<PAGE>

                       U.S. SECURITIES AND EXCHANGE COMMISSION
                                Washington, D.C. 20549

                                      FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 
    1934
    For the fiscal year ended: June 30, 1998

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934
    For the transition period from ________________ to ________________ 

    Commission file number:  000-12471

                                COLORADO MEDTECH, INC.
                (Exact name of registrant as specified in its charter)

             COLORADO                                   84-0731006             
  (State or other jurisdiction of          (I.R.S. Employer Identification No.)
  incorporation or organization)

                     6175 LONGBOW DRIVE, BOULDER, COLORADO 80301
             (Address of principal executive offices, including zip code)

                                    (303) 530-2660
                 (Registrant's Telephone Number, including area code)

      SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: None

         SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:

                             COMMON STOCK (NO PAR VALUE)
                                   (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months (or for such shorter period that the 
registrant was required to file such reports), and (2) has been subject to 
such filing requirements for the past 90 days. Yes    X     No _______

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

     The aggregate market value of the voting and nonvoting common stock held 
by nonaffiliates computed by reference to the average bid and asked prices of 
such stock as of August 31, 1998 was $33,461,806. 

The number of shares outstanding of the issuer's Common Stock as of August 
31, 1998 was 10,740,846.

                         DOCUMENTS INCORPORATED BY REFERENCE

     Registrant's definitive Proxy Statement to be filed pursuant to 
Regulation 14A under the Securities Exchange Act of 1934 is incorporated by 
reference in Part III of this report.

<PAGE>

                                        PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

     Colorado MEDtech, Inc. ("CMED"), through its wholly-owned subsidiaries, 
RELA, Inc. ("RELA"), Novel Biomedical, Inc. ("Novel"), and BioMed Y2K, Inc. 
("BioMed"), and its operating divisions, Respiratory Products and Erbtec 
Engineering ("Erbtec") (collectively, the "Company"), is a leading 
full-service provider of advanced medical products and comprehensive 
outsourcing services. CMED was incorporated in 1977 as a Colorado corporation 
to develop, manufacture, market and service computerized diagnostic and 
testing instrumentation. RELA a Colorado corporation, was incorporated in 
1977. RELA is an integrated custom product development and manufacturing 
services company specializing in the design, development and manufacture of 
electronic and electro-mechanical medical products and software systems. The 
Company merged RELA into CMED in July 1998, and is now operating RELA as a 
division of CMED. This merger will have no material effect on the day to day 
operations of RELA. Novel, a Minnesota corporation acquired by CMED in 
February 1997, was incorporated in 1986. Novel specializes in the custom 
design, development and manufacture of unique disposable medical devices, 
primarily catheters, used in angioplasty, minimally invasive surgery, 
electrophysiology, and infertility treatment. BioMed, a Colorado corporation, 
was incorporated in April 1998. BioMed offers a combination of tools and 
services to support health care institutions' efforts to establish year 2000 
compliance for their biomedical devices. In October 1997, CMED completed the 
acquisition of the operating assets of Erbtec Engineering, Inc. Erbtec's main 
products are high power Radio Frequency amplifiers, power supplies and 
systems for Magnetic Resonance Imaging equipment. The Respiratory Products 
division designs and develops instrumentation for respiratory care.

PRODUCTS AND SERVICES

  OUTSOURCING SERVICES

     RELA and Novel design, develop and manufacture healthcare products for a 
broad range of customers that includes major pharmaceutical and medical 
device companies.  RELA develops electronic and electromechanical medical 
devices and software, primarily for the diagnostic, therapeutic, respiratory 
care and medical software markets.  RELA also manufactures products for some 
of its customers which range from surgical disposables to automated 
instruments.  Novel designs, develops and manufactures unique disposable 
medical devices, primarily catheters, used in angioplasty, minimally invasive 
surgery, electrophysiology and infertility treatment.  RELA and Novel employ 
engineers, scientists, and technicians, manufacturing specialists and 
assembly workers.  The Company believes its experience in applying its proven 
methodologies and advanced technologies to the development of innovative new 
products gives its clients an advantage in their marketplace by providing 
them with state-of-the-art, quality products in a timely and cost-effective 
manner.

     In addition to development, RELA provides product definition services, 
conducts focus groups and performs software verification and validation 
activities necessary for Food and Drug Administration ("FDA") approval.  

                                       -2-

<PAGE>

Additional services include:
<TABLE>
<S>                                                   <C>
- Feasibility studies                                 - Disposables engineering                     
- User interface design and usability testing         - Prototype development                       
- Electronic design and development                   - Design for manufacturability and reliability
- Electronic packaging and printed-circuit design       engineering 
- Software development, verification and validation   - Pilot, short- and long-run production       
- Mechanical design and engineering                   - Quality assurance and testing               
- Machining and modeling services                     - Product service and sustaining engineering  
</TABLE>

     Rapidly advancing technologies, heightened worldwide competition and the 
demands of an increasingly sophisticated marketplace have created pressures 
on companies, both domestic and international, to develop high quality, 
cost-effective, world-class products in time to meet the narrowing windows of 
opportunity in the marketplace.  These conditions have produced opportunities 
for companies that can react to those market needs.  Such companies need to 
have the technology, experience and ability to develop high quality, 
state-of-the-art products.  The Company believes it is uniquely positioned to 
provide its clients, within a single integrated structure, the valuable 
product development and manufacturing resources they need to satisfy the 
requirements of a worldwide marketplace.

  MEDICAL PRODUCTS

     CMED's Respiratory Products develops, manufactures, markets and services 
computerized diagnostic and testing instrumentation.  Its current program, 
FreshAir-TM-, is a self-contained oxygen generation system. Respiratory 
Products has applied for FDA approval of an oxygen regeneration system that 
is intended for use in long-term healthcare facilities. This system is 
expected to reduce the cost of oxygen to patients of these facilities.  The 
facilities would be able to generate their own oxygen rather than purchasing 
it from third parties.  The Company expects this product to be in commercial 
production during fiscal 1999.

     Erbtec specializes in designing, developing and manufacturing 
high-performance RF amplifiers and integrated power delivery subsystems.  By 
combining RF, digital and embedded software technologies, Erbtec is able to 
produce advanced, computer-controlled RF and DC power products.  Erbtec 
focuses on the MRI and general medical imaging industries for the sale of its 
products.

     BioMed provides software tools for Year 2000 compliance management and 
reporting.  BioMed has developed an extensive medical device compliance 
database tailored to the needs of the healthcare industry.  The modified 
software, called BioMed Y2KOne-TM-, offers a combination of tools and 
services to support healthcare institutions in there efforts to establish 
Year 2000 compliance for their biomedical devices. Specific services offered 
by BioMed include: Year 2000 compliance database for medical devices; 
inventory consolidation, consulting and support; specialized Year 2000 
training; device remediation, consulting and conversion planning; device 
testing; custom software reviews and analysis; and, contingency planning and 
cost impact analysis.

                                       -3-

<PAGE>

MARKETING

     The Company markets its services through a direct sales program and 
nationwide network of independent manufacturers' representatives.  The 
Company employs 10 persons in the functions of sales and marketing.  The 
Company promotes its services through advertising, direct mail and exhibition 
at industry trade shows.

SIGNIFICANT CUSTOMERS AND BACKLOG

     For the period ended June 30, 1998, two customers accounted for 
approximately 23% (GE Medical Systems, General Electric Company) and 22% 
(Gen-Probe Incorporated) of the total revenues of the Company.  For the 
period ended June 30, 1997, the same two customers accounted for 0% and 19% 
of the total revenues of the Company.  Due to the nature of the outsourcing 
services business, it is typical for the Company to have about 40% to 50% of 
its total revenues from two to three customers in any given year.  It is also 
typical that the Company's revenues from these customers account for a very 
high percentage of its total revenues for a one to three year period, then to 
see the customers' revenue percentage drop, to be replaced by another large 
customer.  Foreign sales were 8% of the Company's total sales.  The loss of a 
significant customer could have a material, detrimental impact on the 
Company's operations.  Most sales are on net thirty-day credit terms.

     At June 30, 1998, the Company's backlog of orders for services or 
shipment of product in fiscal 1999 was approximately $40 million compared to 
approximately $22 million at June 30, 1997.  This increase is attributable to 
the increase in orders booked during fiscal year 1998, which were in excess 
of $60 million, compared to bookings of approximately $33 million in fiscal 
year 1997.

RESEARCH AND PRODUCT DEVELOPMENT

     The Company intends to continue to develop new products and services for 
a broad range of customers.  In addition to internal development efforts, the 
Company may license or acquire related technology and/or products from 
external resources.

     While the Company employs approximately 200 engineers, scientists and 
technicians in research and development activities, these employees' efforts 
are primarily devoted to contract work for customers and their expenses are 
included in the cost of sales and services. Research and development expenses 
historically have been attributable to Respiratory Products.  During fiscal 
year 1998, most of the research and development expenses are attributable to 
Respiratory's oxygen regeneration system, Erbtec's RF solid state amplifier 
systems and BioMed's software tools and database.  No research and 
development expenditures are currently attributable to RELA or Novel.  For 
fiscal years 1998, 1997 and 1996, the Company incurred approximately 
$1,681,000, $304,000 and $97,000, respectively, for research and development 
activities. 

     Consistent with the Company's operating plans, the Company is 
continuously pursuing the acquisition and development of new or improved 
technology or products.  Should the Company identify any opportunities that 
would be commercially viable, the amount of future research and development 
expenditures may increase. 

                                       -4-

<PAGE>

COMPETITION

     The principal competitive factors in the outsourcing and medical 
products markets are reputation, quality, price and schedule.  The Company's 
present and future competition comes from a variety of sources.  These 
sources include consulting, commercial product development and manufacturing 
companies.  There are a number of firms that provide services similar to the 
Company's.  These vary from small consulting operations offering a small 
subset of the Company's services to a few integrated service companies. RELA 
competitors include SeaMed Corporation and Kollsman Manufacturing Company.  
Novel competitors include ACT Medical, Incorporated, Danforth Biomedical, and 
NuMED, Incorporated.  Erbtec competitors include Analogic Corporation and 
ETO, Inc., a Division of Astex, Inc.  BioMed competitors may include Clark 
Information Services, Superior IS and System Resource Corp.

     On a lesser scale, the Company also competes with commercial and 
university research laboratories.  There are both for-profit and 
not-for-profit organizations nationwide that perform services similar to the 
product development aspect of the Company's business.  These include 
Battelle, Inc., Stanford Research Institute, Arthur D. Little Center for 
Product Development, Southwest Research Institute and the research 
capabilities within the nation's leading universities.

     As the Company develops and manufactures other proprietary products, 
such as the oxygen regeneration system and the BioMed Y2KOne-TM- software, it 
can expect to encounter additional competitors, many of which may be larger 
and in a stronger financial position than the Company.  As cost containment 
efforts continue in the healthcare marketplace, competition will continue to 
be intense in the future.

MANUFACTURING

     The Company manufactures its products and customer products at four 
facilities in Boulder, Colorado, Longmont, Colorado and Plymouth, Minnesota. 
Most products are built in response to specific customer purchase orders, 
while others are fabricated as standard products.  The manufacturing process 
consists primarily of assembly, test and packaging of both custom and 
commercially available components from outside sources.

     Most of the materials and components used in the Company's products are 
available from a number of different suppliers.  The Company generally 
maintains multiple sources for most items, but some components are single 
source.  The Company is dependent upon its suppliers for timely delivery of 
quality components.  To date, the Company has not experienced significant 
delays in the delivery of such components.

PRODUCT WARRANTIES AND SERVICE

     The Company generally warrants its products for 90 days, but in limited 
cases for up to 18 months, against defects in materials and workmanship.  The 
Company has established a provision for estimated expenses of providing 
service under these warranties.  Nonwarranty service is billed to the 
customer as performed.

GOVERNMENT REGULATION

     The Medical Device Amendments of 1976 to the Food, Drug and Cosmetic Act 
(the "Act") and regulations issued or proposed thereunder, including the Safe 
Medical Devices Act of 1990, provide for regulation by the FDA of the 
marketing, design, manufacturing, labeling, packaging and distribution of 
medical devices. These regulations 

                                       -5-

<PAGE>

apply to the Company's products and many of the Company's customers' 
products.  The Act and the regulations include requirements that 
manufacturers of medical devices register with and furnish lists of devices 
manufactured by them to the FDA.  Prior to marketing a medical device, FDA 
clearance must be obtained.  Tasks to be performed for approval range from 
bench-test data and engineering analysis to potentially expensive and 
time-consuming clinical trials.  The types of tasks for a particular product 
submission are indicated by the classification of the device and previous 
approvals for similar devices.  There are also certain requirements of other 
federal laws and of state, local and foreign governments, which may apply to 
the manufacture and marketing of the Company's products.  To date, the 
Company has not experienced significant difficulty in complying with the 
requirements imposed on it by the FDA or other governmental agencies.

     The FDA's "Quality System Regulation for Medical Devices" ("QSR") sets 
forth standards for the Company's design and manufacturing processes that 
require the maintenance of certain records and provide for unscheduled 
inspections of the Company's facilities.  The Company does not expect to make 
significant expenditures as a result of these requirements.  The Company's 
procedures and records were reviewed in 1995, 1997 and 1998 by the FDA during 
routine general inspections.  The inspections resulted in some procedural 
changes that are intended to assure continued compliance with current QSR.

     The ISO 9000 series of quality management and quality assurance 
standards has been adopted by over 90 countries.  ISO standards require that 
a quality system be used to guide work to assure quality and to produce 
quality products and services.  EN ISO 9001, the most comprehensive of the 
standards, covers 20 elements.  These elements include management 
responsibility, design control, training, process control and servicing.  EN 
ISO 9001 is the quality systems standard used by companies providing design, 
development, manufacturing, installation and servicing.

     RELA, Novel and Erbtec are registered device manufacturers with the 
FDA and meet the agency's QSR requirements. In addition, the Company is 
EN ISO 9001 and EN 46001 registered by a Notified Body. There are no material 
costs or expenses associated with the Company's compliance with federal, 
state and local environmental laws.

PATENTS

     The Company has no significant patents.  The Company believes that the 
conduct of its business is not dependent upon its ability to obtain or defend 
patents.  

EMPLOYEES

     As of June 30, 1998, the Company had 410 employees, of which 332 are 
full-time.  88% of the Company's employees are employed at its operations in 
Boulder and Longmont, Colorado and 12% of employees are employed in Plymouth, 
Minnesota.  No employees are represented by labor organizations and there are 
no collective bargaining agreements.  Employee relations are believed to be 
good.

ITEM 2.  DESCRIPTION OF PROPERTY.

     CMED, RELA and BioMed operate out of leased facilities located at 6175 
Longbow Drive, Boulder, Colorado and 410 South Sunset Street, Longmont, 
Colorado.  The Boulder facility has a five-year lease, which expires on June 
30, 2002.  The lease calls for average monthly payments over the term of the 
lease of $36,139.  In addition, the Company is responsible for certain 
expenses, including property taxes, insurance and maintenance.  CMED, RELA 

                                       -6-

<PAGE>

and BioMed conduct administrative operations, custom product development 
services and consulting services at this facility.

     RELA's manufacturing is conducted at its Longmont facility.  This 
facility has a five-year lease that expires on July 1, 2002.  The lease calls 
for average monthly payments over the term of the lease of $13,657.  In 
addition to the base lease payment, the Company is responsible for certain 
expenses, including property taxes, insurance and maintenance.

     Novel operates out of a leased facility located at 13845 Industrial Park 
Boulevard, Plymouth, Minnesota.  Novel has a four-year lease that expires on 
January 31, 2001.  This lease calls for average monthly payments over the 
term of the lease of $8,941.  In addition, Novel is responsible for certain 
expenses, including property taxes, insurance and maintenance.  Novel's 
custom manufacturing and product development services are conducted out of 
this facility.

     Erbtec operates out of a leased facility located at 2760 29th Street, 
Boulder, Colorado.  Erbtec has a one-year lease that expires November 30, 
1998. This lease calls for average monthly payments over the term of the 
lease of $12,920.  In addition, Erbtec is responsible for certain expenses, 
including property taxes, insurance and maintenance.  All of Erbtec's 
operations are conducted out of this facility.

     The Company has leased a facility located at 1510 Nelson Road, Longmont, 
Colorado.  The lease period begins October 1, 1998 and expires on June 30, 
2002. The lease calls for average monthly payments over the term of the lease 
of $7,119.  In addition to the base lease payment, the Company is responsible 
for certain expenses, including property taxes, insurance and maintenance.  
The Company is planning to use this facility for manufacturing operations.

     The Company owns a 10.91-acre parcel of industrial-zoned vacant land in 
Louisville, Colorado (the "Louisville Parcel").  The Company's title in the 
Louisville Parcel is in fee simple.  It is the opinion of management that, as 
the Louisville Parcel is vacant land, it is not necessary to provide 
insurance coverage for the property.  At June 30, 1998, the Company is 
holding the land as available-for-sale.  Notwithstanding the Company's 
ownership of the Louisville Parcel, it is not the policy of the Company to 
invest in real estate or interests in real estate, real estate mortgages, or 
securities of or interests in persons primarily engaged in real estate 
activities.

ITEM 3.  LEGAL PROCEEDINGS.

     The Company is not involved in any material pending legal proceedings.

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

     There were no matters submitted to a vote of shareholders during the 
last quarter of the fiscal year ended June 30, 1998.

                                       -7-

<PAGE>


                                    PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     The common stock of the Company has been traded on the Nasdaq (National 
Association of Securities Dealers Automated Quotations) stock market since 
the Company's initial public offering in July 1983.  The Company's common 
stock has been listed on the Nasdaq National Market since October 1997.  The 
following table sets forth the range of high and low closing prices of the 
Company's common stock as reported by Nasdaq during fiscal years 1998 and 
1997:
<TABLE>
<CAPTION>
                                  Fiscal Year Ended June 30,
                           -------------------------------------------
                                    1998               1997
                           -------------------------------------------
                               High       Low      High       Low     
                           -------------------------------------------
      <S>                      <C>       <C>       <C>       <C>
      First Fiscal Quarter     $ 7.12    $5.12     $3.50     $2.62
      
      Second Fiscal Quarter    $ 7.00    $5.87     $3.31     $2.88
      
      Third Fiscal Quarter     $10.25    $5.81     $3.19     $2.81
      
      Fourth Fiscal Quarter    $10.12    $6.94     $6.31     $2.88
</TABLE>

     The foregoing quotations represent quotations between dealers without 
adjustment for retail markups, markdowns or commissions and may not represent 
actual transactions.

     At June 30, 1998 the Company had approximately 1,100 shareholders of 
record.  The Company has never paid a dividend, and does not anticipate the 
payment of dividends in the foreseeable future.

     The Company did not sell any unregistered securities in the three-month 
period ended June 30, 1998. 

                                       -8-

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

     The selected, consolidated financial information presented below for the 
five years ended June 30, 1998, is derived from the consolidated financial 
statements of the Company.  This information should be read in conjunction 
with the Consolidated Financial Statements and Notes thereto and Management's 
Discussion and Analysis of Financial Conditions and Results of Operations. 
Certain reclassifications have been made to prior year financial statements 
to conform with current presentation.

(In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                          YEARS ENDED JUNE 30,
                                                          --------------------
                                   1998(a)       1997(b)          1996           1995            1994  
                                   -------       -------          ----           ----            ----  
<S>                               <C>           <C>             <C>            <C>             <C>
STATEMENT OF OPERATIONS DATA:

Net sales and service             $  47,300     $  28,243       $  19,130       $  19,821      $  20,615
Gross profit                      $  16,943     $   9,786       $   6,790       $   6,838      $   7,250
Net income                        $   4,492     $   2,480       $   1,597       $   1,037      $     806
Earnings per share
     Basic (c)                    $     .47     $     .35       $     .23       $     .15      $     .15
     Diluted (c)                  $     .37     $     .27       $     .21       $     .15      $     .15

STATEMENT OF CASH FLOWS DATA:

Net cash provided by (used in)
     Operating activities         $   8,268      $  2,899       $   1,268       $  2,342       $   2,450
     Investing activities         $  (8,922)     $ (6,655)      $  (2,798)      $   (200)      $    (121)
     Financing activities         $   1,482      $  4,811       $       -       $   (897)      $   1,129

BALANCE SHEET DATA:

Cash and cash equivalents         $   2,499      $  1,671       $     615       $  2,144       $  3,727
Short-term investments            $  12,144      $ 10,293       $   5,408       $  2,593       $      -
Current assets                    $  29,249      $ 20,585       $  12,099       $  9,746       $  8,611
Total assets                      $  34,007      $ 23,853       $  13,217       $ 10,958       $  9,883
Current liabilities               $  12,285      $  9,461       $   6,666       $  6,005       $  5,966
Total long-term debt              $       -      $      -       $       -       $      -       $      -
Total shareholders' equity        $  21,723      $ 14,392       $   6,550       $  4,953       $  3,917
Cash dividends per share          $       -      $      -       $       -       $      -       $      -
</TABLE>

(a)  In October 1997, the Company acquired the operating assets of Erbtec
     Engineering, Inc.
(b)  In February 1997, the Company acquired Novel Biomedical, Inc.
(c)  As restated under Statement of Financial Accounting Standards No. 128,
     "Earnings per Share".

                                       -9-


<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
         RESULTS OF OPERATIONS.

FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of liquidity have consisted of cash flow 
from operations, cash deposits received from customers related to research 
and development and manufacturing contracts and cash proceeds from the 
issuance of common stock.  Historically, the Company has also utilized 
proceeds from debt borrowings.  The Company expects capital expenditures to 
be consistent with the previous year during fiscal year 1999.  The Company 
anticipates that it will fund its expenditures, as well as research and 
development costs, through cash generated from operations.

     On October 30, 1997, the Company was approved for a three year revolving 
line of credit for $5 million the first year, $7 million the second year and 
$9 million the third year  The credit facility is at the bank's prime lending 
rate (8.5% at June 30, 1998) through the term of the agreement and is secured 
by all accounts receivable, general intangibles, inventory and equipment. The 
agreement contains various restrictive covenants, which include, among 
others, maintenance of certain financial ratios, maintenance of a minimum 
tangible net worth and limitations on annual investments, dividends and 
capital expenditures.  As of June 30, 1998, no amounts were outstanding under 
the credit facility.

     In June 1994, the Company completed the private placement of 1,500,000 
units, each unit consisting of one share of no par common stock and two 
warrants.  The units were offered at the greater of $1.00 or 75% of the 
average of the closing bid and ask price of the common stock for the five 
days prior to subscription.  1,500,000 of the warrants were priced at 125% of 
the average of the closing bid and ask price of the common stock on the date 
of purchase of the units, and an additional 1,500,000 warrants were issued 
with an exercise price equal to 175% of the average of the closing bid and 
ask price of the common stock on the date of purchase of the units.  The 
exercise prices of the warrants ranged from $1.41 to $2.68.  The proceeds 
from this offering were approximately $1.5 million.

     During June 1997, the Company called all of the above warrants that had 
not previously been exercised. During fiscal year 1997, 2,070,000 of these 
warrants were exercised for $4,630,800. The remaining 930,000 warrants were 
exercised during July and August 1997, resulting in cash proceeds to the 
Company of $1,120,800 and cancellation of 142,505 shares of previously issued 
common stock that were used in lieu of cash to exercise the warrants.

     In December 1993, the Company completed the private placement of 500,000 
shares of no par value common stock at an offering price of $1.00 per share.  
The net proceeds from this offering were approximately $493,000.

     Of the 5,000,000 shares issued in the above transactions, 3,500,000 were 
sold to a wholly-owned subsidiary of Vencor, Inc. ("Vencor"), a Louisville, 
Kentucky-based operator of intensive care hospitals and nursing homes that 
specialize in treating patients with catastrophic illnesses.  The Company 
entered into a standstill agreement with Vencor in June 1994 whereby Vencor 
will not acquire more than 40% of the Company's common stock for five years 
from the agreement date.  At August 31, 1998, Vencor owned 33% of the 
Company's outstanding stock.

                                       -10-

<PAGE>

     The Company's working capital increased to $16,965,000 at June 30, 1998 
from $11,124,000 at June 30, 1997.  The increase in working capital occurred 
primarily because of the Company's cash flow from operations and the proceeds 
from the issuance of common stock through the exercise of options and 
warrants. The average number of days outstanding of the Company's accounts 
receivable was approximately 50 days at June 30, 1998 compared to 57 days at 
June 30, 1997. The Company has granted extended terms to certain customers 
which increased the average number of days outstanding of the Company's 
accounts receivable by 3 days for the year ended June 30, 1998.

     During the year ended June 30, 1998, the Company acquired approximately 
$1,479,000 of property and equipment consisting principally of computer 
equipment.  The Company has no present material commitments for capital 
expenditures.

     The ratio of current assets to current liabilities was 2.4 to 1 at June 
30, 1998, compared to 2.2 to 1 at June 30, 1997.  The liabilities to equity 
ratio was .6 to 1 at June 30, 1998, compared to .7 to 1 at June 30, 1997.  
The improvement in both of these ratios is due to the Company's profitable 
growth during the year ended June 30, 1998.

     Cash provided by operations during the year ended June 30, 1998 was $8.3 
million and increased approximately $5.4 million, compared to fiscal year 
1997, as a result of the profitable growth of the Company, the increase in 
accounts payable and accrued expenses, improved inventory turns and the 
reduction in days outstanding of accounts receivable.  

                                       -11-

<PAGE>


RESULTS OF OPERATIONS

     As an aid to understanding the Company's operating results, the 
following table indicates the percentage relationships of income and expense 
items to total revenue for the line items included in the Consolidated 
Statements of Operations for the three years ended June 30, 1998, 1997 and 
1996, and the percentage change in those items for the years ended June 30, 
1998 and 1997, from the prior year.
<TABLE>
<CAPTION>
As a Percentage of Total Revenues                               Percentage Change from Prior Year   
---------------------------------                               ---------------------------------   
   For the Years Ended June 30,                                   For the Years Ended June 30,
     1998      1997      1996                LINE ITEMS               1998           1997
     ----      ----      ----                ----------               ----           ----
       %         %         %                                           %              %
     <S>       <C>       <C>        <C>                               <C>            <C>
     100.0     100.0     100.0            Sales and Service           67.5           47.6 

      64.2      65.3      64.5       Cost of Sales and Services       64.5           49.6 
     -----     -----     -----                                       -----          -----
      35.8      34.7      35.5              Gross Profit              73.1           44.1 
     -----     -----     -----                                       -----          -----
       3.7       4.6       5.2          Marketing and Selling         36.5           29.8 

      16.1      16.4      20.2       Operating, Gen'l and Admin       65.1           19.4 

       3.6       1.1        .5       Research and Development        452.5          213.4 
     -----     -----     -----                                       -----          -----
      23.4      22.0      25.9        Total Operating Expenses        78.1           25.2
     -----     -----     -----                                       -----          -----
      12.4      12.7       9.6         Earnings from Operations       64.4           95.3

        .9       1.0       2.4            Other Income, Net           42.9          (35.7)
     -----     -----     -----                                       -----          -----
      13.3      13.7      11.9      Earnings Before Income Taxes      62.8           69.5

       3.8       4.9       3.6       Provision for Income Taxes       30.0          102.5 
     -----     -----     -----                                       -----          -----
       9.5       8.8       8.3                Net Income              81.2           55.3 
     -----     -----     -----                                       -----          -----
     -----     -----     -----                                       -----          -----
</TABLE>

FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997

     Revenues were $47.3 million for the year ended June 30, 1998, compared 
to $28.2 million for the prior year, an increase of 67%.  Of total revenues, 
outsourcing contributed approximately 75% and 95% in the fiscal years 1998 
and 1997, respectively, while products contributed approximately 25% and 5% 
in the fiscal years 1998 and 1997, respectively.  The increase in revenues is 
attributable in part to the acquisition of Novel, effective January 1997, and 
of Erbtec in October 1997, which contributed approximately $14.8 million of 
revenue during the year ended June 30, 1998.  The Company's revenue growth 
also was the result of core business growth, which had an increase in revenue 
of 27% compared to 1997.

                                       -12-

<PAGE>

     Gross margins increased to 36% from 35% for the year ended June 30, 
1998, compared to the year ended June 30, 1997.  The increase in the 
Company's margins is a result of the shifting composition of the Company's 
revenues between products and services and the increase in sales of 
proprietary products.

     Marketing and selling expenses increased by 36% for the year ended June 
30, 1998, as compared to the prior year.  The increase is attributable to the 
growth in sales and the acquisitions of Erbtec and Novel.  Marketing and 
selling expenses as a percentage of total revenue decreased to 4% from 5% for 
the year ended June 30, 1998, compared to 1997 as a result of the increase in 
revenues. 

     Operating, general and administrative expenses increased by 65% for the 
year ended June 30, 1998, compared to the prior year.  The increase is 
attributable to the acquisition of Erbtec and Novel, expenses incurred in 
August 1997 in moving the RELA manufacturing facility from Boulder, Colorado 
to Longmont, Colorado, the addition of executive personnel at RELA, increased 
recruiting and hiring costs of new employees and the overall growth of the 
Company.  As a percentage of revenues, operating, general and administrative 
expenses were approximately 16% for each of the years ended June 30, 1998 and 
1997.

     Research and development expenses for the year ended June 30, 1998, 
compared to the prior year increased by approximately $1.4 million, or 453%. 
Research and development expenses are attributable to new products for 
Respiratory Products, Erbtec and BioMed.  Consistent with the Company's 
operating plans, the Company continues to pursue the acquisition or 
development of new or improved technology or products.  Should the Company 
identify any such opportunities, the amount of future research and 
development expenditures may increase.

     Net other income and expenses increased approximately $124,000 to 
$413,000 for the year ended June 30, 1998, compared to $289,000 for the year 
ended June 30, 1997.  The increase is attributable to a higher short-term 
investment balance during fiscal year 1998, compared to fiscal year 1997. 

     The fiscal year 1998 and 1997 consolidated statements of operations 
contain a net tax provision of $1.8 million and $1.4 million, respectively.  
The Company accounts for income taxes under the provisions of Statement of 
Financial Accounting Standards ("SFAS") No. 109, which requires recognition 
of deferred income tax assets and liabilities for the expected future income 
tax consequences, based on enacted tax laws, of temporary differences between 
the financial reporting and tax bases of assets, liabilities and 
carryforwards. SFAS No. 109 requires recognition of deferred tax assets for 
the expected future effects of all deductible temporary differences, loss 
carryforwards and tax credit carryforwards.  Deferred tax assets are then 
reduced, if deemed necessary, by a valuation allowance for any tax benefits 
which, based on current circumstances, are not expected to be realized.  
During fiscal year 1998, the Company determined the valuation allowance was 
no longer required because the increased taxable income from the acquisition 
of Erbtec could be offset by tax credits and net operating loss ("NOL") 
carryforwards.  In fiscal years 1998 and 1997, the Company reduced its 
valuation allowance by $590,000 and $80,000, respectively, for the 
utilization of prior years' NOL in the current year and certain deferred tax 
assets that the Company now believes will be fully utilized.  The effective 
tax rate during fiscal year 1998 was 29%, compared to a 36% effective tax 
rate during fiscal year 1997.

     The Company recorded net income of approximately $4.5 million for the 
fiscal year ended June 30, 1998, compared to $2.5 million for the fiscal year 
ended June 30, 1997.  Earnings per share for the year ended June 30, 1998 
were $.37, calculated on 12,256,461 diluted weighted average shares 
outstanding, compared to $.27 for the same period in the prior year 
calculated on 9,114,292 diluted weighted average shares outstanding.  The 
diluted 

                                       -13-

<PAGE>

weighted average shares outstanding increased by approximately 3,142,000 
shares for the year ended June 30, 1998, compared to the same period in 1997, 
due to the exercise of 3,000,000 private placement warrants and the exercise 
of options and Board of Director ("Board") and consultant warrants.  This 
increase in net income is attributed to the 67% growth in the Company's 
revenues, an increase in gross margins by 1% for the fiscal year 1998, 
compared to 1997, having the combination of operating, general and 
administrative expenses and marketing and selling expenses increase at a 
slower rate than revenues and the decrease in the effective tax rate.

     The Company evaluated its overall business in fiscal year 1996 and, as a 
result, sharpened its market focus.  The Company has continued to refine its 
market focus during 1997 and 1998.  The current targeted markets are: 
Diagnostic and Laboratory Instruments; Imaging Accessories; Therapeutic 
Instruments; and, Software.  Each area represents a U.S. market of $2 billion 
or more per year, with annual growth of approximately 8% to 15%.  Generally, 
the marketplace for outsourcing services is expected to remain strong and 
competitive, with significant opportunity for companies that can develop 
low-cost, high quality products in a timely manner.  Management is dedicated 
to improving operating results through consistent performance, improved sales 
levels and cost reductions.  There are no assurances that management will be 
successful in achieving improved operating results.

FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996

     Revenues were $28.2 million for the year ended June 30, 1997, compared 
to $19.1 million for the prior year, an increase of 48%.  Of the total 
revenues, outsourcing contributed approximately 95% for both fiscal year 1997 
and 1996, while products contributed approximately 5% for both fiscal year 
1997 and 1996. The increase in revenues was attributable to the growth of the 
core business, which reported an increase in revenues of 41% in fiscal year 
1997 compared to fiscal year 1996.  The Company's revenue growth was also 
improved by the acquisition of Novel in January 1997, which contributed $1.6 
million of revenue during the last six months of fiscal year 1997.

     The Company's gross margins as a percentage of total revenues, which 
were approximately 35%, did not change for the years ended June 30, 1997 and 
1996.

     Marketing and selling expenses increased by 30% for the year ended June 
30, 1997, as compared to the prior year.  The increase was attributable to 
the growth in sales and the acquisition of Novel.  Marketing and selling 
expenses as a percentage of total revenue were approximately 5% for the years 
ended June 30, 1997 and 1996. 

     Operating, general and administrative expenses increased by 
approximately $749,000, or 19% for the year ended June 30, 1997, compared to 
the prior year.  The increase was attributable to the overall growth of the 
Company and the acquisition of Novel.  As a percentage of revenues, 
operating, general and administrative expenses decreased to 16% from 20%, in 
fiscal year 1997, compared to fiscal year 1996, respectively.

     Research and development expenses for the year ended June 30, 1997, 
compared to the prior year, increased by approximately $207,000, or 213%.  
The increase was a result of the Company's greater emphasis on developing 
proprietary products. 

     Net other income and expenses decreased approximately $161,000 to 
$289,000 for the year ended June 30, 1997, compared to $450,000 for the year 
ended June 30, 1996.  The decrease was attributable to a $122,000 gain from 
the sale of the cardiopulmonary product lines and an approximately $50,000 
gain on two dispute settlements that occurred during fiscal year 1996.  
During fiscal year 1997, the Company's interest income increased by $47,000, 
compared to fiscal year 1996. 

                                       -14-

<PAGE>

     The fiscal year 1997 and 1996 statements of operations contained a net 
tax provision of $1,385,000 and $684,000, respectively.  In fiscal years 1997 
and 1996, the Company reduced its valuation allowance by $80,000 and 
$178,000, respectively, for the utilization of prior years' NOL in the then 
current year and certain deferred tax assets that the Company believed would 
be fully utilized. The effective tax rate during fiscal year 1997 was 36%, 
compared to a 30% effective tax rate during fiscal year 1996.

     The Company recorded net income of approximately $2.5 million for the 
fiscal year ended June 30, 1997, compared to approximately $1.6 million for 
the fiscal year ended June 30, 1996.  Earnings per share for the year ended 
June 30, 1997 were $.27, calculated on 9,114,292 diluted weighted average 
shares outstanding, compared to $.21 for the same period in the prior year, 
calculated on 7,766,805 diluted weighted average shares outstanding.  The 
diluted weighted average shares outstanding increased by approximately 
1,347,000 shares for the year ended June 30, 1997 compared to the same period 
in 1996 due to the increase in the dilutive common equivalent shares for 
stock options and warrants because of the increase in the Company's stock 
price during fiscal 1997 compared to fiscal 1996.  This increase in net 
income was attributed to the 48% growth in the Company's revenues, while 
maintaining the gross margins at 35% for the fiscal years 1997 and 1996, and 
having the operating, general and administrative expenses and marketing and 
selling expenses increase at a slower rate than revenues.

INFORMATION SYSTEMS AND THE YEAR 2000 ISSUE

     As is the case for most other companies using computers in their 
operations, the Company and its subsidiaries are in the process of addressing 
the Year 2000 problem.  The Company is currently engaged in a comprehensive 
project to upgrade its information technology and manufacturing computer 
software to programs that will consistently and properly recognize the Year 
2000.  Many of the Company's systems include new hardware and packaged 
software recently purchased from vendors who have represented that these 
systems are already Year 2000 compliant. The Company is in the process of 
obtaining assurances from vendors that timely updates will be made available 
to make all remaining purchased software Year 2000 compliant.  The Company 
will utilize both internal and external resources to test and reprogram or 
replace all of its software for Year 2000 compliance.

     The Company does not believe that its proprietary products or any of its 
outsourcing services involve any material Year 2000 risks. In addition to 
reviewing its internal systems, the Company has begun formal communications 
with its significant vendors concerning Year 2000 compliance. There can be no 
assurance that the systems of other companies that interact with the Company 
will be sufficiently Year 2000 compliant so as to avoid an adverse impact on 
the Company's operations, financial condition and results of operations.

     The Company does not presently anticipate that the costs to address the 
Year 2000 issue will have a material adverse effect on the Company's 
financial condition, results of operations or liquidity.  Present estimated 
cost for remediation is less than $100,000.

     The Company presently anticipates that it will complete its Year 2000 
assessment and remediation by the end of fiscal year 1999.  However, there 
can be no assurance that the Company will be successful in implementing its 
Year 2000 remediation plan according to the anticipated schedule.  In 
addition, the Company may be adversely affected 

                                       -15-

<PAGE>

by the inability of other companies whose systems interact with the Company 
to become Year 2000 compliant and by potential interruptions of utility, 
communications or transportation systems as a result of Year 2000 issues.

     Although the Company expects its internal systems will be Year 2000 
compliant as described above, the Company intends to prepare a contingency 
plan that will specify what it plans to do if it or important external 
companies are not Year 2000 compliant in a timely manner.  The Company 
expects to prepare its contingency plan during fiscal year 1999.

NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board ("FASB") issued 
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive 
Income", ("SFAS 130").  SFAS 130 establishes standards for reporting and 
displaying comprehensive income and its components in a financial statement 
that is displayed with the same prominence as other financial statements.  
SFAS 130 is effective for fiscal years beginning after December 15, 1997.  
Comprehensive income would have been approximately $4,527,147, $2,479,617 and 
$1,596,602 for the years ended June 30, 1998, 1997 and 1996, respectively.

     In June 1997, the FASB issued Statement of Financial Accounting 
Standards No. 131, "Disclosures about Segments of an Enterprise and Related 
Information" ("SFAS 131").  SFAS 131 requires that public companies report 
information about their operating segments based on the financial information 
used by the chief operating decision maker in their annual financial 
statements and requires those companies to report selected information on 
their interim statements.  SFAS 131 is effective for fiscal years beginning 
after December 15, 1997.  Management has not determined the segments, if any, 
that will be reported in connection with the adoption of SFAS 131.

     In June 1998, the FASB issued Statement of Financial Accounting 
Standards No. 133, "Accounting for Derivative Instruments and Hedging 
Activities" ("SFAS 133").  SFAS 133 establishes accounting and reporting 
standards for derivative instruments, including certain derivative 
instruments embedded in other contracts and for hedging activities.  It 
requires that an entity recognize all derivatives as either assets or 
liabilities in the statement of financial position and measure those 
instruments at fair value. SFAS 133 is effective for fiscal quarters and 
fiscal years beginning after June 15, 1999.  Management believes that the 
adoption of SFAS 133 will not have significant impact on the Company's 
financial condition and results of operations.

     In April 1998, the Accounting Standards Executive Committee ("AcSEC") 
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of 
Start-up Activities."  SOP 98-5 provides guidance on financial reporting of 
start-up costs and organization costs and requires such costs to be expensed 
as incurred. SOP 98-5 is effective for financial statements for fiscal years 
beginning after December 15, 1998.  The Company believes that application of 
SOP 98-5 will not have a material impact on its financial statements.

FORWARD-LOOKING STATEMENTS

     The statements contained in this report which are not historical facts 
are forward-looking statements that are subject to risks and uncertainties 
that could cause actual results to differ materially from those set forth in 
or implied by forward-looking statements.  Such risks include, but are not 
limited to, the risk that a downturn in general economic conditions may tend 
to adversely affect research and development budgets of potential customers 
upon which the Company is dependent, the risk that the Company's 
project-oriented revenues could be delayed or 

                                       -16-

<PAGE>

adversely affected if new contracts are not in place when existing contracts 
are completed, and the risk that the nature of bidding and performing 
research and development-type contracts and manufacturing contracts may 
result in short-term fluctuations in revenue or expense that could adversely 
affect quarterly results.

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

     The Company, as part of its cash management strategy, had short-term 
investments at June 30, 1998 consisting of approximately $9,137,000 in U.S. 
Treasury and government agency securities, $2,300,000 in commercial paper and 
$707,000 in corporate notes.  The Company has the intent and ability to hold 
these short-term investments to maturity and thus has classified these 
investments, which are stated at amortized cost that approximates market, as 
"held-to-maturity".  All of the short-term investments mature in less than 
one year.  The Company has completed a market risk sensitivity analysis of 
these short-term investments based upon an assumed 1% increase in interest 
rates at July 1, 1998.  If market interest rates had increased by 1% on 
July 1, 1998, the Company would have had an approximate $36,000 loss on these 
short-term investments.  Because this is only an estimate, any actual loss 
due to an increase in interest rates could differ from this estimate. 

                                       -17-

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS

Index to Financial Statements and Schedules:
<TABLE>
<CAPTION>

                                                           Page 
                                                          Number
                                                          ------
     <S>                                                  <C>
     Report of Independent Public Accountants               F-1

     Consolidated Balance Sheets                            F-2

     Consolidated Statements of Operations                  F-4

     Consolidated Statements of Shareholders' Equity        F-5

     Consolidated Statements of Cash Flows                  F-6

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

     All schedules for which provision is made in the applicable accounting 
regulation of the Securities and Exchange Commission are not required under 
the related instructions or are inapplicable, and therefore have been omitted.

                                       -18-

<PAGE>

                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Colorado MEDtech, Inc.:


We have audited the accompanying consolidated balance sheets of COLORADO 
MEDTECH, INC. (a Colorado corporation) and subsidiaries as of June 30, 1998 
and 1997, and the related consolidated statements of operations, 
shareholders' equity and cash flows for each of the three years in the period 
ended June 30, 1998.  These financial statements are the responsibility of 
the Company's management.  Our responsibility is to express an opinion on 
these financial statements based on our audits.  

We conducted our audits 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 financial statements referred to above present fairly, in 
all material respects, the financial position of Colorado MEDtech, Inc. and 
subsidiaries as of June 30, 1998 and 1997, and the results of their 
operations and their cash flows for each of the three years in the period 
ended June 30, 1998, in conformity with generally accepted accounting 
principles.

                                       ARTHUR ANDERSEN LLP


Denver, Colorado,
   August 24, 1998.


                                       F-1


<PAGE>

                                                                    Page 1 of 2


                            COLORADO MEDTECH, INC.
                                       

                         CONSOLIDATED BALANCE SHEETS
                                          
                         AS OF JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
                   ASSETS                                        1998           1997
                   ------                                       ------         ------
<S>                                                         <C>            <C>
CURRENT ASSETS:
  Cash and cash equivalents                                 $  2,499,072   $  1,670,821
  Short-term investments                                      12,144,005     10,293,101
  Accounts receivable-
    Trade - less allowance for uncollectible accounts
     of $580,000 and $162,000, respectively                    7,631,436      4,549,543
    Unbilled                                                     182,537        690,564
  Inventories, net                                             4,225,680      2,390,267
  Deferred income taxes                                        1,676,227        795,459
  Prepaid expenses and other                                     890,260        195,483
                                                            ------------   ------------
       Total current assets                                   29,249,217     20,585,238
                                                            ------------   ------------
PROPERTY AND EQUIPMENT:
  Computer equipment                                           3,224,215      2,307,210
  Office furniture and fixtures                                1,262,193        963,145
  Leasehold improvements                                         485,748        365,860
  Manufacturing equipment                                      1,063,920        548,054
                                                            ------------   ------------
       Total property and equipment                            6,036,076      4,184,269
  Less - Accumulated depreciation and amortization            (4,301,804)    (3,505,865)
                                                            ------------   ------------
       Property and equipment, net                             1,734,272        678,404
                                                            ------------   ------------
INVESTMENT IN LAND                                               500,000        500,000
                                                            ------------   ------------
GOODWILL, net                                                  1,724,796      1,628,326
                                                            ------------   ------------
DEFERRED INCOME TAXES AND OTHER                                  798,997        461,465
                                                            ------------   ------------
                                                            $ 34,007,282   $ 23,853,433
                                                            ------------   ------------
                                                            ------------   ------------
</TABLE>
                                        
           The accompanying notes to consolidated financial statements
                 are an integral part of these balance sheets.

                                      F-2
<PAGE>

                                                                    Page 2 of 2


                            COLORADO MEDTECH, INC.


                          CONSOLIDATED BALANCE SHEETS
                                       
                         AS OF JUNE 30, 1998 AND 1997

<TABLE>
<CAPTION>
          LIABILITIES AND SHAREHOLDERS' EQUITY                         1998           1997
          ------------------------------------                        ------         ------
<S>                                                               <C>             <C>
CURRENT LIABILITIES:
  Accounts payable                                                $  4,426,172    $  3,075,225
  Accrued product service costs                                        291,566         373,629
  Accrued salaries and wages                                         3,126,671       1,805,770
  Other accrued expenses                                             1,169,004         992,354
  Customer deposits                                                  2,804,450       3,175,530
  Income taxes payable                                                 466,788          38,691
                                                                  ------------    ------------
     Total current liabilities                                      12,284,651       9,461,199
                                                                  ------------    ------------
COMMITMENTS AND CONTINGENCIES (Note 7)

SHAREHOLDERS' EQUITY:
  Preferred stock, no par value; 5,000,000 shares authorized;
   none issued                                                           -                -
  Common stock, no par value; 25,000,000 shares authorized;
   10,740,013 and 9,341,108 issued and outstanding
   at June 30, 1998 and 1997, respectively                          11,879,456       9,076,206
  Retained earnings                                                  9,808,175       5,316,028
  Unrealized gain on available-for-sale investment                      35,000            -
                                                                  ------------    ------------
     Total shareholders' equity                                     21,722,631      14,392,234
                                                                  ------------    ------------
                                                                  $ 34,007,282    $ 23,853,433
                                                                  ------------    ------------
                                                                  ------------    ------------
</TABLE>
                                        
          The accompanying notes to consolidated financial statements
                 are an integral part of these balance sheets. 

                                       F-3
<PAGE>

                                       
                            COLORADO MEDTECH, INC.


                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                       
               FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                    1998            1997            1996
                                                 -----------    -----------     -----------
<S>                                              <C>            <C>             <C>
NET SALES AND SERVICE                            $47,300,200    $28,243,185     $19,130,979

COST OF SALES AND SERVICE                         30,357,492     18,456,764      12,341,217
                                                 -----------    -----------     -----------
GROSS PROFIT                                      16,942,708      9,786,421       6,789,762
                                                 -----------    -----------     -----------
COSTS AND EXPENSES:
  Marketing and selling                            1,756,661      1,287,091         991,508
  Operating, general and administrative            7,626,103      4,619,447       3,870,181
  Research and development                         1,680,625        304,180          97,059
                                                 -----------    -----------     -----------
    Total operating expenses                      11,063,389      6,210,718       4,958,748
                                                 -----------    -----------     -----------
INCOME FROM OPERATIONS                             5,879,319      3,575,703       1,831,014
                                                 -----------    -----------     -----------
OTHER INCOME (EXPENSE):
  Interest expense                                   (14,127)       (22,460)        (59,945)
  Interest income and other                          426,955        311,374         509,533
                                                 -----------    -----------     -----------
  Total other income                                 412,828        288,914         449,588
                                                 -----------    -----------     -----------
INCOME BEFORE PROVISION FOR INCOME TAXES           6,292,147      3,864,617       2,280,602

PROVISION FOR INCOME TAXES                         1,800,000      1,385,000         684,000
                                                 -----------    -----------     -----------
NET INCOME                                       $ 4,492,147    $ 2,479,617     $ 1,596,602
                                                 -----------    -----------     -----------
                                                 -----------    -----------     -----------
EARNINGS PER SHARE (Note 2):
  Basic                                                 $.43           $.35            $.23
                                                 -----------    -----------     -----------
                                                 -----------    -----------     -----------
  Diluted                                               $.37           $.27            $.21
                                                 -----------    -----------     -----------
                                                 -----------    -----------     -----------
WEIGHTED AVERAGE COMMON AND COMMON 
  EQUIVALENT SHARES OUTSTANDING:
  Basic                                           10,446,868      7,165,499       6,901,762
                                                 -----------    -----------     -----------
                                                 -----------    -----------     -----------
  Diluted                                         12,256,461      9,114,292       7,766,805
                                                 -----------    -----------     -----------
                                                 -----------    -----------     -----------
</TABLE>
                                        
           The accompanying notes to consolidated financial statements
               are an integral part of these financial statements.

                                      F-4
<PAGE>

                            COLORADO MEDTECH, INC.


                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

               FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                              Unrealized
                                                                               Gain On
                                                         Common Stock         Available-
                                                  -------------------------    For-Sale       Retained
                                                    Shares        Amount      Investment      Earnings
                                                  ----------    -----------   ----------     ----------
<S>                                                <C>          <C>            <C>           <C>
BALANCES, June 30, 1995                            6,901,762    $ 3,713,652    $    -        $1,239,809

  Net income                                            -              -            -         1,596,602
                                                  ----------    -----------   ----------     ----------
BALANCES, June 30, 1996                            6,901,762      3,713,652         -         2,836,411

  Issuance of Common Stock                         2,449,346      5,053,574         -              -   
  Purchase of Common Stock                           (80,000)      (242,144)        -              -   
  Common stock issued in conjunction                                             
    with the Novel acquisition                        70,000        207,816         -              -   
  Options issued in conjunction                                                  
    with the Novel acquisition                          -           338,672         -              -   
  Options issued for services                                                    
    from consultants                                    -             4,636         -              -   
  Net income                                            -              -            -         2,479,617
                                                  ----------    -----------   ----------     ----------
BALANCES, June 30, 1997                            9,341,108      9,076,206         -         5,316,028
                                                                                 
  Issuance of Common Stock                         1,376,597      1,989,646         -              -   
  Purchase of Common Stock                           (66,400)      (507,390)        -              -   
  Common stock issued in conjunction                                             
    with the Erbtec acquisition                       88,708        620,956         -              -   
  Change in unrealized gain on                                                   
    available-for-sale investment                       -              -          35,000           -    
  Tax benefit from sale of option shares                -           593,442         -              -   
  Options issued for services                                                    
    from consultants                                    -           106,596         -              -   
  Net income                                            -              -            -         4,492,147
                                                  ----------    -----------   ----------     ----------
BALANCES, June 30, 1998                           10,740,013    $11,879,456    $  35,000     $9,808,175
                                                  ----------    -----------   ----------     ----------
                                                  ----------    -----------   ----------     ----------
</TABLE>

          The accompanying notes to consolidated financial statements
              are an integral part of these financial statements.
                                       
                                      F-5
<PAGE>

                                                                    Page 1 of 2
                                                                     

                               COLORADO MEDTECH, INC.

                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                     
                  FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                    1998                1997              1996
                                                                -----------         -----------       -----------
<S>                                                             <C>                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                    $ 4,492,147         $ 2,479,617       $ 1,596,602
  Adjustments to reconcile net income to net cash flows             
   from operating activities-                                       
    Deferred tax benefit                                           (966,000)            (80,000)          (91,000)
    Depreciation and amortization                                 1,047,007             433,747           391,405
    Allowance for uncollectible accounts                            392,783             (12,921)          (25,000)
    Reserve for inventory                                           134,578            (202,000)         (295,000)
    Gain on sale of product line                                       -                   -             (121,986)
    Non-cash consulting services                                    106,596               4,636              -     
    Changes in operating assets and liabilities-                        
      Accounts receivable                                          (779,833)         (1,758,217)         (460,881)
      Inventories                                                   240,123            (377,038)         (485,899)
      Prepaid expenses and other assets                              50,680            (165,430)           56,954
      Accounts payable and accrued expenses                       3,921,199           2,051,653            43,242
      Customer deposits                                            (371,080)            525,223           659,397
                                                                -----------         -----------       -----------
          Net cash flows from operating activities                8,268,200           2,899,270         1,267,834
                                                                -----------         -----------       -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:                                  
  Cash paid for purchase of Novel, net                                 -             (1,126,363)             -
  Cash paid for purchase of Erbtec, net                          (5,392,731)               -                 -     
  Purchase of investments                                          (200,000)            (25,000)             -     
  Capital expenditures                                           (1,478,570)           (643,326)         (231,982)
  Increase in short-term investments, net                        (1,850,904)         (4,859,839)       (2,815,587)
  Proceeds from sale of product line                                  -                    -              250,000
                                                                -----------         -----------       -----------
          Net cash flows used in investing activities            (8,922,205)         (6,654,528)       (2,797,569)
                                                                -----------         -----------       -----------
</TABLE>

            The accompanying notes to consolidated financial statements
                are an integral part of these financial statements.
                                                                       
                                       F-6
<PAGE>

                                                                   Page 2 of 2
                                                                     
                             COLORADO MEDTECH, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                                     
                  FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                         1998               1997             1996
                                                                     ----------          ----------       -----------
<S>                                                                  <C>                 <C>              <C>
CASH FLOWS FROM FINANCING ACTIVITIES:                                        
  Issuance of Common Stock                                           $1,989,646          $5,053,574       $      -
  Purchase of Common Stock                                             (507,390)           (242,144)             -
                                                                     ----------          ----------       -----------
          Net cash flows from financing activities                    1,482,256           4,811,430              -
                                                                     ----------          ----------       -----------
NET INCREASE (DECREASE) IN CASH                                             
 AND CASH EQUIVALENTS                                                   828,251           1,056,172        (1,529,735)

CASH AND CASH EQUIVALENTS, at beginning of period                     1,670,821             614,649         2,144,384
                                                                     ----------          ----------       -----------
CASH AND CASH EQUIVALENTS, at end of period                          $2,499,072          $1,670,821       $   614,649
                                                                     ----------          ----------       -----------
                                                                     ----------          ----------       -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW                                   
 INFORMATION:                                                           
  Cash paid for interest                                             $   14,849          $   31,593       $    59,767
                                                                     ----------          ----------       -----------
                                                                     ----------          ----------       -----------
  Cash paid for income taxes                                         $1,535,003          $1,675,000       $   885,000
                                                                     ----------          ----------       -----------
                                                                     ----------          ----------       -----------
SUPPLEMENTAL DISCLOSURE OF                                             
NON-CASH INVESTING AND                                                
FINANCING ACTIVITIES:                                                  
  Issuance of Common Stock for acquisition of Novel                  $     -             $  207,816       $      -
                                                                     ----------          ----------       -----------
                                                                     ----------          ----------       -----------
  Issuance of stock options for acquisition of Novel                 $     -             $  338,672       $      -
                                                                     ----------          ----------       -----------
                                                                     ----------          ----------       -----------
  Issuance of Common Stock for acquisition of Erbtec                 $  620,956          $     -          $      -
                                                                     ----------          ----------       -----------
                                                                     ----------          ----------       -----------
</TABLE>
                The accompanying notes to consolidated financial statements
                     are an integral part of these financial statements.

                                           F-7
 
<PAGE>

                               COLORADO MEDTECH, INC.

                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                            JUNE 30, 1998, 1997 AND 1996


(1) ORGANIZATION AND OPERATIONS

     Colorado MEDtech, Inc. ("CMED") was incorporated in 1977 as a Colorado 
corporation to develop, manufacture, market and service computerized 
diagnostic and testing instrumentation.

     RELA, Inc. ("RELA"), a Colorado corporation and wholly owned subsidiary 
of CMED, was incorporated in 1977.  RELA is an integrated custom product 
development and manufacturing services company specializing in the design, 
development and manufacture of electronic and electro-mechanical medical 
products and software systems.  The Company merged RELA into CMED in July 1998, 
and is now operating RELA as a division of CMED.  This merger will have no 
material effect on the day to day operations of RELA.

     Novel Biomedical, Inc. ("Novel"), a Minnesota corporation and wholly 
owned subsidiary acquired by CMED in February 1997, was incorporated in 1986. 
Novel specializes in the custom design, development and manufacture of 
unique disposable medical devices, primarily catheters, used in angioplasty, 
minimally invasive surgery, electrophysiology, and infertility treatment. 

     In October 1997, CMED completed the acquisition of the operating assets 
of Erbtec Engineering, Inc. ("Erbtec").  Erbtec is operated as a division of 
CMED. Erbtec's main products are high power Radio Frequency amplifiers, power 
supplies and systems for Magnetic Resonance Imaging equipment.

     BioMed Y2K, Inc. ("BioMed"), a Colorado corporation and wholly owned 
subsidiary of CMED, was incorporated in April 1998.  BioMed offers a 
combination of tools and services to support health care institutions' 
efforts to establish year 2000 compliance for their biomedical devices.

(2) SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION

     The accompanying financial statements reflect the consolidated results 
of CMED, RELA, Novel and BioMed (collectively, the "Company").  All 
significant intercompany transactions and accounts have been eliminated.

     CASH AND CASH EQUIVALENTS

     The Company considers all highly liquid investments with original 
maturities of three months or less to be cash equivalents. 

                                       F-8

<PAGE>

     INVESTMENTS

     The Company accounts for its investments in accordance with the 
provisions of Statement of Financial Accounting Standards No. 115, 
"Accounting for Certain Investments in Debt and Equity Securities."  
Short-term investments are primarily U.S. Treasury and government agency 
securities, which the Company has the intent and the ability to hold to 
maturity and thus has classified these investments, which are stated at 
amortized cost which approximates market, as "held-to-maturity".  All of the 
Company's held-to-maturity investments mature in less than one year.  The 
unrealized gains and losses on these held-to-maturity investments were 
immaterial at June 30, 1998 and 1997.  The following is a summary of 
held-to-maturity investments as of June 30, 1998 and 1997:

<TABLE>
<CAPTION>
      Security Type                         1998            1997
      -------------                         ----            ----
      <S>                                <C>             <C>    
           U.S. Treasury and 
             government agency
             securities                  $ 9,137,095     $ 5,298,635
           Commercial paper                2,299,905       3,968,369
           Corporate notes                   707,005       1,026,097
                                         -----------     -----------
                                         $12,144,005     $10,293,101
                                         -----------     -----------
                                         -----------     -----------
</TABLE>

     The Company also has approximately $120,000 of equity available-for-sale
investments which are marked to market in the accompanying consolidated balance
sheets.  These equity available-for-sale investments have no specific maturity. 
The realized and unrealized gains and losses on the equity available-for-sale
investments were immaterial as of and for the years ended June 30, 1998 and
1997.

     INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out method) or
market.  The cost of inventories includes material, labor and manufacturing
overhead.  As of June 30, 1998 and 1997, inventories, net of allowances,
consisted of:

<TABLE>
<CAPTION>
                                       1998               1997
                                   -----------        -----------
<S>                                <C>                <C>
          Raw materials            $ 2,957,886        $ 1,791,104
          Work-in-process            1,267,794            594,697
          Finished goods                -                   4,466
                                   -----------        -----------
                                   $ 4,225,680        $ 2,390,267
                                   -----------        -----------
                                   -----------        -----------
</TABLE>

     PROPERTY AND EQUIPMENT

     Property and equipment are stated at cost.  Depreciation and 
amortization are provided principally on the straight-line method over the 
estimated useful lives of the assets, which range from 2 to 7 years.  
Depreciation expense for the years ended June 30, 1998, 1997 and 1996 was 
approximately $796,000, $401,000 and $391,000, respectively.

     GOODWILL

     Goodwill resulting from the Erbtec and Novel acquisitions is stated at 
cost, net of accumulated amortization of approximately $284,000 and $33,000, 
as of June 30, 1998 and 1997, respectively.  Amounts of goodwill for Erbtec 

                                       F-9

<PAGE>

and Novel are being amortized using the straight-line method over estimated 
useful lives of 2 and 25 years, respectively.

     ACCRUED PRODUCT SERVICE COSTS

     The Company warrants its products against defects in materials and 
workmanship, generally for 90 days, but in limited cases for up to 18 months. 
Estimated costs of product service are accrued at the time of sale.

     CUSTOMER DEPOSITS

     Customer deposits result from cash received in advance for future 
contract work.

     EARNINGS PER SHARE

     In February 1997, the Financial Accounting Standards Board ("FASB") 
issued Statement of Financial Accounting Standards No. 128, "Earnings Per 
Share", ("SFAS 128"), which was effective for periods ended after December 
15, 1997. This statement establishes standards for computing and presenting 
earnings per share. Basic earnings per share are computed on the basis of the 
weighted average shares outstanding during each period. Diluted earnings per 
share are computed on the basis of the weighted average shares outstanding 
during each period, including dilutive common equivalent shares for stock 
options and warrants. As a result of adopting  SFAS 128, reported earnings 
per share for the years ended June 30, 1997 and 1996 were restated.  The 
effect of this accounting change on previously reported earnings per share 
was as follows:

<TABLE>
<CAPTION>
                                                 1998        1997     1996
                                                 ----        ----     ----
<S>                                              <C>         <C>      <C>
Primary earnings per share
     (as reported under the prior method)        $.37        $.24     $.21
Effect of SFAS 128
     on basic earnings per share                  .06         .11      .02
                                                 ----        ----     ----
Basic earnings per share                         $.43        $.35     $.23
                                                 ----        ----     ----
                                                 ----        ----     ----

Fully diluted earnings per share
     (as reported under the prior method)        $.36        $.23     $.17
Effect of SFAS 128
     on diluted earnings per share                .01         .04      .04
                                                 ----        ----     ----
Diluted earnings per share                       $.37        $.27     $.21
                                                 ----        ----     ----
                                                 ----        ----     ----
</TABLE>

     A reconciliation between the number of shares used to calculate basic 
and diluted earnings per share is as follows (in thousands):

<TABLE>
<CAPTION>
                                                   1998        1997        1996
                                                   ----        ----        ----
<S>                                              <C>          <C>         <C>
Net income (income available to 
     common shareholders)                         $ 4,492     $ 2,480     $ 1,597
                                                  -------     -------     -------
                                                  -------     -------     -------
Weighted average number of common shares 
     outstanding (shares used in basic earnings
     per share computation)                        10,447       7,165       6,902
Effect of stock options and warrants
     (treasury stock method)                        1,809       1,949         865
                                                  -------     -------     -------
Shares used in diluted earnings per share
     computation                                   12,256       9,114       7,767
                                                  -------     -------     -------
                                                  -------     -------     -------
</TABLE>

     Options and warrants that were of an antidilutive nature for the years 
ended June 30, 1998, 1997 and 1996 that were outstanding but not included in 
the shares used in diluted earnings per share computation totaled 
approximately 1,571,000, 3,972,000 and 4,630,000, respectively.

                                       F-10

<PAGE>


     NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the FASB issued Statement of Financial Accounting 
Standards No. 130, "Reporting Comprehensive Income", ("SFAS 130").  SFAS 130 
establishes standards for reporting and displaying comprehensive income and 
its components in a financial statement that is displayed with the same 
prominence as other financial statements.  SFAS 130 is effective for fiscal 
years beginning after December 15, 1997.  Comprehensive income would have 
been approximately $4,527,147, $2,479,617 and $1,596,602 for the years ended 
June 30, 1998, 1997 and 1996, respectively.

     In June 1997, the FASB issued Statement of Financial Accounting 
Standards No. 131, "Disclosures about Segments of an Enterprise and Related 
Information" ("SFAS 131").  SFAS 131 requires that public companies report 
information about their operating segments based on the financial information 
used by the chief operating decision maker in their annual financial 
statements and requires those companies to report selected information on 
their interim statements.  SFAS 131 is effective for fiscal years beginning 
after December 15, 1997.  Management has not determined the segments, if any, 
that will be reported in connection with the adoption of SFAS 131.

     In June 1998, the FASB issued Statement of Financial Accounting 
Standards No. 133, "Accounting for Derivative Instruments and Hedging 
Activities" ("SFAS 133").  SFAS 133 establishes accounting and reporting 
standards for derivative instruments, including certain derivative 
instruments embedded in other contracts and for hedging activities.  It 
requires that an entity recognize all derivatives as either assets or 
liabilities in the statement of financial position and measure those 
instruments at fair value. SFAS 133 is effective for fiscal quarters and 
fiscal years beginning after June 15, 1999.  Management believes that the 
adoption of SFAS 133 will not have significant impact on the Company's 
financial condition and results of operations.

     In April 1998, the Accounting Standards Executive Committee ("AcSEC") 
issued Statement of Position ("SOP 98-5"), "Reporting on the Costs of 
Start-up Activities."  SOP 98-5 provides guidance on financial reporting of 
start-up costs and organization costs and requires such costs to be expensed 
as incurred.  SOP 98-5 is effective for financial statements for fiscal years 
beginning after December 15, 1998.  The Company believes that application of 
SOP 98-5 will not have a material impact on its financial statements.

     REVENUE RECOGNITION POLICY

     The Company recognizes revenue for manufacturing services upon shipment 
of the related products and recognizes revenues for engineering contract 
services as work is performed and contract requirements are met.  Unbilled 
receivables result from revenue recognized for contract services in excess of 
billings.  Unanticipated losses on engineering contracts are provided for, in 
full, when determinable.

     INCOME TAXES

     The Company accounts for income taxes under the provisions of Statement 
of Financial Accounting Standards No. 109 "Accounting for Income Taxes" 
("SFAS 109"), which requires recognition of deferred income tax assets and 
liabilities for the expected future income tax consequences, based on enacted 
tax laws, of temporary differences between the financial reporting and tax 
bases of assets, liabilities and carryforwards.  SFAS 109 requires 
recognition of deferred tax assets for the expected future effects of all 
deductible temporary differences, loss carryforwards and tax credit 
carryforwards.  Deferred tax assets are then reduced, if deemed necessary, by 
a valuation allowance for any tax benefits which, based on current 
circumstances, are not expected to be realized (see Note 6). 

                                       F-11

<PAGE>

     STOCK-BASED COMPENSATION PLANS

     The Company accounts for its stock-based compensation plans under 
Accounting Principles Board Opinion No. 25. "Accounting for Stock Issued to 
Employees" ("APB 25").  Effective in 1995, the Company adopted the disclosure 
option of Statement of Financial Accounting Standards No. 123, "Accounting 
for Stock-Based Compensation" ("SFAS 123").  SFAS 123 requires that companies 
which do not choose to account for stock-based compensation as prescribed by 
the statement shall disclose the pro forma effects on earnings and earnings 
per share as if SFAS 123 had been adopted. Additionally, certain other 
disclosures are required with respect to stock compensation and the 
assumptions used to determine the pro forma financial statement effect of 
SFAS 123 (see Note 5).

     MANAGEMENT'S ESTIMATES

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

     FINANCIAL INSTRUMENTS

     The fair market values of accounts receivable, accounts payable and 
other financial instruments approximate their carrying values in the 
accompanying consolidated balance sheets.

     RECLASSIFICATIONS

     Certain prior year amounts have been reclassified to conform to current 
year presentation.

 (3) ACQUISITIONS

     In October 1997, the Company completed the acquisition of the operating 
assets of Erbtec.  The purchase was completed for $5.39 million in cash and 
issuance of 88,708 shares of common stock, resulting in a total purchase 
value of approximately $6.0 million, including acquisition costs.  At the 
date of the purchase, $1 million of the cash portion of the purchase price 
was placed in escrow pending the performance of certain criteria outlined in 
the purchase and sale agreement.  During the quarter ended June 30, 1998, the 
Company was informed that certain of the purchase and sale agreement criteria 
would not be met and the seller would be refunding $750,000 of the escrowed 
purchase price.  This receivable is included in other current assets in the 
accompanying consolidated balance sheets.  The net purchase price, less the 
net tangible assets acquired, resulted in goodwill of $480,773 that will be 
amortized over a 2-year period.  The accompanying consolidated financial 
statements include the operating results of Erbtec since October 1, 1997, the 
effective date of the acquisition.  The total purchase price and net cash 
used for the acquisition of Erbtec are as follows:

                                       F-12

<PAGE>

<TABLE>
     Assets acquired:

          <S>                                            <C>
          Cash                                           $     8,882
          Accounts receivable                              2,186,816
          Inventories                                      2,210,114
          Equipment and furniture                            373,227
          Other assets                                        12,757
          Goodwill                                           480,773
                                                         -----------
     Total purchase price                                  5,272,569

        Less:
             Stock issued                                   (620,956)
             Cash acquired                                    (8,882)
        Plus:
             Receivable of escrowed funds                    750,000
                                                         -----------
        Net cash paid for purchase of Erbtec             $ 5,392,731
                                                         -----------
                                                         -----------
</TABLE>

     In February 1997, the Company completed the acquisition of Novel.  The 
Company acquired Novel for $1,899,196, which included cash, the issuance of 
70,000 shares of common stock, and the grant of 294,211 non-qualified stock 
options.  The stock was valued at fair market value on the date the Agreement 
and Plan of Reorganization was entered into between CMED and Novel.  The 
non-qualified stock options were valued using the Black-Scholes option 
pricing model.  In fiscal 1998, the Company recognized certain tax benefits 
related to assets obtained in the Novel acquisition, which resulted in an 
adjustment to goodwill.  The purchase price, less the net assets acquired, 
resulted in goodwill of $1,528,332 that is being amortized over a 25-year 
period.  The accompanying consolidated financial statements include the 
operating results of Novel since January 3, 1997, the effective date of the 
acquisition.

     The following unaudited pro forma results of operations of the Company 
for the fiscal years ended June 30, 1998, 1997 and 1996 assume that the 
acquisition of Erbtec had occurred on July 1, 1996 and the acquisition of 
Novel had occurred on July 1, 1995.  These pro forma results are not 
necessarily indicative of the actual results of operations that would have 
been achieved nor are they necessarily indicative of future results of 
operations.  Should the Company obtain additional information about the fair 
market value of the assets acquired, the purchase price may be adjusted in 
future periods.

<TABLE>
<CAPTION>
                                                    Year Ended June 30,
                                                    -------------------
                                         1998              1997            1996
                                         ----              ----            ----
   <S>                                <C>               <C>             <C>
   Revenues                           $50,752,000       $42,480,000     $20,503,000
   Net Income                         $ 4,293,000       $ 4,117,000     $ 1,560,000
   Net Income Per Share (Diluted)     $       .35       $       .44     $       .20
</TABLE>

                                       F-13
<PAGE>

(4)  CREDIT FACILITY

     The Company entered into a bank financing arrangement on October 30, 
1997 that provides for a three-year revolving line of credit for $5 million 
the first year, $7 million the second year and $9 million the third year. The 
credit facility is at the bank's prime lending rate (8.5% at June 30, 1998) 
through the term of the agreement and is secured by all accounts receivable, 
general intangibles, inventory and equipment. The agreement contains various 
restrictive covenants which include, among others, maintenance of certain 
financial ratios, maintenance of a minimum tangible net worth and limitations 
on annual investments, dividends and capital expenditures. No amounts were 
advanced under this credit facility during fiscal 1998 and 1997.


 (5) SHAREHOLDERS' EQUITY

     Preferred Stock

     The Company's shareholders have authorized 5,000,000 shares of no par 
value preferred stock, to be issuable from time to time in such series and to 
have such rights and preferences as the Company's Board of Directors (the 
"Board") may designate.  As of June 30, 1998 and1997, no shares of preferred 
stock have been issued.

     COMMON STOCK

     The Company's shareholders have authorized 25,000,000 shares of no par 
value common stock, of which 10,740,013 and 9,341,108 shares were issued and 
outstanding as of June 30, 1998 and 1997, respectively.  During the years 
ended June 30, 1998 and 1997, the Company purchased 66,400 and 80,000 shares 
of common stock, respectively, which decreased the Company's equity by 
approximately $507,000 and $242,000, respectively.  These shares were 
purchased so that the stock issued under the Employee Stock Purchase Plan 
would be less dilutive.

     STOCK OPTION PLAN

     On June 25, 1992, the Board approved a Stock Option Plan (the "Plan").  
The Plan provides for the grant of both incentive and nonstatutory stock 
options as defined by the Internal Revenue Code of 1986, stock appreciation 
rights and supplemental bonuses at the discretion of the Board.  Under the 
terms of the Plan, the purchase price of the shares subject to an incentive 
option will be the fair market value of the Company's common stock on the 
date the option is granted.  If the grantee owns more than 10% of the total 
combined voting power of all classes of stock on the date of grant, the 
purchase price shall be at least 110% of the fair market value at the date of 
grant and the exercise term shall be up to five years from the date of grant. 
All other options granted under the Plan are exercisable up to 10 years from 
the date of grant.  Under the Plan, 3,500,000 shares of common stock are 
reserved for options.  Vesting periods for options issued are determined by 
the Board at date of grant and currently vest over three to eight years.  A 
summary of the status of the Plan follows:

                                       F-14
<PAGE>

<TABLE>
<CAPTION>
                                          FY 1998       FY 1997       FY 1996
                                          -------       -------       -------
     <S>                                 <C>           <C>           <C>
     Balance outstanding at beginning
       of fiscal year                    1,470,571     1,385,949       754,817
     Granted during period                 873,400       374,200       788,000
     Forfeited during period               (62,101)      (56,636)     (156,868)
     Exercised during period              (246,719)     (232,942)         -    
                                         ---------     ---------     --------- 
     Outstanding at June 30,             2,035,151     1,470,571     1,385,949 
                                         ---------     ---------     --------- 
                                         ---------     ---------     --------- 
     Exercisable at June 30,               597,775       369,670       447,053 
                                         ---------     ---------     --------- 
                                         ---------     ---------     --------- 
     Weighted average exercise price:                                          
       At beginning of period               $ 2.28        $ 1.91        $ 1.41 
       At end of period                     $ 3.98        $ 2.28        $ 1.91 
       Exercisable at end of period         $ 2.07        $ 1.44        $ 1.29 
       Options granted                      $ 6.30        $ 3.04        $ 2.33 
       Options exercised                    $ 1.81        $ 1.33        $    - 
       Options forfeited                    $ 4.82        $ 2.30        $ 1.61 
       Weighted average fair value of                                   
          options granted during period     $ 3.49        $ 1.64        $ 1.45 
</TABLE>

<TABLE>
<CAPTION>
                                                June 30, 1998
                     ----------------------------------------------------------
                             Options Outstanding            Options Exercisable
                     -----------------------------------    -------------------
                               Weighted                                Weighted
                               Average       Remaining                 Average 
   Range of                    Exercise     Contractual                Exercise
Exercise Prices      Shares     Price       Life (Years)     Shares     Price  
---------------      ------     -----       ------------     ------     -----
<S>                <C>         <C>          <C>              <C>        <C>
 $1.25 - $1.66       242,667    $1.42           2.2          242,667    $1.42
 $1.67 - $2.38       397,505    $1.85           4.4          235,835    $1.82
 $2.39 - $4.25       556,679    $3.14           5.3           77,607    $3.04
 $4.26 - $5.47       250,000    $5.47           4.1           41,666    $5.47
 $5.48 - $8.00       588,300    $6.65           4.6             -       $   -
                   ---------                                 -------
                   2,035,151                                 597,775
                   ---------                                 -------
                   ---------                                 -------
</TABLE>

     NON-QUALIFIED STOCK OPTIONS

     The Company has issued non-qualified stock options outside the Plan to 
purchase up to 728,651 shares of the Company's common stock in exchange for 
employment recruiting services' the acquisition of Novel and to employees.  
The value of options issued to non-employees has been determined using the 
Black-Scholes model and recorded in the accompanying consolidated financial 
statements. All non-qualified stock options were granted with an exercise 
price that was equal to the fair market value of the Company's stock on the 
date of grant.  A summary of the status of the Company's non-qualified stock 
options outside the Plan follows.

                                       F-15
<PAGE>

<TABLE>
<CAPTION>
                                           FY 1998     FY 1997     FY 1996
                                           -------     -------     -------
     <S>                                   <C>         <C>        <C>
     Balance outstanding at beginning
       of fiscal year                      709,351     434,440    434,440 
     Granted during period                    -        294,211         -  
     Forfeited during period               (10,958)     (1,000)        -  
     Exercised during period               (84,140)    (18,300)        -  
                                           -------     -------    ------- 
     Outstanding at June 30,               614,253     709,351    434,440 
                                           -------     -------    ------- 
                                           -------     -------    ------- 
     Exercisable at June 30,               503,039     531,578    434,440 
                                           -------     -------    ------- 
                                           -------     -------    ------- 
     Weighted average exercise price:                                     
       At beginning of period               $ 1.97      $ 1.28     $ 1.28 
       At end of period                     $ 2.05      $ 1.97     $ 1.28 
       Exercisable at end of period         $ 1.85      $ 1.64     $ 1.28 
       Options granted                      $    -      $ 2.97     $    - 
       Options exercised                    $ 1.28      $ 1.44     $    - 
       Options forfeited                    $ 2.97      $ 2.97     $    - 
       Weighted average fair value of       $   -       $ 1.75     $    - 
         options granted during period
</TABLE>

<TABLE>
<CAPTION>
                                                June 30, 1998
                     ----------------------------------------------------------
                             Options Outstanding            Options Exercisable
                     -----------------------------------    -------------------
                               Weighted                                Weighted
                               Average       Remaining                 Average 
   Range of                    Exercise     Contractual                Exercise
Exercise Prices      Shares     Price       Life (Years)     Shares     Price  
---------------      ------     -----       ------------     ------     -----
<S>                <C>         <C>          <C>              <C>        <C>
$1.25 - $  1.44      332,000    $1.27              .5        332,000    $1.27
$1.45 - $  2.97      282,253    $2.97             3.7        171,039    $2.97
                     -------                                 -------
                     614,253                                 503,039
                     -------                                 -------
                     -------                                 -------
</TABLE>

     DIRECTOR, CONSULTANT AND OTHER WARRANTS

     The Board grants warrants to the outside directors for serving on the 
Board. Warrants were issued in February 1993 to purchase 120,000 shares of 
the Company's common stock at $1.63 per share; in November 1993 to purchase 
90,000 shares of the Company's common stock at $1.50 per share; in June 1995 
to purchase 180,000 shares of the Company's common stock at $1.59 per share; 
in November 1996, to purchase 15,000 shares of the Company's common stock at 
$3.03 per share; in November 1997, to purchase 90,000 shares of the Company's 
common stock at $6.41 per share; and in August 1998, to purchase 180,000 
shares of the Company's common stock at $7.00 per share.  During fiscal years 
1998 and 1997, 110,000 and 70,000 director warrants were exercised, 

                                       F-16
<PAGE>

respectively.  In fiscal 1997, 15,000 warrants expired, unvested.  As of June 
30, 1998, 195,000 warrants were vested.  The warrants have a five-year term, 
and have exercise prices equal to the fair market value of the Company's 
stock on the date of grant.

     In connection with a prior borrowing in March 1993, the Company issued 
100,000 warrants to purchase the Company's common stock at an exercise price 
of $1.50 per share. In May 1994, the Company changed the warrant price to 
$1.25 per share.  All of these warrants were exercised during fiscal year 
1997.  The warrants had a five-year term.  

     In March 1993, the Company issued 100,000 warrants with a five-year term 
in connection with a purchase option on the Company's land (see Note 9).  
These warrants were exercisable at $2.00 per share from March 1996 through 
March 1997 and at $2.25 per share thereafter.  These warrants would have 
vested only if the land purchase option was exercised.  The warrants expired 
unexercised in March 1998.

     In November 1993, the Company issued warrants to its attorneys to 
purchase 100,000 shares of the Company's common stock.  These warrants vested 
25% per year beginning November 1993, and were exercisable at the average of 
the bid and ask prices of the Company's common stock as of the vesting date.  
The warrants vested in 1993, 1994, 1995 and 1996, and were exercisable at 
$1.50, $1.25, $1.81 and $3.00 per share, respectively.  All of these warrants 
were exercised during fiscal 1998.

     In May 1997, the Company granted 125,000 warrants to a consulting group 
in exchange for investor relation services.  The exercise prices range from 
$4.00 to $10.00 per share and the warrants have a three-year term from the 
date of grant.  The Company has recognized approximately $107,000 and $5,000 
of expense in fiscal years 1998 and 1997, respectively, related to these 
warrants based on the value of the services received. 

     A summary of all of the above-described warrants is as follows:
<TABLE>
<CAPTION>
                                          FY 1998       FY 1997       FY 1996
                                          -------       -------       -------
     <S>                                 <C>           <C>           <C>
     Balance outstanding at beginning
       of fiscal year                      630,000       675,000       675,000
     Granted during period                  90,000       140,000          -
     Forfeited during period              (100,000)      (15,000)         -
     Exercised during period              (210,000)     (170,000)         -
                                          --------      --------       -------
     Outstanding at June 30,               410,000       630,000       675,000
                                          --------      --------       -------
                                          --------      --------       -------
     Exercisable at June 30,               295,000       430,000       460,000
                                          --------      --------       -------
                                          --------      --------       -------
     Weighted average exercise price:
       At beginning of period                $2.72         $1.64         $1.64
       At end of period                      $4.16         $2.72         $1.64
       Exercisable at end of period          $1.96         $1.84         $1.50
       Warrants granted                      $6.41         $6.04         $  -
       Warrants exercised                    $1.72         $1.40         $  -
       Warrants forfeited                    $2.25         $1.59         $  -
       
       Weighted average fair value of        
         warrants granted during period      $1.82         $ .96         $  -
</TABLE>

                                       F-17

<PAGE>

<TABLE>
<CAPTION>
                                                June 30, 1998
                     ----------------------------------------------------------
                            Warrants Outstanding           Warrants Exercisable
                     -----------------------------------    -------------------
                               Weighted                                Weighted
                               Average       Remaining                 Average 
   Range of                    Exercise     Contractual                Exercise
Exercise Prices      Shares     Price       Life (Years)     Shares     Price  
---------------      ------     -----       ------------     ------     -----
<S>                <C>         <C>          <C>              <C>        <C>
 $1.25 - $ 1.81      180,000    $1.58           1.7          180,000    $1.58
 $1.82 - $ 3.03       15,000    $3.03           3.4           15,000    $3.03
 $3.04 - $ 6.00       75,000    $5.00           1.9           75,000    $5.00
 $6.01 - $10.00      140,000    $7.16           3.9           25,000    $7.00
                     -------                                 -------
                     410,000                                 295,000
                     -------                                 -------
                     -------                                 -------
</TABLE>

     PRIVATE PLACEMENT WARRANTS

     In June 1994, the Company completed the private placement of 1,500,000 
units, each unit consisting of one share of no par value common stock and two 
warrants. During fiscal 1997, 2,070,000 of these warrants were exercised for 
approximately $4,631,000.  The remaining 930,000 warrants were exercised 
during July and August 1997 at a price per share ranging from $1.41 to $2.68, 
resulting in cash proceeds to the Company of approximately $1,121,000 and 
cancellation of 142,505 shares of previously issued common stock that were 
used in lieu of cash to exercise the warrants.

A summary of all of the above-described warrants is as follows:
<TABLE>
<CAPTION>
                                          FY 1998       FY 1997       FY 1996
                                          -------       -------       -------
     <S>                                 <C>           <C>           <C>
     Balance outstanding at beginning
       of fiscal year                     930,000       3,000,000    3,000,000
     Exercised during period             (930,000)     (2,070,000)         -
                                         --------      ----------    ---------
     Outstanding at June 30,                 -            930,000    3,000,000
                                         --------      ----------    ---------
                                         --------      ----------    ---------
     Exercisable at June 30,                 -            930,000    3,000,000
                                         --------      ----------    ---------
                                         --------      ----------    ---------
     Weighted average exercise price:
       At beginning of period              $ 2.07          $ 2.18       $ 2.18
       At end of period                    $  -            $ 2.07       $ 2.18
       Exercisable at end of period        $  -            $ 2.07       $ 2.18
       Warrants exercised                  $ 2.07          $ 2.24       $  -
</TABLE>

                                       F-18
<PAGE>

     EMPLOYEE STOCK PURCHASE PLAN

     In September 1996, the Board of Directors adopted an Employee Stock 
Purchase Plan (the "ESPP"), effective for the plan year beginning January 1, 
1997.  Under the ESPP, the Company is authorized to issue up to 240,000 
shares of common stock over a three-year period, with a maximum of 80,000 
shares per year, to its full time employees, nearly all of whom are eligible 
to participate.  Under terms of the ESPP, employees can have up to 10% of 
their salary withheld to purchase the Company's common stock.  The purchase 
price of the stock is 85% of the lower of its beginning-of-the-year or 
end-of-the-year market price.  In January 1998, the Company issued 75,526 
shares of common stock under the ESPP at $2.50 per share.

     STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123

     SFAS 123 defines a fair-value based method of accounting for employee 
stock options or similar equity instruments.  However, SFAS 123 allows the 
continued measurement of compensation cost for such plans using the intrinsic 
value-based method prescribed by APB 25, provided that pro forma disclosures 
are made of net income or loss and net income or loss per share, assuming the 
fair-value based method of SFAS 123 had been applied.  The Company has 
elected to account for its stock-based compensation plans under APB 25; 
accordingly, for purposes of the pro forma disclosure presented below, the 
Company has computed the fair values of shares issued under the ESPP, all 
options and warrants issued during fiscal years 1998, 1997 and 1996 using the 
Black-Scholes pricing model and the following weighted average assumptions:
<TABLE>
<CAPTION>
                                        1998            1997          1996
                                        ----            ----          ----
     <S>                              <C>             <C>           <C>
     Risk-free interest rate              5.84%           5.70%         6.18%
     Expected lives                   3.8 years       3.5 years     4.2 years
     Expected volatility                  67.4%           69.8%         74.6%
     Expected dividend yield                 0%              0%            0%
</TABLE>

     To estimate expected lives of options for this valuation, it was assumed 
options would be exercised upon becoming fully vested.  Cumulative 
compensation cost recognized in pro forma net income or loss with respect to 
options that are forfeited prior to vesting is adjusted as a reduction of pro 
forma compensation expense in the period of forfeiture.  The Company's common 
stock market volatility was based on the closing market price at the end of 
each month since the merger of CMED and RELA in October 1992.  Fair value 
compensation is highly sensitive to the volatility factor assumed; the 
greater the volatility, the higher the computed fair value of options granted.

     The total fair value of options and warrants granted, that are included 
in the pro forma calculation, was computed to be approximately $2,536,000, 
$628,000 and $1,141,000 for the years ended June 30, 1998, 1997 and 1996, 
respectively. These amounts are amortized ratably over the vesting periods of 
the options. Pro forma stock-based compensation, net of the effect of 
forfeitures and taxes, was approximately $639,000, $216,000 and $62,000 for 
1998, 1997 and 1996, respectively.

     If the Company had accounted for its stock-based compensation plans in 
accordance with SFAS 123, the Company's net income and pro forma diluted 
earnings per common share would have been reported as follows:

                                     F-19
<PAGE>

<TABLE>
<CAPTION>
                                                 Year Ended June 30,
                                                 -------------------
                                          1998           1997          1996
                                          ----           ----          ----
<S>                                    <C>            <C>           <C>
Net Income                                                     
  As reported                          $4,492,147     $2,479,617    $1,596,602
  Pro forma                            $3,852,790     $2,263,185    $1,534,299

Diluted Earnings Per Common Share 
  As reported                                $.37           $.27          $.21
  Pro forma                                  $.33           $.21          $.21
</TABLE>

(6)  INCOME TAXES

     The provision for income taxes includes the following:

<TABLE>
<CAPTION>
                              Year Ended June 30,
                              -------------------
                    1998             1997            1996
                -----------      -----------      ----------
<S>             <C>              <C>              <C>
Current -
  Federal       $ 2,581,784      $ 1,347,733      $  717,733
  State             184,216           96,267          51,267
                -----------      -----------      ----------
                  2,766,000        1,444,000         769,000
Deferred -
  Federal          (901,664)         (55,067)        (79,333) 
  State             (64,336)          (3,933)         (5,667) 
                -----------      -----------      ----------
Total           $ 1,800,000      $ 1,385,000      $  684,000
                -----------      -----------      ----------
                -----------      -----------      ----------
</TABLE>

     The Company's effective income tax rate was different than the statutory 
federal income tax rate as follows:

<TABLE>
<CAPTION>
                                                    Year Ended June 30,
                                                    ------------------- 
                                            1998            1997           1996
                                        -----------     -----------     ----------
<S>                                     <C>             <C>             <C>
Federal income tax provision at
  statutory rates                       $ 2,138,000     $ 1,314,000     $  775,000
State income tax provision, net of
  federal tax effect                        206,000         133,000         75,000
Nondeductible expenses                       46,000          18,000         12,000
SFAS 109 valuation allowance reduction     (590,000)        (80,000)      (178,000) 
                                        -----------     -----------     ----------
  Effective tax                         $ 1,800,000     $ 1,385,000     $  684,000
                                        -----------     -----------     ----------
                                        -----------     -----------     ----------
</TABLE>

     In accordance with certain provisions of the Internal Revenue Code, a 
change in ownership of greater than 50% of a company within a three-year 
period results in an annual limitation on the Company's ability to utilize 
its net operating loss ("NOL") carryforwards from tax periods prior to the 
ownership change.  Such a change in ownership occurred with respect to the 
Company on October 19, 1992.  Accordingly, the NOL carryforwards at October 
19, 1992 were restricted to annual cumulative amounts of approximately 
$105,000 subject to the expiration of these carryforwards, or approximately 
$1,575,000.  As of June 30, 1998, the Company had NOL carryforwards available 
of approximately $1,219,000. The Company's NOLs expire beginning in 1999 
through 2007.  The Company also has research and development and investment 
tax credit carryforwards totaling approximately $140,000 expiring from 1999 
through 2007.

                                      F-20
<PAGE>

     Deferred taxes are determined based on estimated future tax effects of 
differences between the amounts reflected in the financial statements and the 
tax basis of assets and liabilities given the provisions of the enacted tax 
laws.  Deferred tax assets include the tax effect of NOL and tax credit 
carryforwards.  The net deferred tax assets and liabilities as of June 30, 
1998 and 1997 are comprised of the following:

<TABLE>
<CAPTION>
                                                    1998           1997
                                                 ----------    ----------
<S>                                              <C>           <C>
     Current
        Tax effect of NOL carryforwards          $  457,000    $  538,000
        Allowance for doubtful accounts             217,000        57,000
        Accrued vacation                            177,000        99,000
        Deferred service revenue                       -           15,000
        Reserves                                    685,000       522,000
        Tax credits                                 140,000          -      
        Valuation allowance                            -         (436,000)
                                                 ----------    ----------
     Net current deferred tax asset              $1,676,000    $  795,000
                                                 ----------    ----------
                                                 ----------    ----------
     Noncurrent
        Tax credits                              $     -       $  140,000
        Depreciation for book in excess of tax      367,000       296,000
        Valuation allowance                            -         (154,000) 
                                                 ----------    ----------
     Net noncurrent deferred tax asset           $  367,000    $  282,000
                                                 ----------    ----------
                                                 ----------    ----------
</TABLE>

     The Company had established a valuation allowance due to the uncertainty 
that the full amount of credits and NOL carryforwards would be applied 
against future taxable income.  During fiscal 1998, the Company determined 
the valuation allowance was no longer required because the increased taxable 
income from the acquisition of Erbtec could be offset by tax credits and NOL 
carryforwards. During 1998, 1997 and 1996, the Company reduced the valuation 
allowance by $590,000, $80,000 and $178,000 for the utilization of NOLs in 
the respective years and certain deferred tax assets that the Company now 
believes will be fully utilized.

(7)  COMMITMENTS AND CONTINGENCIES

     Leases 
     ------ 

     The Company leases its operating facilities and certain computer and test
equipment pursuant to noncancellable operating lease arrangements.  The Company
incurred rent expense of $846,000, $467,000 and $511,000 for the years ended
June 30, 1998, 1997 and 1996, respectively, under such agreements.

     At June 30, 1998, future minimum lease payments under leases having an 
initial or remaining noncancellable term of one year or more were 
approximately $825,000 in 1999, $792,000 in 2000, $769,000 in 2001, $728,000 
in 2002, and none in 2003 or thereafter.

     EMPLOYMENT AND COMPENSATION AGREEMENTS

     In June 1993, the Company entered into an employment agreement with the
Company's Chairman, Chief Executive Officer and President, which had a
three-year term.  The agreement fixed the employee's compensation.  In
connection with and as a condition of the employment agreement, the employee
executed a noncompetition agreement in which he agreed not to engage in
competitive activities for a period of two years after his 

                                    F-21

<PAGE>

employment with the Company is terminated, whether voluntarily or 
involuntarily.  The Company also agreed to grant an incentive stock option to 
purchase up to 300,000 shares of the Company's common stock at a purchase 
price of $1.25 per share.  The options vested at 100,000 shares per year over 
three years.  Each portion of the vested option is exercisable for five years 
after the date each portion has vested. During fiscal 1998 and 1997, 80,000 
of these options were exercised each year.

     The Company and the employee extended the employment agreement in 
November 1995 and in May 1996 through June 2002.  The Company agreed to grant 
an incentive stock option to purchase up to 300,000 shares of the Company's 
common stock at a purchase price of $1.84 per share and another 260,000 
shares at a purchase price of $3.25 per share, in consideration of the 
extended employment agreement.  The first group of options vests at 100,000 
shares per year over three years.  The remaining 260,000 shares vest in year 
seven, however, earlier vesting can occur if the Company achieves certain 
targeted stock prices by September 2000.  If the Company terminates his 
employment at any time prior to June 2002, no vesting of the options shall 
occur after the date of termination, but the employee will be entitled to 
receive a severance payment amounting to compensation for a period equal to 
the lesser of 24 months or the unexpired term of the agreement.  If the 
employee terminates his employment prior to June 1999, no further vesting of 
the stock options shall occur, and the unexercised portion of the options, 
whether or not vested, shall terminate.  Subject to these restrictions, each 
portion of the vested options shall be exercisable for five years after the 
date such portion has vested.

     Two of the Company's other officers have also entered into employment 
agreements with the Company.  These agreements provide for a severance 
payment equal to one year's salary if the officer's employment is terminated 
as a result of loss of officer status, relocation of the Company or for 
reasons other than cause and two years' salary if the officer's employment is 
terminated as a result of a significant ownership change in the Company.  
These agreements have no fixed term, and may be terminated by either party at 
any time.

     OTHER

     In connection with an equity offering in June 1994, the Company entered
into a standstill agreement with a corporation that owns 3,500,000 shares of the
Company's common stock.  The standstill agreement limits the corporation to not
more than a 40% ownership of the Company.  The standstill agreement expires in
June 1999.

     The Company had sales to this corporation of approximately $67,000, 
$1,473,000 and $381,000 in 1998, 1997 and 1996, respectively.  As of June 30, 
1998 and 1997, the Company had accounts receivable balances of $0 and 
$423,000, respectively, related to these sales.

(8)   401(k) RETIREMENT PLAN

     In fiscal year 1988, the Company established the Colorado MEDtech, Inc.
401(k) Retirement Plan, which is governed by Section 401(k) of the Internal
Revenue Code.  Employees are eligible to enroll in the plan on January 1 and
July 1, any time after they become full time employees of the Company.  The
Company makes discretionary contributions that vest over a three-year period. 
Company contributions were $175,000, $100,000 and $75,000 for the years ended
June 30, 1998, 1997 and 1996, respectively.

(9)  INVESTMENT IN LAND

     In 1987, the Company acquired a parcel of land from a shareholder, officer
and former director of the Company.  The parcel comprises 10.91 acres of
industrial zoned land located within the city boundaries of Louisville,
Colorado.  The Company purchased the parcel for $631,750, the price established
by an independent appraisal.  During 1992, the Company obtained an independent
appraisal for the parcel that indicated a decline in 

                                    F-22
<PAGE>

the valuation of the property.  The property is valued at the appraisal value 
in the accompanying consolidated balance sheets.  In connection with a 
previous borrowing arrangement, the Company granted an option to purchase the 
land at a purchase price of $640,968.  This option expired, unexercised, in 
March 1998.  At June 30, 1998 the Company is holding the land as 
available-for-sale.

(10) MAJOR CUSTOMERS

     Four customers accounted for more than 10% of total sales and service
revenues for the years ended June 30, 1998, 1997 and 1996, as follows:

<TABLE>
<CAPTION>
                                1998     1997     1996
                                ----     ----     ----  
               <S>              <C>      <C>      <C>
               Customer
               -------- 
                  A              23%       0%       0%
                  B              22%      19%       2%
                  C               2%      14%      13%
                  D               0%      12%      27%
</TABLE>

     At June 30, 1998 and 1997, these four customers had accounts receivable due
to the Company as follows:

<TABLE>
<CAPTION>
                                    1998               1997
                                    ----               ----  
                  <S>           <C>                <C>
                  A             $ 1,662,000        $     -       
                  B             $ 1,996,000        $  318,000
                  C             $   122,000        $  996,000
                  D             $      -           $  148,000
</TABLE>

The loss of a significant customer could have a material, detrimental impact on
the Company's operations.

(11) SALE OF PRODUCT LINES

     In June 1995, the Company entered into an agreement to sell the Company's
cardiopulmonary product lines to a competitor (the "Purchaser").  The
transaction closed on August 16, 1995.  The sale transaction included all
inventories, intangible property rights, customer lists and tooling associated
with cardiopulmonary product lines as well as the trade name Cybermedic.  In 
addition, the Purchaser assumed the warranty and service obligations related 
to these products.  The Purchaser placed noncancellable orders with the 
Company for additional manufactured units.  All of the units related to this 
contract were shipped to the Purchaser during fiscal year 1996.

                                    F-23
<PAGE>

(12) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

The Company's quarterly results of operations are summarized as follows (In 
thousands, except earnings per share data):

<TABLE>
<CAPTION>
                                           1st       2nd        3rd       4th
                                         Quarter    Quarter    Quarter   Quarter
                                         -------    -------    -------   -------
<S>                                      <C>        <C>        <C>       <C>
Fiscal Year Ended June 30, 1997

     Net sales and service               $ 5,288    $ 5,777    $ 8,483   $ 8,695
     Gross profit                        $ 1,755    $ 2,043    $ 2,847   $ 3,142
     Net income                          $   453    $   492    $   672   $   863
     Earnings per share (as restated):
       Basic                             $   .07    $   .07    $   .10   $   .11
       Diluted                           $   .05    $   .06    $   .08   $   .09

Fiscal Year Ended June 30, 1998

     Net sales and service               $ 7,260    $12,183    $13,450   $14,407
     Gross profit                        $ 2,639    $ 4,008    $ 4,796   $ 5,500
     Net income                          $   664    $   943    $ 1,329   $ 1,556
     Earnings per share:
       Basic                             $   .07    $   .09    $   .12   $   .14
       Diluted                           $   .06    $   .08    $   .11   $   .12
</TABLE>

                                      F-24
<PAGE>

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

     None.

                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

     The Company's definitive Proxy Statement to be filed pursuant to Schedule
14A under the Securities Exchange Act of 1934 is incorporated herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION.

     The Company's definitive Proxy Statement to be filed pursuant to Schedule
14A under the Securities Exchange Act of 1934 is incorporated herein by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

     The Company's definitive Proxy Statement to be filed pursuant to Schedule
14A under the Securities Exchange Act of 1934 is incorporated herein by
reference.

 ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The Company's definitive Proxy Statement to be filed pursuant to Schedule
14A under the Securities Exchange Act of 1934 is incorporated herein by
reference.

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

(a)  (1) and (2) The following financial statements and financial statement 
         schedules are filed as part of this report:

         Report of Independent Public Accountants
         Consolidated Balance Sheets as of June 30, 1998 and 1997
         Consolidated Statements of Operations for the Years Ended June 30,
           1998, 1997 and 1996
         Consolidated Statements of Shareholders' Equity for the Years Ended
           June 30, 1998, 1997 and 1996
         Consolidated Statements of Cash Flows for the Years Ended June 30,
           1998, 1997 and 1996
         Notes to Consolidated Financial Statements

     All other schedules have been omitted because they were not applicable, not
         required or the required information is shown in the consolidated
         financial statements or notes thereto.

(b)  Reports on Form 8-K.  No reports on Form 8-K were filed for the 
         three-month period ended June 30, 1998. 


                                    -19-

<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.

     Dated: September 24, 1998.              COLORADO MEDTECH, INC.


                                             By: /s/ John V. Atanasoff, II
                                                ------------------------------
                                                John V. Atanasoff, II
                                                Chief Executive Officer

     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.

<TABLE>
<CAPTION>
Signature                     Title                              Date  
---------                     -----                              ----  
<S>                           <C>                                <C>
/s/ John V. Atanasoff, II     Chief Executive Officer,           September 24, 1998
----------------------------  President and Director 
John V. Atanasoff, II         (Principal Executive Officer)    


/s/ Dean A. Leffingwell       Director                           September 24, 1998
----------------------------  
Dean A. Leffingwell


/s/ Ira M. Langenthal         Director                           September 24, 1998
----------------------------  
Ira M. Langenthal


/s/ Robert L. Sullivan        Director                           September 24, 1998
----------------------------  
Robert L. Sullivan


/s/ Clifford W. Mezey         Director                           September 24, 1998
----------------------------  
Clifford W. Mezey


/s/ Michael R. Barr           Director                           September 24, 1998
----------------------------  
Michael R. Barr


/s/ John E. Wolfe             Director                           September 24, 1998
----------------------------  
John E. Wolfe


/s/ Bruce L. Arfmann          Chief Financial Officer            September 24, 1998
----------------------------  (Principal Accounting Officer)
Bruce L. Arfmann  
</TABLE>


                                    -20-
<PAGE>

                                 INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit                                                                          Sequential 
Number    Description                                                              Page No. 
------    -----------                                                              -------- 
<S>       <C>                                                                    <C>
3.1       Articles of Incorporation; Complete Copy, as Amended. (A)
3.2       Bylaws, as Amended. (B)
4.2       Specimen of Common Stock Certificate. (C)
10.22     Promissory Notes payable to Lockett E. Wood and Deeds of 
          Trust with respect to Louisville, Colorado property acquisition. (D)
10.31     Colorado MEDtech, Inc. Stock Option Plan.
10.32     Employment Agreement between Colorado MEDtech, Inc. and 
          John V. Atanasoff, II. (E) 
10.33     Standstill Agreement dated June 30, 1994 between Vencor, Inc. 
          and Colorado MEDtech, Inc. (F)
10.35     Employment Agreement between Colorado MEDtech, Inc. and
          Bruce L. Arfmann (G)
10.37     Employment Agreement between Colorado MEDtech, Inc. and
          Lockett E. Wood (G)
10.38     Extension of Employment Agreement between Colorado MEDtech, Inc. 
          and John V. Atanasoff, II (H)
10.39     Agreement and Plan of Reorganization among Colorado MEDtech, Inc.,
          Novel Biomedical, Inc. and Jonathan Kagan (I)
10.40     Employment Agreement between Novel Biomedical, Inc. and 
          Jonathan Kagan (J)
10.41     Employment Agreement between Colorado MEDtech, Inc. and Lee Erb (K)
10.42     Colorado MEDtech, Inc. 1996 Employee Stock Purchase Plan as 
          Amended on November 21, 1997, Effective as of January 1, 1998 (L)
10.43     Asset Purchase Agreement by and among Colorado MEDtech, Inc., 
          Erbtec Engineering, Inc., and Lee Erb, dated October 1, 1997 (M)
10.44     Loan Agreement, Commercial Security Agreement, and Promissory Note 
          dated October 30, 1997 between Colorado MEDtech, Inc. and Bank One, 
          Colorado, NA
21.1      Subsidiaries of Business Issuer 
23.1      Consent of Independent Public Accountants
27.1      Financial Data Schedule for the year ended June 30, 1998
</TABLE>

(A)       Filed as an exhibit to the Company's Current Report on Form 8-K, dated
          May 14, 1993.
(B)       Filed with Registration Statement (No. 2-83841-D) on Form S-18 on
          May 17, 1983, with amendment filed as exhibit to the Company's Annual
          Report on Form 10-K for the year ended October 31, 1984.
(C)       Filed with Registration Statement (No. 2-83841-D) on Form S-18 on 
          May 17, 1983.
(D)       Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
          the quarter ended April 30, 1987.
(E)       Filed as an exhibit to the Company's Current Report on Form 8-K, dated
          June 21, 1993
(F)       Filed as an exhibit to Schedule 13D Amendment No. 2 dated July 18,
          1994 filed by Vencor, Inc.
(G)       Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
          the year ended June 30, 1994.

<PAGE>

(H)       Filed as an exhibit to the Company's Quarterly Report on Form 10-QSB
          for the quarter ended March 31, 1996.
(I)       Filed as an exhibit to the Company's Current Report on Form 8-K, 
          dated February 28, 1997.
(J)       Filed as an exhibit to the Company's Annual Report on Form 10-KSB for
          the year ended June 30, 1997.
(K)       Filed as an exhibit to the Company's Quarterly Report on Form 10-Q 
          for the quarter ended September 30, 1997.
(L)       Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
          the quarter ended December 31, 1997.
(M)       Filed as an exhibit to the Company's Current Report on Form 8-K, dated
          October 1, 1997.