SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  ANNUAL REPORT
                                       ON
                                   FORM 10-KSB


|X|     Annual report under Section 13 or 15(d) of the  Securities  Exchange Act
        of 1934 for the fiscal year ended December 31, 1997

|_|     Transition  report under Section 13 or 15(d) of the Securities  Exchange
        Act of 1934 for the transition period from ___________ to ___________


                         Commission file number 0-15873

                             LASERGATE SYSTEMS, INC.
                             -----------------------
                 (Name of small business issuer in its charter)
Florida                                                               59-2543206
-------                                                               ----------
State or other jurisdiction of                   (I.R.S. Employer Identification
incorporation or organization

2189 Cleveland Street, Suite 230, Clearwater, Florida                  33765
-----------------------------------------------------                  -----
(Address of principal executive offices)                             (Zip Code)

Issuer's telephone number: (813) 803-1574

Securities registered under Section 12 (b) of the Exchange Act:  None

Securities registered under Section 12 (g) of the Exchange Act:

Common Stock, par value $0.03 per share                Redeemable Warrants
---------------------------------------                -------------------
           (Title of Class)                             (Title of Class)  

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

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the best of the  registrant's  knowledge,  in  definitive  proxy or  information
statement  incorporated  by  reference  in Part III of this  Form  10-KSB or any
amendment to this Form 10-KSB.

The issuer's revenue for its most recent fiscal year was $4,917,536.

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates  computed by reference to the price at which the common equity
was sold,  or the average bid and asked  prices of such common  equity,  as of a
specified date within the past 60 days.

At April 28, 1998,  the aggregate  market value of the Common Stock of Lasergate
Systems, Inc. held by non-affiliates ( 15,184,550 shares) was $1,898,069.

State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.

At April 28, 1998, 15,299,393 shares of Common Stock were outstanding.

Transitional Small Business Disclosure Format (check one): Yes [_]      No [X]


<PAGE>




                                     PART I

Some  of the  statements  contained  in  this  document  are  based  on  current
expectations. These statements are forward looking and actual results may differ
materially based upon certain risk factors. These impacting factors may include,
but  are  not  limited  to,  technological  change,  availability  and  cost  of
financing,  long-term  investment  cycles,  customer  acceptance,  product  ship
schedules,  product  integration,   saturation,   corporate  licenses,  cost  of
revenues,  sales and marketing and support  investments,  intellectual  property
rights, and litigation.

ITEM 1. DESCRIPTION OF BUSINESS

Lasergate  Systems,  Inc. (the  "Company")  is a corporation  that was organized
under the laws of the State of Florida in 1985. The Company is an integrator and
provider of admission control and revenue accounting systems.

GENERAL

The  Company is  engaged in the  development,  assembly,  marketing,  servicing,
installation, and sales of computerized admission control and revenue accounting
systems.  These products include a reserved seating  ticketing  system,  general
admission  ticketing system and an access control solution which are marketed to
ticketing  operations  at a  variety  of  entertainment  venues.  The  Company's
products are generally marketed to the facility based entertainment industry and
are used at many types of facilities,  including  amusement parks,  theme parks,
ski  resorts,  multi-purpose  stadiums  and arenas,  performing  arts  theaters,
museums, casinos,  aquariums, and zoos in the United States, Canada, and certain
countries outside of North America.

The Company has developed an access control system that employs  applications of
various  technologies  to automate and verify  admission to  attractions  and to
provide  revenue  control and  accountability,  while reducing fraud inherent in
situations involving cash transactions when proper controls are not implemented.
These technologies  include proximity or radio frequency  identification  (RFID)
scanning,  laser (bar code)  scanning,  and reading  magnetic  stripe data.  The
system  creates a detailed  record of and  permits  individual  charges for both
overall facility  admission and access to each of its attractions or events. The
access  control  system has been designed to interface with any of the Company's
general admission ticketing systems, thus providing a seamless solution.

In March,  1997,  the  Company  introduced  its newest  version  of the  general
admission  ticketing  product  called  Admits for  Windows(R),  a Windows  NT(R)
ticketing  system.  The  system  provides  computerized   point-of-sale  general
admission  tickets,  including timed admission  tickets and/or wristband tickets
for  amusement  and water parks.  The Company has  discontinued  the sale of its
previous general  admission  products,  Admits Gold and Admits Platinum,  but is
still providing  technical  support for those products to customers with support
agreements.  During 1998, the Company plans to stop offering support  agreements
for Admits Gold and Admits Platinum products.

The Company  markets its Video Imaging Season Pass system,  in conjunction  with
the  Admits  for  Windows(R)  product.  This  system  allows  the venue to issue
on-the-spot  personalized  credentials for season passes,  membership cards, and
employee cards. Producing a personalized credential involves bringing together



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information,  a photo image,  a bar code,  and some fixed text onto a medium for
tamper proof, durable use by a customer, employee, or member.

The Company's  reserved seating ticketing product,  "Select-a-Seat,"  allows the
customer  to  sell  tickets  and  assigns  individual  seats  for  a  particular
performance or for a series of performances.  The Select-a-Seat  system controls
individual  box office ticket sales and  optionally has the capability of taking
telephone and mail order reservations,  group reservations,  remote outlet sales
and season subscription sales.

The  Company  has  installed  general  admission  ticketing  systems in over 200
facilities including:

             The American Skiing Company
             Tatilya Park, Istanbul, Turkey
             Sun Valley,  a ski and golf resort in Sun Valley,  Idaho
             World of Coca  Cola,  Atlanta,  Georgia  and Las  Vegas,
             Nevada  Snowbird,   a  ski  resort  in  Snowbird,   Utah
             Blackpool Pleasure Beach, Ltd., Blackpool, England Regal
             Cinemas  Fun  Centers  Art  Gallery of Ontario  National
             Science  Center  Museum  of  African  American  History,
             Detroit, Michigan

The Company's Select-a-Seat system is used by over 80 facilities including:

             Carnegie Hall, New York, New York
             Contemporary Group (providing tickets for the St. Louis Blues), 
               St. Louis, Missouri
             Datatix (providing tickets for the Utah Jazz), Salt Lake City, Utah
             Kravis Center, West Palm Beach, Florida

Current  installations  vary from  systems  which  provide  for  simple  general
admission  tickets to those  which allow  access by patrons to an  entertainment
facility,  to systems  which  provide  for more  complex  arrangements,  such as
tickets  of  decrementing  value,  (the  point or  monetary  value of the ticket
decreases with each use),  which permit limited access to individual  events and
attractions  within a park.  Individually  bar-coded  tickets are printed by the
Admits for Windows(R) system and authorized for use by the holder upon printing.
Relevant data concerning the remaining value and  restrictions of the ticket are
available  from the  access  control  system  each time the bar code is read and
processed. With bar codes, no information is actually contained in the bar code,
but instead is held by the Admits for  Windows(R)  system in individual  records
identified  by the unique bar code.  The bar code is scanned by a laser  scanner
and, if the bar code is valid,  the access control system  releases a turnstile.
This validation process, in conjunction with proprietary  processing and storage
features,  permits the Admits for  Windows(R)  system to utilize  many  printing
point-of-sale  stations and  turnstiles  at  individual  attractions  to process
simultaneous information at all locations.

NEW PRODUCT STRATEGY

The Company's  product strategy is focused on integrating  leading edge hardware
and software  technologies into a cohesive family of products that provide users
with the  flexibility and control to positively  impact their business  results.
Three  elements  of this  new  strategy  include:  transitioning  from  separate
products to offering



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one product with a modular solution orientation; substituting a standard product
with customized modules for customized  application  solutions;  and moving from
multiple platforms including DOS and UNIX to a Windows(R) platform.

During the fourth quarter of 1996, the Company began selling the next generation
of its ticketing system, Admits for Windows(R).  It is a Windows(R) version that
includes  ticketing,  access control,  concession sales,  reporting and advanced
reservations as well as other features  currently under development  designed to
meet the many needs of  Windows(R)  based  clients.  The  Company  is  currently
integrating  functions of the  Select-a-Seat  product into a Windows(R) NT based
product. This will create a single product platform with the ability to generate
general admission and reserved seat tickets, thereby providing customers with an
integrated solution for multiple ticketing requirements.

ADMITS FOR WINDOWS(R)

Admits for  Windows(R)  is a Windows(R)  based  point-of-sale  (POS) system that
integrates technologies that enhance ticketing and access control operation. The
system can be used to issue  tickets,  wristbands or receipts and provide access
control  both  for  general  admission  or timed  admission  events.  A  minimum
configuration for an Admits for Windows(R) for Windows system presently consists
of the following  basic  components:  a personal  computer,  a printer,  and the
Company's Admits for Windows(R)  ticketing  software.  It may also have optional
peripherals,  including  but not limited to: touch screen  monitor;  specialized
keyboards;  ticket,  wristband or receipt  printer;  credit card  reader;  and a
customer display, as well as third party software for specialized applications.

Admits for  Windows(R)  is designed  to handle the diverse  needs of a ticketing
office  including  cash  control,  ticket  printing,  event set-up and financial
reporting.  It can  also  include  point-of-sale  software  for gift  shops  and
concession  stands,  as well as access control using turnstiles and proximity or
radio  frequency  identification  (RFID)  scanning or laser (bar code) scanning.
Although it is not protected by a registered copyright, Admits for Windows(R) is
deemed  by  the  Company  to be  proprietary  and  the  Company  relies  upon  a
combination  of  contract  and trade  secret  laws to  protect  its  proprietary
interest  in such  software  (See  "Intellectual  Property").  What the  Company
believes to be the proprietary  nature of the Admits for Windows (R) system is a
result of the inter-relationship of these components and the increased number of
functions that this relationship  provides,  as well as the software which links
them, rather than the components  themselves.  Additional software systems could
include, but are not limited to, credit card processing, season pass capability,
access control,  capacity  ticketing,  and additional products provided by third
parties,  such as fund raising.  Admits for Windows(R) can be a stand-alone  POS
device or multiple  POS  stations  networked  together,  selling from one common
inventory  of  available  events.  Using the  Windows(R)  platform,  Admits  for
Windows(R)  delivers a superior  price/performance  ticketing and access control
solution.

The Admits for  Windows(R)  product  architecture  uses a layered  approach that
provides the user with a relatively powerful set of user definable configuration
options in  addition to a high level of  integrity  of  operations.  The Company
deploys this product  architecture to enhance  performance and provide customers
with application and programming  flexibility.  The  configuration  layer of the
architecture provides software development tools for custom  configurations.  By
developing  this  configuration  layer,  the  Company has given the end user the
ability to configure systems more effectively and efficiently with less risk and
expense of software modifications.




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<PAGE>



The Company's  Admits for Windows(R)  computer  software system provides general
admission  ticketing  for  facilities  that desire the  flexibility  of offering
tickets that can be printed for a variety of applications,  with and without bar
codes.  It ranges  from  simple  entry fees to timed  admission  and  tickets of
decrementing value.

Unlike other forms of admission control, which can be subject to tampering,  the
Company's  access control system maintains the records for each ticket holder on
the system  computer and only  recognizes  those tickets  produced by Admits for
Windows(R).  This makes  counterfeiting  nearly  impossible and prevents  ticket
holders from  manipulating the value of their ticket.  While  competitors  offer
systems  which  supply many of the same  features as Admits for  Windows(R)  the
Company believes that the large number of features and flexibility of its system
gives the  Company a  competitive  advantage  in  marketing  its  products  (See
"Competition.").

The Company continues its success with respect to the installation of Admits for
Windows(R) in the snow skiing resort market.  The system  provides for fast lift
ticketing  and season pass  production  in  addition to mobile  scanning at lift
entry areas.  Recent  installations  include the American Skiing Company's seven
resorts, including Sunday River, Maine, Killington,  Vermont, and The Canyons in
Utah.

This combined admission control system utilizes the following basic components:

            TICKET. A bar-coded  ticket is printed at one of several  locations.
            Since  the bar code is ink on paper  and is  printed  by a  standard
            thermal or laser printer, it cannot be demagnetized (unlike magnetic
            tickets)  and will  generally  remain  valid  even if the  ticket is
            folded or  mutilated.  The system can be expanded to provide  season
            passes  with  photographic  identification  cards  as well as  group
            ticketing and  reservation  applications  to print numerous  tickets
            simultaneously for sales through brokers or to groups.

            ATTENDED AND AUTOMATED POINT OF SALE TERMINALS.  Tickets can be sold
            either by an attendant with a point-of-sale terminal, which includes
            a cash  drawer,  a terminal  to select  the  ticket  type and ticket
            printer, or by an automated  point-of-sale  terminal. As a ticket is
            printed,  a  computer  record is made of the bar  code,  the type of
            ticket  sold,  its  cost  and the  type  of  payment.  These  can be
            reconciled later against the funds collected by a ticket  attendant.
            The  terminal  can  also  be  utilized  to  record   patron   survey
            information.

An  automated  point-of-sale  terminal  menu is much like a bank ATM. The patron
answers  questions  about the type of ticket desired on a touch screen,  inserts
cash or credit card and the terminal  prints the ticket.  Both the automated and
attended  point-of-sale  terminal have the capability of directly  communicating
with credit card companies to check the patron's credit and make the appropriate
charge.  Accountability  for cash receipts  occurs by tracking and reporting all
cash and other collections and the subsequent use of the ticket issued.
Each transaction and entry updates the record for each bar code.

SCANNERS.  Scanners can be directly linked to Admits for Windows(R)  software to
read bar-coded tickets produced by the Admits for Windows(R) software.  Scanners
can be hand-held or integrated with access control equipment.

PRICE. The price for the Admits for Windows(R) system varies widely depending on
the complexity of the system desired,  the kinds of additional features added to
the system,  and the number of people expected to use the system,  which affects
the number of entry  points and the  equipment  required.  To date,  most of the
Admits for



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Windows(R)  systems the Company has installed  were sold for prices ranging from
approximately $55,000 to $300,000.

ADMITS FOR WINDOWS (R) FEATURES.  Admits for Windows(R) systems are adaptable to
allow a facility to meet its  ticketing  requirements.  Applications  range from
ticketing for simple general admission to a facility to more complex  ticketing,
such as season  passes,  tickets  which admit the holder to certain or all rides
and/or areas of the park and discount  tickets which may only be used at certain
times of the day or on certain  days.  Admits for  Windows(R)  systems  are menu
driven,  allowing  individuals  without  computer  skills to operate  them.  The
Systems are also  flexible,  allowing  facility  personnel  to modify the charge
(i.e.,  apply a coupon or discount,  give consideration to the age of the ticket
holder,  etc.) to the ticket holder for a given ride or attraction.  A ticket or
card can be printed at one of several  locations and can include the name of the
facility. The type of ticket and any other information specified by the facility
may also be included.  Tickets can be designed in the form of paper  tickets for
single day use, laminated plastic cards with photographs for season pass use, or
wristbands for use by children or in water parks.

Facilities are able to utilize the ability of the Admits for  Windows(R)  system
to generate a wide variety of ticket  types and to easily  change the value of a
ticket-type to enhance  revenues.  For example,  an amusement park can lower the
points needed to enter an attraction during low-usage periods to equalize patron
traffic and generate more revenue during low-use time periods. Similarly, a park
can offer commercial  sponsorship for various  attractions  during specific time
periods,   attracting  advertising  income.  The  system's  flexibility  permits
numerous variations of ticketing strategies to encourage facility attendance and
increase usage.

ACCESS CONTROL

BACKGROUND.  Bar codes,  which  have been  available  for use since the  1970's,
consist of a series of lines or bars printed on paper or plastic. By varying the
width of the bars and spaces between the bars, a bar code provides an item, such
as a ticket,  with a unique identity.  The Company also utilizes magnetic stripe
and proximity chip technologies providing equally unique characteristics.

The  Company's  technology,  through its admission  and access  control  system,
reduces fraud and labor costs while enhancing  accountability and profitability.
Within the United States alone,  the  entertainment  and  recreation  industries
encompass  tens of thousands of facilities  adaptable to the Company's  systems.
Included are family entertainment centers,  fairgrounds,  stadiums, water parks,
amusement parks, arenas, zoos, aquariums, museums, ice skating facilities, movie
theaters and convention centers.

Use of bar codes and standard  scanning  equipment or radio frequency  hand-held
scanners permits the access control system to closely monitor general attendance
at both  amusement/theme  park facilities as well as ski resorts. By determining
the validity of each ticket based on its  identification  number  encoded in its
barcode or proximity  chip,  these scanning  devices  reduce the  possibility of
admission from counterfeit tickets.

FEATURES. The Company's access control system, which is an optional feature with
the Admits for Windows(R) family of products, integrates the scanning technology
of bar codes and proximity chips with laser scanners  placed in turnstiles,  and
hand-held or stationary  proximity readers. The Company believes the proprietary
nature of the access control system is the inter-relationship of the components,
as well as the software that links them, rather than the components  themselves.
To gain entry to a facility or an individual attraction, the bar code or chip on
or in the card or ticket is scanned by a laser  scanner  located at the point of
entry. The ticket holder



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can scan the ticket in any  direction.  After it is processed,  if the ticket is
valid,  the access  control  system  responds  with an audible  signal  and,  if
desired,  opens a  turnstile.  If the ticket  holder  does not pass  through the
turnstile,  the ticket  retains its prior value.  In  facilities  where  tickets
decrease in value as used, display devices may be placed throughout the facility
to simply read the ticket  value so that a holder can  determine  the  remaining
value of a ticket.

Facility  personnel can thus access a summary of cash  receipts,  attendance and
other statistical information about admissions as it is occurring.  The computer
can be  programmed  to generate a summary of the day's  activity,  including the
cash and credit card  transactions,  the number of patrons entering the facility
and individual attractions and other statistical  information.  Such data, along
with summary  weekly,  monthly or annual data,  assists  facilities  in managing
their business and can highlight irregularities in ticket collections.

SELECT-A-SEAT

The  Company's  reserved  seating  software  system  is  called   Select-a-Seat.
Select-a-Seat  is  a  broad  in-house   computerized   box  office   management,
reservation and event marketing system.  For reserved seating as well as general
admission  sales.   Select-a-Seat  has  90  installations   servicing  over  200
facilities,  which are selling in excess of 40 million  tickets  annually in the
United States,  Canada,  Malaysia,  and Singapore.  The software can be used for
distribution and control of admission tickets for theaters,  professional sports
teams,  university  athletic  departments,   multi-purpose  arenas,  racetracks,
casinos,  concert  halls,  performing  arts  organizations,   museums  and  IMAX
theaters.

Select-a-Seat maintains an inventory of available seats in a facility, including
section,  row and  seat  information.  At the time of sale,  the  system  prints
tickets for a customer with the pertinent performance information as well as the
seating  location  .  Select-a-Seat  displays  a series of prompts on a computer
screen,  leading the ticket seller  through the selling  process.  Once a ticket
sale is completed,  all pertinent  performance records are updated and inventory
is simultaneously depleted.  Select-a-Seat controls reserved seating and general
admission  box  office  sales,  telephone  and mail  order  reservations,  group
reservations,  remote outlet sales,  and season  subscription  ticket sales. The
Select-a-Seat season ticketing program provides for rapid,  efficient and simple
entry of season  ticket  purchases or account  data,  seat  assignment,  payment
posting, account verification,  financial auditing, seat status auditing, ticket
printing and client invoicing.

In addition to ticket sales and revenue control, Select-a-Seat stores a database
of ticket  buyers.  Facilities can maintain such  information as name,  address,
purchase  and  payment  history,  and  demographic   information  such  as  age,
performance preference and source of account.

When selling tickets,  Select-a-Seat  displays a series of prompts on a computer
screen, leading the ticket seller through the selling process.  Tickets are held
in the system,  unavailable for other sales,  while a transaction is in process.
Once a ticket sale is completed,  all pertinent  performance records are updated
and  inventory  is  immediately  depleted.  Any  unsold  tickets  held  for that
transaction are made available again.

The  Select-a-Seat  season ticketing  program  provides for fast,  efficient and
simple  entry of season  purchase  or account  data,  seat  assignment,  payment
posting, account verification,  financial auditing, seat status auditing, ticket
printing and client invoicing.




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In  addition  to  being a  comprehensive  ticket  and  revenue  control  system,
Select-a-Seat  is an  important  marketing  tool.  It  stores  parking,  novelty
purchases,  and  tracks  buyer  characteristics  such  as  show  preference  and
advertising  response.  Demographic  and biographic  information  about a ticket
buyer or prospective ticket buyer is stored in Select-a-Seat.

The  Select-a-Seat  system is also purchased by  entrepreneurs  and governmental
agencies  to set up  regional or  citywide  ticket  distribution  networks as an
alternative  to a  national  service  bureau.  The  Select-a-Seat  system  is an
alternative to a national service bureau,  allowing  facilities to control their
own ticket inventory,  maintain  reasonable service charges,  and retain service
charge revenue.  The Company has sold and installed  Select-a-Seat  Systems that
sell tickets  where the event is held, as well as over the telephone and through
remote ticket distribution  points. When organizations  purchase  Select-a-Seat,
tickets sold over the  telephone  and at remote sales  locations can carry a per
ticket service charge,  which the owner of the system retains.  Therefore,  many
organizations  will purchase  Select-a-Seat to be used as a source of generating
additional revenue for the facility as well as controlling  inventory and ticket
sales.

In addition to ticket and revenue control  functions,  Select-a-Seat can be used
to store various  characteristics of each individual patron, such as car parking
preferences,  novelty purchases made, performance preferences and past responses
to  various  forms  of  advertising.   These   characteristics,   combined  with
demographic  and biographic  data, give system owners a powerful tool for direct
mailings.

Select-a-Seat offers features specifically designed to meet the needs of various
market niches such as performing arts venues,  large  stadiums,  citywide ticket
bureaus and professional sports teams.

The price of  Select-a-Seat  varies  depending on the modules  purchased and the
number of concurrent  users  provided for,  ranging from a price of $7,000 for a
single terminal box office to $600,000 for multi-terminal  access and modules to
support   season   tickets,   telephone   orders,   reporting  and  credit  card
authorizations.  To date, most of the Select-a-Seat  systems installed were sold
for prices ranging from approximately $35,000 to $200,000.

DISCONTINUED  PRODUCTS.  During 1997,  the Company did not have any sales of its
legacy  products  (Lasergate  Admits  Gold and Admits  Platinum).  None of these
products were a primary focus of the Company in 1997, and the Company  considers
them to be discontinued.

PRODUCT SERVICING AND ADMINISTRATION

The  Company has  developed  a number of common  procedures  for  producing  and
servicing each of its products, as explained below.

ASSEMBLY AND TESTING. The Company purchases components for its systems,  such as
the computer  equipment and circuit boards,  turnstiles,  metal housings,  laser
scanners and ticket  printers from a variety of carefully  selected  sources and
assembles and integrates critical components with its proprietary software. Many
of the components are enhanced by off-the-shelf  hardware readily available from
numerous sources. However, all subsections and unique operating environments are
fully  integrated and all Company  software is tested to ensure proper operation
and delivery of the highest quality product possible.




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INSTALLATION  AND  TRAINING.  The  Company's  technicians  install  each  of the
Company's  systems,  providing any  customization  required and  overseeing  the
placement of all equipment.  The purchaser is responsible  for  installation  of
cabling to link each component to the central computer.  Low-voltage  cables are
dedicated to the system and are not  expensive  or  difficult  to install.  This
cabling  method allows both new and existing  purchasers  to easily  install the
Company's  systems and allows  existing  installations  to expand their existing
systems as their  business  grows.  The Company also  provides  interfaces  into
various local area networks (LAN's) and fiber-optics systems.

The Company  provides initial  training for the  administrators  and/or facility
personnel of each system at each  installation  and provides a user manual.  The
Company encourages training of personnel at the supervisory level and encourages
these  individuals  to train the end users that  operate  the  Company's  system
within the customer's  environment.  Additional  training is available either at
the installation site or the Company's headquarters at the option and expense of
the purchaser.

WARRANTY MAINTENANCE AND SERVICING. The Company offers a 90-day warranty for its
software products.  After the end of the warranty period, the Company offers its
customers  maintenance and servicing for an annual fee. The Company provides for
telephone  response to calls for assistance  during  certain  business hours and
days, or available  around the clock,  seven days a week for certain  additional
charges. Also provided are standard updates to the system purchased, user guides
and repair or  replacement  (at customer  expense) of hardware  components.  The
Company's  customer support staff is often able to diagnose and correct problems
through computer  link-up from the Company's  headquarters to each site. If more
extensive  modifications  are  required or if a facility  requires  training for
additional  personnel,  Company personnel will make additional site visits for a
fee.

As of December 31, 1997,  the Company has accrued  $554,000 to provide for costs
which may be incurred to fix software errors ("bugs") including  estimated costs
to make  discontinued  products "Year 2000 Compliant."  Management  believes all
current products are "Year 2000 Compliant."

RESEARCH AND DEVELOPMENT

The Company's engineers are engaged in developing  enhancements and applications
for the  Company's  technology.  Such  applications  are  intended to create new
products for the Company's markets and to enhance product  competitiveness.  The
Company's  technical  staff will  concentrate  their efforts on  completing  the
technology  necessary  for  such new  installations,  although  there  can be no
assurance  that the Company  will be able to develop or market such new products
or applications.

MARKETING

The Company's overall marketing strategy is focused on a distribution model that
provides  for direct  distribution.  The  Company's  products  are  segmented to
address  requirements  targeted at specific  entertainment  venues which include
amusement/theme  parks,  ski  resorts,  stadiums  and  arenas,  performing  arts
theaters, museums, aquariums and zoos and regional ticketing networks.

The Company has  traditionally  marketed its  products  and  services  through a
direct  sales  channel.  Marketing  efforts take place  principally  at selected
industry trade shows which are aligned with the above defined vertical  markets,
at regional  seminars which focus on  application  solutions,  through  targeted
direct mail campaigns and



                                        9

<PAGE>



by advertising in trade periodicals.  Qualified leads,  generated as a result of
these marketing  efforts,  and high profile,  target accounts  selected from the
above  vertical  markets,   provide  the  basis  upon  which  the  direct  sales
organization  pursues new opportunities.  Additionally,  some new prospects have
been attracted by the positive  impressions  created through discussions with or
visits to existing customer installations.

The Company  believes that certain of its prior  customers  using one or more of
the  Company's  products  may  currently  have or may  soon  develop  a need for
additional  products offered by the Company.  Therefore,  in addition to seeking
new customers and new markets for its  products,  the Company  intends to market
its full product line to its existing customer base through targeted direct mail
campaigns and telemarketing.

The Company has also recently  aligned  itself with certain  companies that sell
other  products used for  ticketing,  admissions,  and access  control,  and has
successfully  secured sales contracts in the process.  The Company does not have
exclusive  arrangements  with  any  vendors  with  whom  the  Company  has  from
time-to-time  partnered;  however,  as these  arrangements  have  been  mutually
beneficial in the past, the Company intends to further pursue this type of joint
marketing.

The Company views its  installed  base as a very  important  source of new leads
and, in fact, it has led to substantial business in 1997. The Company intends to
continue to explore these  references  and use its installed base as a basis for
getting new business.

The Company markets products that typically require substantial customization in
order to meet the  customers'  particular  requirements.  While the  Company has
reduced the cost of  installing,  customizing  and servicing  (maintaining)  the
customized software, these costs have remained higher than desired. With this in
mind,  in June  1996,  the  Company  initiated  an  internal  assessment  of its
marketing and product  management  strategies to determine whether the Company's
software  could be  modified  in order to  provide  a broader  range of  product
options to its customers without incurring substantial customization costs.

As a  result  of the  assessment,  the  Company  concluded  that  its  principal
application components for ticketing, revenue management and access control will
continue  to  provide  significant  benefits  to our  customers  and  prospects;
however,  rather  than  continue to market  products  that  require  substantial
customization, it will design and offer products in a modular fashion that allow
the user to define how the  software is set up or  configured  for a  particular
site through a table-driven  set of parameters  selected by the user.  They will
consist  of  a  primary  product  with  optional  pre-developed  modules  and  a
configuration  layer to meet specific  customer needs that would require limited
or no customization by the Company.  Additionally,  the  implementation  of this
project will afford the Company an  opportunity  to employ the same  development
tool (a high level, Rapid Application Development language) for each module that
will  provide  a high  degree  of  consistency  and  efficiency  in the  product
development  process.  Although no assurances can be given,  management  expects
that applying the Company's proprietary  technology in this fashion will provide
a more effective  means of delivering  business  solutions to the  entertainment
industry.

This modular  concept was implemented in the Company's new Admits for Windows(R)
product which was  introduced in May,  1997.  For most of 1997,  the  additional
costs of introducing the new product more than offset any cost savings achieved,
but the  Company  has  begun to  achieve  cost  reductions  as a result  of this
development effort and new product  introduction in areas of product development
and customer support. In addition, the product has a new appearance that is more
user  friendly  and allows  the user to modify a  configuration  layer  (without
access to the source code), which can remain in place when updating the product



                                       10

<PAGE>



to a new revision level. As a result, the Company expects its new products to be
more competitive in the market.

CUSTOMERS

The Company has sold its  products to a variety of  customers.  Listed below are
several examples of installations:

SELECT-A-SEAT AT CARNEGIE HALL, NEW YORK, NEW YORK.  Select-a-Seat was installed
in  Carnegie  Hall in 1987.  There  are over 35 users of this  system  that sell
tickets  to  all  concert  performances,   taking  telephone   reservations  and
processing season subscription ticket sales;

ADMITS FOR  WINDOWS(R)  AT AMERICAN  SKIING  COMPANY.  Admits for  Windows(R) is
installed at seven ski resorts operated by American Skiing Company.  These sites
include Killington, Sugarbush, Attitash, and Mount Snow in Vermont; Sunday River
and Sugarloaf in Maine;  and The Canyons in Utah. This  installation  represents
the largest networked computing application to date for the Company. It includes
new radio frequency  identification scanning (proximity scanning) technology and
new  applications  designed and developed to enhance the  customer's  ability to
market and ensure their guests' convenience and satisfaction.  All sites include
multiple  point-of-sale  stations,  video ID stations, and RFID pass scanning at
the lifts.  The  proximity  cards issued to guests act as debit cards,  frequent
visitor cards, and season passes, permitting card holders to proceed directly to
the lifts without waiting in point-of-sale ticketing lines.

ADMITS FOR WINDOWS(R) AT SUN VALLEY SKI RESORT,  SUN VALLEY,  IDAHO.  The Admits
for Windows(R) at Sun Valley Ski Resort includes 27  point-of-sale  stations for
lift  ticket  sales,  six  video ID  stations  for  season  passes,  and 6 radio
frequency  ski lift  scanning  stations for access  control.  It processes  over
400,000 tickets per year.

ADMITS FOR WINDOWS(R) AT ART GALLERY OF ONTARIO, ONTARIO, CANADA. The Admits for
Windows(R)  system at the Art Gallery of Ontario  ("AGO") was  installed  in the
first quarter of 1997. It includes 12 point-of-sale stations for main ticketing,
group sales and back office ticketing  applications.  The system has enabled AGO
to implement an Art Card which provides bar coded access control through 6 entry
points utilizing custom ticket stock imprinted with selected artwork.

Due to the length of time it takes for the Company to  purchase,  customize  and
install certain of its products,  there may  occasionally be a backlog of orders
for  equipment.  As of December 31, 1997 and December  31, 1996,  the  Company's
backlog was $893,000 and $963,000 respectively. The backlog represented sales to
numerous  sites with  purchase  prices  ranging  from  approximately  $90,000 to
$196,000.  Management  believes the backlog was less than the prior year because
of the transition in sales from legacy products to the new product. As is common
within the software industry,  some prospective  customers refused to consider a
system  that  did  not  have  a  lengthy   history  of  performance  at  sizable
installations  within their market  segment.  In 1996,  Bayindir  Insaat  Turizm
Ticaret (a large, indoor amusement park in Istanbul,  Turkey) represented 12% of
the Company's  sales.  In 1997,  American Skiing Company (owner of multiple U.S.
ski resorts) represented 54% of the Company's sales.





                                       11

<PAGE>



COMPETITION

The  Company  faces  significant   competition  from  different  sources.   This
competitive  activity can be analyzed by the following  areas:  product features
and capabilities, price, service/support,  product availability, technology, and
corporate structure.

PRODUCT FEATURES AND CAPABILITIES

ADMITS FOR WINDOWS(R). There are several companies in the United States offering
basic computerized ticketing capabilities which are similar to those the Company
offers through its Admits for Windows(R)  systems.  They include,  among others,
PACER CATS and Gateway  Ticketing  Systems.  While  those  firms have  automated
ticketing  programs  similar  to  that  of  the  Company,   and  have  resources
substantially greater than those of the Company, the Company believes Admits for
Windows(R) competes effectively with these companies on the basis of pricing and
ease of installation, use and maintenance.

SELECT-A-SEAT.  The Company's  Select-a-Seat  reserved  seating system  competes
against  companies such as  Ticketmaster,  Inc.,  Select  Ticketing  Systems and
Prologue  Systems,  Inc. Some of those  companies have  resources  substantially
greater than the Company. The Company believes that it competes effectively both
in pricing and over all functionality of its  Select-a-Seat  system and that the
Company has a  competitive  advantage in that the  Select-a-Seat  software  will
operate with a wide variety of hardware  products that a customer  might already
own.  The  computerized  reserved  seat ticket  industry has  historically  been
dominated by two national ticketing companies: Ticketron, Inc. and Ticketmaster,
Inc.  Ticketron,  Inc.  was  acquired by  Ticketmaster,  Inc.,  leaving only one
national ticketing company, Ticketmaster,  Inc. Ticketmaster,  Inc. leases their
equipment and software to arenas,  stadiums and theaters and establishes  remote
sales  locations and  telephone  reservations  centers to sell  tickets.  Ticket
buyers pay a service charge to  Ticketmaster,  Inc. for their services.  Service
charges can range from $1.50 per ticket to over $7.50 per ticket.  The Company's
Select-a-Seat  system,  as an alternative to the national  ticketing  companies,
allows  facilities to retain  control of their ticket  inventory,  and ticketing
service charges.  When organizations  purchase  Select-a-Seat,  all tickets sold
over the  telephone,  the  Internet,  or at remote sales  locations  can carry a
per-ticket service charge (if the owner chooses to do so) which the owner of the
system retains. Therefore, many organizations purchase Select-a-Seat as a source
of revenue.  For a discussion of  Select-a-Seat,  see the  information  included
under the caption "Select-a-Seat" above.

ACCESS  CONTROL.  The primary  competing  technology  for the  Company's  access
control  system is magnetic  strips,  such as those  located on the back of most
credit  cards and many forms of paper  tickets  as well as various  forms of bar
code  readers.  Competitors  in this arena  include  VGS and  Gateway  Ticketing
Systems.  The Company's primary competitor for its access control system is Data
Service  Company of America,  Inc. which offers access control by allowing users
to swipe their bar-coded ticket through a slot reader.  The Company believes its
access control system competes effectively with Data Service Company of America,
Inc.

PRICING

There is significant  and consistent  competitive  pressure to adjust and modify
pricing,  particularly for hardware components.  The Admits for Windows product,
with its  differentiated  feature  set  continues  to  command a premium  price,
however as the product  matures and as  competitors  develop  their  competitive
offerings,  the price  will need to be  reduced.  The  Select-a-Seat  product is
market  priced,  however due to its life cycle  position,  the  Company  will be
forced to consider  additional  investment of development  resources in an aging
product  versus giving price  reductions  to maintain the Company's  competitive
position.



                                       12

<PAGE>



SERVICE AND SUPPORT

The majority of the Company's  competitors  have  established  customer  service
centers,  help desks,  and technical  support  services.  The ability to provide
highly reliable,  well skilled support staffs generally  extends the competitive
position of each company.  The Company has deployed  these  functions to support
customer needs, and is able to remain competitive in most markets served.

PRODUCT AVAILABILITY

Currently,  the  Company  distributes  its  products  through  its direct  sales
channel,  and although  this remains to be an effective  method,  reserved  seat
customers have recently expressed alternative buying preferences.  The Company's
major  competitors  have  responded  quickly to these  preferences  by deploying
on-line ticketing through the Internet.  Although this method of distribution is
unrefined,  it has captured the  interest of many,  and has created  significant
discussion  in  the  market.  The  Company  has  recognized  the  value  of  the
distribution channel and intends to develop its own offering.

TECHNOLOGY

The  Company's  products  conform  to  industry   standards,   and  the  product
architecture  provides  customers  with  seamless  integration  of  third  party
packages.   This  capability  is  currently   unsurpassed  in  the  industry  to
management's knowledge and provides the Company a competitive advantage.

CORPORATE STRUCTURE AND OTHER

The  Company  is  publicly  held,  and as  such  is  required  to  disclose  all
activities,  financial and otherwise.  At times,  this has been a  disadvantage,
allowing  competitors  to obtain  and  publicize  information  in ways that have
created concern among prospective customers.

The Company  generally  enters  into  non-disclosure  agreements  related to its
proprietary  technologies  and trade  secrets with its  employees and with those
companies and individuals with which it has contractual agreements.

PRODUCTION AND SUPPLIERS

The  Company  produces  each  of  its  systems  by  enhancing,  integrating  and
assembling various components readily available from numerous  suppliers.  A few
components, such as metal housings and circuit boards are specially manufactured
for the Company to its  specifications  and ordered from one or more  suppliers.
The Company's  major suppliers are Digital  Equipment,  Tech Data, Data General,
BOCA Systems,  Inc., Peak Technologies,  Brady Signmark,  Alvarado Manufacturing
Co., Indiana Cash Drawer Corporation,  and Jetstar,  Inc. The other products the
Company offers are primarily software.

The Company  typically  assembles and tests its software at its headquarters and
installs it along with appropriate hardware on-site for its various customers.




                                       13

<PAGE>



PERSONNEL

In order to reduce its  overhead  costs,  the Company  entered into an agreement
effective  December  16,  1996,  with a firm that  provides  all  administrative
services  relating to payroll,  personnel  and  employee  benefits  (an employee
leasing agreement).  Management  continues to hire, dismiss,  set pay rates, and
supervise the employees.

As  of  December  31,  1997,  the  Company  employed  (or  employee  leased)  38
individuals,  including 4 in management, 7 in engineering,  10 in operations, 10
in sales  and  marketing,  4 in  finance  and  accounting  and 3  support  staff
personnel.  The Company  retained  one  individual  as a contract  employee  and
another individual who served as a part-time consultant.

The Company generally enters into non-disclosure and non-competition  agreements
with its employees. None of the Company's employees is represented by a union or
covered by a collective bargaining agreement. The Company believes its relations
with its employees are excellent.

INTELLECTUAL PROPERTY

The Company  holds a copyright  for the software  comprising  the  Select-a-Seat
system. The Company has service marks for the names  Select-a-Seat and Lasergate
Systems, Inc. and also for the Select-a-Seat and LSi logos. The Company believes
that its copyright and service marks provide it with a competitive advantage and
are valuable assets.

The Company regards certain  features of its internal  operations,  software and
documentation  as proprietary.  The Company relies on a combination of contract,
copyright,  service  mark and trade  secret  laws as well as other  measures  to
protect  its  proprietary   information.   The  Company  generally  enters  into
confidentiality  agreements  with each of its employees and customers and, where
appropriate,  with  certain  vendors,  in which each party agrees not to use the
Company's  proprietary  intellectual  property for purposes other than those for
the benefit of the Company.  In addition,  the Company safeguards its technology
through security measures such as passwords and codes. Policing unauthorized use
of the Company's  information  and technology is difficult,  and there can be no
assurance that these  safeguard  measures will be successful or that the Company
will have the financial  resources  necessary to enforce its proprietary rights.
Trade secret laws in the computer  technology  area are rapidly  developing and,
should  the  Company's  proprietary  products  be  appropriated,  it may seek to
enforce its rights.

While the  Company's  competitiveness  may be affected by its ability to protect
its proprietary information, the Company believes that because of the rapid pace
of  technological  change in the computer  software  industry,  trade secret and
copyright protection are less significant competitive factors than the know-how,
ability and experience of the Company's employees, frequent product enhancements
and the timeliness and quality of support  services.  While  competitors  may be
able to  develop  software  products  with  similar  capabilities,  the  Company
believes that a competitor would have to devote substantial resources to develop
products that can compete effectively with the Company's products.  Accordingly,
although the Company  deems its  proprietary  interest in its service  marks and
copyright to be important,  it does not believe that its failure or inability to
protect that interest would have a material adverse effect on its business.  The
competitive  advantage  derived  from  the  technology  involved  in each of the
Company's products is a result of the inter-relationships of the components



                                       14

<PAGE>



and the variety of features that they are able to provide when  integrated,  and
the software that links them, rather than the individual components themselves.

The Company has  applied for  copyrights  in order to protect its new Admits for
Windows(R)  product There can be no assurance  that a copyright will be obtained
or that it will afford  sufficient  protection  for the Company's  products.  In
addition, the Company may not have the resources necessary to enforce its rights
with  respect  to  any  of its  copyrights,  trade  secrets,  service  marks  or
prospective filings since this can sometimes involve protracted legal battles.

As referred to above, the Company has service marks for the names  Select-a-Seat
and Lasergate Systems,  Inc.; Admits for Windows(R) is a product of the Company.
All other brands and products  mentioned in this report are  trademarks of their
respective holder(s).

YEAR 2000 COMPUTER ISSUES

Many currently  installed  computer  systems and software  products are coded to
accept only two-digit  entries in the date code field.  Beginning around January
1999, these date code fields will need to distinguish twenty-first century dates
from  twentieth  century  dates.  As a result,  in less than one year,  computer
systems and/or software used by many companies may need to be upgraded to comply
with  such  "Year  2000"  requirements.  Significant  uncertainty  exists in the
software  industry   concerning  the  potential  effects  associated  with  such
compliance. Although the Company's current products (its new Windows(R) products
and the  current  version  of its  reserved  seat  product,  Select-a-Seat)  are
designed  to be Year 2000  compliant,  some  legacy  products  are not Year 2000
compliant.  Many versions of non-compliant products have been sold and installed
in the past; however, the terms of their licenses may expire or the customer may
decide to replace  their system  before any  modifications  would be  necessary.
Thus, some versions may have no impact upon the Company,  but other versions may
require  modifications or upgrades and the resources  required to complete these
modifications  and upgrades may be  substantial.  Additionally,  there can be no
absolute  assurance that the Company's software products that are designed to be
Year 2000 compliant are actually compliant.  Management is currently  evaluating
the impact of Year 2000 requirements upon the Company,  and developing a plan to
limit  the  Company's  exposure  and cost of  compliance.  Management  currently
estimates the cost of compliance to be  approximately  $100,000 and has provided
for this cost as part of its warranty provision.

ITEM 2. DESCRIPTION OF PROPERTY

The  Company  leased  approximately  11,910  square  feet  of  office  space  in
Clearwater,  Florida,  until November 1997. The monthly rent expense during 1997
was  approximately  $14,000 per month.  The lease did not expire until April 30,
1999, but was terminated early without a cancellation penalty.

In November 1997, the Company leased  approximately 10,160 square feet of office
space in  Clearwater,  Florida.  The lease  expires on November  30,  2002.  The
Company has the right under its written lease agreement to one five-year renewal
of the lease at prevailing  market rates.  The Company also has a right of first
refusal for additional  office space in the same office complex as space becomes
available.  Until November 1998, the rent payable will be  approximately  $8,200
per month.




                                       15

<PAGE>




ITEM 3. LEGAL PROCEEDINGS

On June 15, 1995, the Company's founder and former President and Chief Executive
Officer,  Donald Turner,  commenced an action against the Company in the Circuit
Court for Pinellas County,  Florida,  Civil Division.  Mr. Turner alleges, among
other things,  that he was wrongfully  terminated  from his employment and seeks
damages that in the aggregate could exceed $1,000,000.  The Company believes Mr.
Turner's suit is without merit and intends to continue vigorously  defending the
action.

On or about June 27,  1997, a class  action was  commenced in the United  States
district Court for the Eastern District of New York (CV 97-3775) by Andrew Petit
and Michael A. Lepera,  on behalf of themselves  individually,  and on behalf of
all others similarly situated against inter alia, the Company,  Sterling Foster,
& Co., Inc. ("Sterling Foster"),  the Company's former underwriter,  counsel for
Sterling Foster and certain issuer  defendants for whom Sterling Foster acted as
underwriter.  The Complaint  alleges that in connection  with an offering of the
Company's securities which became effective on October 17, 1994, Sterling Foster
engaged in a campaign to inflate the price of the Company's  stock,  to create a
short  position at the  inflated  price and then cover the short  position  with
shares  from   shareholders  who  had  been  secretly  released  from  "lock-up"
agreements. With respect to the Company, the Complaint alleges that it failed to
disclose  in its  Registration  Statement  that  prior to the date the  offering
became  effective,  Sterling  Foster  had  secretly  agreed to  release  certain
shareholders  from "lock-up"  agreements for the purpose of selling their shares
to Sterling  Foster at reduced prices.  The  Plaintiffs'  claims allege that the
Company violated Sections 11 and 12 (2) of the Securities Act of 1933,  Sections
10(b)  of the  Securities  Exchange  Act of  1934  and  Rule  10b-5  promulgated
thereunder  and Section  349 of the New York  General  Business  Law, as well as
making  negligent  misrepresentations.  In February  1998 the  Company  moved to
dismiss the complaint in its entirety. The Company believes that it has defenses
to these claims and intends to vigorously defend itself in this action.

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

None.















                                       16

<PAGE>

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The  following  tables  set forth the high and low sales  prices  for the Common
Stock on the NASDAQ Stock Market for the periods indicated:


QUARTER ENDED                       HIGH SALES PRICE             LOW SALES PRICE
-------------                       ----------------             ---------------
March 31, 1996                            $2                          $7/8
June 30, 1996                              1                          11/16
September 30, 1996                         1                          17/32
December 31, 1996                        25/32                         7/32
March 31, 1997                            3/4                          9/32
June 30, 1997                            15/32                         7/32
September 30, 1997                        7/16                         7/32
December 31, 1997                         1/2                          1/8

As of April 28, 1998, there were 4,197 holders of record of the Common Stock. No
dividends have ever been declared or paid on the Company's  Common Stock and the
Company does not presently  intend to pay any dividends on its Common Stock. The
closing price of the Common Stock on April 28, 1998, was $1/8 per share.


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

GENERAL

The Company has a net loss for 1997 of  $2,923,069,  and a history of  operating
losses that have  accumulated to  $19,706,387,  at December 31, 1997. In view of
these matters,  recoverability  of a major portion of the recorded asset amounts
shown in the accompanying balance sheet is dependent upon continued operation of
the Company, which in turn is dependent upon the Company's ability to succeed in
its future operations.  The financial  statements do not include any adjustments
relating to the  recoverability  and classification of recorded asset amounts or
amounts and  classification  of liabilities  that might be necessary  should the
Company  be unable to  continue  in  existence.  The  report of our  independent
certified public accountants is qualified as to this going concern  uncertainty.
The following  commentary  addresses the Company's  operations  for 1997 and its
plan to improve future results.

Since June, 1996, the Company has committed substantial resources to the design,
development,   and  marketing  of  its  new  Admits  for   Windows(R)   product.
Concurrently,  the Company has dedicated significant resources to maintenance of
its Legacy products.  While these  development,  marketing and maintenance costs
were being  incurred,  the  Company  began a product  launch  designed  to fully
replace its main product line. The new Admits for Windows(R)  general  admission
ticketing and access control products are rich in features desired by customers,
and the product  platform,  Windows  NT(R),  is the  platform of choice for many
customers.  Management  believes that the Company's product direction is focused
correctly and that the Company will continue to gain market share as the product
matures  over the next year.  However,  the sales force had  limited  success in
1997,  primarily due to the reluctance of customers to license  software that is
critical to their business until it has been installed for an extended period of
time at a facility  similar to their own. This situation began to change in late
1997 as the  Company's  prospective  customers  were able to  obtain  references
regarding the  Company's  product from several  existing  customers who had been
using the product since early in the year, and the Company  succeeded at selling
and installing the new Admits for Windows(R)  product at eighteen  installations
in 1997,  including all four of the targeted  market segments for the product as
follows:
                                                   Unaudited
                                     ---------------------------------
            Market Segment           Installations           Customers
            --------------           -------------           ---------

Ski Resorts                                9                      3
Museums, Aquariums & Zoos                  5                      4
Family Entertainment Centers               3                      1
Theme Parks and Amusement Parts            1                      1
                                          --                     --
            Totals                        18                      9
                                                              

                                       17
<PAGE>


Management  believes that having the Admits for Windows(R)  product installed at
the above sites will  improve  its ability to sell the product and expects  1998
sales  opportunities  to be at  least  the same as  those  experienced  in 1997.
However,  the Company's  financial stability has affected its sales. The company
cannot provide an absolute  guarantee to customers that  development of products
will  continue.  For this  reason,  the Company  continues  to seek and actively
pursue a  possible  relationship  with a  strategic  partner  who could  improve
customers'  perceptions  of the  Company's  financial  stability  as well as the
Company's  actual  financial  position.  Any such  relationship  would  probably
include an equity  investment in the Company.  The Company may also review other
financing opportunities.

It should be noted that the  Company has been  seeking a  strategic  partner for
approximately  one year now, but has been unable to find a suitable partner that
is  willing  to  invest a  significant  amount  of  capital  on  terms  that are
acceptable to the Company. Presently, the Company is operating with minimal cash
and  negative  working  capital.  Current  liabilities  are in excess of current
assets by $1,467,960 at December 31, 1997. These circumstances  require that the
Company  exercise  greater  caution in  conducting  its business and, at certain
times,  take  extraordinary  measures.  In the past, such measures have included
asking certain  vendors to extend payment terms by as much as 120 days,  and, on
occasion, delaying payroll for senior management. Although Management recognizes
the critical  nature of the  Company's  cash position and attempts to manage the
Company's  expenditures  accordingly,   there  is  a  risk  that  under  certain
conditions,  immediate financing could be required.  The costs of obtaining such
financing  are  unknown  and the  likelihood  of  obtaining  such  financing  is
uncertain.   Management  intends  to  continue  to  operate  the  Company  in  a
conservative manner through its efforts to further reduce operating expenses and
product  costs  and  to  focus  on  higher  margin  sales  opportunities.  While
Management believes the Company will be able to operate without interruption, it
intends to continue  discussions with certain potential partners and to seek out
additional  potential  candidates  who can  potentially  enhance  the  Company's
financial position and marketing  abilities.  However, no assurances can be made
that a suitable partner will be found or that sufficient  capital will be raised
if  necessary  to  allow  the  Company  to  continue  its   operations   in  the
conservative, cost-saving manner in which they are currently being conducted.

RESULTS OF OPERATIONS: 1997 COMPARED TO 1996

Revenues

Revenues increased to $4,917,536 in 1997 from $4,204,626 in 1996, representing a
17% increase. Revenues consisted of system sales and installations of $4,470,626
in 1997 and $3,588,383 in 1996, and  maintenance and support of $446,910 in 1997
and  $616,243  in 1996.  The  increase  in system  sales and  installations  was
primarily  attributable to the introduction of the Admits for Windows(R) product
and  significant  new  sales  to  American  Skiing  Company.   The  decrease  in
maintenance and support  revenue was partially due to fewer  customers  renewing
maintenance agreements on legacy products, but largely due to a one-time sale of
support  services to Bayindir  Insaat Tuerizm  Ticaret in 1996 of  approximately
$90,000.

In 1996, the Company's principal products,  Select-a-Seat,  Admits Platinum, and
Admits Gold,  represented  approximately 33%, 35%, and 16% of revenues. In 1997,
the Company discontinued sales of Admits Platinum and Admits Gold and introduced
Admits for Windows(R). Admits for Windows(R) represented 89% of revenues




                                       18
<PAGE>



in 1997, and Select-a-Seat  represented 11%. Maintenance and support represented
9% of revenues in 1997 and 14% in 1996

In 1997, one customer,  American Skiing Company,  the owner of multiple U.S. ski
resorts,  represented  54% of revenues.  In 1996, one customer,  Bayindir Insaat
Turizm Ticaret, a large, indoor amusement park in Istanbul,  Turkey, represented
12% of  revenues.  In 1998,  the  Company  expects to  continue  the  beneficial
relationship with American Skiing Company who will represent a significant share
of 1998 revenue.  Sales to other  customers are expected to increase  which will
reduce the sales percentage attributable to American Skiing Company in 1998.

Cost of Revenues
----------------

Cost of  revenues  in 1997 and  1996  included  the  costs  associated  with the
hardware  and  software  acquired for the  Company's  customers,  the full costs
associated with the engineering and installation of the systems,  the full costs
associated  with the  provision of customer  support,  and the  amortization  of
capitalized software.

Cost of revenues increased to $3,809,442 from $3,104,792.  This 23% increase was
the result of costs related to a 17% increase in sales and reduced gross margins
on sales to American Skiing Company,  partially offset by increased efficiencies
in  installing  products.  Warranty  provisions  for 1997  totaled  $146,654 and
warranty  work charged  against the  allowance in 1997  totaled  $163,076.  As a
percentage  of revenues,  cost of revenues in 1997  represented  77% of revenues
compared to 74% of revenues in 1996. This decline is a result of reduced margins
on significant sales to American Skiing Company.

Although  the  sales  mix for  hardware  versus  software  has  been  relatively
consistent  during  1997 and 1996,  it should be noted that the ratio of cost of
revenues-to-revenues  is also a function of whether  the sales or  services  are
hardware or software intensive.  Hardware sales result in lower gross margins as
hardware is not developed by the Company,  but acquired for  customers,  as is a
small portion of software.  Sales of the Company's  software and related systems
development activities provide the Company greater gross margins.

Development Costs
-----------------

Development costs decreased  slightly to $445,365 in 1997 from $460,709 in 1996,
a decrease of $15,344,  or 3%. As a percentage  of revenues,  development  costs
decreased from 11% in 1996 to 9% in 1997. This was due primarily to the increase
in revenue and capitalization of development  costs.  Development costs for 1997
do not include $318,650 of capitalized costs or $123,578 of costs charged to the
warranty  allowance.  Development  costs  for  1996 do not  include  $25,000  of
capitalized costs or $91,000 of costs charged to warranty  allowance.  By adding
these  amounts  back  to  development   costs,  gross  spending  on  development
activities can be calculated.  Gross spending increased from $576,709 in 1996 to
$887,593 in 1997.  This  represents a 54%  increase,  which was primarily due to
increased  staffing  and  consulting  costs . The  Company  expects to  continue
development  efforts  in 1998 at  about  the same  level  as in  1997,  with the
majority of the development effort focused on its new modular products.



                                       19
<PAGE>



Selling, General and Administrative
-----------------------------------

Selling,  general and administrative  expenses decreased from $4,547,990 in 1996
to $3,396,415 in 1997, representing a 25% decrease. As a percentage of revenues,
these  expenses were 69% in 1997 and 108% in 1996,  which  reflects  substantial
cost reductions in 1997.

The principal components of the decrease in selling, general and administrative,
in 1997 as compared to 1996 are described below:

General  and  administrative  expenses  decreased  from  $3,274,239  in  1996 to
$2,186,182 in 1997, representing a 33% decrease. The principal components of the
decrease  are  decreases in executive  compensation  of $436,347,  legal fees of
$227,090,  bad debt  expense of  $161,511,  shareholder  relation's  expenses of
$109,487, and printing costs of $45,974.

Sales and marketing  expenses decreased to $1,210,233 in 1997 from $1,273,751 in
1996,  representing a 5% decrease.  This decrease was primarily  attributable to
reduced sales commissions.

Write Down of Capitalized Software Costs
----------------------------------------

In 1996, the Company  decided to offer its products in a modular fashion and the
Company commenced the development of the new modular product.  Accordingly,  the
Company wrote down the value of capitalized  software  $1,075,000  under the net
realizable value determination provisions of SFAS No. 86 Computer Software to be
Sold, Leased, or Otherwise Marketed. (See Note 2 to the financial statements).

Write Down of Customer Lists and Support Contracts
--------------------------------------------------

As a result of the Company's review for potential  impairment of intangibles and
review of costs  associated with customers  acquired through the acquisitions of
Delta  Information  Services and GIS  Information  Systems,  Inc., the remaining
value of customer lists and support contracts ($230,208) was written off.

Other Income (Expense)
----------------------

Net interest income was $40,825 in 1997 compared to $53,557 in 1996.

Net other  income/(expense)  represented  $67,674 of  expense in 1996  primarily
associated  with the results of  operations  of the  Company's  joint venture in
Australia with P.M.S.I.  Group Pty.  Limited.  The company's  share of the joint
venture's net  earnings/(loss)  from  operations was a $77,790 loss in 1996. The
joint venture  discontinued  operations in 1997 and the results of operations in
1997 were provided for in 1996.

Income Taxes
------------

The Company  currently  has a substantial  net operating  loss carry forward for
which the  Company  has not  recognized  a tax  benefit  due to the  uncertainty
related to when and how much of the tax  benefits  will be  ultimately  realized
(See Note 9 to the financial statements).



                                       20
<PAGE>



Net Loss
--------

Net loss decreased to $2,923,069 in 1997 from  $4,997,962 in 1996. The Company's
operations  were affected by various factors as discussed above with the largest
components being  a  reduction  of  general  and   administrative   expenses  of
$1,088,057 and a reduction in the writedown of intangibles of $844,792.

Net Loss Per Share
------------------

In March 1997,  the  Securities  and Exchange  Commission  (SEC)  announced  its
position on accounting  for the issuance of convertible  preferred  stock with a
non-detachable  conversion  feature that is deemed "in the money" at the date of
issue (a "beneficial  conversion  feature").  The Company's  preferred stock has
such features.  As a result,  the Company has recognized the intrinsic  value of
beneficial  conversion  features of  preferred  stock as  dividends to preferred
shareholders.  The  accounting  described  herein  for the  intrinsic  value  of
beneficial  conversion  features  does  not  affect  the  financial  statements,
including the reported net loss and,  stockholders'  equity (including  retained
earnings),  with the  exception  that the reported net loss per common share has
been  increased  by the amount of the  preferred  dividends.  After  recognizing
dividends of $475,570 for 1997 and $2,836,353 for 1996,  the net loss per common
share is $(.46) for 1997 and $(1.29) for 1996.

New Accounting Pronouncements Adopted
-------------------------------------

SFAS No. 128, Calculation of Earnings per Share, was implemented for 1997. There
was no effect on the Company's financial statements.

New Accounting Pronouncements to be Adopted
-------------------------------------------

SOP 97-2,  Software  Revenue  Recognition,  will be adopted in 1998. The Company
does not expect that the adoption of SOP 97-2 will have a material effect on its
financial statements.

SFAS No. 130, Reporting  Comprehensive  Income,  will be adopted in 1998 and the
Company expects no material impact to the financial statement presentation.

SFAS  No.  131,   Disclosures  about  segments  of  an  Enterprise  and  Related
Information,  will be adopted in 1998,  which has a possible  impact only to the
Company's disclosure information and not its results of operations.

Financial Condition: 1997 Compared to 1996
------------------------------------------

Total assets  decreased  from  $6,436,945 on December 31, 1996, to $4,267,988 on
December 31, 1997, representing a decrease of $2,168,957,  or 34%. This includes
a decrease in cash of $1,534,063.

Total liabilities  decreased to $2,627,004 on December 31, 1997, from $3,320,392
on December 31, 1996, representing a decrease of $693,388, or 21%. The principal
contributing  factors to the decrease are the  reduction in deferred  revenue of
$553,045  and accrued  expenses of $216,468  partially  offset by an increase in
accounts  payable of $237,600.  In addition,  the Company's  obligation to issue
$140,000 of common stock was eliminated with the settlement of the  Potter/Betty
litigation.  (See Note 10 to the Financial Statements)

Liquidity and Capital Resources
-------------------------------

The following table represents a summary of the Company's cash flow for 1997 and
1996:






                                       21
<PAGE>




                                                  1997                 1996
                                                  ----                 ----
Net cash used in operating activities         $(2,520,099)         $(2,282,971)
Net cash used in investing activities            (456,411)            (228,663)
Net cash provided by financing activities       1,442,447            3,779,953
Net increase (decrease) in cash and cash
 equivalents                                  $(1,534,063)         $ 1,268,319


The Company used cash of $2,520,099 in 1997 and $2,282,971 in 1996 for operating
activities.  From its inception in October 1985 through  December 31, 1997,  the
Company has incurred cumulative losses of $19,706,387, with a loss of $2,923,069
for the year ended  December 31, 1997.  The  company's  net loss in 1997 was due
primarily to expenditures  related to the factors  referred to under the caption
"Results of Operations:  1997 Compared to 1996" above.  Included in the net loss
for  1997  were  non-cash  expenses  totaling  $677,395,  which  included  (i) a
write-down  of  customer  lists of $230,208  and (ii)  depreciation/amortization
expenses of $436,621.  Cash generated  from changes in assets  totaled  $413,910
with  accounts  and notes  receivable  decreasing  by  $293,904,  investment  in
inventories  decreasing  by  $22,709,  and  prepaid  expenses  and other  assets
decreasing by $97,297.  These uses of cash were offset by a decrease in accounts
payable and accrued  expenses of $118,868,  a decrease in accrued warranty costs
of $16,422, and a decrease in deferred revenue of $553,045.

The Company used cash in investing activities in the amount of $456,411 in 1997,
which was used for additions to property,  equipment,  and software  costs,  and
used  cash  in  investment  activities  in  the  amount  of  $228,663  in  1996,
principally used for additions to property, equipment, and software costs.

The Company was provided cash by financing  activities of $1,442,447 in 1997 and
$3,779,953 in 1996.  The Company  relied on net proceeds from public and private
offerings  and loans and advances  from related  parties to fund its  operations
during 1997 and 1996.  A private  offering in 1997 and two private  offerings in
1996 provided $7,447,500 and $6,623,082, respectively.

On March 11, 1996, the Company and GIS Systems Limited  Partnership  executed an
agreement  whereby  the  parties  agreed,  among  other  things,  to settle  the
remaining  obligation  to GIS  totaling  $2,324,335,  cancel the  $559,000  note
receivable from GIS, cancel the $199,359 account receivable from GIS, and redeem
the  109,333  shares of Common  Stock and  111,800  shares of Series B Preferred
Stock previously issued to GIS. In connection  therewith,  the Company agreed to
pay to GIS the sum of $1,550,000.

The cash  payment  of  $1,550,000  made to GIS on April  12,  1996,  the date of
closing,  was  principally  provided  from the net  proceeds  of the April  1996
Private Placement described below.

On March 27, 1996,  the Company  commenced a Private  Placement of the Company's
newly established Series E Preferred Stock at $10.00 per share and completed the
private placement as of April 22, 1996. The Company received $1,450,582,  net of
commissions and offering  expenses,  for the sale of 162,500 shares of preferred
stock.  As of June 28, 1996,  150,000 shares of the Series E Preferred Stock had
been converted into 2,453,686 shares of the Company's Common Stock.

On June 10, 1996, the Company  commenced a Private Placement of 8,000 shares, at
$750 a share, of the Company's newly established Series F Convertible  Preferred
Stock. On June 27, 1996, the Private Placement closed with the Company receiving
$5,172,500, net of commissions and offering expenses, for the sale of 8,000 such
shares. Also, on June 27, 1996, the Company used $300,000 of the proceeds of the
Series F  Preferred  Stock  Private  Placement  to pay off the notes  payable to
related  parties  and on June 28,  1996,  the  Company  used  $1,000,000  of the
proceeds to redeem 95,950 shares of Series A Convertible Preferred Stock held by
the



                                       22
<PAGE>



same party.  These preferred  shares were  convertible  into 1,879,837 shares of
Common Stock and  potentially  convertible  into as many as 2,590,650  shares of
Common  Stock  had  they not  been  redeemed  (plus  additional  shares  for any
dividends that would have accrued).

Each share of Series F Preferred Stock was convertible into the Company's Common
Stock, at a conversion  price that is tied to the trading price of the Company's
Common Stock at the time of conversion;  provided, however, that for purposes of
such conversion, a trading price that is less than $.45 per share, was deemed to
be $.45 and a trading  price that was more than $1.00 per share was deemed to be
$1.00.  On January  27,  1997,  55 Series F  convertible  preferred  shares were
converted  into 100,000  shares of common stock at a conversion  price of $.55 a
share.  The  conversion  price was  calculated  as of September  30,  1996,  the
conversion requests date.

On November 4, 1997,  the Company sold 7,500 shares of Series G Preferred  Stock
("Series G") to RBB Bank, AG as nominee for its clients (who are the  beneficial
owners  of such  shares)  for  $7,500,000  pursuant  to an  exemption  from  the
registration  requirements of the Securities Act, as amended, under Regulation S
promulgated  thereunder.   RBB  Bank,  AG  has  no  voting  power,  directly  or
indirectly,  nor investment power, with respect to such shares.  Pursuant to the
transaction,  the  Company  redeemed  7,945  shares  of the  Company's  Series F
Preferred  Stock owned by some of the Series G investors for $6 million  leaving
the Company with  $1,447,500 of net proceeds  after giving effect to expenses of
the offering. No sales commissions were paid.

Upon payment of the $300,000  note and  redemption  of the Series A  Convertible
Preferred  Stock,  each of which was held by the same private  investors,  three
members of the  Company's  board of  directors  (Stewart  L. Krug,  Lawrence  W.
Umstadter,  and Timothy E. Mahoney) who were nominated by such private investors
and served at their  request,  resigned from the board.  The company  filled the
vacancies created by such resignations by appointing three new directors. (Bruce
D. Barrington,  John J. Chluski,  and Philip P. Signore.  Mr. Barrington and Mr.
Signore  resigned as  Directors  of the Company on February  24, 1998 and May 1,
1998, respectively.)

While  no  assurances  can  be  given,  management  believes  that  the  current
organization infrastructure and the Company's products are sufficient to support
revenues  greater  than the  levels  achieved  in 1997,  and  that  income  from
operations should continue to progress throughout 1998, such that the results of
operations in 1998 should be closer to a break-even than the net loss in 1997.




                                       23
<PAGE>



ITEM 7. FINANCIAL STATEMENTS

      Following  this page are the Company's  financial  statements for the year
ended December 31, 1997, which include the following items:

                                                                            Page

      Report of Independent Certified Public Accountants                    F-1

      Consolidated Balance Sheets as of
            December 31, 1997 and December 31, 1996                         F-2

      Consolidated Statements of Operations for the years ended
            December 31, 1997 and December 31, 1996                         F-3

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

      Consolidated Statements of Cash Flows for the years
            ended December 31, 1997 and December 31, 1996                   F-5

      Notes to Consolidated Financial Statements                            F-7

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

      None.




                                       24
<PAGE>




                                    PART III

ITEM 9.     DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

       THE DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY ARE AS FOLLOWS:


                              YEAR FIRST BECAME             PRESENT POSITION
    NAME                AGE       DIRECTOR       CLASS      WITH THE COMPANY
    ----                ---       --------       -----      ----------------

Bruce D. Barrington      55         1996           II                --
John J. Chluski          74         1996           II            Director
Eric T. Jager            54         1997           I             Director
Jacqueline E. Soechtig   47         1994          III       President, Chief
                                                            Executive Officer
                                                             and Chairman of
                                                                 the Board
Frank W. Swacker         75         1995          III        Vice Chairman of
                                                                the Board

The Company's  Articles of  Incorporation  and By-Laws  provide for a classified
Board of Directors.  The Board is divided into three classes designated Class I,
Class II and Class III.  The term of each Class III Director is to expire at the
1998 Annual Meeting of Shareholders and the term of each Class II Director is to
expire at the 1999 Annual Meeting. Mr. Jager was appointed mid-term as a Class I
Director to fill a vacancy.  Mr.  Jager will be up for  re-election  at the 1998
Annual  Meeting of  Shareholders  and such term will  expire at the 2000  Annual
Meeting of Shareholders. Directors hold office until their respective successors
are elected and duly qualified, or until death, resignation or removal. Officers
hold office  until the meeting of the Board of Directors  following  each Annual
Meeting  of  Shareholders  and  until  their  successors  have been  chosen  and
qualified.  Mr.  Barrington and Mr. Signore resigned as Directors of the Company
on February 24, 1998 and May 1, 1998, respectively.

JOHN J. CHLUSKI has been a member of the Board of Directors of the Company since
November 1, 1996, and is presently  Chairman of the Audit Committee.  Since 1988
Mr. Chluski has been an international  business  consultant and advisor.  He has
served as an active Board Member of several ITT  subsidiaries and is presently a
Director of ITT  Composants  (France).  Mr. Chluski is also a Director of Howmet
S.A. (France), and serves as Advisor to the Chairman of Marceau Investissements,
a Paris-based investment fund, and Advisor to Monitor Company, a global strategy
consulting  firm  based in  Cambridge,  Massachusetts.  From  1972 to 1988,  Mr.
Chluski  held  several  executive   management  positions  at  ITT  Corporation,
including Group Executive-Engineered  Products-Europe, and Senior Vice President
and Executive Representative of the Chairman.

ERIC T. JAGER has been a member of the Board of Directors  of the Company  since
May 28, 1997, and is presently Chairman of the Nominating  Committee.  Mr. Jager
is the Executive Vice President - Investments of Bartlett & Company ("Bartlett")
and  President  of  Windcrest  Investment  Management,  a division  of  Bartlett
involved in  diversified  portfolio  management.  Mr.  Jager has served in these
positions  since 1983 and prior  thereto he served as a Senior  Vice  President,
Investment  Analyst and  Director  of  Investment  Research at Eppler,  Guerin &
Turner, an investment banking firm in Dallas,  Texas. Mr. Jager is a Director of
Nygaard  Corporation,  Bartlett  Futures,  Scout Mutual  Funds,  Johnson  County
Business  Tech  Center  and  Tech-Industry  Consultants.  Mr.  Jager is also the
Chairman of the Board of Shawnee Mission Education Foundation and a Director and
Co-Chairman of Kansas Inc.

JACQUELINE  E.  SOECHTIG  has been a Director of the  Company and the  Company's
President  and Chief  Executive  Officer  since  October 31,  1994.  She is also
Chairman of the Board of Directors. From September




                                       25
<PAGE>



1994 until immediately prior to her employment by the Company,  Ms. Soechtig was
a consultant to the Company.  During the  ten-month  period prior  thereto,  Ms.
Soechtig  purchased and operated a restaurant in  Clearwater,  Florida  together
with her spouse.  From February 1992 through December 1993, Ms. Soechtig was the
President and Chief Executive  Officer of Precision  Systems,  Inc.  ("PSI"),  a
company  engaged  in the  production  and  sales  of voice  and call  processing
systems. Prior to her employment with PSI, Ms. Soechtig served as Vice President
of Business  Development for Sprint Corp. (May 1990 through  February 1992). She
also held the position of Vice President of MCI  Telecommunications  Corporation
where she served in various sales,  marketing and technical  capacities from May
1984 through May 1990. Both Sprint and MCI are engaged in the telecommunications
industry.  Additionally,  from  1970 to  1983,  Ms.  Soechtig  was  employed  by
International Business Machines Corp. in various technical and sales positions.

FRANK W.  SWACKER  has been a member of the Board of  Directors  of the  Company
since May 3, 1995,  and is presently  Vice Chairman of the Board and Chairman of
the Compensation Committee.  Mr. Swacker has been engaged in the practice of law
for the  past 46  years,  more  than  the  last  five  of such  years  as a sole
practitioner under the name of Swacker & Associates, P.C. Between 1968 and 1978,
he was the International  Counsel for  Allis-Chalmers  Corporation in Milwaukee,
Wisconsin.  Mr. Swacker has published articles focusing on international foreign
trade and the financial,  antitrust and cross-cultural  aspects of transnational
business  and is the lead  author of the 1996 two volume  work  entitled  "World
Trade  Without   Barriers,"  a   comprehensive   treatise  on  the  World  Trade
Organization  and dispute  resolution.  Additionally,  he has advised the United
States House of Representatives  on international  trade treaties and has served
as Special  Assistant  Deputy Attorney  General for the State of New York. Since
1960,  Mr. Swacker has been a member of the National Panel of Arbitrators of the
American Arbitration Association.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the  Securities  Exchange Act of 1934 (the "Act"),  as amended,
requires the Company's Executive Officers and Directors, and any persons who own
more  than  10% of any  class  of the  Company's  equity  securities  which  are
registered  under the Act to file certain reports relating to their ownership of
such  securities  and changes in such ownership with the Securities and Exchange
Commission  and NASDAQ,  and to furnish the Company with copies of such reports.
To the  Company's  knowledge,  based  solely on a review  of the  copies of such
reports  furnished  to  the  Company,  all  Section  16(a)  filing  requirements
applicable to such  Officers,  Directors and owners of over 10% of the Company's
equity  securities  registered under the Act, during the year ended December 31,
1997,  have been  complied  with  except as  follows:  Eric T.  Jager (a current
Director  of the  Company)  and James H.  Moore,  Jr. (a current  Officer of the
Company)  were each  inadvertently  late in filing one  report of  transactions.
Frank W. Swacker (a current Director of the Company) was  inadvertently  late in
filing two reports of transactions.

MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD

The Board of Directors has an Audit Committee and a Compensation Committee.  The
Audit  Committee  recommends  to the  Board  of  Directors  the  appointment  of
independent auditors to audit the Company's  consolidated  financial statements,
reviews the Company's internal control procedures and advises the Company on tax
and other matters connected with the growth of the Company.  The Audit Committee
also reviews with  management  the annual audit and other work  performed by the
independent auditors.  The Compensation Committee administers the Company's 1994
Plan Stock Option Plan and  recommends  to the Board of Directors the nature and
amount of compensation to be paid to the Company's Executive Officers.




                                       26
<PAGE>


During the fiscal year ended  December 31,  1997,  the Board of Directors of the
Company held fifteen  meetings,  the Audit  Committee  held two meetings and the
Compensation  Committee held one meeting. Each Director attended at least 75% of
the aggregate  number of meetings of the Board of Directors and the  Committees,
which were held during the period the Director  served as a Director  during the
fiscal year ended December 31, 1997, except Mr. Barrington did not attend either
of the Audit Committee Meetings. For the year ended December 31, 1997, The Audit
Committee and the Compensation  Committee both consisted of Mr. Barrington,  Mr.
Chluski, Mr. Jager and Mr. Swacker.

REMUNERATION OF NON-EMPLOYEE DIRECTORS

Upon the initial  election and upon each  re-election of an outside  Director to
serve a term as a Director of the Company,  such Director is entitled  under the
Company's  1994 Plan,  to be granted a  non-qualified  stock  option to purchase
5,000  shares of Common  Stock for each year of such  term,  with  5,000 of such
options to vest at the  beginning  of each year of such term  provided  that the
Director  continues  to serve  in such  capacity  at the  time of the  scheduled
vesting.  The  exercise  price of such  options is set at 85% of market value at
time of grant.  During the fiscal year ended  December 31, 1997, Mr. Chluski and
Mr. Jager were each granted options to purchase 5,000 shares under the Company's
1994 Stock Option Plan at an exercise  price of  approximately  $.24 (85% of the
market value at time of grant). As a further inducement to his agreeing to serve
on the Board,  Mr.  Jager was granted an  additional  option to purchase  37,500
shares  outside  of  the  1994  Stock  Option  Plan  at  an  exercise  price  of
approximately  $.28  (100% of the market  value at time of  grant).  In order to
compensate Mr. Swacker at the same rate as all other non-employee Directors, Mr.
Swacker  was  granted an option to purchase  37,500  shares  outside of the 1994
Stock Option Plan at an exercise price of approximately $.28 (100% of the market
value at time of grant).







                                       27
<PAGE>



ITEM 10.  EXECUTIVE COMPENSATION

The  following   table  sets  forth  certain  summary   information   concerning
compensation  with  respect to each  person who  served as the  Company's  Chief
Executive Officer during the fiscal year ended December 31, 1997 and each of the
Company's  Executive  Officers whose total cash  compensation for the year ended
December 31, 1997 exceeded $100,000:

<TABLE>
<CAPTION>
                           SUMMARY COMPENSATION TABLE

                                   ANNUAL COMPENSATION       LONG-TERM COMPENSATION
                               --------------------------   -------------------------
                                                              Awards        Payouts
      Name                                                    ------        -------
      and                                                   Securities
    Principal                                               Underlying    All Other
    Position                   Year    Salary $   Bonus $   Options(#)   Compensation
    --------                   ----    --------   -------   ----------   ------------
<S>                            <C>    <C>         <C>          <C>           <C>
Jacqueline E. Soechtig(1)(4)   1997    222,500       --         --            --
    President and              1996    220,000    100,000       --            --
    Chief Executive            1995    220,000     20,170       --            --
    Officer                                                                     
                                                                            
Glenn W. Phillips(2)(4)        1997    102,404       --         --            --
Vice President--Sales          1996    130,950     50,000       --            --
& Marketing                    1995       --         --         --            --
James H. Moore, Jr.(3)(4)      1997    100,000       --         --            --
    Vice President--           1996    100,000     50,000       --            --
    Operations,                1995    100,000       --         --            --
    Assistant Secretary
</TABLE>

(1)  Ms.  Soechtig  has been  employed by the Company  since  October 31,  1994.
     Commencing  November 1, 1997, Ms. Soechtig's  annual salary is $235,000.  A
     $20,170  bonus  payable  in 1994 upon Ms.  Soechtig's  employment  with the
     Company was paid during 1995.  During the year ended December 31, 1996, Ms.
     Soechtig was awarded a bonus of $100,000.
(2)  Mr.  Phillips was employed by the Company from January,  1996 until August,
     1997.  Mr.  Phillips'  annual  salary was  $150,000.  During the year ended
     December 31, 1996, Mr. Phillips was awarded a bonus of $50,000.
(3)  Mr. Moore has been employed by the Company since January, 1995. Mr. Moore's
     annual  salary is currently  $100,000.  During the year ended  December 31,
     1996, Mr. Moore was awarded a bonus of $50,000.
(4)  No formal  meeting of the  Compensation  Committee was held during 1996, in
     that two of its three  members had resigned  from the Board of Directors on
     June 28, 1996,  prior to the time at which 1996  performance was evaluated.
     The continuing member,  recognizing the  accomplishments of the officers of
     the Company,  submitted a written  recommendation to the Board of Directors
     outlining cash and non-cash incentive pay  recommendations for each officer
     of the  Company  based  on an  evaluation  of  their  performances  and the
     Company's  performance.  The  recommendation  was submitted to the Board of
     Directors at its meeting on




                                       28
<PAGE>



     October 21, 1996, at which all of the directors were present.  The Board of
     Directors  accepted  the  recommendation  unanimously,  with  Ms.  Soechtig
     abstaining with respect to her compensation.

NO OPTIONS(1)  were granted during the Company's 1997 fiscal year to the current
and former Executive Officers named in the Summary Compensation Table above.

The following  table sets forth  certain  information  concerning  the number of
shares of Common Stock  acquired upon the exercise of stock  options  during the
year ended  December  31, 1997 by, and the number and value at December 31, 1997
of  shares  of  Common  Stock  subject  to  unexercised  options  held  by,  the
individuals listed in the Summary Compensation Table.


                                                   Number of
                                                  Securities      Value of 
                                                   Underlying     Unexercised
                                                  Unexercised    In-The-Money
                     Shares                       Options/SARs   Options/SARs
                    Acquired        Value        At FY-End (#)    At FY-End ($)
                       on          Realized       Exercisable/    Exercisable/
NAME              Exercise (#)       ($)         Unexercisable   Unexercisable
----              ------------       ---         -------------   -------------

Jacqueline E.          --            --            375,000/0          0/0
Soechtig

EMPLOYMENT AGREEMENT

      Jacqueline  E.  Soechtig,  President  and Chief  Executive  Officer of the
Company, is a party to an employment agreement with the Company, which commenced
on October 31, 1994 for a term of three years.  Ms.  Soechtig's  base salary for
the entire  three-year term was $220,000 per annum.  The agreement also provided
for  incentive  compensation  in the form of  bonuses.  A  performance  bonus of
$100,000 was paid to Ms.  Soechtig in 1996.  Pursuant to the  agreement and as a
signing  bonus,  Ms.  Soechtig was paid $20,170 and was granted  ten-year  stock
options to purchase  375,000  shares of Common  Stock,  which are all  presently
exercisable  at an exercise price of $2.00 per share.  Ms.  Soechtig was granted
certain  registration  rights  with  respect  to  the  shares  of  Common  Stock
underlying  all of such options.  The fair value of the 375,000 shares of Common
Stock underlying Ms. Soechtig's options was determined by the Board of Directors
to be $5.00  per  share  at the time of the  option  grant  considering  various
factors such as restrictions  placed on the underlying  shares and their lack of
liquidity,  as well as their  quoted  market price on October 31, 1994 of $13.50
per share. In accordance  with accounting  provisions of APB No. 25, the Company
recorded compensation expense of $375,000 in 1994, $562,500 in 1995 and $187,500
in 1996. These amounts represent the difference  between the fair value of $5.00
per share (determined by the Board of Directors  considering  various factors as
restrictions,  etc.) and the  exercise  price.  On July 30,  1997,  the Board of
Directors,  unanimously  approved a resolution  (with Ms.  Soechtig  abstaining)
authorizing an amendment to the employment  agreement  which extends the term of
the agreement to October 31, 2000 and increases her base salary to $235,000.

--------
1     On March 13,  1997,  the Board of  Directors  granted  options to purchase
      shares of Common  Stock to each of  Jacqueline  E.  Soechtig  and James H.
      Moore,  which grant is subject to and will become  effective upon approval
      by the Shareholders at the 1998 Annual Meeting of the Shareholders.




                                       29
<PAGE>



ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following  table sets forth certain  information  as of April 28, 1998
regarding the beneficial  ownership of shares of Common Stock by (i) each person
(including  any  "group"  as  that  term  is used  in  Section  13(d)(3)  of the
Securities  Exchange Act of 1934,  as amended) who is known by the Company to be
the  beneficial  owner of more than five percent of the Common  Stock,  its only
class of voting  securities  (ii) each Director and nominee,  (iii) each current
and former  Executive  Officer  named in the Summary  Compensation  table herein
titled "Executive Compensation" and (iv) all Directors and Executive Officers of
the Company as a group.

<TABLE>
<CAPTION>
                                                                                              PERCENT OF     
                                                                        AMOUNT OF          PRESENTLY ISSUED  
                                                                    PRESENTLY ISSUED       AND OUTSTANDING   
                                                                     AND OUTSTANDING         COMMON STOCK    
                                      AMOUNT         PERCENT OF       COMMON STOCK           PLUS COMMON     
                                       AND            PRESENTLY        PLUS COMMON          STOCK ISSUABLE   
  NAME AND ADDRESS                  NATURE OF        ISSUED AND      STOCK ISSUABLE        UPON CONVERSION   
         OF                         BENEFICIAL       OUTSTANDING          UPON            OF SERIES G SHARES 
  BENEFICIAL OWNER                 OWNERSHIP(1)     COMMON STOCK      CONVERSION OF        SERIES G SHARES(2)
  ----------------                 ------------     ------------      -------------        ------------------
<S>                                  <C>              <C>             <C>                       <C> 
Jacqueline E. Soechtig               398,500(3)       2.5%            398,500(3)                1.0%
c/o Lasergate Systems, Inc.                                                                 
2189 Cleveland Street                                                                       
Suite 230                                                                                   
Clearwater, FL 33765                                                                        
                                                                                            
John J. Chluski                      100,827(4)        *              100,827(4)                 *
c/o Lasergate Systems, Inc.                                                                 
2189 Cleveland Street                                                                       
Suite 230                                                                                   
Clearwater, FL 33765                                                                        
                                                                                            
Frank W. Swacker                      80,500(5)        *               80,500(5)                 *
c/o Lasergate Systems, Inc.                                                                 
2189 Cleveland Street                                                                       
Suite 230                                                                                   
Clearwater, FL 33765                                                                        
                                                                                            
Eric T. Jager                        176,500(6)       1.1%            176,500(6)                 *
c/o Lasergate Systems, Inc.                                                                 
2189 Cleveland Street                                                                       
Suite 230                                                                                   
Clearwater, FL 33765                                                                        
                                                                                            
James H. Moore                            16           *                   16                    *
c/o Lasergate Systems, Inc.                                                                 
2189 Cleveland Street                                                                       
Suite 230                                                                                   
Clearwater, FL 33765                                                                        
</TABLE>



                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                                                              PERCENT OF     
                                                                        AMOUNT OF          PRESENTLY ISSUED  
                                                                    PRESENTLY ISSUED       AND OUTSTANDING   
                                                                     AND OUTSTANDING         COMMON STOCK    
                                      AMOUNT         PERCENT OF       COMMON STOCK           PLUS COMMON     
                                       AND            PRESENTLY        PLUS COMMON          STOCK ISSUABLE   
  NAME AND ADDRESS                  NATURE OF        ISSUED AND      STOCK ISSUABLE        UPON CONVERSION   
         OF                         BENEFICIAL       OUTSTANDING          UPON            OF SERIES G SHARES 
  BENEFICIAL OWNER                 OWNERSHIP(1)     COMMON STOCK      CONVERSION OF        SERIES G SHARES(2)
  ----------------                 ------------     ------------      -------------        ------------------
<S>                                  <C>              <C>             <C>                       <C> 
Glenn W. Phillips                          0           *                    *                    *
c/o Lasergate Systems, Inc.                                                                 
2189 Cleveland Street                                                                       
Suite 230                                                                                   
Clearwater, FL 33765                                                                        
                                                                                            
Philip P. Signore                          0           *                    *                    *
c/o Lasergate Systems, Inc.                                                                 
2189 Cleveland Street                                                                       
Suite 230                                                                                   
Clearwater, FL 33765                                                                        
                                                                                            
RBB Bank, AG (as                   7,937,332(7)      51.9%         32,755,549(7)               81.6%
nominee for its clients, who                                                                
are the beneficial owners)                                                                  
Burgring 16                                                                                 
8010 Graz                                                                                   
Austria                                                                                     
                                                                                            
All Directors and Executive          756,343(8)      10.3%            853,843(8)                2.1%
Officers of the Company as                                                               
A group (8 persons)
</TABLE>

-------------------
*     Less than 1%.
(1)   Unless otherwise noted, the Company believes that all persons named in the
      table have sole voting and investment  power with respect to all shares of
      Common Stock beneficially owned by them.
(2)   Assumes full  conversion of the Company's  Series G Convertible  Preferred
      Stock into a total of 32,655,549 shares of Common Stock representing 81.4%
      of the Company's Common Stock.
(3)   Includes  375,000 shares of Common Stock which Ms.  Soechtig has the right
      to acquire pursuant to presently exercisable stock options.
(4)   Includes  47,500 shares of Common Stock which Mr. Chluski has the right to
      acquire pursuant to presently exercisable stock options.
(5)   Includes (i) 52,500 shares of Common Stock which Mr. Swacker has the right
      to acquire pursuant to presently  exercisable  stock options;  (ii) 13,000
      shares  of  Common  Stock  jointly  owned  by Mr.  And Mrs.  Swacker;  and
      (iii)15,000 shares of Common Stock owned by Mr. Swacker's wife as to which
      Mr. Swacker disclaims beneficial ownership.
(6)   Includes  (i) 124,000  shares of Common Stock owned by a mutual fund which
      Mr. Jager  manages and with  respect to which Mr. Jager has voting  power,
      (ii) 10,000 shares of Common Stock owned by Mr.




                                       31
<PAGE>



      Jager's wife as to which Mr. Jager  disclaims  beneficial  ownership,  and
      (iii)  42,500  shares of  Common  Stock  which Mr.  Jager has the right to
      acquire pursuant to presently exercisable stock options.
(7)   RBB Bank,  AG holds such  shares as nominee  for its  clients  who are the
      beneficial  owners of such shares,  none of whom holds more than 5% of the
      outstanding  shares  of the  Company.  RBB Bank,  AG has no voting  power,
      directly or indirectly,  nor investment  power with respect to such shares
      and therefore disclaims beneficial ownership of such shares.
(8)   Includes  shares  of Common  Stock  which  such  Directors  and  Executive
      Officers have the right to acquire pursuant to presently exercisable stock
      options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On November 4, 1997,  the Company sold 7,500 shares of Series G Preferred  Stock
to RBB Bank AG as nominee for its clients (who are the beneficial owners of such
shares) for  $7,500,000.  Each share of Series G Preferred  Stock is convertible
into 4,354 shares of Common Stock. Prior to the transaction,  many of the Series
G Investors were  beneficial  owners of 7,945 shares of Series F Preferred Stock
and 100,000  shares of Common Stock.  Pursuant to the  transaction,  the Company
redeemed 7,945 shares of Series F Preferred Stock for $6,000,000.

During 1997, the Company paid $156,630 to a vendor in which an outside  director
had a substantial financial interest for programming services, paid $36,000 to a
relative of the chief  executive  officer for consulting  services,  and accrued
$50,000 for services performed by outside directors, which have not been paid as
of April 10, 1998.




                                       32
<PAGE>



                                     PART IV

ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K

(a)         Exhibits

3.1         Amended and  Restated  Articles of  Incorporation  (incorporated  by
            reference  to  Exhibit  3.1 of  Amendment  No.  1 to  the  Company's
            Quarterly Report on Form 10-QSB,  File No. 0-15873,  for the quarter
            ended June 30, 1996).

3.2         Articles of Amendment of Articles of Incorporation  (incorporated by
            reference to Exhibit 3.1 to the  Company's  Form 8-K dated  November
            19, 1997, File No. 0-15873).

3.3         By-laws, as amended (incorporated by reference to Exhibit 3.4 of the
            Company's Annual Report on Form 10-K, File No. 0-15878, for the year
            ended December 31, 1994).

4.1         Regulation    S    Subscription    Agreement    between   RBB   Bank
            Akiengesellschaft  and the Company (incorporated by reference to the
            Company's Form 8-K dated November 19, 1997, File No. 0-15873).

4.2         Registration Rights Agreement between Herbert Strauss (as Headtrader
            of RBB Bank  Aktiengesellschaft)  and the Company  (incorporated  by
            reference to the Company's  Form 8-K dated  November 19, 1997,  File
            No. 0-15873).

4.3         Letter  Agreement  between the  Company  and RBB  Aktiengesellschaft
            granting  the  Company  the right to return its  Series F  Preferred
            Stock  (incorporated  by reference to the  Company's  Form 8-K dated
            November 19, 1997, File No. 0-15873).

4.4         Amended and Restated 1994 Stock Option Plan.

10.1        Lease,  dated as of February 20, 1995, between the Company and 28050
            Corporate  Square  Associates,  L.P.  (incorporated  by reference to
            Exhibit 10.2 of the Company's  Annual Report on Form 10-K,  File No.
            0-15873, for the year ended December 31, 1994).

10.2*       Office  Building  Lease,  dated  October 21, 1997,  between DCS Real
            Estate and the Company.

10.3        Stock Purchase  Agreement by and among 1103065  Ontario Inc.,  Delta
            Information  Services,  Inc., James Potter, Marion Audrey Potter and
            Derek  Betty  (incorporated  by  reference  to  Exhibit  2.1  to the
            Company's Form 8-K dated December 22, 1994, File No. 0-15873).

10.4        Registration  Rights and Put  Agreement  by and among James  Potter,
            Marion Audrey Potter,  Derek Betty and the Company  (incorporated by
            reference to Exhibit 10.1 to the Company's  Form 8-K dated  December
            22, 1994, File No. 0-15873).

10.5        Asset Purchase  Agreement by and between the Company and GIS Systems
            Limited Partnership (incorporated by reference to Exhibit 2.1 to the
            Company's Form 8-K dated February 15, 1995, File No.

10.6        Series B Promissory  Note made by the Company payable to GIS Systems
            Limited  Partnership  (incorporated  by reference to Exhibit 99.1 to
            the Company's Form 8-K dated February 15, 1995, File No. 0-15873).

10.7        Series C Promissory  Note made by the Company payable to GIS Systems
            Limited  Partnership  (incorporated  by reference to Exhibit 99.2 to
            the Company's Form 8-K dated February 15, 1995, File No. 0-15873).

10.8        Promissory Note made by GIS Systems Limited  Partnership  payable to
            the  Company  (incorporated  by  reference  to  Exhibit  99.2 to the
            Company's Form 8-K dated February 15, 1995, File No. 0-15873).






                                       33
<PAGE>



10.9        The Series B Preferred  Stock Pledge and Call Agreement by and among
            the Company,  GIS Systems  Limited  Partnership  and  NationsBank of
            Florida,  N.A.  (incorporated  by  reference  to Exhibit 99.4 to the
            Company's Form 8-K dated February 15, 1995, File No. 0-15873).

10.10       Consulting  Agreement  by and between the Company and Fred  Maglione
            (incorporated by reference to Exhibit 99.5 to the Company's Form 8-K
            dated February 15, 1995, File No. 0-15873).

10.11       Consulting Agreement between James Potter,  1103065 Ontario Inc. and
            the  Company  (incorporated  by  reference  to  Exhibit  10.2 to the
            Company's Form 8-K dated December 22, 1994, File No. 0-15873).

10.12       Letter Agreement among the Company, GIS Systems Limited Partnership,
            Nicholas  Flaskay,  and Fred Maglione  (incorporated by reference to
            Exhibit 10.17 of the  Company's  Annual Report on Form 10-KSB,  File
            No. 0-15873, for the year ended December 31, 1995).

10.13       Employment  Agreement of  Jacqueline E.  Soechtig  (incorporated  by
            reference to Exhibit  10.17 of the  Company's  Annual Report on Form
            10-K, File No. 0-15873, for the year ended December 31, 1994).

21.1        Subsidiaries  of the Company  (incorporated  by reference to Exhibit
            21.1 of the Company's  Annual Report on Form 10-K, File No. 0-15873,
            for the year ended December 31, 1994).

27.1*       Financial Data Schedule


-----------
*   Filed herewith.

            For the Company's financial statements for the period ended December
31, 1996, see Part II, Item 7 of this Report on Form 10-KSB.

(b) Reports on Form 8-K.

            Form 8-K, dated November 19, 1997.








                                       34
<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.

                                                LASERGATE SYSTEMS, INC.



                                                By: /s/ Jacqueline E. Soechtig
                                                   -----------------------------
                                                    Jacqueline E. Soechtig
                                                    Chairman, President and 
                                                    Chief Executive Officer

                                                Date: May 6, 1998


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.

     NAME                             CAPACITY                          DATE


/s/ JACQUELINE E. SOECHTIG    Chairman, President and Chief          May 4, 1998
---------------------------   Executive Officer
Jacqueline E. Soechtig                                                 


/s/ PHILIP P. SIGNORE         Chief Financial Officer                May 4, 1998
---------------------------
Philip P. Signore


/s/ FRANK W. SWACKER          Director                               May 4, 1998
---------------------------
Frank W. Swacker


/s/ JOHN J. CHLUSKI           Director                               May 4, 1998
---------------------------
John J. Chluski


/s/ ERIC T. JAGER             Director                               May 4, 1998
---------------------------
Eric T. Jager







<PAGE>



                        CONSOLIDATED FINANCIAL STATEMENTS
                            AND REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS


                             LASERGATE SYSTEMS, INC.
                                AND SUBSIDIARIES

                           December 31, 1997 and 1996



<PAGE>







                                TABLE OF CONTENTS


                                                                            PAGE


Report of Independent Certified Public Accountants.......................... F-1


Consolidated Balance Sheets as of December 31, 1997 and 1996................ F-2


Consolidated Statement of Operations for the Years
  Ended December 31, 1997 and 1996.......................................... F-3


Consolidated Statement of Stockholders' Equity for the
  Years Ended December 1997 and 1996........................................ F-4


Consolidated Statements of Cash Flows for the Years
  Ended December 31, 1997 and 1996  ........................................ F-5


Notes to Consolidated Financial Statements.................................. F-7


<PAGE>







               Report of Independent Certified Public Accountants




Board of Directors
Lasergate Systems, Inc. and Subsidiaries

We have  audited  the  accompanying  consolidated  balance  sheets of  Lasergate
Systems,  Inc.  and  Subsidiaries  as of December 31,  1997,  and 1996,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows  for  the  years  then  ended.   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 an overall financial statement  presentation.
We believe 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 Lasergate  Systems,  Inc. and
Subsidiaries at December 31, 1997, and 1996, and the results of their operations
and their cash flows for the years then  ended,  in  conformity  with  generally
accepted accounting principles.

The  accompanying  financial  statements  have been prepared,  assuming that the
Company will continue as a going concern. As shown in the financial  statements,
the Company incurred a net loss of $2,923,069 during the year ended December 31,
1997,  and,  as of  that  date,  the  Company  has  an  accumulated  deficit  of
$19,706,387.  In addition,  the Company's current liabilities exceed its current
assets by $1,467,960 at December 31, 1997. The Company's  operating loss history
raises  substantial  doubt  about the  Company's  ability to continue as a going
concern.  The Company has  historically  relied on net proceeds  from public and
private  offerings  and loans and  advances  from  related  parties  to fund its
operations.  Management  believes that  additional  monies from these sources or
from strategic  corporate  partnerships will be necessary to fund its operations
in 1998.  Management's plans in regard to these matters are described in Note 3.
The financial  statements do not include any adjustments  that might result from
the outcome of this uncertainty.


                                                          /s/ Grant Thornton LLP

                                                          GRANT THORNTON LLP
Tampa, Florida
April 29, 1998




                                      F-1

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries
                           CONSOLIDATED BALANCE SHEETS

                                  December 31,
<TABLE>
<CAPTION>
                                                                                  1997               1996
                                                                              ------------       ------------
<S>                                                                           <C>                <C>         
                                     ASSETS
Current assets:
Cash and cash equivalents                                                     $    390,762       $  1,924,825
Accounts receivable, net of allowance for doubtful accounts of
           $157,690 and $147,124                                                   455,001            868,931
Note receivable, current portion                                                    50,251               --
Inventories                                                                        232,192            254,901
Prepaid expenses                                                                    30,838             40,966
                                                                              ------------       ------------
                     Total current assets                                        1,159,044          3,089,623
                                                                              ------------       ------------

Note receivable, long-term portion                                                  59,091               --
Property and equipment, net                                                        305,509            304,024
Systems and software costs, net of write-down and amortization
          of $1,611,753 and $1,525,856                                             475,491            242,739
Goodwill, net of amortization of $398,557 and $265,568                           2,249,716          2,382,705
Customer lists and support contracts, net of amortization of
          $425,000 and $141,667                                                       --              283,333
Other assets, net                                                                   19,137            134,521
                                                                              ------------       ------------
                    Total assets                                              $  4,267,988       $  6,436,945
                                                                              ============       ============
 
              LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
Notes payable, bank                                                                 23,575             28,628
Accounts payable, trade                                                            780,271            542,671
Deferred revenues                                                                  356,471            909,516
Accrued warranty costs                                                             554,497            570,919
Accrued expenses                                                                   912,190          1,128,658
                                                                              ------------       ------------
                    Total current liabilities                                    2,627,004          3,180,392

Obligations to repurchase common stock                                                --              140,000
                                                                              ------------       ------------
                    Total Liabilities                                            2,627,004          3,320,392

Stockholders' equity:
     Preferred stock,  $.03 par value,  2,000,000 shares
          Authorized, 7,500 and 8,000 shares issued and outstanding at
          December 31, 1997, and 1996, respectively                                    225                240
     Common stock, $.03 par value, 20,000,000 shares authorized,
          7,462,061 and 7,362,061 issued and outstanding at December 31,
          1997, and 1996, respectively                                             223,862            220,862
Additional paid-in capital                                                      21,123,284         19,818,769
Less: Common stock, $.03 par value, 20,000 shares at December
          31, 1996, subject to put options                                            --             (140,000)

Accumulated deficit                                                            (19,706,387)       (16,783,318)
                                                                              ------------       ------------
                    Total stockholders' equity                                   1,640,984          3,116,553
                                                                              ------------       ------------
                    Total liabilities and stockholders' equity                $  4,267,988       $  6,436,945
                                                                              ============       ============
</TABLE>




         The accompanying notes are an integral part of these statements

                                      F-2

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENT OF OPERATIONS

                            Years Ended December 31,

<TABLE>
<CAPTION>
                                                              1997              1996
                                                          -----------       -----------
<S>                                                       <C>               <C>        
Revenues                                                  $ 4,917,536       $ 4,204,626

Operating Expenses:
     Cost of revenues                                       3,809,442         3,104,792
     Development                                              445,365           460,709
     Selling, general and administrative                    3,396,415         4,547,990
     Write down of intangibles                                230,208         1,075,000
                                                          -----------       -----------

               Operating loss                              (2,963,894)       (4,983,865)

Other income (expense)
     Interest income (expense)                                 40,825            53,557
     Other, net                                                  --             (67,654)
                                                          -----------       -----------

               Loss before income taxes                    (2,923,069)       (4,997,962)

Income taxes                                                     --                --
                                                          -----------       -----------

               Net loss                                    (2,923,069)       (4,997,962)

Dividends to preferred shareholders (intrinsic value
     Of beneficial conversion features-see Note 11)          (475,570)       (2,836,353)
                                                          -----------       -----------

Net loss available to common shareholders                 $(3,398,639)      $(7,834,315)
                                                          ===========       ===========

Net loss per common share                                 $      (.46)      $     (1.29)
                                                          ===========       ===========

Weighted Average Common Stock Outstanding                   7,454,938         6,063,633
                                                          ===========       ===========


</TABLE>






         The accompanying notes are an integral part of these statements

                                      F-3

<PAGE>
                    Lasergate Systems, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                     Years Ended December 31, 1997 and 1996

<TABLE>
<CAPTION>
[TABLE 1 OF 2]
                                                                                                      
                                              PREFERRED STOCK                   COMMON STOCK          
                                        ----------------------------    ----------------------------  
                                                            PAR                             PAR       
                                           SHARES          VALUE           SHARES          VALUE      
                                        ------------    ------------    ------------    ------------  
<S>                                          <C>        <C>                <C>          <C>           
BALANCE, DECEMBER 31, 1995                   387,750    $     11,633       3,125,013    $     93,751  

Retirement of common stock and Series B
 preferred stock in settlement of 
 acquisition obligations                    (111,800)         (3,355)       (109,333)         (3,279) 
Issuance of Series E preferred stock         162,500           4,875            --              --    
Preferred stock dividend, Series E
 (intrinsic value of Beneficial
 conversion features)                           --              --              --              --    
Issuance of Series F preferred stock           8,000             240            --              --    
Preferred stock dividend, Series F
 (intrinsic value of Beneficial
 conversion features)                           --              --              --              --    
Redemption of Series A preferred stock       (95,950)         (2,878)           --              --    
Conversion of Series D preferred to
 common stock                               (180,000)         (5,400)      1,673,479          50,204  
Conversion of Series E preferred to
 common stock                               (162,500)         (4,875)      2,627,902          78,836  
Issuance of common stock as compensation        --              --            45,000           1,350  
Grant of stock options for
 executive compensation                         --              --              --              --    

Net Loss                                        --              --              --              --    
                                        ------------    ------------       ---------    ------------  

BALANCE, DECEMBER 31, 1996                     8,000             240       7,362,061         220,862  

Conversion of Series F preferred to 
 common stock                                    (55)             (2)        100,000           3,000  
Issuance of Series G preferred stock; net      
 of $52,500 of offering costs.                 7,500             225            --              --    
Preferred stock dividend, Series G 
 (intrinsic value of Beneficial
 conversion features)                           --              --              --              --    
Redemption of Series F preferred stock        (7,945)           (238)           --              --    
Cancellation of Put Option                      --              --              --              --    
Net Loss                                        --              --              --              --    
                                        ------------    ------------       ---------    ------------  

BALANCE, DECEMBER 31,1997                      7,500    $        225       7,462,061    $    223,862  
                                        ============    ============    ============    ============  
</TABLE>

<TABLE>
<CAPTION>
[TABLE 2 OF 2]
                                                           COMMON
                                                            STOCK                                    
                                          ADDITIONAL       SUBJECT          NOTES
                                           PAID-IN         TO PUT        RECEIVABLE       ACCUMULATED
                                           CAPITAL         OPTION        STOCKHOLDERS       DEFICIT
                                        ------------    ------------     ------------    ------------
<S>                                     <C>             <C>              <C>             <C>          
BALANCE, DECEMBER 31, 1995              $ 14,065,743    $   (140,000)    $   (559,000)   $(11,785,356)

Retirement of common stock and Series B
 preferred stock in settlement of 
 acquisition obligations                      22,609            --            559,000            --
Issuance of Series E preferred stock       2,142,136            --               --              --
Preferred stock dividend, Series E
 (intrinsic value of Beneficial
 conversion features)                       (696,429)           --               --              --
Issuance of Series F preferred stock       7,312,184            --               --              --
Preferred stock dividend, Series F
 (intrinsic value of Beneficial
 conversion features)                     (2,139,924)           --               --              --
Redemption of Series A preferred stock      (997,121)           --               --              --
Conversion of Series D preferred to
 common stock                                (44,804)           --               --              --
Conversion of Series E preferred to
 common stock                                (73,961)           --               --              --
Issuance of common stock as compensation      40,836            --               --              --
Grant of stock options for
 executive compensation                      187,500            --               --              --

Net Loss                                        --              --               --        (4,997,962)
                                        ------------    ------------     ------------    ------------ 

BALANCE, DECEMBER 31, 1996                19,818,769        (140,000)               0     (16,783,318)

Conversion of Series F preferred to 
 common stock                                 (2,998)           --               --              --
Issuance of Series G preferred stock; net
 of $52,500 of offering costs.             7,922,845            --               --              --
Preferred stock dividend, Series G 
 (intrinsic value of Beneficial
 conversion features)                       (475,570)           --              --              --    
Redemption of Series F preferred stock    (5,999,762)           --               --              --
Cancellation of Put Option                  (140,000)        140,000             --              --
Net Loss                                        --              --               --        (2,923,069)
                                        ------------    ------------     ------------    ------------ 

BALANCE, DECEMBER 31,1997               $ 21,123,284    $          0     $          0    $(19,706,387)
                                        ============    ============     ============    ============
</TABLE>

         The accompanying notes are an integral part of this statement

                                      F-4

<PAGE>

                    Lasergate Systems, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                            Years Ended December 31,

<TABLE>
<CAPTION>
                                                                              1997              1996
                                                                          -----------       -----------
<S>                                                                       <C>               <C>         
Cash flows from operating activities:
     Net loss                                                             ($2,923,069)      $(4,997,962)
     Adjustments to reconcile net loss to cash used in operating
activities:
          Depreciation and amortization                                       436,621           513,153
          Write-down of capitalized software costs                               --           1,075,000
          Write-down of customer list                                         230,208              --
          (Gain) loss in joint venture                                           --              77,790
          Increase in allowance for doubtful accounts                          10,566           110,997
          Compensation recognized from issuance of stock
               and grant of stock options                                        --             229,686
     Decrease (increase) in:
          Accounts receivable, trade                                          403,364          (540,617)
          Note receivable                                                    (109,460)             --
          Inventories                                                          22,709            70,763
          Prepaid expenses                                                     10,246            43,426
          Other                                                                87,051           (83,598)
     Increase (decrease) in:
          Accounts payable and accrued expenses                              (118,868)          764,362
          Accrued warranty costs                                              (16,422)          273,919
          Deferred revenue                                                   (553,045)          180,110
                                                                          -----------       -----------

                    Net cash used in operating activities                  (2,520,099)       (2,282,971)
                                                                          -----------       -----------

Cash flows from investing activities:
     Net additions to property, equipment, and software costs                (137,762)         (203,663)
     Capitalized software development costs                                  (318,649)          (25,000)
                                                                          -----------       -----------
                    Net cash used in investing activities                    (456,411)         (228,663)
                                                                          -----------       -----------

Cash flows from financing activities:
     Proceeds from secondary public or private offering,                    7,447,500         6,623,082
           net of offering costs
     Redemption of preferred stock                                         (6,000,000)       (1,000,000)
     Settlement of acquisition obligations                                       --          (1,550,000)
     Proceeds from loans, other                                                  --              30,200
     Repayment of loans, other                                                 (5,053)          (23,329)
     Repayment of loans, related parties                                         --            (300,000)
                                                                          -----------       -----------
                    Net cash provided by financing activities               1,442,447         3,779,953
                                                                          -----------       -----------

Net increase (decrease) in cash and cash equivalents                       (1,534,063)        1,268,319
                                                                          -----------       -----------

Cash and cash equivalents, beginning of year                                1,924,825           656,506
                                                                          -----------       -----------

Cash and cash equivalents, end of year                                    $   390,762       $ 1,924,825
                                                                          ===========       ===========
</TABLE>

        The accompanying notes are an integral part of these statements.


                                      F-5
<PAGE>


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

INTEREST AND INCOME TAXES PAID:
                                               YEAR ENDED DECEMBER 31,
                                                1997             1996
                                                ----             ----
Interest                                      $ 2,810          $17,494
Income taxes                                     --               --

NON-CASH INVESTING AND FINANCING ACTIVITIES:

1996:
In March  1996,  the  Company  settled its  acquisition  obligation  with GIS as
follows:

Promissory notes payable, stockholders                                $2,324,335
Less:
          Cash payment                                                 1,550,000
          Accounts receivable canceled                                   199,359
          Note receivable canceled                                       559,000
          Retirement of common and preferred stock                        15,976
                                                                      ----------
                                                                      $     --  
                                                                      ==========


The Company recognized  $2,836,353 of preferred  dividends for 1996 based on the
intrinsic value of beneficial conversion features (see Note 11).

1997
----

The Company  recognized  $475,570 of preferred  dividends  for 1997 based on the
intrinsic value of beneficial conversion features (see Note 11).

The  Company  cancelled  its  obligation  to issue  common  stock of $140,000 in
connection with the Potter settlement agreement. (See Note 10).





        The accompanying notes are an integral part of these statements.

                                       F-6
<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996

NOTE 1 - DESCRIPTION OF BUSINESS

Lasergate  Systems,  Inc. (the "Company") was organized and  incorporated in the
State of Florida in 1985. The Company is engaged in the  development,  assembly,
marketing,   servicing  and  installation  of  admission   control  and  revenue
accounting  systems for both  general  admission  and  reserved  seating.  These
systems are used  primarily  at  amusement  parks,  theme  parks,  water  parks,
museums,   aquariums,   zoos,  casinos,  ski  resorts,  night  clubs,  theaters,
professional and university athletic and multi-purpose  arenas, and other public
facilities, including state, county and local fairs, movie theaters, race tracks
and golf courses.

The Company  introduced  a new  product in 1997,  Admits for  Windows(R),  which
represented 89% of product  revenues,  with  Select-a-Seat  representing  11% of
product revenue. In 1996, the Company's discontinued  products,  Admits Platinum
and Admits Gold,  represented 35% and 16% respectively of product  revenue,  and
Select-a-Seat represented 33%.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying  consolidated  financial statements include the accounts of the
Company  and  its  wholly  owned  subsidiaries.  All  significant  inter-company
accounts and transactions have been eliminated.

USE OF ESTIMATES IN FINANCIAL STATEMENTS

In  preparing  financial   statements  in  conformity  with  generally  accepted
accounting  principles,  management  makes estimates and assumptions that affect
the reported  amounts of assets and  liabilities  and  disclosures of contingent
assets and liabilities at the date of the financial  statements,  as well as the
reported  amounts of revenues and expenses  during the reporting  period.  These
estimates  are a major factor in providing  for warranty  costs,  allowance  for
doubtful accounts, valuation of intangibles,  litigation, and certain taxes that
are further  described  herein.  While  actual  results  could differ from those
estimates,  management does not expect the variances, if any, to have a material
effect on the financial statements.

CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.

ACCOUNTS RECEIVABLE, NET

Accounts  receivables  are reported net of allowance for doubtful  accounts.  At
least quarterly,  management  reviews the collection  status of its accounts and
provides  an  appropriate  allowance,  if  necessary.  Based on  these  reviews,
management  believes  that  its  accounts  at  December  31,  1997  and 1996 are
reasonably stated.

INVENTORIES

Inventories  are  stated  at the  lower  of  cost or  market,  with  cost  being
determined principally by the use of the first-in, first-out method.



                                       F-7
<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


PROPERTY AND EQUIPMENT

Property and equipment are stated at cost.  Depreciation is being provided using
the  straight-line  method over the estimated  economic useful lives (3-5 years)
for financial statement and income tax purposes.

SYSTEMS AND SOFTWARE COSTS

Systems and software  costs  represent the  capitalized  software costs (at full
cost) of  software  development  for the  Company's  new Admits  for  Windows(R)
product plus $200,000 of remaining  acquisition  costs for old products (Admits,
Delta,  and  Select-a-Seat)  which was  estimated  to be the value of a detailed
product  plan for the new  products  (the  Company did not incur any costs for a
detailed  product  plan - it was  able to use the old  products  to  serve  that
purpose).  Such costs are amortized on a  product-by-product  basis.  The annual
amortization  expense is the greater of the amount computed using the ratio that
current  gross  revenues  for each  product  bear to the  total of  current  and
anticipated  future gross revenues for that product or the straight-line  method
over the remaining estimated economic life (6 years) of the product.

All development  costs are capitalized once  technological  feasibility has been
achieved on a product  until the product is released for general  sale, at which
time,  only the costs of  development  of  significant  additions to a product's
features and functions are capitalized.  Technological feasibility is determined
on a  project  by  project  basis.  For  the  Admits  for  Windows(R)  products,
technological  feasibility  was achieved with the creation of a working model by
December 1996.  Thus, the Company's  expenditures  related to the development of
its  systems  and  software  prior  to  December  1996,  along  with the cost to
integrate GIS and Delta  products with the Company's  products in 1996 have been
included in development costs. Expenditures related to development of Admits for
Windows(R) from December 1996 through December 1997 have been capitalized.

During  1996,  the  Company  decided to convert all of their  products  into one
modular Windows(R) based product.  Accordingly,  the softwares'  carrying values
were  written  down  $1,075,000  to  approximately  $200,000,  representing  the
softwares'  estimated net realizable value. (See Note 6.) Amortization of system
and  software  costs in 1997 and 1996,  exclusive  of the write  down  discussed
above,  was  $95,014,  and  $167,523  and is  included in Cost of  Revenues.  In
previously published 1996 financial  statements,  these costs were included as a
component of Selling,  General,  and  Administrative  Expense,  and accordingly,
those financial statement amounts have been reclassified.

INTANGIBLES

Intangibles that were recognized in connection with the Company's acquisition of
GIS and Delta in 1995 and 1994,  respectively,  relate to systems  and  software
costs  (see  above),  non-competition  agreements,  customer  list  and  support
contracts,  and goodwill. Such costs have been and are being amortized using the
straight-line  method over their respective  estimated useful lives: systems and
software  costs  (see  above),  non-competition   agreements--three  (3)  years,
customer list and support  contracts--six (6) years, and  goodwill--twenty  (20)
years.  Amortization  expense  (exclusive  of  software)  for  1997 and 1996 was
$214,447 and $232,156,  and is included in selling,  general and  administrative
expenses.  Management reviews, at least on a quarterly basis, whether or not any
impairment  has occurred  with respect to such acquired  intangibles  that could
warrant an adjustment to the carrying  values.  As a result of this review,  the
remaining  net balance of customer list and support  contracts of  approximately
$230,000 was written off. Undiscounted cash flow projections associated with the
acquired  business is the primary focal point in the assessment and analysis for
potential  impairment.  During  1997 and  1996,  no  impairment  was  identified
exclusive  of the write down of  software  costs and  customer  lists  discussed
above.



                                       F-8
<PAGE>

                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996

Management believes that the following  assumptions used in the determination of
the referred to undiscounted  cash flow  projections  are reasonable:  estimated
period of  recovery - 17 years;  estimated  annual  increase  in revenues - 14%;
estimated  cost of revenues - 60%;  estimated  increase in selling,  general and
administrative expenses - 6%; and estimated income tax rate - 39%.

INVESTMENT IN JOINT VENTURE

The Company  uses the equity  method of  accounting  for its 50%  investment  in
Lasergate Systems  Asia-Pacific Pty. Limited. At December 31, 1997 and 1996, and
for the years then ended, the joint venture's assets, liabilities and results of
operations are not  significant.  The Company's share of the joint venture's net
(loss) from operations for 1997 and 1996 was $0 and ($77,790), respectively, and
was classified in other income/expense in the consolidated financial statements.
The net carrying  value of the  Company's  investment  in/advances  to the joint
venture at December 31, 1997, and 1996, was $0.

At the end of 1996,  the Company  decided to dissolve the joint  venture and the
1996 results  include an estimated  provision to accomplish  this. In 1997,  the
joint venture discontinued operations.  As the Company has not guaranteed any of
the  joint  venture's  liabilities  and  the  Company  has  no  further  funding
commitments  to the joint  venture,  the  Company  believes  no  further  losses
relating to the joint venture will occur.

WARRANTY COSTS AND WARRANTY LIABILITY (ALLOWANCE)

Effective in 1996, the Company began  providing for warranty costs each month as
a  percentage  of sales in order to more  closely  match  these  costs  with the
associated  revenue.  The total  provision  during 1997 was  $146,654 or 3.0% of
sales,  and charges  against the  allowance  amounted to $163,076.  The warranty
liability  at  December  31,  1997 is  $554,497  which  management  believes  is
sufficient to cover all known and unknown  warranty costs which will be incurred
in the  future  to  satisfy  customers  for sales  through  December  31,  1997,
including  estimated costs to make discontinued  products "Year 2000 Compliant."
Management believes all current products are "Year 2000 Compliant."

Provisions for the warranty allowance are classified as cost of revenues.

FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31,  1997,  and  December  31,  1996,  the carrying  amount of cash,
accounts  receivable,  accounts  payable and accrued expenses and notes payable,
approximate fair value because of the short-term  maturities of these assets and
liabilities.




                                       F-9
<PAGE>



                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


REVENUE RECOGNITION

Revenues  from  the sale of  equipment,  which  have  been  predominately  under
short-term  contracts during the periods presented  herein,  are recognized upon
the acceptance of the system by the customer provided that no significant vendor
or post-contract  support  obligations  remain outstanding and collection of the
resulting  receivable  is  probable.  Revenues  from  special  sales  sold under
evaluation  periods are recognized at the end of this period.  Revenues from the
sale of  equipment  and software  licenses  with a planned  installation  period
exceeding  ninety days are  accounted  for using the  percentage  of  completion
method.

Revenues from post contract  customer  support and  maintenance  are  recognized
ratably over the maintenance period if collectibility is probable.

Revenues include product sales and service revenues.  Service revenues represent
approximately 9% and 14%, respectively, of total revenues in 1997 and 1996.

Deferred  revenues include customer deposits and advanced billings in accordance
with  contract  terms of $356,471  and  $909,516 at December  31, 1997 and 1996,
respectively.

Cost of revenues  includes the costs  associated  with the hardware and software
acquired for the Company's  customers,  the estimated full costs associated with
the engineering and installation (mostly software  customization) of the system,
and  amortization  of capitalized  software.  Cost of revenues also includes the
estimated  full cost related to support and  maintenance.  The Company  believes
that the  estimated  full  costs are  reasonably  stated and  classified  in all
material respects.

During 1997 and 1996, certain of the Company's contracts with customers afforded
the Company the  opportunity to develop  products for their customers which were
also new  products for the Company not subject to  exclusive  arrangements  with
those customers. The resulting cost of those products is included in development
costs  versus cost of revenues  along with other  development  costs  related to
enhancement of the Company's existing products during 1997 and 1996.

RECLASSIFICATIONS

Certain 1996  financial  statement  amounts have been  reclassified  in order to
reflect these amounts on a basis consistent with 1997 presentation. Amortization
of capitalized  software  development costs is now included in Cost of Revenues.
These amounts were reclassified from Selling, General and Administrative Expense
to Cost of Revenues in the 1996 Statement of Operations.

INCOME TAXES

Under the  liability  method  specified in  Statement  of  Financial  Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes," deferred tax assets and
liabilities  are  determined  based  on the  difference  between  the  financial
statement and tax basis of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse.



                                      F-10
<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


NET LOSS PER COMMON SHARE

Net loss per  common  share is based on the  weighted  average  number of shares
outstanding  during the  periods.  Options  and  warrants  and the effect of the
convertible  securities  were not  included in the  calculation  of net loss per
share because they were  anti-dilutive.  The net loss used in the calculation is
the net loss available to common  shareholders,  which reflects  preferred stock
dividends (intrinsic value of beneficial conversion features-see Note 11).

The Company adopted Statement of Financial  Accounting  Standards (SFAS) No. 128
"Earnings  Per Share".  This new standard  eliminates  primary and fully diluted
earnings  per share  (the same in 1997 and 1996  because of  anti-dilution)  and
requires  presentation  of basic and diluted  earnings per share  together  with
disclosure of how the per share amounts were computed.  The adoption of this new
standard did not have a material  impact on the disclosure of earnings per share
in the financial statements.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived  assets  and  certain  identifiable  intangibles  held and used by an
entity along with goodwill are reviewed by management  for  impairment  whenever
events or changes in circumstances indicate that the carrying amount of an asset
may  not  be  recoverable.  If  the  sum  of  the  expected  future  cash  flows
(undiscounted  and without  interest)  is less than the  carrying  amount of the
asset, an impairment loss is recognized. Measurement of that loss would be based
on the fair value of the asset. SFAS No. 121 also generally requires  long-lived
assets and certain identifiable intangibles to be disposed of should be reported
at the lower of the carrying amount or the fair value less cost to sell.

ACCOUNTING FOR STOCK BASED COMPENSATION

For employee  stock awards,  as allowed by SFAS No. 123, the Company has elected
to continue using the accounting method promulgated by the Accounting Principles
Board  Opinion  No. 25.  Accounting  for Stock  Issued to  Employees  to measure
compensation.  As a result,  SFAS No. 123 proforma  disclosures  are required in
these  financial  statements.  The  adoption of SFAS No.  123's  accounting  and
reporting  provisions  had an  insignificant  effect on the Company's  financial
statements (see Note 11).

NEW ACCOUNTING PRONOUNCEMENTS TO BE ADOPTED

The AICPA Accounting Standards Executive Committee has issued SOP 97-2, Software
Revenue Recognition, which supercedes SOP 91-1. SOP 97-2 will be adopted in 1998
and  retroactive  application  is  prohibited.  This SOP  retains the same basic
revenue  recognition  criteria  of SOP 91-1;  however,  with  respect to bundled
contracts,    a   new   criterion   for    allocation   of   contract   fee   is
introduced--"vendor-specific  objective  evidence of fair  value".  In addition,
further  guidance is given as to revenue  recognition  issues when elements of a
contract are not all delivered,  including  services and post-contract  customer
support.  The Company  does not expect that the adoption of SOP 97-2 will have a
material effect on its financial statements.

SFAS No. 130  Reporting  Comprehensive  Income is  effective  for  fiscal  years
beginning  after  December 15, 1997.  This statement  establishes  standards for
reporting and display of  comprehensive  income and its components in a full set
of  general-purpose  financial  statements.  The  requirements of this statement
include:

(a)  Classifying  items of other  comprehensive  income  by  their  nature  in a
     financial statement and


                                      F-11

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


(b)  Displaying the accumulated balance of other comprehensive income separately
     from  retained  earnings  and  additional  paid-in  capital in the equities
     section of the balance  sheet.  

The Company  plans to adopt SFAS No. 130 for the year ending  December 31, 1998,
and  expects  no  material   impact  to  the   Company's   financial   statement
presentation.

SFAS  No.  131,   Disclosures  about  Segments  of  an  Enterprise  and  Related
information,  is effective for fiscal years  beginning  after December 15, 1997.
This  statement  supercedes  SFAS No. 14 Financial  Reporting  for Segments of a
Business Enterprise, and amends SFAS No. 94, Consolidation of all Majority Owned
Subsidiaries.  This Statement  requires annual financial  statements to disclose
information  about products and services,  geographic areas, and major customers
based on a management  approach,  along with  interim  reports.  The  management
approach  requires  disclosing  financial and descriptive  information  about an
enterprise's  reportable operating segments,  based on reporting information the
way  management  organizes  the  segments  for  making  business  decisions  and
assessing  performance.  The Company plans to adopt SFAS No. 131 in 1998,  which
has a possible impact only to the Company's  disclosure  information and not its
results of operations.

NOTE 3 - OPERATIONAL AND FUNDING MATTERS

The Company has a net loss for 1997 of  $2,923,069,  and a history of  operating
losses that have  accumulated to  $19,706,387,  at December 31, 1997. In view of
these matters,  recoverability  of a major portion of the recorded asset amounts
shown in the accompanying balance sheet is dependent upon continued operation of
the Company, which in turn is dependent upon the Company's ability to succeed in
its future operations.  The financial  statements do not include any adjustments
relating to the  recoverability  and classification of recorded asset amounts or
amounts and  classification  of liabilities  that might be necessary  should the
Company be unable to continue in existence.  The following  commentary addresses
the Company's operations for 1997 and its plan to improve future results.

Since June, 1996, the Company has committed substantial resources to the design,
development,   and  marketing  of  its  new  Admits  for   Windows(R)   product.
Concurrently,  the Company has dedicated significant resources to maintenance of
its legacy products.  While these  development,  marketing and maintenance costs
were being  incurred,  the  Company  began a product  launch  designed  to fully
replace its main product line. The new Admits for Windows(R)  general  admission
ticketing and access control products are rich in features desired by customers,
and the product  platform,  Windows  NT(R),  is the  platform of choice for many
customers.  Management  believes that the Company's product direction is focused
correctly and that the Company will continue to gain market share as the product
matures  over the next year.  However,  the sales force had  limited  success in
1997,  primarily due to the reluctance of customers to license  software that is
critical to their business until it has been installed for an extended period of
time at a facility  similar to their own. This situation began to change in late
1997 as the  Company's  prospective  customers  were able to  obtain  references
regarding the  Company's  product from several  existing  customers who had been
using the product since early in the year, and the Company  succeeded at selling
and installing the new Admits for Windows(R)  product at eighteen  installations
in 1997,  including all four of the targeted  market segments for the product as
follows:

                                                    (Unaudited)
                                             --------------------------
            Market Segment                   Installations    Customers
            --------------                   -------------    ---------
Ski Resorts                                         9              3
Museums, Aquariums & Zoos                           5              4
Family Entertainment Centers                        3              1
Theme Parks and Amusement Parts                     1              1
                                                   --             --
            Totals                                 18              9



                                      F-12

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


Management  believes that having the Admits for Windows(R)  product installed at
the above sites will  improve  its ability to sell the product and expects  1998
sales  opportunities  to be at  least  the same as  those  experienced  in 1997.
However,  the Company's  financial stability has affected its sales. The company
cannot provide an absolute  guarantee to customers that  development of products
will  continue.  For this  reason,  the Company  continues  to seek and actively
pursue a  possible  relationship  with a  strategic  partner  who could  improve
customers'  perceptions  of the  Company's  financial  stability  as well as the
Company's  actual  financial  position.  Any such  relationship  would  probably
include an equity  investment in the Company.  The Company may also review other
financing opportunities.

It should be noted that the  Company has been  seeking a  strategic  partner for
approximately  one year now, but has been unable to find a suitable partner that
is  willing  to  invest a  significant  amount  of  capital  on  terms  that are
acceptable to the Company. Presently, the Company is operating with minimal cash
and current  liabilities  exceed  current  assets by  $1,467,960 at December 31,
1997. These  circumstances  require that the Company exercise greater caution in
conducting its business and, at certain times, take extraordinary  measures.  In
the past,  such measures have included  asking certain vendors to extend payment
terms by as much as 120 days, and, on one occasion,  delaying payroll for senior
management.  Although Management recognizes the critical nature of the Company's
cash  position and attempts to manage the  Company's  expenditures  accordingly,
there is a risk that under  certain  conditions,  immediate  financing  could be
required.  The costs of obtaining  such financing are unknown and the likelihood
of obtaining  such  financing is  uncertain.  Management  intends to continue to
operate  the  Company in a  conservative  manner  through its efforts to further
reduce operating  expenses and product costs and to focus on higher margin sales
opportunities.  While  Management  believes  the Company will be able to operate
without interruption,  it intends to continue discussions with certain potential
partners and to seek out additional  potential  candidates  who can  potentially
enhance the Company's  financial position and marketing  abilities.  However, no
assurances can be made that a suitable  partner will be found or that sufficient
capital  will be raised  if  necessary  to allow the  Company  to  continue  its
operations in the conservative,  cost-saving  manner in which they are currently
being conducted.


NOTE 4 - INVENTORIES

Inventories as of December 31 consist of the following:


                                             1997                1996
                                           --------            --------
Installations-in-process                   $104,930            $199,561
Parts and systems                           127,262              55,340
                                           --------            --------
                                           $232,192            $254,901
                                           ========            ========



                                      F-13

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996




NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment at December 31, consist of the following:

                                                        1997              1996
                                                      --------          --------
Furniture and equipment                               $452,171          $507,311
Purchased software                                      10,269            19,244
Test equipment                                          45,323            52,902
                                                      --------          --------
                                                       507,763           579,457
Less accumulated depreciation                          202,254           275,433
                                                      --------          --------
                                                      $305,509          $304,024
                                                      ========          ========


Depreciation  expense was $137,513 and $102,612 for 1997 and 1996.  During 1997,
$212,399 of assets were retired.


NOTE 6 - SYSTEMS AND SOFTWARE COST

Historically,   the  Company  has  marketed  products  that  typically  required
substantial   customization   in  order  to  meet  the   customers'   particular
requirements.  During  1996,  the Company  changed its  strategy  and decided to
design products in a modular  fashion.  The modules consist of a primary product
with optional  pre-developed  modules and a configuration layer to meet specific
customer needs that requires  limited or no  customization  by the Company.  The
implementation  of this project has afforded the Company the  opportunity to use
the same  development  tool (high level  programming  language) for each module,
thus  providing a certain  degree of  consistency  and efficiency in the product
development process.

As of June 1997,  the Company had installed  limited  functionality  versions at
four different sites. These versions had fully functional  ticketing modules and
some  additional  features,  but not all the  features  planned  for the general
release  version.  As of May 13,  1997 the  Company  had  completed  the general
release version of Admits for Windows(R) (the new general admission product) and
has since  installed it at a number of sites  within  several  market  segments,
including all sites that had earlier versions. During June 1997, the development
effort was focused on two groups of applications for the ski industry. The first
group of ski  applications was released on July 1, 1997, and the second group of
ski applications  was released on September 30, 1997.  During the fourth quarter
of 1997,  the majority of the  development  effort was focused on refinements of
the ski applications  (including "bug fixes").  Although these applications were
developed for the ski industry,  management expects many of these features to be
well received in other market segments too. Future  development  efforts will be
focused on a reserved  seating module that the Company will develop as soon as a
customer is willing to purchase it.

As a result of this development effort and new product introduction, the Company
expects to achieve cost  reductions  beginning  in the first  quarter of 1998 in
areas of product development and customer support. In addition,  the product has
a new appearance which is more user friendly and will allow the user to modify a
configuration  layer  (without  access to the source  code)  which can remain in
place when  updating  the  product of a new  revision  level.  As a result,  the
Company expects its new products to be more competitive in the market.

                                      F-14

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996



In 1997,  approximately  $319,000 of development costs were incurred for the new
general  admission  product,  and  the  entire  amount  was  capitalized.  Since
inception,  development  costs incurred for the new product total  approximately
$450,000 of which $344,000 has been capitalized.

The Company  estimates the cost of developing a reserved  seating module for the
new product will total approximately  $300,000 to $500,000, of which $15,000 has
been incurred, none of which has been capitalized.

NOTE 7 - OTHER ASSETS

Other assets as of December 31, consist of the following:


                                                          1997            1996
                                                        --------        --------
Non-competition agreement net of
     Amortization $85,000 and $56,667                   $   --          $ 28,333
Other                                                     19,137         106,188
                                                        --------        --------
                                                        $ 19,137        $134,521
                                                        ========        ========

NOTE 8 - NOTES PAYABLE

At December 31, 1997, the Company had an outstanding balance of $23,575 due to a
bank.  The note matures on August 23, 2001,  has an annual  interest rate of 10%
and is collateralized with office equipment.

NOTE 9 - INCOME TAXES

The  Company  has  a net  operating  loss  (NOL)  for  income  tax  purposes  of
approximately  $14,500,000  at December 31, 1997,  which begins to expire in the
year 2000.  The  deferred  tax  benefit is  determined  based on the  difference
between  the  financial  reporting  and tax bases of assets and  liabilities  as
measured by the enacted tax rate which will be in effect when these  differences
are realized.  The Company cannot reasonably predict when it can utilize the NOL
carry forward and, therefore, the Company has recognized an equivalent valuation
allowance against the deferred tax benefit.

The principal types of temporary  differences and their related tax effects that
give rise to the deferred tax assets as of December 31, are as follows:

                                                   1997              1996
                                               -----------       -----------

Basis difference in intangible assets          $    33,000       $    53,000
Warranty cost                                      205,000           211,000
Bad debt allowance, employee vacation pay
     And other accruals                            320,000           326,000
Compensation related to stock options              415,000           415,000
Net operating loss carry forward (1)             5,385,000         4,310,000
                                               -----------       -----------
                                                 6,358,000         5,315,000
Less valuation allowance                        (6,358,000)       (5,315,000)
                                               -----------       -----------
                                               $         0       $         0
                                               ===========       ===========

(1) Certain transactions  involving the beneficial ownership of the Company have
occurred which resulted in a stock ownership  change for purposes of Section 382
of the Internal Revenue Code of 1986, as amended. Consequently, a 





                                      F-15

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


portion  of the  Company's  net  operating  loss  carry  forward  is  subject to
limitation on their utilization against future income.

The Company's computed effective tax rate differs from the Federal statutory tax
rate as follows:

                                                                1997       1996
                                                                ----       ----
Federal statutory rate                                           34%        34%
Effect of net operating losses (NOL) or NOL carry forward       (34)%      (34)%
                                                                ----       ----
Effective tax rate, after the effect of NOL                       0%         0%
                                                                ====       ====


NOTE 10 - COMMITMENTS AND CONTINGENCIES

OPERATING LEASE

The  Company  leases its office and  warehouse  facility  as well as some office
equipment under operating leases.

Future minimum payments under these operating leases are as follows:

                               1998      $121,786
                               1999       136,643
                               2000       147,061
                               2001       144,710
                               2002       130,545
                                         --------
                                         $680,745
                                         ========

Total  lease  payments  for the  years  ended  December  31,  1997 and 1996 were
$167,620 and $144,569, respectively.

LEGAL PROCEEDINGS

On June 15, 1995, the Company's  founder,  former  President and Chief Executive
Officer,  Donald Turner (and four family members hereinafter  referred to as the
"Turners"),  commenced an action  against the  Company,  Jeffrey  Markowitz  and
Richard  Friedman in the  Circuit  Court for  Pinellas  County,  Florida,  Civil
Division.  Trial is  currently  set for the week of June 22,  1998.  Mr.  Turner
alleges,  among  other  things,  that  he was  wrongfully  terminated  from  his
employment and seeks damages that in the aggregate could exceed $1,000,000.  The
Company believes Mr. Turner's suit is substantially without merit and intends to
continue  vigorously  defending the action. The Company's legal counsel believes
that if  plaintiffs  prevail  and  obtain a judgment  for  damages  against  the
Company,  an  estimate  of  probable  damages  would be  approximately  $200,000
exclusive  of  palintiffs'  costs,  attorney  fees and  pre-  and  post-judgment
interest.

On or about June 27,  1997, a class  action was  commenced in the United  States
district Court for the Eastern District of New York (CV 97-3775) by Andrew Petit
and Michael A. Lepera,  on behalf of themselves  individually,  and on behalf of
all others similarly situated against inter alia, the Company,  Sterling Foster,
& Co., Inc. ("Sterling Foster"),  the Company's former underwriter,  counsel for
Sterling Foster and certain issuer  defendants for whom Sterling Foster acted as
underwriter.  The Complaint  alleges that in connection  with an offering of the
Company's securities which became effective on October 17, 1994, Sterling Foster
engaged in a campaign to inflate the price of the Company's  stock,  to create a
short  position at the  inflated  price and then cover the short  position  with
shares  from   shareholders  who  had  been  secretly  released  from  "lock-up"
agreements. With respect to the Company, the Complaint alleges that it failed to
disclose  in its  Registration  Statement  that  prior to the date the  offering
became  effective,  Sterling  Foster  had  secretly  agreed to  release  certain
shareholders  from "lock-up"  agreements for the purpose of selling their shares
to Sterling  Foster at reduced prices.  The  Plaintiffs'  claims allege that the
Company violated Sections 11 and 12 (2) of the Securities Act of 1933,  Sections
10(b)  of the  Securities  Exchange  Act of  1934  and  Rule  10b-5  promulgated
thereunder  and  Section  349 of the New York  General  Business  Law,  and made
negligent misrepresentations.  In February 1998 the Company moved to dismiss the
complaint in its  entirety.  The Company  believes that it has defenses to these
claims and intends to vigorously defend itself in this action.



                                      F-16

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


In January 1997,  Derek Betty and James Potter  instituted  actions  against the
Company arising  pursuant to agreements  entered into at the time of the sale of
Delta Information Services,  Inc. ("Delta") to the Company. The first action was
entitled Derek Betty v.  Lasergate  Systems,  Inc. (the "Betty  Action") and the
second action was entitled James Potter v. Lasergate  Systems,  Inc. and 1103065
Ontario,  Inc. (the "Potter Action").  The Betty Action alleged that the Company
failed to return shares of the  Company's  stock which were being held in escrow
pursuant to a Collateral Stock Pledge Agreement  executed in connection with the
sale of Delta Information  Services,  Inc.  ("Delta") to the Company.  The Betty
Action also alleged a breach of the terms and conditions of Registration  Rights
and Put Option  Agreement  executed in connection  with the sale of Delta to the
Company.  The Betty Action sought damages in an amount in excess of $15,000. The
Potter  Action also alleged a breach of the  Registration  Rights and Put Option
Agreement.  Moreover,  the Potter Action included  allegations  concerning James
Potter's Consulting Agreement with the Company and a Non-Compete Agreement.  The
Potter  Action sought a declaratory  judgment  determining  that the Company and
1103065  Ontario  Inc  ("Ontario")  were in material  breach of the  Non-Compete
Agreement  and that Potter be relieved of all  obligations  to perform under the
Non-Compete  Agreement.  The Company succeeded in consolidating both proceedings
in arbitration and filed a counterclaim. On November 7, 1997, the Company signed
a settlement  agreement with Derek Betty and James and Marion Potter which ended
the  arbitration  proceeding.  The  settlement  agreement,  among other  things,
canceled the  outstanding  put options (which would have required the Company to
purchase  20,000 shares of its Common Stock for $140,000),  left the Non-Compete
Agreement in place, and required the Company to make a cash payment of $30,000.

The Company is also involved in other legal actions. Management does not believe
that the ultimate  resolution of these other matters will have a material effect
on the Company's  financial  position.  However,  should the Turners prevail and
obtain a  judgment  against  the  Company,  the  Company  would  need to  obtain
immediate  financing of some nature. The costs of such financing are unknown and
the likelihood of obtaining such financing is uncertain.

OTHER MATTERS

Management  has executed  voluntary  disclosure  agreements  with several states
regarding its sales tax reporting obligations.  Management believes the reported
sales tax liability as of December 31, 1997, is reasonably adequate.

NOTE 11  - STOCKHOLDERS' EQUITY

COMMON STOCK

The  Company  has  20,000,000  authorized  shares  of  Common  Stock,  of  which
10,471,228  are either  issued and  outstanding  or  reserved  for  options  and
warrants. Additionally, 7,500 shares of Series G preferred stock are outstanding
which can convert into 32,655,549 Common Shares.

The Company  disclosed to Series G shareholders  that it did not have sufficient
shares of Common Stock for all the Series G shares to be converted. The Board of
Directors  have  authorized  an  increase  in the  number of shares  subject  to
shareholders  approval to allow full conversion of the Series G shares,  and the
terms of the Series G subscription document provide for significant penalties if
the additional  shares are not authorized by the  shareholders.  These penalties
have  been  temporarily  suspended  by the  Series G  shareholders  but could be
reinstated at their discretion.  If reinstated,  these penalties would amount to
$375,000 if sufficient  Common Shares are not authorized  within sixty (60) days
and an additional $750,000 for every one hundred twenty (120) days thereafter.



                                      F-17

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996




PREFERRED STOCK

The Company's articles of incorporation authorize a total of 2,000,000 shares of
preferred stock. The Company's Board of Directors has established and authorized
the Series G convertible  preferred stock that is presently  outstanding as well
as Series A through F which are no longer outstanding

                                           F           G         Total
                                       ---------------------------------
         Total Authorized shares
             December 31, 1997            --         8,000       8,000
             December 31, 1996           8,000        --         8,000

         Outstanding shares
             December 31, 1997            --         7,500       7,500
             December 31, 1996           8,000        --         8,000

         Outstanding share amounts
             December 31, 1997            --        $  225      $  225
             December 31, 1996          $  240        --        $  240

Both series  contain or contained  specific  provisions  as to  conversion  into
shares of common stock and liquidation  values. The shares are or were nonvoting
and  participate  or  participated  equally as to  dividends  declared  with the
Company's  common stock.  None of the preferred stock above has or had mandatory
redeemable provisions.

For  discussion  of Series E, F, and G shares  see  Issuance  of  Stock--Private
Placements.

PREFERRED STOCK DIVIDENDS

In March,  1997 the  Securities  and Exchange  Commission  (SEC)  announced  its
position on accounting  for the issuance of convertible  preferred  stock with a
nondetachable  conversion  feature  that is deemed "in the money" at the date of
issue (a "beneficial conversion feature").  The beneficial conversion feature is
initially recognized and measured by allocating a portion of the preferred stock
proceeds  equal to the  intrinsic  value of that feature to  additional  paid-in
capital.  The  intrinsic  value  is  calculated  at the  date  of  issue  as the
difference of the conversion  price and the quoted market price of the Company's
common stock,  into which the security is convertible,  multiplied by the number
of shares into which the security is  convertible.  The discount  resulting from
the allocation of proceeds to the beneficial  conversion feature is treated as a
dividend and is recognized as a return to the  preferred  shareholders  over the
minimum period in which the preferred shareholders can realize that return (i.e.
from the date the securities are issued to the date they are first convertible).
The  accounting  for the beneficial  conversion  feature  requires the use of an
unadjusted quoted market price (i.e. no valuation discounts allowed) as the fair
value used in order to determine the intrinsic  value dividend.  However,  since
the  proceeds  of some  series  of  preferred  stock  have  been  used to redeem
previously  issued preferred stock, the intrinsic value is reduced by the amount
of any  previously  recognized  dividend on the redeemed  shares.  The intrinsic
value of dividends to  preferred  shareholders  are added to the net loss before
calculating  the net loss per common share.  The  intrinsic  value of beneficial
conversion  features to preferred  shareholders  are $475,570 and $2,836,353 for
1997 and 1996 respectively.


                                      F-18

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996



ISSUANCE OF COMMON STOCK FOR SERVICES

In June 1996,  the Company  issued 45,000  shares of restricted  common stock to
non-employee   directors  as  compensation   for  past  services  as  directors.
Compensation  for the  services  totaled  approximately  $42,000  based upon the
market value of the Company's  common  stock,  which  approximated  the value of
services rendered.

ISSUANCE OF STOCK--PRIVATE PLACEMENTS

On March 27, 1996,  the Company  commenced a private  placement of shares of the
Company's  newly  established  Series E Preferred  Stock at $10.00 per share. On
April 22,  1996,  162,500  shares of the Series E Preferred  Stock  successfully
closed  with the  Company  receiving  total  proceeds,  net of  commissions  and
offering costs,  of $1,450,582.  As of July 3, 1996, all 162,500 Series E shares
converted into 2,627,902 shares of common stock.

On June 10, 1996, the Company  commenced a private placement of 8,000 shares, at
$750 a share, of the Company's newly established Series F Convertible  Preferred
Stock.  On June 27,  1996,  the  placement  closed  with the  Company  receiving
$5,172,500,  net of  commissions  and offering  expenses,  for the sale of 8,000
shares of preferred stock.  Each Series F share had a face value of $1,000,  and
was convertible into shares of common stock after August 7, 1996, at, generally,
the  average  market  price  for the five  trading  days  preceding  conversion.
However, for any conversion effected on or after June 6, 1997, but prior to June
6, 1998, the conversion would have been 96% of such average market price, and on
or after June 6, 1998, the conversion would have been 94% of such average market
price,  but if such average  market price were more than $1.00,  the  conversion
price would have been $1.00,  and one preferred  share would have converted into
1,000 shares of common  stock;  and if such average  market price were less than
$0.45, the conversion price would have been $0.45, and one preferred share would
have  converted  into 2,222  shares of common  stock.  Thus,  the 8,000 Series F
shares were convertible into between  8,000,000 and 17,777,778  shares of common
stock.  The entire  Series F was  redeemable at the price of $1.00 per share any
time on or after June 7, 1999 at the Company's option upon giving 30 days notice
to  the  holders  of the  Series  F  Preferred  Stock.  Series  F  shares  had a
liquidation  value of  $1,000  per  share.  On  January  27,  1997,  55 Series F
convertible  preferred shares were converted into 100,000 shares of common stock
at a conversion  price of $0.55 a share.  The conversion price was calculated as
of September 30, 1996,  the  conversion  request date. On November 4, 1997,  the
remaining 7,945 Series F Shares were redeemed in connection with the issuance of
Series G Shares.

On  October  30,  1997,  the  Board of  Directors  authorized  a new  series  of
convertible  preferred stock, par value $.03, designated as Series G Convertible
Preferred  Stock ("Series G Shares").  The  authorized  number of such shares is
8,000.  Each  share has a face  value of $1,000  and is  convertible  into 4,354
shares of Common Stock (a conversion price of $0.22967 per Common Share).

On November 4, 1997,  the Company sold 7,500 shares of Series G Preferred  Stock
to RBB Bank,  AG as nominee for its clients  (who are the  beneficial  owners of
such  shares) for  $7,500,000  pursuant to an  exemption  from the  registration
requirements  of the  Securities  Act of 1933,  as amended , under  Regulation S
promulgated  thereunder.  The Series G Shares are  convertible  into  32,655,549
common shares. Pursuant to the transaction, the Company redeemed 7,945 shares of
the company's Series F Preferred Stock for $6 million,  leaving the Company with
$1,447,500 of net proceeds  after giving effect to expenses of the offering.  No
sales commissions were paid.

Under the terms of the subscription agreement, the Company will pay a penalty of
5% of the face value of outstanding  Series G Shares  ($375,000) if shareholders
have not approved an increase in the  authorized  number of Common  Shares in an
amount sufficient to allow for conversion of all Series G Shares within 120 days
of the


                                      F-19

<PAGE>

                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


subscription  agreement (by March 4, 1998). An additional penalty of 10% will be
incurred for each 120 days beyond March 4, 1998, until shareholders authorize an
amendment to the Articles of Incorporation to increase the authorized  number of
Common Shares in an amount  sufficient  to allow for  conversion of all Series G
Shares into Common Shares (the "Amendment").  Such penalties shall be payable in
cash.  If  sufficient  cash is not  available  to legally pay the  penalty,  the
Company  will issue a note  payable to the Series G holders in the amount of the
penalty bearing interest at a rate of 20% per annum.

The  penalties  described  in the  preceding  paragraph  have  been  temporarily
suspended  by  the  Series  G  investors  on  the  condition  that  the  Company
expeditiously  propose  the  Amendment  to the  shareholders  at the 1998 Annual
Meeting of  shareholders  such that for the Series G  investors  will be able to
convert  all the  Series G shares  into  common  shares.  However,  the Series G
investors may reinstate  these  penalties  upon sixty days notice.  On April 11,
1998,  the Company  converted  1,800 of the 7,500 Series G Shares into 7,837,332
common shares.
 

RESERVATION AND AUTHORIZATION OF COMMON STOCK

Upon the redemption of all outstanding  Series F Shares,  the Company unreserved
8,000,000  shares of common  stock.  Then,  upon the sale of the  Series G , the
Company  reserved  8,000,000  shares  of  common  stock  to  provide  for  their
conversion.  The Series G Shares are convertible  into 32,655,549  common shares
but the  subscription  agreement  provided for the reservation of only 8,000,000
shares. The Board of Directors plans to recommend to the Company's  stockholders
at the 1998 Annual Meeting of Stockholders that they approve an amendment to the
Company's  Articles of Incorporation to increase the number of authorized shares
of common stock.  Upon  approval of this  amendment by the  stockholders  of the
Company, the Company will reserve 24,655,549  additional shares to allow for the
possibility of the Series G shares  converting into as many as 32,655,549 common
shares.

STOCK OPTION PLANS

In February 1994, the Board of Directors  authorized  the  establishment  of the
Company's  1994 Stock  Option Plan (the  "Plan").  The Plan permits the grant of
options that may be either  incentive  stock  options  (ISO's) or  non-qualified
stock options  (NQSO's).  The total number of shares of common stock for options
that may be granted under the Plan may not exceed 58,333  subject to adjustment,
as defined. The Compensation/Stock Option Committee of the Board of Directors is
authorized  to  determine  the number of options  to be  granted,  the number of
shares that will be subject to any option and the exercise  price.  The exercise
price  for  non-qualified  stock  options  may not be less  than 25% of the fair
market  value  of the  common  stock on the date of  grant.  At the 1995  annual
meeting  of  shareholders,  shareholders  approved  changes  to  the  Plan  that
authorized  grants of 5,000 options per term year at an exercise price of 85% of
the market  value for each  outside  Director.  The options  vest at the rate of
5,000 shares per year at the  beginning of each term year.  Automatic  grants of
5,000  options  were made  during  1997 to each of John J.  Chluski  (an outside
Director), Bruce D. Barrington (who served as an outside Director until February
24, 1998),  and Eric T. Jager (an outside  Director).  A total of 40,000 options
have been granted under the Plan. The automatic grants were the only grants made
under the Plan in 1997.

NON-QUALIFIED STOCK OPTIONS

The Company granted an additional  37,500 options outside of the Plan to each of
Mr. Chluski,  Mr.  Barrington,  and Mr. Jager shortly after their appointment to
the Board of Directors as an  inducement  for them to join the Board in addition
to the automatic grants of 5,000 options each. These options are exercisable for
10 years at exercise prices ranging from $.28125 to $.65625 and were immediately
vested.  In order to  compensate  Mr.  Swacker  at the  same  rate as all  other
non-employee  Directors,  Mr.  Swacker was granted an option to purchase  37,500
shares  outside  of  the  1994  Stock  Option  Plan  at  an  exercise  price  of
approximately $.28 (100% of the market value at time of grant).


                                      F-20
<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


In 1997,  the Board of Directors  granted  options to purchase  shares of common
stock to officers of the Company which are subject to and will become  effective
upon approval by the shareholders at the 1998 Annual Meeting of Shareholders.

In  October  1994,  the  Board of  Directors  authorized  the  grant of  375,000
non-qualified stock options at an exercise price of $2.00 per share were granted
to the Company's  President  and Chief  Executive  Officer in connection  with a
three year  employment  agreement.  Of the total options  granted,  125,000 were
granted as a signing  bonus  effective  October  31,  1994 and were  immediately
exercisable  since their issuance was not  contingent on future  services as are
the remaining  250,000 options.  Accordingly,  compensation  expense of $375,000
representing  the  difference   between  the  fair  value  of  $5.00  per  share
(determined  by the  Board of  Directors  considering  various  factors  such as
restrictions,  etc.) and the exercise  price,  was recorded in the  consolidated
statement of operations for 1994. In addition,  the corresponding  obligation to
issue (grant)  common stock options also has been reflected in the balance sheet
as of December 31, 1994. Of the remaining  balance of 250,000  options,  125,000
options  vested on October 31, 1995 and  125,000  options  vested on October 31,
1996.  In  accordance  with  accounting  provisions  of APB No. 25, the  Company
recorded compensation expense in 1997 of $0 and $187,500 in 1996.

The Company  granted  options to purchase  120,000  shares of common stock to an
executive  officer for services  rendered  during 1996.  These options vested on
October 31,  1996.  During  1997 20,000 of these  options  were  cancelled.  The
remaining  options  grant the right to  purchase  100,000  shares at an exercise
price of $0.66 and are  exercisable  until one year  after  registration  of the
underlying  stock (the underlying  stock has not been registered as of April 28,
1998).  

A summary  of the  status  of the  Company's  outstanding  stock  options  as of
December 31, 1997,  and 1996, and changes during the years ending on those dates
is presented below:

                                                                WEIGHTED AVERAGE
                                                     SHARES      EXERCISE PRICE
                                                     ------      --------------

Options outstanding, December 31, 1995               413,500       $   1.97
Options granted                                      205,000       $    .78
Options canceled or forfeited                        (17,500)      $   1.00
                                                    --------       --------
Options outstanding, December 31, 1996               601,000       $   1.59
Options granted                                       90,000       $   0.27
Options canceled or forfeited                        (26,000)      $   1.00
                                                    --------       --------
Options outstanding, December 31, 1997               665,000       $   1.41

The following table summarizes  information concerning currently outstanding and
exercisable stock options:

                                                         WEIGHTED
                                                         AVERAGE
                            RANGE OF                    REMAINING     WEIGHTED
                            EXERCISE       NUMBER     CONTRACT LIFE    AVERAGE
                            PRICES       OUTSTANDING      (YEARS)     EXERCISE
                            ------       -----------      -------     --------

Outstanding Options:      $0.24-$0.66      275,000          7.1      $   0.52
                          $2.00-$2.76      390,000          6.7      $   2.03
                                                                    
Exercisable Options:      $0.24-$0.66      275,000          7.1      $   0.52
                          $2.00-$2.76      390,000          6.7      $   2.03
                                                                       
The Company has adopted only the disclosure  provisions of Financial  Accounting
Standard  No. 123  Accounting  for  Stock-Based  Compensation,  as it relates to
employment awards. It applies APB Opinion No. 25, Accounting for Stock Issued to
Employees,  and related interpretations in accounting for its plans and does not
recognize 


                                      F-21

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


compensation  expense  for its  stock-based  compensation  plans  other than for
restricted stock. If the Company had elected to recognize  compensation  expense
based  upon the fair  value at the  grant  date for  awards  under  these  plans
consistent with the  methodology  prescribed by SFAS 123, the Company's net loss
available to common  shareholders  would be  increased to the pro forma  amounts
indicated below for the years ended December 31:

                                                          1997          1996
                                                          ----          ----
Net loss available to common   As reported             $ 3,398,639   $ 7,834,315
       shareholders            Pro forma (unaudited)   $ 3,416,889   $ 7,929,715

Loss per common share          As reported             $       .46   $      1.29
                               Pro forma (unaudited)   $       .46   $      1.31


The fair value of each option  grant is estimated on the date of grant using the
Binomial options-pricing model with the following  weighted-average  assumptions
used for grants in 1997 and 1996, respectively, no dividend yield for all years,
expected volatility of approximately 128% for 1997 and 112% for 1996;  risk-free
interest  rates of  approximately  6.0% for both years,  and  expected  lives of
approximately 2.5 years for both years.

WARRANTS

In connection with the secondary public offering  completed in October 1994, the
Company  issued  1,840,000  redeemable  warrants to  purchasers of the Company's
common  stock.  These  redeemable  warrants  were  immediately   detachable  and
separately  tradable  from the common  stock with which they were  issued.  Each
redeemable  warrant  expires on October  16,  1999,  and  entitles  the  holder,
commencing  one year from the effective  date of the  offering,  to purchase one
share  of the  Company's  common  stock  for  $5.50,  the  exercise  price.  The
redeemable  warrants  are subject to  redemption  commencing  one year after the
effective  date at a  price  of  $.05  per  redeemable  warrant  subject  to the
occurrence of certain events, as defined, including a reduction of the price per
share of common stock to less than the redemption price.

The Company  granted  warrants to purchase 4,167 shares of the Company's  common
stock at an exercise price of $4.50 per share,  which expire on May 20, 1998, in
connection with financing activities in 1993.

In connection with the private placement of Series F Convertible Preferred Stock
completed in June 1996,  the Company  issued  500,000  warrants to the placement
agent.  These  warrants  expire on September 30, 2001, and entitle the holder to
purchase one share of the  Company's  common  stock at an exercise  price of the
average  conversion  price of the Series F Convertible  Preferred Stock ($0.55),
with  anti-dilution  provisions  which reduce the exercise  price to the average
conversion  price of any  subsequent  issuance of  convertible  preferred  stock
(Series G =  $0.22967).  In 1997,  Series G  Preferred  Stock was issued  with a
conversion price of $0.22967.  Accordingly, the exercise price of these warrants
was reduced to $0.22967. In 1996, the estimated fair value of these warrants for
the  placement  agent  services  rendered,  based on SFAS No. 123  provisions is
approximately $190,000, determined by using a binomial option-pricing model with
assumed volatility of 122%,  risk-free rate of 6.0%, and expected holding period
of three years. A SFAS No.123 valuation of these warrants in 1997 based upon the
new  exercise  price did not result in a higher  fair value  than  $190,000  and
accordingly this amount has not been revalued. For financial statement purposes,
the value of the  services  (compensation)  is  reflected  as a reduction to the
proceeds  received  from the  related  private  placement  and,  accordingly,  a
reduction to paid-in capital. In addition, the value assigned to the warrants is
reflected as an addition to paid-in capital (Stockholders' Equity).  Because the
reduction and increase to




                                      F-22

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


paid-in capital are offsetting  amounts of $190,000,  the Company has chosen not
to reflect them separately in the Statement of Stockholders' Equity.

A summary of the status of the Company's outstanding warrants as of December 31,
1997,  and 1996, and changes during the years ending on those dates is presented
below:

                                                               WEIGHTED AVERAGE
                                                   SHARES       EXERCISE PRICE

Warrants outstanding, December 31, 1995           2,121,067         $5.96
Warrants granted                                    500,000           .23
Warrants canceled or forfeited                         --            --
                                                 ----------         -----

Warrants outstanding, December 31, 1996           2,621,067         $4.87
Warrants granted                                       --            --
Warrants canceled or forfeited                     (276,900)         9.08
                                                 ----------         -----

Warrants outstanding, December 31, 1997           2,344,167         $4.37
                                                 ==========         =====

The following table summarizes  information concerning currently outstanding and
exercisable warrants:

                                                           WEIGHTED
                                                           AVERAGE
                              RANGE OF                    REMAINING     WEIGHTED
                              EXERCISE        NUMBER    CONTRACT LIFE    AVERAGE
                               PRICES      OUTSTANDING     (YEARS)      EXERCISE

Outstanding Warrants:           $0.23         500,000        3.5          $0.23
                             $3.75-$5.50    1,844,167        1.8          $5.50
                                                          
                                                          
Exercisable Warrants:           $0.23         500,000        3.5          $0.23
                             $3.75-$5.50    1,844,167        1.8          $5.50
                                                           


NOTE 12 - SALES TO MAJOR CUSTOMERS

In 1997,  one customer,  American  Skiing  Company  (owner/operator  of nine ski
resorts in the United States) represented 54% of revenues.

In 1996, one customer, Bayindir Insaat Turizm Ticaret (a large, indoor amusement
park in Istanbul, Turkey) represented 12% of revenues.



                                      F-23

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                     Years ended December 31, 1997 and 1996


NOTE 13 - EMPLOYEE BENEFITS

Effective July 1, 1995, the Lasergate  Systems,  Inc. Profit Sharing 401(k) Plan
was  established  covering  substantially  all  employees.  The Company  made no
contribution to the 401(k) Plan during 1996 or 1997.

In order to reduce its  overhead  costs,  the Company  entered  into an employee
leasing  agreement  effective  January 1, 1996,  with a firm that  provides  all
administrative  services relating to payroll,  personnel and employee  benefits.
The Company signed an agreement with a new employee  leasing  company  effective
December 16, 1996.  Management  continues to hire,  dismiss,  set pay rates, and
supervise the employees.

NOTE 14 - RELATED PARTY TRANSACTIONS

During 1997, the Company paid $156,630 to a vendor in which an outside  director
had a substantial financial interest for programming services, paid $36,000 to a
relative of the chief  executive  officer for consulting  services,  and accrued
$50,000 for services performed by outside directors, which have not been paid as
of April 10, 1998.

During 1996,  the Company made a cash payment of $14,000 to an outside  Director
of the Company for extensive business consulting services. The Company also paid
approximately  $20,000  to a vendor  in which  another  outside  Director  had a
substantial financial interest for programming services.








                                      F-24