEMs") such as ADT Security Systems, Inc.,
Diebold, Incorporated and Polaroid Corporation.  Since 1996 sales through these
OEMs have decreased significantly.  To offset this decline, the Company has
enhanced its other distribution channels and is seeking additional distribution
relationships  for both the ID and CCTVware Products.

     Internationally, the Company markets its products through its direct sales
force, its wholly-owned subsidiary in the United Kingdom and various
international distributors.  In the fourth quarter of 1995, the Company entered
into a long-term contract with Aramco Services Company, the U.S. subsidiary of
Aramco (a Saudi Arabian multinational corporation), for the sale of a customized
security and identification system which is currently installed in multiple
locations in Saudi Arabia ("Aramco" or the "Aramco Contract").  The Aramco
Contract provides for the payment of approximately $6.2 million over a three
year term upon the Company's satisfactory completion of various milestones.  The
Company has received payments through December 31, 1997, of approximately $5.3
million from the Aramco Contract.

COMPETITION

     The market for the Company's products is extremely competitive.  The
Company's 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) for the
Transit product; TVX, Inc. and Prima Facie, Inc., (ii) for the M Series and Solo
products; Dedicated Micros, Inc., Sensormatic Corporation, Primary Image, Ltd,
and Alpha Systems Lab.  Loronix has not yet identified any competitors, other
than VCR suppliers, for the 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 and Sensormatic Corporation, 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 with the Company's proprietary software.  The Company believes that
it can continue to obtain components for systems at reasonable 

                                       4
<PAGE>

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 sources, 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 enters into
confidentiality and invention assignment agreements with its employees and
mutual non-disclosure agreements with its manufacturing representatives,
dealers, distributors and OEMs and 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 the timeliness and quality of support services.

     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 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 core technologies and incorporating new technologies into the
Company's products.  The Company's research and development resources have been
primarily directed 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 approach.

     In 1997 and 1996, the Company spent, net of capitalized software costs,
$1,526,000 and $981,000, respectively, for research and development.

EMPLOYEES

     As of February 9, 1998, the Company employed 75 persons including four
persons in part-time positions.  The Company has one employee located in each of
Nevada, California, Texas, and Massachusetts and six employees located in
Basingstoke, England with the remainder located in Colorado.  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 5 of
the 25 acres for administration, marketing, research and development, 

                                       5
<PAGE>

operations and customer support.  In January 1996, the Company entered into a 
three year lease for approximately 2,000 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. Depending on the success of its CCTVware product line, 
the Company may expand its Durango facility by up to 20,000 square feet in 
1998.

     In July 1997, the Company entered into a $700,000 mortgage agreement for
its Durango-La Plata County 20,000 square foot facility secured by a 1st Deed of
Trust.

ITEM 3.   LEGAL PROCEEDINGS

     The Company has completed its litigation with the Company's former Vice
President of Marketing and Sales, Mr. Robert Demson who filed a lawsuit against
the Company alleging breach of contract and fraud.  This individual, who
terminated his employment with the Company in May 1994,alleged that he was
promised, but never received, options to purchase shares of the Company's Common
Stock at a significant discount from fair market value and that he was deprived
of certain sales commissions.  The parties agreed to binding arbitration which
was completed on May 1, 1997.  The arbitrator ruled in favor of the Company on
the claim for stock options and in favor of the individual on the claim for
commissions.  As a result of the arbitrator's ruling, the Company paid the
individual $18,112.

     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 Transit product infringes certain
claims of two patents held by Prima Facie, Inc. and that the Company has
interfered with Prima Facie, Inc.'s business relationships.  The suit seeks
injunctive relief against further infringement and damages.  The lawsuit also
names one of the Company's domestic distributors as a co-defendant.  Although
the Company believes these claims are without merit and intends to defend itself
vigorously, an adverse result in the litigation could have a negative impact on
the financial position and the results of operations of the Company.

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>
   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

   1996
     First quarter                           $3.250    $2.000
     Second quarter                          $4.250    $2.375
     Third quarter                           $4.375    $3.063
     Fourth quarter                          $6.250    $3.500
     
</TABLE>

     As of January 21, 1998, there were approximately 112 shareholders of record
of the Company's Common Stock.  Management estimates that there are
approximately 830 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, 1997, COMPARED TO 1996

     REVENUE

     The Company's revenue is derived from sales of systems 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 decreased 14% from $10.9 million in 1996 to $9.4
million in 1997, which included approximately $5.9 million of CCTVware Product
sales.  The decline in revenue from 1996 to 1997 resulted primarily from lower
than expected sales of CCTVware Products and a decrease in ID Product sales
following the completion of the Aramco Contract in 1996.  Revenue in 1996
included approximately $5.1 million associated with the Aramco Contract and an
additional $983,000 of revenue that was associated with Aramco that was outside
the scope of the Aramco Contract.  In 1997 the Company recognized minimum
revenue associated with Aramco that was outside the scope of the Aramco
Contract.

                                       7
<PAGE>

     COSTS AND EXPENSES

     COST OF PRODUCTS SOLD.  The cost of products sold, consisting principally
of the costs of hardware components, supplies and, in 1996, manpower costs
associated with the Aramco Contract, as well as software amortization, increased
from $5.0 million in 1996 to $5.1 million in 1997, and represented 45% and 54%
of revenue, respectively.  The increase in the cost of products sold as a
percentage of revenue was primarily attributable to a shift in the Company's
product mix away from ID Products and toward CCTVware Products, which have a
higher cost of product sold as a percentage of revenue.  If the Company's
CCTVware Products achieve widespread acceptance in the marketplace and if the
Company generates higher sales volumes for such products, the Company expects
the CCTVware Products cost of goods sold as a percentage of revenue to decrease
as the Company achieves greater efficiencies and lowers its costs.

     OPERATIONS AND CUSTOMER SUPPORT.  Operations and customer support expenses,
net of expenses associated with the Aramco Contract which were charged to cost
of products sold in 1996, increased from $1.0 million in 1996 to $1.6 million in
1997, and represented 9% and 17% of revenue, respectively.  The percentage
increase from 1996 to 1997 was the result of a 14% decrease in revenue without a
commensurate decrease in expenses.  Gross expenses, including expenses
associated with the Aramco Contract in 1996, increased from $1.1 million in 1996
to $1.6 million in 1997.  The increase in such expenses resulted primarily from
headcount and compensation-related increases and increases in postage,
telecommunications, travel and depreciation expenses.

     SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
expenses, net of expenses associated with the Aramco Contract which were charged
to cost of products sold in 1996, increased from $3.1 million in 1996 to $3.8
million in 1997, and represented 28% and 40% of total revenue, respectively. 
The percentage increase from 1996 to 1997 was the result of a 14% decrease in
revenue with an increase in expenses.  Gross expenses, including expenses
associated with the Aramco Contract in 1996, increased from $3.2 million in 1996
to $3.8 million in 1997.  The increase in such expenses resulted primarily from
headcount and compensation-related increases and increases in accounting and
legal fees and travel, general insurance, maintenance, allowance for doubtful
accounts and depreciation expenses. In 1997, the Company also recorded charges
of approximately $175,000 as a result of the resignation of M. Dean Gilliam, the
Company's former Chief Executive Officer and President.

     RESEARCH AND DEVELOPMENT.  Research and development expenses, net of
capitalized software  costs, increased from $1.0 million in 1996, net of
expenses associated with the Aramco Contract which were charged to cost of
products sold in 1996, to $1.5 million in 1997, and represented 9% and 16% of
revenue, respectively.  Gross expenses, including expenses associated with the
Aramco Contract in 1996, increased from $1.1 million in 1996 to $1.5 million in
1997.  The increase in such expenses resulted primarily from headcount and
compensation-related increases and increases in travel and depreciation expenses
in support of an overall expansion in new product research and development.  The
Company expects to continue to fund new product development in 1998 at or above
the dollar levels expended in 1997.

     INTEREST INCOME.  Net interest income decreased from $299,500 in 1996 to
$121,000 in 1997.  This decrease was due to a reduction of cash available for
investment.

     OTHER EXPENSE.  Other expense increased from $1,600 in 1996 to $42,400 in
1997.  This increase was due to (i) an $18,100 expense resulting from the
litigation settlement with the Company's former Vice President of Sales and
Marketing, and (ii) $24,300 of expenses relating to foreign exchange rate losses
and losses on the disposal of certain fixed assets.

     INCOME TAX.  Income tax expense for 1996 of $160,900 was estimated at 13%
of the pretax earnings.  An income tax expense $32,400 was recorded for 1997
despite the pretax loss as a result of increasing the valuation allowance
related to the Company's deferred income tax asset.

                                       8
<PAGE>

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

     During the years ended December 31, 1996 and 1997, the Company financed its
operations primarily from working capital.  The Company's principal uses of cash
during 1996 and 1997 were to (i) in 1997, fund operating activities; (ii)
acquire property and equipment; and (iii) invest in the development of its
software.

     During 1996, the Company's cash and cash equivalents decreased from $6.2
million at December 31, 1995 to $6.1 million at December 31, 1996.  Net cash
provided by operating activities of $1.7 million consisted primarily of net
income of $1.0 million, plus non-cash charges for depreciation, amortization and
deferred income taxes of $960,100, and decreases in accounts receivable and
inventory of $571,700, and an increase in accrued liabilities of $15,200, offset
by increases in contracts in progress with earned revenue exceeding related
progress billings, prepaid expenses and other assets of $517,900 and decreases
in accounts payable and deferred maintenance revenue of $351,000.  Net cash used
in investing activities of $1.8 million consisted primarily of $1.1 million of
capital expenditures, $216,300 increase in notes receivable and $492,500 of
software development costs.

     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 contracts in progress with
earned revenue exceeding related progress billings, prepaid expenses and other
assets, and increases in accounts payable, accrued liabilities, and customer
deposits 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 financing of the Company's
facility.

     As of December 31, 1997, the Company had $7.2 million in working capital. 
The Company's principal sources of liquidity are its cash and cash equivalents
and cash generated from operating activities, if any.  The Company anticipates
capital expenditures for 1998 of approximately $500,000.  Because of the ramp-up
of the CCTVware product line and the long sales cycle related thereto, the
Company has negotiated with its bank a $700,000 mortgage on the Company's
facility and up to a $2.5 million line of credit based on a percentage of the
Company's eligible accounts receivable.  As a result, the Company believes it
has sufficient working capital to meet its capital requirements and fund
operations for at least the next twelve months.
     
     The Company's mortgage repayment terms are based on a 9.5% interest rate
and a 15 year amortization schedule with a 5 year balloon payment due in July
2002.  The line of credit facility expires in May 1998 and has not been used to
date.  Availability under this line of credit can be further limited based on
the balance of eligible accounts receivable as discussed above.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board issued SFAS 130,
REPORTING COMPREHENSIVE INCOME.  This Statement established standards for
reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements.  This Statement shall be effective for fiscal years beginning after
December 15, 1997.  Reclassification of financial statements for earlier periods
provided for comparative purposes is required.  This statement, requiring
additional informational disclosures, is effective for the Company's fiscal year
ending December 31, 1998.

     In June 1997, the Financial Accounting Standards Board issued SFAS 131,
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.  This
accounting statement established standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that enterprises report selected information about
operating segments in interim financial reports issued to shareholders.  This
accounting statement shall be effective for fiscal years beginning after
December 15, 1997.  In the initial year of application, comparative information
for earlier 

                                       9
<PAGE>

years is to be restated.  At this time, the Company does not believe
that this accounting statement will have a significant impact on the financial
position or results of operations for the year ending December 31, 1998.
     
     Statement of Position 97-2 Software Revenue Recognition, (SOP 97-2) issued
by the accounting standards executive committee, is effective for fiscal years
beginning after December 15, 1997.  Earlier application is permitted.  SOP 97-2
provides guidance on when revenue should be recognized and in what amounts for
licensing, selling, leasing, or other wise marketing computer software.  The
Company does not expect adoption of SOP 97 to have a material effect, if any, on
its financial position or results of operations.

YEAR 2000 CONVERSION

     The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures.  Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk.  The Company is addressing this risk by upgrading its
financial and operating systems to be compliant with the Year 2000.  The Company
believes that the cost of achieving Year 2000 compliance is estimated to be
approximately $15,000 and will be incurred in 1998.  The Company's software
products available for sale are year 2000 compliant.

CERTAIN FACTORS BEARING ON FUTURE RESULTS

     The statements in the last sentence under the caption "Properties," the
third sentence under the caption "Revenue," the last sentence under the caption
"Costs and Expenses," the last sentence under the caption "Research and
Development," the third and last sentences of the fourth paragraph under the
caption "Financial Condition, Liquidity and Capital Resources," the third to
last sentence under the caption "Variability of Operation Results" below and the
first sentence under the caption "Capital Requirements" 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.

     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, systems integrators, distributors and OEMs 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.  For instance, an OEM that used to be sell the Company's ID Products
elected to produce its own identification products and currently competes with
the Company.  

     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 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 1996, Aramco and the Aramco Contract
accounted for 56% of the Company's revenue.  The Company has completed
substantially all of its obligations under the Aramco Contract and other sales
associated with Aramco and currently has no reason to believe that it will not
collect the remaining payments to be made thereunder.  However, there can be no
assurance that events or conditions may not occur which could threaten the
Company's ability to collect all amounts owed thereunder which could result in a
material adverse effect on the Company's business, operating 

                                       10
<PAGE>

results and financial condition  In addition, there can be no assurance that 
any further new business will arise from this customer.

     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.  Moreover, while the
Company believes that the price/performance characteristics of its ID products
are currently competitive, increased competition from low-cost,
low-functionality identification systems have created, and will continue to
create, pricing pressures which could materially and adversely affect the
Company's ID Products business, operating results and financial condition.

     PROPRIETARY RIGHTS. The Company is not aware that its products, trademarks
or other proprietary rights infringe on the proprietary rights of any other
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").  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.  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.

     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
results of operations or financial position.

     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.

     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 has delayed
anticipated revenues, delays in the award of municipal contracts for CCTVware
Products delayed the booking of substantial orders and the conclusion of the
Aramco Contract has led to a sharp decrease in the Company's ID Product 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

                                       11
<PAGE>

quarter and may result in losses.  Further, the effect of software 
amortization related to the Company's capitalized software development costs 
at December 31, 1997 on the cost of products sold is expected to increase 
from $297,700 in 1997 to approximately $400,000 in 1998.  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.

     LEGAL PROCEEDINGS.  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 Transit product
infringes certain claims of two patents held by Prima Facie, Inc. and that the
Company has interfered with Prima Facie, Inc.'s business relationships.  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 intends to
defend itself vigorously, an adverse result in the litigation could have a
negative impact on the financial position and the results of operations of the
Company.

     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.  For instance, the
Company's former Chief Executive Officer and President and the Company's former
Vice President of Sales and Marketing recently left the Company and such
positions have not yet been filled.  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.

     CAPITAL REQUIREMENTS.  The Company believes that it has sufficient working
capital to meet its requirements for at least the next 12 twelve 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 or institutional or government buyers, the Company's capital
requirements may exceed the Company's available capital resources.  Although the
Company's operating activities generate cash, the Company may in such events
require additional capital resources.  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, financial condition
and results of operation.

     VOLATILITY OF STOCK PRICE.  In recent months, the stock market in general,
and the market for shares of technology companies in particular, have
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of the affected companies.  In addition, factors such as
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, as well as other
events or factors, may have a significant impact on the market price of the
Company's Common Stock.  There can be no assurance that the trading price of the
Company's stock will remain at or near its current level.

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, 1997                     F-3
     Consolidated Statements of Operations for the years ended
     December 31, 1997 and 1996                                          F-4
     Consolidated Statements of Stockholders' Equity 
     for the years ended December 31, 1997 and 1996                      F-5
</TABLE>






                                       12
<PAGE>


<TABLE>
<CAPTION>
                                                                       Page No.
                                                                       --------
     <S>                                                               <C>
     Consolidated Statements of Cash Flows for the years ended
     December 31, 1997 and 1996                                          F-6
     Notes to Consolidated Financial Statements                          F-8
</TABLE>

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

     None










                                       13

<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 1998 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.                  60        President, Chief Executive
                                                  Officer and Chairman of the
                                                  Board of Directors
     Jonathan C. Lupia..............    46        Chief Financial Officer and
                                                  Secretary
     Peter A. Jankowski.............    35        Chief Technical Officer
     Timothy S. Whitehead.........      44        Vice President and Officer
     F. James Price...................  60        Vice President and Officer
</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 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.  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.

                                       14
<PAGE>

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 1998 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 1998 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 1998 annual meeting of stockholders to be
filed with the Commission.

                                       15
<PAGE>

                                      PART IV

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

     (a)  EXHIBITS

<TABLE>
          <S>         <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.
               (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 17)
          27.1        Financial data sheet for the year ended December 31, 1997
     

          (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.
          ----------------------------------------------------------------------
</TABLE>

     (b)  REPORTS ON FORM 8-K
          
          None

                                       16
<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, and Secretary

Date:  March 16, 1998

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 attorneys-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 16, 1998
     -------------------------------
     Edward Jankowski, President, 
     Chief Executive Officer and 
     Chairman of the Board

By:  /s/ Jonathan C. Lupia                        Date:  March 16, 1998
     -------------------------------
     Jonathan C. Lupia, Chief Financial Officer,
     and Secretary

By:  /s/ George M. Duffy                          Date:  March 16, 1998
     -------------------------------
     George M. Duffy, Director

By:  /s/ Rodney Wilger                            Date:  March 16, 1998
     -------------------------------
     C. Rodney Wilger, Director

By:  /s/ Donald W. Stevens                        Date:  March 16, 1998
     -------------------------------
     Donald W. Stevens, Director

By:  /s/ Louis E. Colonna                         Date:  March 16, 1998
     -------------------------------
     Louis E. Colonna, Director

                                       17
<PAGE>
                                       
                        INDEX TO FINANCIAL STATEMENTS
                                       


Independent Auditors' Report                                             F-2

Consolidated Balance Sheet at December 31, 1997                          F-3

Consolidated Statements of Operations for the years ended
  December 31, 1997 and 1996                                             F-4

Consolidated Statements of Stockholders' Equity for
  the years ended December 31, 1997 and 1996                             F-5

Consolidated Statements of Cash Flows for the years ended
  December 31, 1997 and 1996                                             F-6

Notes to Consolidated Financial Statements                               F-8


                                     F-1
<PAGE>

                                 [LETTERHEAD]


                         INDEPENDENT AUDITORS' REPORT


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, 1997, 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, 1997. 
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, 1997, and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.



                                   /s/ KPMG Peat Marwick LLP


January 30, 1998
San Diego, California


                                     F-2
<PAGE>

                LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                          Consolidated Balance Sheet

                               December 31, 1997

<TABLE>
<S>                                                                                              <C>
                                ASSETS (NOTE 6)
Current assets:
  Cash and cash equivalents                                                                        $  3,334,124
  Accounts receivable:
    Trade, net of allowance for doubtful accounts of $93,533                                          2,464,882
    Officers and employees                                                                              134,744
  Contract in progress with earned revenue exceeding related progress billings (note 3)                 715,763
  Inventory                                                                                           1,511,048
  Prepaid expenses and other assets                                                                     192,684
  Note receivable                                                                                       124,271
  Notes receivable, related parties (note 5)                                                             58,610
                                                                                                    -----------

        Total current assets                                                                          8,536,126

Property and equipment, net (note 4)                                                                  3,781,321
Capitalized software costs, net of accumulated amortization of $858,739                                 822,961
Notes receivable, related parties (note 5)                                                               76,905
Deposits and other assets                                                                                42,807
Goodwill, net of accumulated amortization of $54,736                                                      2,708
                                                                                                    -----------

        Total assets                                                                                $13,262,828
                                                                                                    -----------
                                                                                                    -----------

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current installments of long-term debt (note 6)                                                   $    23,611
  Current installments of capital lease obligations (note 9)                                             12,542
  Accounts payable                                                                                      854,534
  Accrued liabilities                                                                                   239,258
  Customer deposits                                                                                     143,412
  Accrued taxes                                                                                          42,546
  Deferred maintenance revenue                                                                           63,470
                                                                                                    -----------

        Total current liabilities                                                                     1,379,373
                                                                                                    

Long-term debt, excluding current installments (note 6)                                                 667,964
Capital lease obligations, excluding current installments (note 9)                                       10,432
                                                                                                    -----------

        Total liabilities                                                                             2,057,769
                                                                                                    -----------

Stockholders' equity (note 8):
  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 
   4,646,186 shares                                                                                       4,646 
  Additional paid-in capital                                                                         15,197,362
  Notes receivable from stockholders (note 5)                                                          (147,883)
  Accumulated deficit                                                                                (3,849,066)
                                                                                                    -----------

        Total stockholders' equity                                                                   11,205,059
                                                                                                    -----------

Commitments and contingencies (notes 9 and 11)

        Total liabilities and stockholders' equity                                                  $13,262,828
                                                                                                    -----------
                                                                                                    -----------
</TABLE>


                                     F-3
<PAGE>
                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                     Consolidated Statements of Operations

                     Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
                                                         1997           1996
                                                     ------------    -----------
<S>                                                  <C>             <C>
Systems, supplies and maintenance revenue            $  9,313,980      5,769,459
Contract revenue                                           88,650      5,146,912
                                                     ------------    -----------

        Total revenue                                   9,402,630     10,916,371
                                                     ------------    -----------

Costs and expenses:
  Cost of systems, supplies and maintenance             5,098,231      2,713,906
  Contract costs                                           18,899      2,243,468
  Operations and customer support                       1,567,413      1,003,017
  Selling, general and administrative                   3,750,367      3,080,872
  Research and development                              1,525,827        980,971
                                                     ------------    -----------

        Total costs and expenses                       11,960,737     10,022,234
                                                     ------------    -----------

        Income (loss) from operations                  (2,558,107)       894,137
                                                     ------------    -----------

Other income (expense):
  Interest income, net                                    120,972        299,473
  Other expense                                           (42,391)        (1,551)
                                                     ------------    -----------

                                                           78,581        297,922
                                                     ------------    -----------

        Income (loss) before income taxes              (2,479,526)     1,192,059

Income tax expense                                        (32,416)      (160,868)
                                                     ------------    -----------

        Net income (loss)                            $ (2,511,942)     1,031,191
                                                     ------------    -----------
                                                     ------------    -----------

        Basic and diluted net income (loss) 
         per share                                   $       (.54)           .22
                                                     ------------    -----------
                                                     ------------    -----------

Weighted-average shares outstanding                  $  4,659,252      4,666,603
                                                     ------------    -----------
                                                     ------------    -----------
</TABLE>

See accompanying notes to consolidated financial statements.


                                     F-4
<PAGE>

              LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

          Consolidated Statements of Stockholders' Equity (Deficit)

                   Years ended December 31, 1997 and 1996
<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, 1995               4,667,936       $  4,668     15,288,676       (244,231)    (2,368,315)    12,680,798

Retirement of common stock and notes
 receivable from stockholders                  (6,000)            (6)       (29,244)        29,250             --             --

Net income                                         --             --             --             --      1,031,191      1,031,191
                                            ---------       --------     ----------       --------     ----------     ----------

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 and 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
                                            ---------       --------     ----------       --------     ----------     ----------
                                            ---------       --------     ----------       --------     ----------     ----------
</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, 1997 and 1996
<TABLE>
<CAPTION>
                                                                   1997           1996
                                                               -----------     ----------
<S>                                                            <C>             <C>
Cash flows from operating activities:
  Net income (loss)                                            $(2,511,942)     1,031,191
  Adjustments to reconcile net income (loss) 
   to net cash provided by (used in) operating activities:
    Depreciation and amortization                                1,068,309        816,709
    Loss on disposal of capital equipment                            8,575             --
    Loss on foreign currency exchange                               10,136             --
    Provision for deferred income taxes                             32,416        143,400
    Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable, net           (1,127,030)       423,874
      (Increase) decrease in contract in 
       progress with earned revenue exceeding
       related progress billings                                   576,720       (402,021)
      (Increase) decrease in inventory                            (934,530)       147,797
      (Increase) decrease in prepaid expenses and other assets      44,060       (115,913)
      Increase (decrease) in accounts payable                      225,775       (326,770)
      Increase in accrued liabilities                               79,150         15,217
      Increase in customer deposits                                143,412             --
      Increase (decrease) in deferred maintenance revenue           48,527        (24,194)
                                                               -----------     ----------

        Net cash provided by (used in) operating activities     (2,336,422)     1,709,290
                                                               -----------     ----------

Cash flows from investing activities:
  Capital expenditures                                            (766,868)    (1,084,940)
  Proceeds from disposal of capital equipment                       15,000             --
  Decrease (increase) in notes receivable                           80,797       (216,312)
  Increase in deposits and other assets                            (19,495)        (5,825)
  Capitalized software costs                                      (460,540)      (492,499)
                                                               -----------     ----------

        Net cash used in investing activities                   (1,151,106)    (1,799,576)
                                                               -----------     ----------

Cash flows from financing activities:
  Proceeds from facility mortgage                                  700,000             --
  Payments of facility mortgage                                     (8,425)            --
  Proceeds from exercise of stock options                            3,593             --
                                                               -----------     ----------

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

Net decrease in cash and cash equivalents                       (2,792,360)       (90,286)

Cash and cash equivalents, beginning of year                     6,126,484      6,216,770
                                                               -----------     ----------

Cash and cash equivalents, end of year                         $ 3,334,124      6,126,484
                                                               -----------     ----------
                                                               -----------     ----------
</TABLE>
                                                                     (Continued)


                                     F-6
<PAGE>

               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

               Consolidated Statements of Cash Flows, Continued

                    Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
                                                                   1997           1996
                                                               -----------     ----------
<S>                                                            <C>             <C>
Supplemental cash flow information:
  Interest paid                                                $    33,730             --
                                                               -----------     ----------
                                                               -----------     ----------

Income taxes paid                                              $        --         54,000
                                                               -----------     ----------
                                                               -----------     ----------

Noncash investing and financing activities:
  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.

  In 1997, the Company converted $124,271 of customer trade 
   accounts receivable to a note receivable.

  In 1996, 6,000 shares of common stock were retired in 
   exchange for forgiveness of a stockholder note receivable 
   of $29,250.

  In 1996, the Company transferred inventory valued at $154,974 
   to property and equipment.

</TABLE>

See accompanying notes to consolidated financial statements.


                                     F-7
<PAGE>
                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                               December 31, 1997


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BUSINESS

     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.

     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.

     REVENUE RECOGNITION

     Revenue from sales of systems and supplies are 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 income as soon as such losses
     are known.  Costs and estimated earnings in excess of billings on
     uncompleted contracts are reported as "Contract in progress with earned
     revenue exceeding related progress billings" in the accompanying
     consolidated balance sheet.

     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.

     INVENTORY

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

     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

     CAPITALIZED SOFTWARE COSTS

     The Company has capitalized costs related to the development of certain
     software 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, 1997
     and 1996 was $297,745 and $231,597, respectively.

     GOODWILL

     Goodwill is being amortized using the straight-line method over 10 years. 
     The Company assesses the recoverability of goodwill by determining whether
     the carrying value can be recovered by projected undiscounted future cash
     flows.  Amortization of goodwill for each of the years ended December 31,
     1997 and 1996 was $5,768 and $5,769, respectively.

     RESEARCH AND DEVELOPMENT EXPENSES

     Expenditures for research and development costs are expensed in the year
     incurred.  In 1997 and 1996, the Company recorded expenses, net of
     capitalized software costs, of $1,525,827 and $980,971, respectively.

     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.

     NET INCOME (LOSS) PER COMMON SHARE

     In December 1997, the Company adopted SFAS No. 128, EARNINGS PER SHARE. 
     SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15 ("APB
     No. 15") and replaces "primary" and "fully diluted" earnings per share
     ("EPS") under APB No. 15 with "basic" and "diluted" EPS.  Unlike primary
     EPS, basic EPS excludes the dilutive effects of options, warrants and other
     convertible securities.  Diluted EPS reflects the potential dilution of
     securities that could share in the earnings of the Company, similar to
     fully diluted EPS.  The adoption of SFAS No. 128 did not have a material
     effect on the Company's net income (loss) per common share.  Options and
     warrants totaling approximately 1,262,000 and 1,140,000 shares were
     excluded from the computations of net income (loss) per common share for
     the years ended December 31, 1997 and 1996, respectively, as their effect
     is anti-dilutive.  Options and warrants with a net dilutive effect of
     approximately 64,000 shares were previously included in the computation of
     net income per share for the year ended December 31, 1996, however, these
     additional shares had no impact on net income per share from that
     calculated under basic EPS.


                                     F-9
<PAGE>
                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

     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 amount of cash and cash equivalents, accounts
     receivable, contract in progress with earned revenue exceeding related
     progress billings, accounts payable, accrued liabilities and accrued taxes
     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 instrument bears interest at a rate  that is
     comparable to current rates offered to the Company for similar debt
     instruments.

     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.

     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.

     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.

     RECLASSIFICATIONS

     Certain amounts in the 1996 consolidated financial statements have been
     reclassified to conform with the 1997 presentation.


                                     F-10
<PAGE>
                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

(2)  BUSINESS CONCENTRATION

     For the years ended December 31, 1997 and 1996, sales to two customers
     accounted for 47% and 54%, respectively, of total revenue.  Outstanding
     receivables from these same customers accounted for 37% of trade accounts
     receivable at December 31, 1997 and 100% of contract in progress with
     earned revenue exceeding related progress billings as of December 31, 1997.

(3)  COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACT

     Costs and estimated earnings on uncompleted contract at December 31, 1997
     are as follows:
<TABLE>
<S>                                                                <C>
               Costs incurred on uncompleted contract              $  2,647,737
               Estimated earnings                                     3,236,123
                                                                   ------------

                                                                      5,883,860
               Less billed to date                                   (5,168,097)
                                                                   ------------
               Included in the accompanying consolidated balance 
                sheet under the following caption - contract in 
                progress with earned revenue exceeding related 
                progress billings                                  $    715,763
                                                                   ------------
                                                                   ------------
</TABLE>

(4)  PROPERTY AND EQUIPMENT

     Property and equipment consists of the following as of December 31, 1997:
<TABLE>
<S>                                                                <C>
          Land                                                     $    225,917
          Building                                                    1,212,520
          Machinery and equipment and third-party software            3,515,535
          Office equipment and furniture                                312,517
          Airplane                                                      184,510
          Automobiles                                                    26,369
          Capital lease                                                  25,085
                                                                   ------------

                                                                      5,502,453
          
          Less accumulated depreciation and amortization             (1,721,132)
                                                                   ------------
          Total                                                    $  3,781,321
                                                                   ------------
                                                                   ------------
</TABLE>

(5)  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 $135,515 as of December 31, 1997.  In addition, the
     Company has outstanding receivables of $134,744 at December 31, 1997, 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.


                                     F-11
<PAGE>

                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

(6)  LONG-TERM DEBT

     Long-term debt at December 31, 1997 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.                            $  691,575
          
          Less current portion                                         (23,611)
                                                                    ----------
          
          Long-term debt, net of current portion                    $  667,964
                                                                    ----------
                                                                    ----------
</TABLE>

     Aggregate maturities of the note payable for each of the five years
     subsequent to December 31, 1997 consist of the following:
<TABLE>
<CAPTION>
       YEAR ENDING
       -----------
<S>                                                                  <C>
          1998                                                       $  23,611
          1999                                                          25,343
          2000                                                          27,858
          2001                                                          30,623
          2002                                                         584,140
                                                                     ---------

                                                                     $ 691,575
                                                                     ---------
                                                                     ---------
</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
     $2,500,000.  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, 1997).  At December 31, 1997, 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, the payment of dividends and capital expenditures.  At
     December 31, 1997, the Company was in violation of certain of these
     covenants, however, the Company obtained a waiver from the lending
     institution for the violations.


                                     F-12
<PAGE>
                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

(7)  INCOME TAXES

     The current-year income tax expense consists of the following at
     December 31, 1997 and 1996:
<TABLE>
<CAPTION>
                                                      1997          1996
                                                   ---------      ---------
<S>                                                <C>            <C>
          Current:
            Federal                                $      --         17,468
            State                                         --             --
                                                   ---------      ---------

                                                          --         17,468
                                                   ---------      ---------
          Deferred:
            Federal                                   25,216        125,348
            State                                      7,200         18,052
                                                   ---------      ---------
          
                                                      32,416        143,400
                                                   ---------      ---------
          
                                                   $  32,416        160,868
                                                   ---------      ---------
                                                   ---------      ---------
</TABLE>

     Income tax expense for the years ended December 31, 1997 and 1996 differs
     from the amount computed by applying the federal statutory rate of 34% as
     follows:
<TABLE>
<CAPTION>
                                                      1997           1996
                                                   ---------      ---------
<S>                                                <C>            <C>
     Computed at federal statutory rate            $(843,000)       405,300
     State tax                                      (100,800)        11,914
     Change in the valuation allowance               958,300       (305,000)
     Nondeductible expenses                           98,200         47,124
     General business credits                        (80,284)            --
     Other, net                                           --          1,530
                                                   ---------      ---------

                                                   $  32,416        160,868
                                                   ---------      ---------
                                                   ---------      ---------
</TABLE>


                                     F-13
<PAGE>
                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

     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, 1997 are as follows:
<TABLE>
<S>                                                                 <C>
     Deferred tax assets:
       Net operating loss carryforwards                             $  955,600
       Research and experimentation credits                            271,200
       Alternative minimum tax credits                                  35,000
       Accounts receivable principally due to the allowance
         for doubtful accounts                                          47,300
       Inventory principally due to the allowance for obsolescence     150,600
                                                                    ----------
          
              Total gross deferred tax assets                        1,459,700
          
     Valuation allowance                                              (958,300)
                                                                    ----------
          
              Net deferred tax assets                                  501,400
                                                                    ----------
          
     Deferred tax liabilities:
       Property and equipment due to differences in depreciation       194,400
       Software development costs                                      307,000
                                                                    ----------
          
              Total deferred tax liabilities                           501,400
                                                                    ----------
          
              Net deferred income taxes                             $       --
                                                                    ----------
                                                                    ----------
</TABLE>

     In 1997, the Company recognized an increase in the valuation allowance of
     $958,300.  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, 1997.  The
     Company has net operating loss carryforwards for federal tax reporting
     purposes, which amounted to approximately $2,421,500 as of December 31,
     1997, which begin to expire in 2008.  Additionally, the Company has
     research and development credits for federal tax reporting purposes
     amounting to $271,200, which begin to expire in 2008, and alternative
     minimum tax credits of $35,000, which have no expiration date.

(8)  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.


                                     F-14
<PAGE>
                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

     COMMON STOCK WARRANTS

     During 1993 and 1994, the Company issued warrants to purchase shares of
     common stock.  At December 31, 1997, 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.

     STOCK OPTION PLAN

     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 1,050,000.  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 1995 through 1997 is as follows:
<TABLE>
<CAPTION>
                                                   WEIGHTED-       WEIGHTED-
                                                    AVERAGE         AVERAGE 
                                      SHARES         RANGE       EXERCISE PRICE
                                     --------   --------------   --------------
<S>                                  <C>        <C>              <C>
ISO options:
  Outstanding at December 31, 1995    334,294   $  2.63 - 6.00      $  3.78
  Granted                             160,000      2.13 - 4.63         2.88
  Canceled                            (41,525)     2.38 - 4.88         3.83
                                     --------   --------------      -------

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

  Exercisable at December 31, 1996    162,894   $  2.63 - 6.00      $  3.91
                                     --------   --------------      -------
                                     --------   --------------      -------

  Exercisable at December 31, 1997    225,567   $  2.13 - 6.00      $  3.47
                                     --------   --------------      -------
                                     --------   --------------      -------
</TABLE>


                                     F-15
<PAGE>
                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

<TABLE>
<CAPTION>
                                                   WEIGHTED-       WEIGHTED-
                                                    AVERAGE         AVERAGE 
                                      SHARES         RANGE       EXERCISE PRICE
                                     --------   --------------   --------------
<S>                                  <C>        <C>              <C>
NSO options:
  Outstanding at December 31, 1995    362,004   $  3.06 - 5.10      $  4.04
  Granted                              75,000      3.25 - 4.13         3.83
                                     --------   --------------      -------
 
  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
                                     --------   --------------      -------
                                     --------   --------------      -------
 
  Exercisable at December 31, 1996    307,254   $  3.06 - 5.10      $  3.99
                                     --------   --------------      -------
                                     --------   --------------      -------
 
  Exercisable at December 31, 1997    367,755   $  3.06 - 5.10      $  3.62
                                     --------   --------------      -------
                                     --------   --------------      -------
</TABLE>

     As of December 31, 1997, the range of exercise prices and weighted-
     average remaining contractual lives of ISO and NSO options outstanding 
     was $1.19 - $6.00 and 7.4 years, and $3.06 - $5.10 and 6.3 years, 
     respectively. The following is a summary of stock options outstanding at
     December 31, 1997:
<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>
      $1.19 - 2.50      16,100       9.70       $ 2.14           --     $  --
       2.51 - 3.50     580,148       6.60         3.10      369,472      3.20
       3.51 - 4.50     345,000       7.50         3.73      145,950      3.69
       4.51 - 6.00      80,600       4.40         5.05       77,900      5.04
                     ---------                              -------
                     1,021,848       6.80         3.45      593,322      3.56
                     ---------                              -------
                     ---------                              -------
</TABLE>


                                     F-16
<PAGE>
                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

     The Company applies APB Opinion No. 25 in accounting for its option plan,
     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 123, the Company's net income (loss) and net income
     (loss) per share would have been adjusted to the pro forma amounts as
     follows:
<TABLE>
<CAPTION>
                                       1997                        1996
                           --------------------------   ------------------------
                           AS REPORTED     PRO FORMA    AS REPORTED    PRO FORMA
<S>                        <C>             <C>          <C>            <C>
      Net income (loss)    $(2,511,942)    (3,064,846)   1,031,191      824,000
      Net income (loss) 
       per share           $      (.54)          (.66)        0.22         0.18

</TABLE>

     Pro forma net income (loss) reflects only options granted in 1997, 1996 and
     1995.  Therefore, the full impact of calculating compensation cost for
     stock options under SFAS 123 is not reflected in the pro forma net income
     (loss) amounts presented above because compensation cost is reflected over
     the options' vesting period of 4 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 1997 and 1996 at an exercise price equal to the fair market
     value on the date of grant was $2.41 and $1.84, respectively, using the
     Black-Scholes option-pricing model.  The following weighted-average
     assumptions were used for 1997 and 1996 grants:  expected dividend yield of
     0%, risk-free interest rate of 5.5% and 6.0%, respectively, expected life
     of 4 years, and expected volatility of 86.75% and 70.19%, respectively.

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

(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 $25,085 as of December 31, 1997.


                                     F-17
<PAGE>

                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

     At December 31, 1997, 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>
                   1998                         $  13,400    $  68,960
                   1999                            10,850       62,186
                   2000                                --       22,634
                   2001                                --          579
                   2002                                --          579
                                                ---------    ---------
          
          Total minimum lease payments             24,250    $ 154,938
                                                             ---------
                                                             ---------
          Less amount representing interest        (1,276)
                                                ---------
          
          Present value of obligations under 
           capital lease                           22,974
          Less current portion                    (12,542)
                                                ---------
          
          Long-term capital lease obligations   $  10,432
                                                ---------
                                                ---------
</TABLE>

     Rental expense under operating leases was approximately $80,000 for the
     years ended December 31, 1997 and 1996.

(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, 1997 and 1996.

(11) CONTINGENCIES

     The Company has completed its litigation with the Company's former Vice
     President of Marketing and Sales, Robert Demson, who filed a lawsuit
     against the Company alleging breach of contract and fraud.  This
     individual, who terminated his employment with the Company in May 1994,
     alleged that he was promised, but never received, options to purchase
     shares of the Company's Common Stock at a significant discount from fair
     market value; and that he was deprived of certain sales commissions.  The
     parties agreed to binding arbitration, which was completed on May 1, 1997. 
     The arbitration ruled in favor of the Company on the claim for stock
     options, and in favor of the individual on the claim for commissions.  As a
     result of the arbitrator's ruling, the Company paid the individual $18,112.


                                     F-18
<PAGE>

                                       
               LORONIX INFORMATION SYSTEMS, INC. AND SUBSIDIARY

             Notes to Consolidated Financial Statements, Continued

     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 intends to defend 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.

     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 $27,000 at December 31, 
     1997. The letter of credit is collateralized by certificates of deposit.


                                     F-19