SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[X]         Annual report under Section 13 or 15(d) of the  Securities  Exchange
            Act of 1934 for the fiscal year ended December 31, 1996

[_]         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
incorporation or organization                                Identification No.)

28050 U.S. 19 North, Suite 502, Clearwater, Florida                34621
---------------------------------------------------              ---------
     (Address of principal executive offices)                    (Zip Code)

Issuer's telephone number: (813) 725-0882
                           --------------

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
                     ---------------------------------------
                                (Title of Class)

                               Redeemable Warrants
                               -------------------
                                (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 is not  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 $4,204,626.

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

At March 20, 1997,  the aggregate  market value of the Common Stock of Lasergate
Systems, Inc. held by non-affiliates (7,235,234 shares) was $2,713,213.

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

At March 20, 1997,  7,362,061 shares of Common Stock were outstanding.  

Documents  incorporated by reference:  Selected  portions of the Proxy Statement
for the  Company's  1997 Annual  Meeting of  Shareholders  are  incorporated  by
reference into Part III of this Form 10-KSB.


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                                     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 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  which  employs  various
applications  of laser  scanning  bar code  technology  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. 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.

The Company has  developed  three  versions of the general  admission  ticketing
product  called  "Admits,"  "Admits  Gold" and  "Admits  Platinum."  Each system
provides computerized  point-of-sale general admission tickets,  including timed
admission tickets and/or wristband tickets for amusement and water parks. Admits
Gold is  generally  marketed  to smaller  facilities  with ten or less points of
sale.  Admits  Platinum is marketed to  facilities  with more than ten points of
sale. The Company's newest offering,  Admits, is a Windows NT(R) based ticketing
system.

The Company  markets the  Passmaker  video ID system,  in  conjunction  with the
Admits  family of products.  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
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.

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

KNOTT'S  CAMP SNOOPY at the Mall of America in  Bloomington,  Minnesota  
TATILYA PARK, Istanbul, Turkey 
UNIVERSAL STUDIOS, Los Angeles,  California 
SUN  VALLEY,  a ski and golf  resort in Sun  Valley,  Idaho  WORLD OF COCA COLA,
Atlanta, Georgia
SNOWBIRD, a ski resort in Snowbird, Utah
HOUSE OF BLUES,  a night club chain in Los  Angeles,  California,  New  Orleans,
Louisiana and Cambridge, Massachusetts
THE FLORIDA AQUARIUM, Tampa, Florida
THE GUGGENHEIM MUSEUM, New York, New York
SUNDAY RIVER, a ski resort in Bethel, Maine
STEAMBOAT SPRINGS SKI RESORT, Steamboat Springs, Colorado
THE BASKETBALL HALL OF FAME, Springfield, Massachusetts
ROCK N ROLL HALL OF FAME, Cleveland, Ohio

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

CARNEGIE HALL, New York, New York
BOSTON RED SOX, Boston, Massachusetts
MGM GRAND HOTEL, Las Vegas, Nevada
DATATIX (providing tickets for the Utah Jazz), Salt Lake City, Utah

Current  installations  vary from  systems  which  provide  for  simple  general
admission  tickets to those  which allow  access by patrons to an  entertainment
facility,  or 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 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  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
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  one  product  with  a  modular   solution   orientation,
substituting  a  standard   product  with  customized   modules  for  customized
application  solutions;  and moving from a DOS or UNIX  platform to a Windows(R)
95/NT platform.

During the fourth quarter of 1996, the Company began selling the next generation
of its ticketing  system,  Admits.  It is a Windows(R)  version  which  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)

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based  clients.  The  Company  plans  to  take  the  current  functions  of  the
Select-a-Seat  product and integrate  them into this  Windows(R)  based product.
This will  create a  singular  product  with the  ability  to  generate  general
admission and reserved  seat  ticketing,  thereby  providing  customers  with an
integrated solution for multiple ticketing requirements.

ADMITS

Admits  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 system presently  consists of the following basic components:  a personal
computer, a printer, and the Company's Admits engineered 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.

Admits is designed to handle the diverse needs of a ticketing  office  including
cash control, ticket printing, event set-up and financial reporting.  Admits 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)  95/NT
platform,  Admits  delivers a superior  price/performance  ticketing  and access
control solution.

The Admits 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.

ADMITS GOLD AND ADMITS PLATINUM

The  Company's  Admits  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.

ADMITS  GOLD.  Admits  Gold  is  particularly  well-suited  for  use by  smaller
facilities with one to ten selling  stations.  The computer program is installed
on a personal computer with an MS-DOS operating system.

ADMITS  PLATINUM Admits  Platinum is a  comprehensive  admission  system that is
flexible  enough  to meet a  variety  of  customer  needs.  Admits  Platinum  is
better-suited than Admits Gold for larger applications,  such as ski resorts and
large  amusement  parks,  in which  numerous  ticketing  stations are  required.
Operating on a personal  computer  workstation with a UNIX host, Admits Platinum
can include, in addition to the ticketing issuance  capabilities of Admits Gold,
point-of-sale  software for gift shops and  concession  stands as well as access
control using bar code scanners and turnstiles.  The Admits  Platinum  software,
although not protected by a registered copyright, 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.").  It is the Company's belief that this  comprehensive
system  provides the Company with an advantage over its competitors by providing
customers with a variety of functions which can be customized to the needs of an
installation.  The system competes on the basis of its reputation in the market,
based on the number and quality of its  installed  sites.  When using the access
control  features of the Admits Platinum  system,  each ticket is given a unique
bar code that, when

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processed,  identifies the conditions  under which it can be used, the remaining
value of that ticket and the time, place and frequency of admission. As a ticket
passes a laser scanner,  the bar codes are scanned,  allowing the access control
system to simultaneously release the turnstile or perform another function while
reducing the value of the ticket. This system may accommodate millions of active
tickets in use and  thousands of different  ticket  types,  varying from tickets
that admit holders during  specified  hours,  during  specified days or that are
issuable for children, adults, senior citizens or other special categories.

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
Platinum.  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  Platinum,  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
Platinum in the ski area market. The system provides for fast lift ticketing and
season  pass  production  in addition  to mobile  scanning at lift entry  areas.
Recent installations include Sugarloaf,  Maine; Shawnee Mountain,  Pennsylvania;
and Massanutten, Virginia.

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 operated to request 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 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  Platinum  software to read
bar-coded tickets produced by the Admits Platinum software.

PRICE.  The price for the Admits  Platinum  or the  Admits  Gold  system  varies
widely,  ranging  from  approximately  $30,000  to  $750,000,  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
Platinum systems the Company has installed were sold for

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prices ranging from approximately $50,000 to $250,000.  The price for the Admits
Gold  system also  varies  depending  on  generally  the same  factors as Admits
Platinum.  However, as this product is specifically targeted to the lower end of
the market, the price range is generally under $100,000.

ADMITS  FEATURES.  Admits  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  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  systems 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.

Admits Gold and Admits  Platinum  are  computer  software  systems.  Each can be
purchased  separately for inclusion in a facility's existing computer system or,
more  typically,  with a number of  additional  optional  hardware  or  software
components with which the Company can integrate at the customer's request.  Such
additional  hardware items may include ticket printers,  cash drawers,  personal
computers,  customer  display  devices and attended or  automated  point-of-sale
terminals.  What the Company believes to be the proprietary nature of the Admits
systems  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, fund raising, and access control.

SELECT-A-SEAT

The  Company's  reserved  seating  software  system  is  called   Select-a-Seat.
Select-a-Seat  software  controls  reserved seating as well as general admission
sales.  Select-a-Seat has 90 installations servicing over 200 facilities,  which
are  selling  in excess of 30 million  tickets  annually  in the United  States,
Canada, Australia, Malaysia, Singapore and Ireland. The software can be used for
distribution and control of admission tickets for theaters,  professional sports
teams,  university  athletic  departments,  multi-purpose  arenas,  race tracks,
casinos,  concert halls,  performing  arts  organizations,  museums and IMAX(TM)
theaters.

Select-a-Seat  is  a  broad  "in-house"   computerized  box  office  management,
reservation and event  marketing  system.  The system  maintains an inventory of
available seats, storing the section,  row and seat information.  At the time of
sale,  the  system  prints  tickets  for  a  customer;  printing  the  pertinent
performance  information  as  well  as the  seating  location  in the  facility.
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.

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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 only
held unavailable in the system 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.

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  track  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  city-wide  ticket  distribution  networks as an
alternative  to a  national  service  bureau.  The  Select-a-Seat  system  is an
alternative to the 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 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.

TICKETING.  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 in the facility. 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.  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.

MARKETING.  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,  city-wide ticket
bureaus and professional sports teams.

PRICE. The price of Select-a-Seat  varies depending on the modules purchased and
the number of concurrent users

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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.

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's  technology,  through its  admission  and access  control  system
(previously sold under the name of Gatepas), reduces fraud and labor costs while
enhancing accountability and profitability.  Within the United States alone, the
entertainment and recreation  industry 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 permit the access control system to closely monitor general  attendance
at both  amusement/theme  park facilities as well as ski resorts. By recognizing
tickets with valid bar codes,  these scanning  devices reduce the possibility of
admission from  counterfeit  tickets.  Bar-coded  tickets cannot be successfully
altered by the holder to defeat the system and are more durable than the fragile
magnetic strips.

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

DISCONTINUED  PRODUCTS.  During 1996,  the Company did not have any sales of its
Facility  Management  System,  or its Resort  Management  System.  The  Facility
Management  System is a  third-party  software  designed  to manage  events at a
meeting  facility,  such as a  convention  center  for  which  the  Company  has
marketing rights.  The Resort Management System is software owned by the Company
that  provides  the  ability to manage  golf tee times and tennis  reservations.
Neither of these  products was a primary  focus of the Company in 1996,  and the
Company considers them to be discontinued.


                                        8

<PAGE>



SOFTWARE  AND  COMPUTERS.  The  Company  holds a federal  registered  copyright,
granted in 1987, on its  gate-control  software  included in the access  control
system.  The system was designed and  developed by the Company.  This  copyright
affords the Company the  protection of the federal  copyright  laws. The Company
has  introduced an upgrade to its ticketing  and  reporting  software,  based on
software acquired when the Company purchased Delta and GIS. The software upgrade
is not  protected  by a  registered  copyright;  however,  the Company  deems it
proprietary  and relies upon a  combination  of  contract,  copyright  and trade
secret laws to protect its  proprietary  interest in the upgraded  software (See
"Intellectual Property.").


PRODUCT SERVICING AND ADMINISTRATION

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

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.

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 who 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,  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.

At December 31, 1995, the Company had $297,000  reserved to accomplish  upgrades
of original  Delta and GIS sites.  Most of this was  accomplished  during  1996;
however, additional upgrades and enhancements were committed to customers during
1996.  These were  primarily  customers  who  purchased  Delta  product  (Admits
Platinum) from the Company during 1995 and early 1996. At December 31, 1996, the
Company has $571,000

                                        9

<PAGE>



reserved to  accomplish  these  upgrades and  enhancements  as well as a certain
amount of  upgrades  and  enhancements  that may be  committed  in the future (a
warranty allowance) on 1996 sales.

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 and indirect selling channels of 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 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.

In 1996,  the Company  began  marketing  its  products  through  two  additional
channels;  an in-house  telemarketing  group,  and a value added  reseller (VAR)
program.  The  telemarketing  group is  responsible  for  qualifying  new  leads
generated through the Company's marketing programs, pursuing new or add-on sales
opportunities  that have a revenue  value of between  ten  thousand  dollars and
fifty thousand dollars and initiating  specific sales promotions targeted at the
existing  installed  base.  The VAR program has led to the  recruitment of three
qualified  resellers in targeted  metropolitan  areas.  Resellers are focused on
low-end general admission  opportunities  that have a revenue value of up to ten
thousand  dollars.  For the resellers to become  certified by the Company,  they
must  have  completed  a  comprehensive  certification  process  which  includes
formalized  product and technical  training at the Company's  training facility.
This program is designed to prepare them to sell and install the product,  train
the users and support their future application needs.

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 most  significant of
these is a recent  alliance with  Neighborhood  Box Office,  a  manufacturer  of
ticketing  kiosks.  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.

                                       10

<PAGE>




The Company markets products that typically require substantial customization in
order to meet the  customer's  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.

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,
which 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 provide will
be  a  highly  effective  means  for  delivering   business   solutions  to  the
entertainment industry.

With this in mind, in June, 1996, the Company  initiated an internal  assessment
of its marketing  and product  management  strategies  to determine  whether the
current  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 has  concluded  that its  principal
application components for ticketing, revenue management and access control will
continue  to  provide  significant  benefits  to its  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.


Accordingly,  the Company  commenced the development  effort to support this new
marketing approach in 1996. As of March, 1997, the Company has installed limited
release  versions  of the  new  product  in five  customer  sites.  The  Company
anticipates the completion of additional  modules, at an average rate of and per
month until  approximately  June, 1997, when the Company  anticipates having the
entire general admission product line rewritten.  Beta sites will continue to be
selected  to  facilitate  testing of each module in a live  environment  and new
configurations  with  additional  modules will be sold before general release of
the products  which is  anticipated  to be in Juen of 1997.  the current  legacy
software products will continue to be marketed and the Company will support this
software for some peeiod of thime beyond availability of general release version
of the new general  admissions  product for the customers who desire to continue
using the  current  software.  As a result of this  development  effort  and new
product introduction, the Company expects to achieve cost reduction beginning in
late 1997 in areas of product development and customer support.  The Company has
sold  and  installed  beta  versions  of the new  software  consisting  of three
modules.  The Company  anticipates  the  completion of additional  modules at an
average rate of one per month until  approximately  June 1997,  when the Company
anticipates   having  the  entire  general  admission  product  line  rewritten.
Additional  beta sites will be selected so each module can be fully  tested in a
"live" environment and new  configurations  with additional modules will be sold
before general release of the products.

As a result of this development effort and new product introduction, the Company
expects to achieve  cost  reductions  beginning in late 1997 in areas of product
development  and  customer  support.  In  addition,  the product will have a new
appearance  that 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 to a new revision level.

                                       11

<PAGE>



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 is one
example of each type of installation:

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 GOLD WITH ACCESS  CONTROL AT ROCK N ROLL HALL OF FAME,  CLEVELAND,  OHIO.
The Admits Gold  system  installed  at the Rock n Roll Hall of Fame  includes 10
point-of-sale  ticketing stations and provides for automated scanning and access
control. The system has been operating since opening day in September,  1995 and
has processed over 1,000,000 tickets;

ADMITS PLATINUM AT SUN VALLEY SKI RESORT, SUN VALLEY, IDAHO. The Admits Platinum
at Sun Valley Ski Resort  includes  27  point-of-sale  stations  for lift ticket
sales,  6 video ID stations for season  passes,  and 6 radio  frequency ski lift
scanning  stations for access  control.  It has processed over  3,000,000  skier
visits since it was installed and currently  processes over 400,000  tickets per
year.

ADMITS PLATINUM WITH ACCESS CONTROL AT THE FLORIDA AQUARIUM, TAMPA, FLORIDA. The
Company  installed its Admits Platinum and access control systems at The Florida
Aquarium in early 1995.  The systems  provide for a  computerized  point-of-sale
ticketing  system and laser scanning bar code  technology to automate and verify
admission  and  access  to the  facility.  The  systems  have  sold and  scanned
approximately 1.9 million tickets since its grand opening in 1995.

ADMITS AT ART GALLERY OF ONTARIO,  ONTARIO, CANADA. The Admits system at the Art
Gallery of Ontario 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, 1996 and December  31, 1995,  the  Company's
backlog was $963,000 and $1,190,000 respectively.  The backlog represented sales
to numerous  sites with purchase  prices ranging from  approximately  $52,000 to
$326,000.  In 1995, no one customer  represented  more than 10% of the Company's
sales. In 1996,  Bayindir Insaat Turizm Ticaret (a large,  indoor amusement park
in Istanbul, Turkey) represented 12% of the Company's sales.

COMPETITION

The Company faces competition from different sources with respect to each of its
products.  The  Company  is  unaware  of any one  competitive  source  with  the
capabilities to supply the number of different  admission and ticketing products
which the Company offers.  The Company  believes it has a competitive  advantage
over any other single  company due to the  Company's  ability to satisfy a great
variety of software or hardware  requirements a customer might have with respect
to general admission ticketing, access control and reserved seating.


                                       12

<PAGE>



ADMITS.  There  are  several  companies  in the  United  States  offering  basic
computerized  ticketing  capabilities  which are  similar  to those the  Company
offers through its Admits Gold and Admits Platinum 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
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 which 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.

GENERAL. 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 whom 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 of such  components are Digital  Equipment,  Tech
Data, Data General, BOCA Systems, Inc., Alvarado Manufacturing Co., Indiana Cash
Drawer Corporation,  Jetstar,  Inc., Arco Distributors,  Inc. The other products
the Company offers are primarily software.

The Company 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 January 1, 1996, with a firm that provides all administrative services
relating to payroll,  personnel  and  employee  benefits  (an  employee  leasing
agreement).  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.

As  of  December  31,  1996,  the  Company  employed  (or  employee  leased)  42
individuals, including 4 in management, 8 in engineering, 13 in operations, 8 in
sales and marketing,  5 in finance and accounting and 4 support staff personnel.
The Company also retained 1 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 is excellent.

INTELLECTUAL PROPERTY

The Company holds  copyrights  for the software  comprising  its access  control
system and 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 copyrights
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 marksand trade secret laws and 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
copyrights 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 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  intends to apply for  copyrights  when feasible in order to protect
its product enhancements as they

                                       14

<PAGE>



are  developed.  There can be no assurance that  copyrights  will be obtained or
that they 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  servicemarks for the names  Select-A-Seat
and  Lasergate  Systems,  Inc.;  Admits is a product of the  Company.  All other
brands and products  mentioned in this report are trademarks of their respective
holder(s).

ITEM 2. DESCRIPTION OF PROPERTY

The Company currently leases approximately 11,910 square feet of office space in
Clearwater,  Florida.  The lease expires on April 30, 1999.  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 building as space becomes  available.  From
March 1997 through February 1998, the rent payable will be approximately $14,000
per month.

ITEM 3. LEGAL PROCEEDINGS

The Company's founder and former President and Chief Executive  Officer,  Donald
Turner,  has  commenced an action  against the Company in a Florida state court.
Mr. Turner alleges,  among other things, that he was wrongfully  terminated from
his employment and seeks damages which 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.

Derek Betty and James Potter have 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 is entitled  Derek
Betty v. Lasergate  Systems,  Inc. ("the Betty Action") and the second action is
entitled James Potter v. Lasergate Systems, Inc. and 1103065 Ontario, Inc. ("the
Potter  Action").  Both  actions are  pending in the Circuit  Court of the Sixth
Judicial Circuit in and for Pinellas County,  Florida.  The Betty Action alleges
that the Company has failed to return  shares of the  Company's  stock which are
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 alleges a breach of the terms and conditions of a
Registration  Rights and Put Option  Agreement  executed in connection  with the
sale of Delta to the Company.  The Betty  Action  seeks  damages in an amount in
excess of $15,000,  which is the jurisdiction amount, but it is anticipated that
damages  could be in excess of $25,000.  The Potter Action also alleges a breach
of the Registration Rights and Put Option Agreement. Moreover, the Potter Action
includes  allegations  concerning James Potter's  Consulting  Agreement with the
Company and a  Non-Compete  Agreement.  The Potter  Action  seeks a  declaratory
judgment determining that the Company and 1103065 Ontario Inc ("Ontario") are in
material breach of the Non-Compete  Agreement and that Potter is relieved of all
obligations to perform under the Non-Compete Agreement. The Company has moved to
dismiss  both  actions  and to compel  arbitration  pursuant  to an  arbitration
provision in the Stock Purchase  Agreement relating to the acquisition of Delta.
A hearing on the motion in the Potter Action is scheduled for April 1, 1997, and
a hearing on the motion in the Betty  Action is scheduled  for May 2, 1997.  The
Company intends to vigorously defend both actions.

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

None.

                                       15

<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, 1995                 $  13 3/4               $  7 1/2
            June 30, 1995                      9 5/8                  4 3/8
            September 30, 1995                 6 1/4                  3 3/4
            December 31, 1995                  6 5/8                  1 3/4
            March 31, 1996                     2                        7/8
            June 30, 1996                      1 7/8                  11/16
            September 30, 1996                 1 3/8                  17/32
            December 31, 1996                  25/32                   7/32

As of March 20, 1997, there were 1,616 holders of record of the Common Stock. No
dividends  have ever been  declared or paid on the Company's  Common Stock.  The
closing price of the Common Stock on March 20, 1997, was $3/8 per share.

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

GENERAL

Due to the  Company's  net loss  for  1996 of  $4,997,962,  and its  history  of
operating losses that have accumulated to $16,783,318, at December 31, 1996, our
independent  certified  public  accountants  have qualified  their  accountants'
report dated March 28, 1997, on the Company's 1996 financial  statements as to a
going  concern  uncertainty.   The  following  commentary  within  "Management's
Discussion  and Analysis"  addresses the Company's  operations  for 1996 and its
plan to improve  future  results.  These matters are also discussed in Note 3 to
the financial statements.

Since the second  quarter of 1994,  a number of  significant  events  have had a
material impact upon the Company's  operating results and its current and future
prospects.  In  addition  to a change in control  and a public  offering  of its
securities,  the changes  included  replacement of the entire Board of Directors
and all of the Company's senior executives,  including the President/CEO as well
as most of its other personnel.  They also included two acquisitions  (Delta and
GIS Systems Limited  Partnership  ("GIS")) with a combined customer base of over
200 sites, and various product integration and development efforts.

These changes  required more than two years of sustained  effort and substantial
amounts of  capital.  At the  beginning  of 1996,  the  Company  had very little
working  capital.  This  situation grew worse during the first half of the year,
and, as a result,  in June 1996,  shipments  to  customers  were not on schedule
because  orders for their product could not be placed with vendors.  The Company
had utilized all credit  extended to it by vendors.  Given these  circumstances,
the Company  undertook two private  placements of  convertible  preferred  stock
during  this time  period,  for which the Company  received a combined  total of
$6,623,082,  net of commissions and offering expenses.  This allowed the Company
to initiate two basic programs designed to move the Company toward

                                       16

<PAGE>



profitability.  First,  it was  decided to begin  development  of a new  product
(Admits)  that  would be  modular in nature,  thus  allowing  the  product to be
customized more easily and installed more efficiently.  Secondly, it was decided
to commit  additional  funds to marketing  efforts,  including a doubling of the
sales force aimed at substantially  increasing  revenues and potentially  moving
the Company beyond the break-even point and towards profitability in the future.

The  development  effort was  immediately  focused  upon the  general  admission
product since it seemed to have the fastest and largest payback. The core of the
product was  developed  earlier than planned and was in Beta testing by November
1996. This was primarily due to the experience of the  development  team and the
ability to forego the creation of a detailed  program  design by  utilizing  the
software programs of the legacy product,  and GIS as a production plan. With the
Company's  efforts to satisfy new and existing  customer demands for programming
changes to the Delta and GIS  products  (see  discussion  of warranty  costs and
warrants  liability in Note 2 of the financial  statements),  the Company had to
keep a substantial  portion of its resources dedicated to the legacy products in
all areas: development, installation, customer support, training, documentation,
and  marketing.  However,  the Company  kept the general  admission  development
effort on schedule.  At the present time,  management  believes the Company will
have the new Admits general  admission  product available for general release by
June 1997.

For most of 1996 the Company employed three or four field sales representatives.
During the fourth  quarter of 1996,  two systems  engineers  were  dedicated  to
providing  pre-sales  support and an inside sales department was formed with two
inside sales representatives hired initially. During February and March of 1997,
two additional  field sales  representatives  were hired,  bringing the total to
six. Thus, for most of 1997, the Company expects to have ten employees dedicated
to sales efforts compared to three or four during 1996.

The combined  result for the Company of expanding the sales force and delivering
the new Admits general  admission  product on schedule is that revenue can still
be favorably impacted during the latter part of 1997. Thus,  management believes
it can achieve a reduction of the operating  loss by the end of 1997 and lay the
foundation  for  future  profitability.  Although  no  assurance  can be  given,
management believes that sustained  expenditure and cash controls would maintain
adequate  working  capital  through  1997,  on the premise  that the new general
admission   Admits   product   will  be  completed  as  planned  by  June  1997.
Nevertheless,  the  Company  intends  to seek and  actively  pursue  a  possible
relationship with a strategic partner,  which would include an equity investment
in the Company and may review other financing opportunities.

RESULTS OF OPERATIONS: 1996 COMPARED TO 1995

Revenues

            Revenues  increased to $4,204,626  in 1996 from  $2,835,206 in 1995,
representing   a  48%   increase.   Revenues   consisted  of  system  sales  and
installations  of $3,588,383 in 1996 and $2,508,206 in 1995, and maintenance and
support of $616,243 in 1996 and  $300,000 in 1995.  The increase in system sales
and  installations  was primarily  attributable to marketing  activities from an
increased sales staff, and from the Company's enhanced products.

            In 1996, the Company's  principal  products,  Select-a-Seat,  Admits
Platinum,  and Admits  Gold,  represented  approximately  33%,  35%,  and 16% of
revenues, respectively, compared to 42%, 30%, and 12% of

                                       17

<PAGE>



revenues,  respectively,  in 1995. By the end of 1997,  the Company  expects the
revenue  from Admits  Platinum and Admits Gold to be  substantially  replaced by
revenue from Admits,  the Company's  modular  Windows(R) based general admission
product.  Maintenance  and support  represented  14% of revenues in 1996 and 11%
1995.  While  maintenance  and support revenue for 1997 is expected to increase,
its percentage of total revenues is not expected to increase.

            In 1996,  one customer,  Bayindir  Insaat Turizm  Ticaret,  a large,
indoor amusement park in Istanbul, Turkey, represented 12% of revenues. In 1995,
no customers  represented  10% or more of revenues.  As the total  customer base
grows, the likelihood of having certain  customers  account for more than 10% of
revenues in future years is reduced.

Cost of Revenues

            Cost of revenues in 1996 and 1995 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,  and the full
costs associated with the provision of customer support.

            Cost of revenues  increased to $2,937,269 from $2,619,436.  This 12%
increase was the result of costs  related to a 48% increase in sales,  partially
offset by increased  efficiencies  in  installing  products.  As a percentage of
revenues,  cost of revenues in 1996 represented 70% of revenues  compared to 92%
of revenues in 1995. This improvement represents more efficient installation and
support of products.

            Although  the  sales  mix for  hardware  versus  software  has  been
relatively consistent during 1995 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  increased  to $460,709 in 1996 from  $348,352 in
1995, an increase of $112,357, or 32%. As a percentage of revenues,  development
costs decreased from 12% in 1995 to 11% in 1996. The Company expects to continue
development  efforts  in 1997 at  about  the same  level  as in  1996,  with the
majority of the development effort focused on its new modular products.

Selling, General and Administrative

            Selling, general and administrative expenses increased to $4,715,513
in 1996 from $4,122,914 in 1995, representing a 14% increase. As a percentage of
revenues,  these expenses were 112% in 1996 and 145% in 1995, which reflects the
subtantial increase in revenues in 1996.

            The  principal  components  of the increase in selling,  general and
administrative, in 1996 as compared to 1995 are described below:

            Sales and  marketing  expenses  increased to $1,273,751 in 1996 from
$1,036,506 in 1995, representing a 23% increase. This increase was attributed to
increased salaries,  benefits, and commissions of $467,213,  associated with the
Company's additions to the sales force, offset by a reduction of $234,715 in the
amount paid to independent contractors who performed similar functions in 1995.

                                       18

<PAGE>





            General and administrative  expenses increased to $3,441,762 in 1996
from $3,086,408 in 1995,  representing a 12% increase.  The principal components
of the  increase  are  increase in  shareholder  relations  expenses,  executive
compensation, employee wages, legal fees, and bad debt expense.

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  7 to the
financial statements). In 1995, there was no write down of assets.

Other Income (Expense)

            Interest expense was $45,061 in 1995. Due to the funds received from
the private  offering in June 1996,  the Company  paid off its debt and invested
the remaining funds, earning interest income in 1996 of $53,577.

            Net other income/(expense) represented $67,674 of expense in 1996 as
compared  to $93,775 of income in 1995.  The  decrease is  primarily  due to 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 compared to earnings
of $48,060 in 1995.

Income Taxes

            The  Company   currently  has  a  substantial   net  operating  loss
carryforward  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 10 to the financial statements).

Net Loss

            Net  loss  increased  to  $4,997,962  ($.82 a  share)  in 1996  from
$4,206,782  ($1.39 a share) in 1995. The Company's  operations  were affected by
various factors as discussed  above with the largest  component being a one-time
write down of capitalized software in the amount of $1,075,000.

New Accounting Pronouncements Adopted

            Accounting for Stock Based Compensation. SFAS No. 123 Accounting for
Stock  Based  Compensation  was  implemented  during  1996.  The affect upon the
Company's financial statements was immaterial.

Financial Condition: 1996 Compared to 1995

            Total assets remained  relatively constant at $6,436,945 on December
31, 1996,  from  $6,406,236  on December 31, 1995,  representing  an increase of
$30,709,  or less than 1%. This  includes an increase in cash of $1,268,319 as a
result of two private placements and a decrease in systems and software costs of
$1,173,928, primarily due to a write-down of these costs.

                                       19

<PAGE>



            Total liabilities decreased to $3,320,392 on December 31, 1996, from
$4,719,465 on December 31, 1995, representing a decrease of $1,399,073,  or 30%.
The  principal  contributing  factors to the decrease are the repayment of notes
payable  of  $300,000  and the  repayment  of the  promissory  notes  payable to
stockholders  with  conversion  futures,  which  had  a  balance  of  $2,324,335
partially offset by increases in deferred  revenue,  accrued warranty costs, and
accrued  expenses.  (See Note 4 to the financial  statements and "Liquidity' and
Capital Resources" below).

Liquidity and Capital Resources

The following  table  presents a summary of the Company's cash flow for 1996 and
1995:
                                                    1996           1995
                                                -----------    -----------
    Net cash used in operating activities       $(2,282,971)   $(2,833,237)
    Net cash used in investing activities          (228,663)      (708,917)
    Net cash provided by financing activities     3,779,953      2,608,823
    Net increase (decrease) in cash
        and cash equivalents                    $ 1,268,319    $  (933,331)

The Company used cash of $2,282,971 in 1996 and $2,833,237 in 1995 for operating
activities.  From its inception in October 1985 through  December 31, 1996,  the
Company has incurred cumulative losses of $16,783,318, with a loss of $4,997,962
for the year ended  December 31, 1996.  The  company's  net loss in 1996 was due
primarily to expenditures  related to the factors  referred to under the caption
"Results of Operations:  1996 Compared to 1995" above.  Included in the net loss
for 1996 were  non-cash  expenses  totaling  $2,006,626  , which  included (I) a
write-down    of    capitalized    software    costs   of    $1,075,000;    (ii)
depreciation/amortization   expenses  of  $513,153;   and  (iii)  equity-related
transactions totaling $229,686 of compensation expense recognized as a result of
the  grant of  stock  options  in 1994.  Cash  that was used to  purchase  items
classified  as  current  assets  totaled   $426,428  with  accounts   receivable
increasing by $540,617,  investment in  inventories  decreasing by $70,763,  and
prepaid  expenses  decreasing  by $43,426.  These uses of cash were offset by an
increase in accounts  payable and accrued  expenses of $764,362,  an increase in
accrued  warranty  costs of  $273,919,  and an increase  in deferred  revenue of
$180,110.

The Company used cash in investing activities in the amount of $228,663 in 1996,
which was used for additions to property,  equipment,  and software  costs,  and
used  cash  in  investment  activities  in  the  amount  of  $708,917  in  1995,
principally related to the loan to GIS stockholders of $559,000.

The Company was provided cash by financing  activities of $3,779,953 in 1996 and
$2,608,823 in 1995.  The Company  relied on net proceeds from public and private
offerings  and loans and advances  from related  parties to fund its  operations
during 1996 and 1995.  Two private  offerings in 1996 and a private  offering in
1995 provided $6,623,082 and $1,870,976, respectively.

In 1995, the Company borrowed  $859,505,  consisting of $559,505 as an unsecured
cash advance from two former  shareholders as evidenced by a promissory note due
October  1996,  at an annual  interest  rate of 8% and $300,000 as an additional
unsecured cash advance from the same parties evidenced by a convertible  secured
promissory  note due March 30, 1996, at an annual interest rate of 9.5%. In June
1995,  the  Company  issued  79,950  shares of its Series A  Preferred  Stock in
satisfaction  of the $559,505  promissory  note and $200,000 of additional  note
payables outstanding since 1994.

In February 1995, the Company  acquired  substantially  all of the assets of GIS
for an aggregate consideration of

                                       20

<PAGE>



approximately $3,700,000.  The purchase price consisted of 109,333 shares of the
Company's  Common  Stock  valued at $765,331,  111,800  shares of the  company's
Series B  Preferred  Stock  valued at  $559,000,  and the  Company's  unsecured,
non-interest-bearing  promissory notes in the aggregate amount of $2,324,335. In
addition, the Company agreed to assume certain liabilities of GIS and loaned GIS
$559,000 as evidenced by a  promissory  note from GIS due March 31, 1996,  which
was secured by the pledge to the Company of the 111,800  shares of the Company's
Series B Preferred Stock.

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 same  party.  These  preferred  shares  were  potentially  convertible  into
2,636,126 shares of Common Stock had they not been redeemed.

Each share of Series F Preferred  Stock is also  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,
will be deemed to be $.45 and a trading  price that is more than $1.00 per share
will be  deemed to be  $1.00.  On  January  27,  1996 55 shares of the  Series F
Preferred  Stock  were  converted  into  100,000  shares  of  common  stock at a
conversion price of $.55 per share.

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).

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 1996, and that  operations  should
continue to progress throughout 1997.



                                       21

<PAGE>



ITEM 7. FINANCIAL STATEMENTS

Following  this page are the Company's  financial  statements for the year ended
December 31, 1996 which include the following items:

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

    Consolidated Balance Sheets as of
                December 31, 1996 and December 31, 1995                   F-2

    Consolidated Statements of Operations for the years ended
                December 31, 1996 and December 31, 1995                   F-3

    Consolidated Statements of Stockholders' Equity for the
                years ended December 31, 1996 and December 31, 1995       F-4

    Consolidated Statements of Cash Flows for the years
                ended December 31, 1996 and December 31, 1995             F-5

    Notes to Consolidated Financial Statements                            F-7


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

None.






                                       22

<PAGE>



                                    PART III

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

            The  information  required by this item is incorporated by reference
herein in the "Election of Directors" section of the Company's  definitive Proxy
Statement  to be filed for the  Company's  1997 Annual  Meeting of  Shareholders
pursuant to Regulation 14A.

ITEM 10. EXECUTIVE COMPENSATION

            The  information  required by this item is incorporated by reference
herein in the "Executive Compensation" section of the Company's definitive Proxy
Statement  to be filed for the  Company's  1997 Annual  Meeting of  Shareholders
pursuant to Regulation 14A.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            The  information  required by this item is incorporated by reference
herein in the "Security  Ownership of Certain  Beneficial Owners and Management"
section  of the  Company's  definitive  Proxy  Statement  to be  filed  for  the
Company's 1997 Annual Meeting of Shareholders pursuant to Regulation 14A.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The  information  required by this item is incorporated by reference
herein in the "Certain  Relationships and Related  Transactions"  section of the
Company's  definitive  Proxy Statement to be filed for the Company's 1997 Annual
Meeting of Shareholders pursuant to Regulation 14A.








                                       23

<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         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         Form  of  Subscription   Agreement  for  Series  D  Preferred  Stock
            (incorporated  by reference to Exhibit 4.1 of the  Company's  Annual
            Report on Form 10-KSB, File No. 0-15873, for the year ended December
            31, 1995).

4.2         Form  of  Subscription   Agreement  for  Series  E  Preferred  Stock
            (incorporated  by reference to Exhibit 4.2 of the  Company's  Annual
            Report on Form 10-KSB, File No. 0-15873, for the year ended December
            31, 1995).

4.3         Form  of  Subscription   Agreement  for  Series  F  Preferred  Stock
            (incorporated by reference to Exhibit 4.1 of the Company's Quarterly
            Report on Form 10-QSB, File No. 0-15873,  for the quarter ended June
            30, 1996).

4.4         Form of Registration  Rights  Agreement with Respect to the Purchase
            of Shares of Series F Preferred Stock  (incorporated by reference to
            Exhibit 4.2 of the Company's  Quarterly  Report on Form 10-QSB, File
            No. 0-15873, for the quarter ended June 30, 1995).

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        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).

10.3        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).

10.4        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.
            0-15873).

10.5        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).

10.6        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).

10.7        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).

10.8        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).

10.9        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).

10.10       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).

10.11       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).

10.12       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.

            None.






                                       24

<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
                                               President and Chief
                                               Executive Officer

                                            Date: March 31, 1997


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    President, Chief Executive Officer  March 31, 1997
Jacqueline E. Soechtig        (Principal Executive Officer) 
                              and Director

/s/PHILIP P. SIGNORE          Vice President - Finance, Chief     March 31, 1997
Philip P. Signore             Financial Officer, Secretary, 
                              Treasurer, and Director
                              (Principal Financial and Accounting 
                              Officer)

/s/ FRANK W. SWACKER          Director                            March 31, 1997
Frank W. Swacker

/s/BRUCE D. BARRINGTON        Director                            March 31, 1997
Bruce D. Barrington

/s/JOHN J. CHLUSKI            Director                            March 31, 1997
John J. Chluski



                                       25

<PAGE>








                        CONSOLIDATED FINANCIAL STATEMENTS
                            AND REPORT OF INDEPENDENT
                          CERTIFIED PUBLIC ACCOUNTANTS

                             LASERGATE SYSTEMS, INC.
                                AND SUBSIDIARIES

                           December 31, 1996 and 1995



<PAGE>



                                TABLE OF CONTENTS

                                                                           PAGE

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

Consolidated Balance Sheets as of December 31, 1996 and 1995.............  F-2

Consolidated Statement of Operations for the Years
  Ended December 31, 1996 and 1995.......................................  F-3

Consolidated Statement of Stockholders' Equity for the
  Years Ended December 1996 and 1995.....................................  F-4

Consolidated Statements of Cash Flows for the Years
  Ended December 31, 1996 and 1995.......................................  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, 1996, and 1995, 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, 1996, and 1995, 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 $4,997,962 during the year ended
December 31, 1996, and, as of that date, the Company has an accumulated  deficit
of $16,783,318.  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 will
not be  necessary  to fund  its  operations  in  1997.  However,  the  Company's
operating loss history raises  substantial  doubt about the Company's ability to
continue as a going concern.  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
March 28, 1997

                                       F-1

<PAGE>

                    Lasergate Systems, Inc. and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS

                                  December 31,
<TABLE>
<CAPTION>
                                                                                1996            1995
                                                                            ------------    ------------
<S>                                                                         <C>             <C>         
                                     ASSETS
Current assets:
   Cash and cash equivalents                                                $  1,924,825    $    656,506
   Accounts receivable, net of allowance for
    doubtful accounts of $147,000 and $36,000                                    868,931         439,311
   Account receivable, related party                                                --           199,359
   Inventories                                                                   254,901         325,664
   Prepaid expenses                                                               40,966          84,392
                                                                            ------------    ------------
                        Total current assets                                   3,089,623       1,705,232
                                                                            ------------    ------------

Property and equipment, net                                                      304,024         246,568
Systems and software costs, net of write down and amortization
    of $1,525,856 and $283,333                                                   242,739       1,416,667
Goodwill, net of amortization of $265,568 and $132,579                         2,382,705       2,515,694
Customer lists and support contracts, net of amortization
 of $141,667 and $70,833                                                         283,333         354,167
Other assets, net                                                                134,521         167,908
                                                                            ------------    ------------
                              Total assets                                  $  6,436,945    $  6,406,236
                                                                            ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Notes payable, related parties                                           $       --      $    300,000
   Notes payable, other                                                           28,628          21,757
   Accounts payable, trade                                                       542,671         634,863
   Deferred revenues                                                             909,516         729,406
   Accrued warranty costs                                                        570,919         297,000
   Accrued expenses                                                            1,128,658         272,104
                                                                            ------------    ------------
                        Total current liabilities                              3,180,392       2,255,130

Promissory notes payable, stockholders with conversion futures                      --         2,324,335
Obligations to issue common stock                                                140,000         140,000
                                                                            ------------    ------------
                              Total liabilities                                3,320,392       4,719,465

Commitments and contingencies                                                       --              --

Stockholders' equity:
   Preferred stock, $.03 par value, 2,000,000 shares
     authorized, 8,000 and 387,750 shares issued and
     outstanding at December 31, 1996 and 1995, respectively                         240          11,633
   Common stock, $.03 par value, 20,000,000 shares authorized,
     7,362,061 and 3,125,013 issued and outstanding at
     December 31, 1996 and 1995, respectively                                    220,862          93,751
   Additional paid-in capital                                                 19,818,769      14,065,743
   Less: Common stock, $.03 par value, 20,000 shares
           at December 31, 1996 and 1995, respectively,
           subject to put options                                               (140,000)       (140,000)
        Notes receivable, stockholders                                              --          (559,000)
   Accumulated deficit                                                       (16,783,318)    (11,785,356)
                                                                            ------------    ------------
                               Total stockholders' equity                      3,116,553       1,686,771
                                                                            ------------    ------------
                               Total liabilities and stockholders' equity   $  6,436,945    $  6,406,236
                                                                            ============    ============
</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,


                                                        1996            1995
                                                    -----------     -----------


Revenues                                            $ 4,204,626     $ 2,835,206

Operating Expenses:
  Cost of revenues                                    2,937,269       2,619,436
  Development                                           460,709         348,352
  Selling, general and administrative                 4,715,513       4,122,914
  Write down of capitalized software costs            1,075,000            --
                                                    -----------     -----------

            Operating loss                           (4,983,865)     (4,255,496)

Other income (expense)
            Interest income (expense)                    53,577         (45,061)
            Other, net                                  (67,674)         93,775
                                                    -----------     -----------

             Loss before income taxes                (4,997,962)     (4,206,782)

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

              Net loss                              $(4,997,962)    $(4,206,782)
                                                    ===========     =========== 


Net loss per common share                           $      (.82)    $     (1.39)
                                                    ===========     =========== 


Weighted Average Common Stock Outstanding             6,063,633       3,023,346
                                                    ===========     =========== 


        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, 1996 and 1995
<TABLE>
<CAPTION>
(PART 1 OF 2)
                                                         Preferred Stock                   Common Stock
                                                         ---------------                   ------------
                                                                                                                     Additional     
                                                                         Par                             Par          Paid-In       
                                                       Shares           Value          Shares           Value         Capital       
                                                    ------------    ------------    ------------    ------------    ------------    
<S>                                                        <C>               <C>       <C>               <C>          <C>           
BALANCE, DECEMBER 31, 1994                                36,364           1,091       2,913,680          87,412       9,258,563    
                                                    ------------    ------------    ------------    ------------    ------------    
Issuance of common stock at $7.00 a share and
  preferred stock at $5.00 per share in
  connection with GIS acquisition                        111,800           3,353         109,333           3,279       1,317,697
Less: note receivable collateralized by preferred
  stock                                                                                                                             
Issuance of preferred stock in Private Placement at
  $10 per share less offering expenses of $215,024       208,600           6,258                                       1,864,718
Grants of stock options for 1994 and 1995
  executive compensation                                                                                                 937,250
Conversion of preferred to common stock                  (28,600)           (858)        110,000           3,300          (2,442)
Issuance of preferred  stock for satisfaction of
  notes payable, related part                             79,950           2,400                                         757,106
Exchange of preferred stock: Shares redeemed             (36,364)         (1,091)
                             Shares issued                16,000             480                                             611
Issuance of common stock under stock option plan                                           2,000              60           1,940
Exercise of common stock put option                                                      (10,000)           (300)        (69,700)   
Net loss                                                    --              --              --              --              --      
                                                    ------------    ------------    ------------    ------------    ------------    
BALANCE, DECEMBER 31, 1995                               387,750    $     11,633       3,125,013    $     93,751    $ 14,065,743    
                                                    ------------    ------------    ------------    ------------    ------------    

Retirement of stock in settlement of acquisition        (111,800)         (3,355)       (109,333)         (3,279)         22,609    
   obligations
Issuance of Series E preferred stock                     162,500           4,875                                       1,445,707
Issuance of Series F preferred stock                       8,000             240                                       5,172,260
Redemption of preferred stock                            (95,950)         (2,878)                                       (997,121)
Conversion of preferred to  common stock                (342,500)        (10,275)      4,301,381         129,040        (118,765)
Issuance of restricted common stock as compensation                                       45,000           1,350          40,836
Grant of stock options for
    Executive compensation                                                                                               187,500
Net loss                                                                                                                            
                                                    ------------    ------------    ------------    ------------    ------------    
BALANCE, DECEMBER 31, 1996                                 8,000             240       7,362,061         220,862      19,818,769    
                                                    ============    ============    ============    ============    ============    
</TABLE>

<TABLE>
<CAPTION>
(PART 2 OF 2)
                                                        Common
                                                        Stock          Notes
                                                        Subject     Receivables
                                                        to Put         Stock-        Accumulated
                                                        Option        holders          Deficit
                                                    ------------    ------------    ------------
<S>                                                 <C>             <C>             <C>          
BALANCE, DECEMBER 31, 1994                              (210,000)                     (7,578,574)
                                                    ------------    ------------    ------------

Issuance of common stock at $7.00 a share and
  preferred stock at $5.00 per share in
  connection with GIS acquisition                   
Less: note receivable collateralized by preferred
  stock                                                                 (559,000)
Issuance of preferred stock in Private Placement at
  $10 per share less offering expenses of $215,024  
Grants of stock options for 1994 and 1995
  executive compensation                            
Conversion of preferred to common stock             
Issuance of preferred  stock for satisfaction of
  notes payable, related part                       
Exchange of preferred stock: Shares redeemed        
                             Shares issued          
Issuance of common stock under stock option plan    
Exercise of common stock put option                       70,000
Net loss                                                    --              --        (4,206,782)
                                                    ------------    ------------    ------------
BALANCE, DECEMBER 31, 1995                          $   (140,000)   $   (559,000)   $(11,785,356)
                                                    ------------    ------------    ------------


Retirement of stock in settlement of acquisition                         559,000
   obligations
Issuance of Series E preferred stock                
Issuance of Series F preferred stock                
Redemption of preferred stock                       
Conversion of preferred to  common stock            
Issuance of restricted common stock as compensation
Grant of stock options for
    Executive compensation                          
Net loss                                                                              (4,997,962)
                                                    ------------    ------------    ------------

BALANCE, DECEMBER 31, 1996                              (140,000)           --       (16,783,318)
                                                    ============    ============    ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       F-4
<PAGE>

                    Lasergate Systems, Inc. and Subsidiaries

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                            Years ended December 31,
<TABLE>
<CAPTION>
                                                                          1996           1995
                                                                      -----------    -----------
<S>                                                                   <C>            <C>         
Cash flows from operating activities:
   Net loss                                                           $(4,997,962)   $(4,206,782)
   Adjustments to reconcile net loss to cash
     used in operating activities:
      Depreciation and amortization                                       513,153        575,985
      Write down of capitalized software costs                          1,075,000           --
      (Gain) loss in joint venture                                         77,790        (48,060)
      Increase in allowance for doubtful accounts                         110,997         19,000
      Obligations to issue options granted as
        compensation for services                                            --          (75,000)
      Compensation recognized from issuance of stock and
        grant of stock options                                            229,686        562,250
      Decrease (increase) in:
         Accounts receivable, trade                                      (540,617)      (305,782)
         Accounts receivable, related party                                  --         (199,359)
         Inventories                                                       70,763       (115,022)
         Prepaid expenses                                                  43,426         53,028
         Other                                                            (83,598)        87,025
      Increase (decrease) in:
         Accounts payable and accrued expenses                            764,362        136,149
         Accrued warranty costs                                           273,919         15,925
         Deferred revenue                                                 180,110        667,406
                                                                      -----------    -----------
             Net cash used in operating activities                     (2,282,971)    (2,833,237)
                                                                      -----------    -----------


Cash flows from investing activities:
   Net additions to property, equipment, and software costs              (228,663)      (121,772)
   Loans to GIS stockholders related to GIS acquisition                      --         (559,000)
   Other acquisition costs                                                   --          (28,145)
                                                                      -----------    -----------
             Net cash used in investing activities                       (228,663)      (708,917)
                                                                      -----------    -----------



Cash flows from financing activities:
   Proceeds from secondary public or private offering, net of
     offering costs                                                     6,623,082      1,870,976
   Proceeds from exercise of warrants/stock options                          --            2,000
   Repurchase of common stock subject to put option                          --          (70,000)
   Redemption of preferred stock                                       (1,000,000)          --
   Settlement of acquisition obligations                               (1,550,000)          --
   Proceeds from loans, other                                              30,200         36,924
   Repayment of loans, other                                              (23,329)       (90,077)
   Proceeds from loans, related parties                                      --          859,000
   Repayment of loans, related parties                                   (300,000)          --
                                                                      -----------    -----------
             Net cash provided by financing activities                  3,779,953      2,608,823
                                                                      -----------    -----------

Net increase (decrease) in cash and cash equivalents                    1,268,319       (933,331)
                                                                      -----------    -----------

Cash and cash equivalents, beginning of year                              656,506      1,589,837
                                                                      -----------    -----------

Cash and cash equivalents, end of year                                $ 1,924,825    $   656,506
                                                                      ===========    ===========
</TABLE>

        The accompanying notes are an integral part of these statements.


                                       F-5

<PAGE>



                    Lasergate Systems, Inc. and Subsidiaries

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

                     Years ended December 31, 1996 and 1995


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

INTEREST AND INCOME TAXES PAID:


                                      Year ended December 31,
                                      -----------------------
                                        1996           1995
                                    -----------    -----------
Interest                            $    17,494    $    31,155
Income taxes                               --             --


NON-CASH INVESTING AND FINANCING ACTIVITIES:

1995:

            The  Company  acquired  substantially  all the assets of GIS Systems
Limited Partnership for total consideration of approximately  $3,700,000 (common
stock  of  $765,331,  preferred  stock  of  $559,000,  and  promissory  note  of
$2,324,335)  and  recorded  assets  at  aggregate  fair  value of  approximately
$3,750,000, with assumed payables of approximately $50,000 (See Note 4).

            The Company issued 79,950 shares of preferred  stock in satisfaction
of related party notes payable of $759,505.


1996:

            In March 1996, the Company settled its  acquisition  obligation with
GIS (See Note 10) as follows:

       Promissory notes payable, stockholders                 $2,324,335
       Less:
                   Cash payment                                1,550,000
                                                                 774,335
                   Accounts receivable canceled                  199,359
                   Note receivable canceled                      559,000
                   Retirement of common and preferred stock       15,976
                                                              ----------
                                                              $        0
                                                              ==========

        The accompanying notes are an integral part of these statements.


                                       F-6

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995


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's principal products "Select-a-Seat",  "Admits Platinum"
and "Admits Gold", represent approximately 33%, 35% and 16% of revenues in 1996,
respectively, and 42%, 30%, and 12% of revenues in 1995, respectively.

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
intercompany 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,
doubtful accounts, valuation of intangibles, litigation, and certain taxes which
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  receivable  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, 1996 and 1995 are
reasonbaly 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

                           December 31, 1996 and 1995


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 fair values  assigned in
connection with the Company's  acquisition of Delta and GIS in December 1994 and
January  1995 (see Note 4) as adjusted by a one-time  write-down  of  $1,075,000
during 1996. 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.

            The Company's expenditures related to the development of its systems
and  software  prior  to the  fourth  quarter  of 1996,  along  with the cost to
integrate GIS and Delta  products with the Company's  products in 1996 and 1995,
have been  expensed  and  included in  development  costs.  No amounts have been
capitalized  by the Company  during 1996 and 1995,  except  those  recorded as a
result of the GIS and Delta acquisitions,  and approximately  $25,000 during the
fourth  quarter of 1996 (See Note 7),  since either the amounts  qualifying  for
capitalization  under Statement of Financial  Accounting Standards (SFAS) No. 86
"Accounting  for Costs of  Computer  Software  to be Sold,  Leased or  Otherwise
Marketed" once  technological  feasibility (as defined) has been achieved,  have
been  insignificant or the customer  specifically  funded the development of the
unique and discrete systems and software through the customer contract.

            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
software's  estimated net realizable value. (See Note 7.) Amortization of system
and  software  costs in 1996 and 1995,  exclusive  of the write  down  discussed
above,  was  $167,523,  and  $283,333  and is  included  in Selling  General and
Administrative Expenses.

INTANGIBLES

            Intangibles  which were  recognized in connection with the Company's
acquisition of GIS and Delta in 1996 and 1995,  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 1996 and 1995 was
$232,156 and $231,745,  and is included in selling,  general and  administrative
expenses. Management reviews, at least on

                                       F-8

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995




a quarterly  basis,  whether or not any  impairment has occurred with respect to
such  acquired  intangibles  which could  warrant an  adjustment to the carrying
values. Undiscounted cash flow projections associated with the acquired business
is the  primary  focal  point  in the  assessment  and  analysis  for  potential
impairment. During 1996 and 1995, no impairment was identified, exclusive of the
write-down of software costs discussed above.

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, 1996
and 1995, 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 1996 and  1995 was  ($77,790)  and
$48,060,  respectively,  and  was  classified  in  other  income/expense  in the
accompanying  consolidated  financial  statements  for  1996 and  1995.  The net
carrying value of the Company's  investment  in/advances to the joint venture at
December  31,  1996,  and  1995,  was  $0 and  $77,790,  respectively,  and  was
classified  in other  assets.  The Company has not  guaranteed  any of the joint
venture's  liabilities  nor does the Company  have any  commitments  to fund its
operations.  The Company  intends to dissolve  this joint venture as of June 30,
1997.

WARRANTY COSTS AND WARRANTY LIABILITY (ALLOWANCE)

            The Company has historically  offered a three month warranty for its
products.  For the period  commencing after the end of the warranty period,  the
Company had offered its  customers a  maintenance  and service  contract  for an
annual fee. However, both companies acquired,  Delta and GIS, offered a one year
warranty  period  followed by a maintenance  and service  contract.  The Company
continued the one year warranty  practice into 1996.  Effective June 1, 1996 the
Company  returned to its original 90-day warranty  period.  This warranty period
primarily  relates to  telephone  support of  customers.  The related  costs are
charged to cost of revenues as incurred.

            At December 31, 1995, the Company had an accrued warranty  liability
(warranty  allowance) of $297,000,  which had been provided to cover the cost of
enhancements to be made (free of charge) to systems  installed in prior periods.
However, some of these modifications were more costly to perform than originally
estimated,  and the Company  has  committed  to make  similar  enhancements  for
additional  customers.  As a result,  an additional  $487,000 was accrued during
1996 in order to provide for the cost of completing all known  warranty  claims.
In addition, during 1996, management reviewed all warranty costs incurred within
the past year,  which had been  provided for by estimating  and recording  known
warranty  liabilities  each  quarter.  Based  on this  review  and  management's
expectation  that  the  number  of  installations  will  continue  to grow  and,
therefore,  make it more  difficult  to review all  installations  individually,
management  has decided to provide for  warranty  costs by  providing a warranty
allowance of 5% of revenues.  During 1996, this amounted to $81,000. The balance
of the accrued warranty allowance at December 31, 1996, was $571,000. Management
believes 5% is a

                                       F-9

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995




conservative  estimate  of these  costs  (which are unknown at time of sale) but
will continue to monitor them to ensure they are provided for on a current basis
in order to match the cost with the associated revenue.

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

            While warranty  modifications are often enhancements that may result
in future product and service  revenues,  no absolute  assurance can be given at
this time.

FAIR VALUE OF FINANCIAL INSTRUMENTS

            At December 31, 1996, and December 31, 1995, 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.

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

            Revenues  include  product  sales  and  service  revenues.   Service
revenues represent approximately 14% and 11%, respectively, of total revenues in
1996 and 1995.

            Deferred revenues include customer deposits of $335,467 and $384,731
and advanced billings in accordance with contract terms of $418,063 and $344,675
at December 31, 1996 and 1995, respectively.

            Cost of revenues includes the costs associated with the hardware and
software  acquired for the  Company's  customers  and the  estimated  full costs
associated with the engineering (mostly software customization) and installation
of the system. Cost of revenues also includes the estimated full cost related to
support and  maintenance.  The Company  refined its procedures for capturing and
reporting this information in 1996. This refinement  affected the  comparability
of the information being reported on. Thus, cost of revenues, development costs,
and selling,  general and  administrative  expenses were  reclassified for 1995,
using the same basis as that which was used for 1996. The Company  believes that
the estimated full costs are reasonably stated


                                      F-10

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995




and classified in all material respects.

            During  1996 and  1995,  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  the  customers.  The  resulting  cost of these  products  is
included  in  development  costs  versus  cost  of  revenues  along  with  other
development  costs related to enhancement of existing  products  during 1996 and
1995.

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.

NET LOSS PER COMMON SHARE

            Net loss per common share is based on the weighted average number of
shares  outstanding  during the periods.  Common stock equivalents  (options and
warrants) and the effect of the convertible  securities were not included in the
calculation of net loss per share because they were antidilutive.

NEW ACCOUNTING PRONOUNCEMENTS ADOPTED

            Effective   January  1,  1996,  the  Company  adopted  Statement  of
Financial  Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived  Assets and for  Long-Lived  Assets to Be  Disposed  Of. SFAS No. 121
requires that long-lived  assets and certain  identifiable  intangibles held and
used by an entity along with goodwill should be reviewed 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 to be reported at
the lower of the  carrying  amount  or the fair  value  less  cost to sell.  The
adoption of SFAS No. 121 had an insignificant  effect on the Company's financial
statements.

            Effective  January  1,  1996,  the  Company  adopted  SFAS No.  123,
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  Principals  Board Opinion No. 25.  Accounting for
Stock  Issued to  Employees to measure  compensation.  As a result,  SFAS No.123
pro-forma 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 13.

                                      F-11

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995




NOTE 3 - OPERATIONAL AND FUNDING MATTERS

            The Company has a net loss for 1996 of $4,997,962,  and a history of
operating losses that have accumulated to $16,783,318,  at December 31, 1996. 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 1996 and its plan to  improve  future
results.

            Since the second  quarter of 1994,  a number of  significant  events
have had a material impact upon the Company's  operating results and its current
and future  prospects.  In addition to a change in control and a public offering
of its  securities,  the changes  included  replacement  of the entire  Board of
Directors in November 1996 and all of the Company's senior executives, including
the  President/CEO  (October 1994) as well as most of its other personnel.  They
also  included  two  acquisitions  (Delta and GIS  Systems  Limited  Partnership
("GIS")) with a combined  customer base of over 200 sites,  and various  product
integration and development efforts.

            These changes  required more than two years of sustained  effort and
substantial  amounts of capital.  At the beginning of 1996, the Company had very
little working  capital.  This situation grew worse during the first half of the
year,  and,  as a result,  in June  1996,  shipments  to  customers  were not on
schedule because orders for their product could not be placed with vendors.  The
Company  had  utilized  all  credit  extended  to it  by  vendors.  Given  these
circumstances,  the Company  undertook  two private  placements  of  convertible
preferred  stock  during  this time  period,  for which the  Company  received a
combined total of $6,623,082,  net of commissions  and offering  expenses.  This
allowed the Company to initiate two basic programs  designed to move the Company
toward  profitability.  First,  it was  decided  to begin  development  of a new
product  (Admits) that would be modular in nature,  thus allowing the product to
be  customized  more easily and installed  more  efficiently.  Secondly,  it was
decided to commit additional funds to marketing efforts, including a doubling of
the sales force  aimed at  substantially  increasing  revenues  and  potentially
moving the Company beyond the break-even point and towards  profitability in the
future.




                                      F-12

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



            The  development  effort was  immediately  focused  upon the general
admission  product since it seemed to have the fastest and largest payback.  The
core of the product was  developed  earlier than planned and was in Beta testing
by November 1996.  This was primarily due to the  experience of the  development
team and the  ability to forego the  creation  of a detailed  program  design by
utilizing  the software  programs of the legacy  products as a production  plan.
With the  Company's  efforts to satisfy new and  existing  customer  demands for
programming  changes to the Delta and GIS product  (see  discussion  of warranty
costs and warranty  viability in Note 2), the Company had to keep a  substantial
portion  of  its  resources  dedicated  to the  legacy  products  in all  areas:
development,   installation,  customer  support,  training,  documentation,  and
marketing. However, the Company kept the general admission development effort on
schedule. At the present time, management believes the Company will have the new
Admits general admission product available for general release by June 1997.

            For most of 1996 the  Company  employed  three or four  field  sales
representatives.  During the fourth quarter of 1996, two systems  engineers were
dedicated to providing  pre-sales  support and an inside  sales  department  was
formed with two inside sales  representatives  hired initially.  During February
and March of 1997,  two  additional  field  sales  representatives  were  hired,
bringing the total to six. Thus,  for most of 1997, the Company  expects to have
ten employees dedicated to sales efforts compared to three or four during 1996.

            The combined result for the Company of expanding the sales force and
delivering the new Admits general  admission product on schedule is that revenue
can still be favorably impacted during the latter part of 1997. Thus, management
believes it can achieve a reduction of the operating loss by the end of 1997 and
lay the foundation for future profitability. Although no assurance can be given,
management believes that sustained  expenditure and cash controls would maintain
adequate  working  capital  through  1997,  on the premise  that the new general
admission   Admits   product   will  be  completed  as  planned  by  June  1997.
Nevertheless,  the  Company  intends  to seek and  actively  pursue  a  possible
relationship with a strategic partner,  which would include an equity investment
in the Company and may review other financing opportunities.

            Although revenues increased to $4,204,626 in 1996 from $2,835,206 in
1995, increased costs more than offset the increased revenues, such that the net
loss  increased  from  $4,206,782  in 1995 to  $4,997,962  in 1996.  The largest
component of the increase was a one-time  write-down of capitalized  software in
the amount of $1,075,000.

            Although no assurances  can be given,  based on actual sales for the
first  three  months of 1997  (unaudited)  and  committed  sales  orders to date
(unaudited),  revenues for 1997 will be at least at the level  achieved in 1996,
with  greater  revenues  being  targeted.  The  foregoing  is a forward  looking
statement  contingent  upon no  cancellation  of existing  sales  orders and the
receipt of future sales orders at the current rate.


                                      F-13

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



NOTE 4 - ACQUISITION OF BUSINESSES

            On February  15, 1995,  effective  January 1, 1995 (the date control
transferred),  the  Company  acquired  substantially  all of the  assets  of GIS
Systems Limited Partnership  ("GIS"). The purchase price for the acquisition was
valued at  approximately  $3,700,000.  The purchase  price  consisted of 109,333
shares of the Company's  common stock valued at $765,331,  111,800 shares of the
Company's Series B Preferred Stock valued at $559,000,  the Company's promissory
note in the  principal  amount  of  $591,000  (see  Note  9) and  the  Company's
promissory note in the principal amount of $1,733,335 (see Note 9). In addition,
the Company agreed to assume certain  liabilities of GIS  (aggregating  $45,718)
and  loaned  GIS  $559,000  (see  paragraph  below).  Direct  acquisition  costs
aggregating  $82,744  (principally  legal and accounting  fees) were incurred in
connection with the acquisition. The promissory notes, totaling $2,324,335, were
convertible into preferred stock and derived their valuation from the underlying
preferred stock. The common stock valuation of $7.00 per share and the preferred
stock valuation of $5.00 per share  reflected the agreed-upon  price between the
buyer and sellers and was approved by the  Company's  Board of  Directors  after
giving effect to such factors as the  restrictions and the size of the blocks of
common and preferred stock.

            The loan of  $559,000  to GIS  evidenced  by a  promissory  note was
secured by the 111,800 shares of the Company's  Series B Preferred Stock and was
due March 31, 1996. The sellers had the option of returning  preferred  stock if
the assignable call provision of $5.00 per share was not exercised. Accordingly,
the note

                                      F-14

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



receivable was presented as a reduction of stockholders' equity.

            See Note 9 for discussion  about the  settlement of the  acquisition
obligations.

            The total purchase price of GIS was allocated based on fair value of
net  tangible  assets  acquired,  with  the  excess  allocated  to  identifiable
intangible  components based on their  individual  estimated fair values and the
remainder was allocated to goodwill.

            The purchase  price,  including the direct  acquisition  costs,  was
allocated as follows:


Inventory                                                           $    85,962
Prepaid expenses and other current assets                                20,472
Fixed assets                                                             87,581
Accounts payables assumed                                               (45,718)
Systems and software costs                                            1,200,000
Customer list and support contracts                                     300,000
Goodwill                                                              2,083,113
                                                                    -----------
                                                                    $ 3,731,410
                                                                    ===========

            In connection  with the acquisition of Delta  Information  Services,
Inc.  (Delta)  in 1994,  the  sellers  were  granted a put option to sell to the
Company up to 10,000 of the shares of the  Company's  common  stock at $7.00 per
share each year for the next three years.  The put option which had an aggregate
value of $210,000 has been  classified as common stock subject to put options in
the  consolidated  balance sheets and represents the amount the Company would be
required to pay if all the put  options  were  exercised.  During  1995,  10,000
options were  exercised  resulting in $70,000 of common  stock  (10,000  shares)
being retired,  leaving a remaining  balance  subject to put options at December
31, 1995, of $140,000.  During 1996, an additional 10,000 options were presented
by the option  holders in order to exercise them.  However,  the Company did not
allow them to be exercised due to a disagreement  with the sellers regarding the
stock purchase agreement. (See Note 12.)

                                      F-15

<PAGE>



                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995


NOTE 5 - INVENTORIES

            Inventories as of December 31, consist of the following:



                                                        1996              1995
                                                      --------          --------

Installations-in-process                              $199,561          $172,411
Parts and systems                                       55,340           153,253
                                                      --------          --------
                                                      $254,901          $325,664
                                                      ========          ========

NOTE 6 - PROPERTY AND EQUIPMENT

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


                                                         1996             1995
                                                       --------         --------

Furniture and equipment                                $507,311         $357,346
Purchased software                                       19,244           12,231
Test equipment                                           52,902           49,812
                                                       --------         --------
                                                        579,457          419,389
Less accumulated depreciation                           275,433          172,821
                                                       --------         --------
                                                       $304,024         $246,568
                                                       ========         ========


NOTE 7 - SYSTEMS AND SOFTWARE COSTS

            The Company  markets  products that  typically  require  substantial
customization in order to meet the customers' particular  requirements.  In June
1996, the Company  commenced an assessment of its marketing  strategy related to
the Company's current software products.  While the Company has reduced the cost
of installing, customizing, and servicing (maintaining) the customized software,
these costs have remained higher than desired levels. With anticipated increased
revenues,  though no assurances are given, the company continues to believe that
it would  successfully  generate profits from the current software.  The Company
commissioned an assessment to determine whether the Company's  computer products
could be  modified in order to provide  more  product  options to its  customers
without  incurring  substantial  customization  costs.  Although the  assessment
principally  focused on the conceptual  design of the products to be offered and
was not an inquiry  as to whether  any  technological  innovations  needed to be
implemented in order for the Company to competitively  market its products,  the
Company's  marketing and  development  personnel  confirmed  that the ticketing,
access control,  and other  technologies that define the current products remain
competitive in the marketplace.


                                      F-16

<PAGE>



                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



            The  Company  has  concluded  as a result  of the  assessment,  that
instead of marketing products that require  substantial  customization,  it will
design  and offer its  products  in a modular  fashion.  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 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.  Although no assurances  can be
given,  management expects that applying the Company's proprietary technology in
this fashion will be a highly effective method of providing  business  solutions
to the entertainment industry.

            Accordingly,  the Company has commenced the  development of this new
marketing approach and expects the new general admission products, incorporating
the modular  concept,  will be available for sale by the second quarter of 1997.
As of March 1997, the Company has installed  limited  functionality  versions of
the new product in four different  sites.  The current software will continue to
be marketed  and the Company will  continue to support the present  software for
some period beyond the  introduction  of the new general  admission  product for
those customers who intend to continue using the current software.

            Because  of the  recent  strategic  decision  described  above,  the
Company  reviewed the  valuation of the current  software  cost  (pre-write-down
amortized  balance of $1,275,000  at June 30, 1996) in  accordance  with the net
realizable value  determination  provisions under SFAS No. 86 "Computer Software
to be Sold,  Leased,  or  Otherwise  Marketed".  As a result,  a  write-down  of
$1,075,000  has been  made to the  software's  carrying  value.  The  software's
estimated  net  realizable  value as  adjusted  of  $200,000  at June 30,  1996,
principally  relates to the  Company's  engineers'  estimate of the  recoverable
value of the current  products proven program and product design,  which will be
incorporated  into the new product  concept and is expected to be fully realized
(recoverable) through future revenues.

            The  Company  estimates  the  cost of  developing  the  new  general
admission  products  incorporating the modular concept will total  approximately
$400,000  to $500,000 by the second  quarter of 1997.  To date,  the Company has
incurred  approximately  $131,000 in development  costs for these  products,  of
which approximately $25,000 has been capitalized at December 31, 1996.

NOTE 8 - OTHER ASSETS

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


                                                            1996          1995
                                                          --------      --------
Non-competition agreement net of
 amortization $56,667 and $28,333                         $ 28,333      $ 56,667
Investment in and advances to joint venture                   --          77,790
Other                                                      106,188        33,451
                                                          --------      --------
                                                          $134,521      $167,908
                                                          ========      ========

                                      F-17

<PAGE>



                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995




NOTE 9 - NOTES PAYABLE

            At December  31,  1995,  the Company had an  outstanding  balance of
$21,757 under a premium financing agreement,  which was paid off during 1996, at
an annual interest rate of 9.25%.

            At December  31,  1996,  the Company had an  outstanding  balance of
$28,628  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 10 - ACQUISITION OBLIGATIONS

            At December 31, 1995, the  "promissory  notes payable,  stockholders
with conversion features" totaling $2,324,335, which was associated with the GIS
acquisition (see Note 4) were, at the Company's election, either payable in cash
or by conversion  into  preferred and common stock prior to March 31, 1996.  The
promissory  notes for $591,000 were  convertible into 118,200 shares of Series B
Preferred Stock. The other promissory notes totaling $1,733,335 were convertible
into the number of common stock shares determined by dividing  $1,733,335 by the
quoted  market  value of the common stock near the date of the  conversion.  The
Company's  stated intent since the  acquisition  date of GIS and at December 31,
1995, was to satisfy the  obligations,  which are non-interest  bearing,  by the
issuance  of  preferred  stock  and  common  stock  and  not by a cash  payment.
Accordingly,  the promissory  notes at December 31, 1995, were not classified as
current  liabilities  as current  assets were not used to satisfy the promissory
notes.

            In order to simplify the Company's  capital and debt  structure,  on
March 11, 1996,  the Company and GIS agreed,  among other things,  to settle the
remaining  obligation to GIS totaling  $2,324,335  by the Company  making a cash
payment to GIS of $1,550,000,  canceling the $559,000 note  receivable from GIS,
and canceling  the $199,359  account  receivable  from GIS, and with the Company
redeeming for  retirement  the 109,333 shares of Common Stock and 111,800 shares
of Series B Preferred  Stock  previously  issued to GIS. On April 12, 1996,  the
transactions  contemplated by the March 11 agreement were  consummated.  Because
the promissory notes included conversion features and had other  characteristics
similar to capital stock, the settlement had no income effect and was recognized
through the related balance sheet accounts, including stockholders' equity. (See
Statements of Stockholders' Equity and Cash Flows).

            At December 31,  1995,  the balance  sheet  reflects  "common  stock
subject to put options" of $140,000.  This  obligation  is further  described in
Note 4 as it pertains to the Company's acquisition of Delta.

                                          

                                      F-18

<PAGE>



                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



NOTE 11 - INCOME TAXES

            The Company has a net  operating  loss (NOL) for income tax purposes
of approximately $12,000,000 at December 31, 1996, 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 are as follows:


                                                            December 31,
                                                   ----------------------------
                                                       1996             1995
                                                   -----------      -----------
Basis difference in intangible assets              $    53,000      $    70,000
Warranty costs                                         211,000          110,000
Bad debt allowance, employee
 vacation pay, and other accruals                      326,000           80,000
Compensation related to stock options                  415,000          350,000
Net operating loss carry forward (1)                 4,310,000        3,340,000
                                                   -----------      -----------
                                                     5,315,000        3,950,000
Less valuation allowance                            (5,315,000)      (3,950,000)
                                                   -----------      -----------
                                                   $      --        $      --  
                                                   ===========      ===========

(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 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:


                                                                  1996     1995
                                                                  ----     ----

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 %
                                                                  ====     ====



                                      F-19

<PAGE>



                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995


NOTE 12 - COMMITMENTS AND CONTINGENCIES

OPERATING LEASE

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

            Future minimum payments under these operating leases are as follows:


                      1997                               162,633
                      1998                               201,642
                      1999                                78,339
                      2000                                28,121
                      2001                                11,717
                                                      ----------
                                                      $  482,452

            Total lease  payments for the years ended December 31, 1996 and 1995
were $144,569 and $89,027, respectively.

LEGAL PROCEEDINGS

            The  Company's  founder  and former  President  and Chief  Executive
Officer, has commenced an action against the Company in Florida state court. The
individual alleges,  among other things, that he was wrongfully  terminated from
his employment and seeks damages which in the aggregate could exceed $1,000,000.
The Company believes the suit is without merit and intends to vigorously  defend
the action.

Derek Betty and James Potter have  instituted  actions  again the  Company.  The
first  action is entitled  Derek Betty v.  Lasergate  System,  Inc.  ("the Betty
Action") and the second action is entitled  James Potter v.  Lasergate  Systems,
Inc. and 1103065 Ontario,  Inc. ("the Potter Action").  Both actions are pending
in the Circuit Court of the Sixth Judicial  Circuit in and for Pinellas  County,
Florida.  The Betty Action  alleges that the Company has failed to return shares
of the Company's  stock which are 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 alleges a breach
of the terms and  conditions of a Registration  Rights and Put Option  Agreement
executed in connection  with the sale of Delta to the Company.  The Betty Action
seeks  damages  in an amount in excess  of  $15,000,  which is the  jurisdiction
amount,  but it is anticipated  that damages could be in excess of $25,000.  The
Potter  Action also alleges a breach of the  Registration  Rights and Put Option
Agreement.  Moreover,  the Potter Action includes  allegations  concerning James
Potter's Consulting Agreement with the Company and a Non-Compete Agreement.  The
Potter  Action seeks a  declaratory  judgment  determining  that the Company and
1103065  Ontario  Inc  ("Ontario")are  in  material  breach  of the  Non-Compete
Agreement  and that Potter is relieved of all  obligations  to perform under the
Non-Compete Agreement. The Company has

                                      F-20

<PAGE>



                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



moved  to  dismiss  both  actions  and  to  compel  arbitration  pursuant  to an
arbitration   provision  in  the  Stock  Purchase   Agreement  relating  to  the
acquisition  of Delta. A hearing on the motion in the Potter Action is scheduled
for April 1, 1997,  and a hearing on the motion in the Betty Action is scheduled
for May 2, 1997. The Company intends to vigorously defend both actions.

            The Company is also involved in other legal actions. Management does
not believe that the  ultimate  resolution  of these and the above  matters will
have a material effect on the Company's financial position.

OTHER MATTERS

            Management is presently  reviewing the methods and  procedures  used
for determining  its sales tax reporting  obligations.  Management  believes the
reported sales tax liability as of December 31, 1996, is reasonably adequate.

NOTE 13  - STOCKHOLDERS' EQUITY

COMMON STOCK

            In December  1995, the Company's  authorized  shares of common stock
was increased from 5,000,000 to 20,000,000.




















                                      F-21

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



PREFERRED STOCK

            The  Company's  articles  of  incorporation  authorize  a  total  of
2,000,000   shares  preferred  stock.  The  Company's  Board  of  Directors  has
established Series A, B, D, E, and F convertible preferred stock ).

<TABLE>
<CAPTION>

                                                       Series of Preferred Stock
                               ------------------------------------------------------------------------
                                  A            B           D             E            F          Total
<S>                            <C>          <C>          <C>          <C>            <C>      <C>      
Authorized shares
   December 31, 1996           200,000      230,000      350,000      350,000        8,000    1,138,000

Outstanding shares
   December 31, 1996              --           --           --           --          8,000        8,000
   December 31, 1995            95,950      111,800      180,000         --           --        387,750

Outstanding share amounts
   December 31, 1996              --           --           --           --            240          240
   December 31, 1995        $    2,879   $    3,354   $    5,400         --           --     $   11,633
</TABLE>

            All series contain specific  provisions as to conversion into shares
of common stock and liquidation values. The shares are nonvoting and, except for
Series A, participate equally as to dividends declared with the Company's common
stock.  The Series A Preferred  Stock bears a  cumulative  dividend at an annual
rate of 8% of its liquidation value ($959,500).  None of the preferred stock has
or had mandatory redeemable provisions.

            In  June  1995,  the  Company  issued  95,950  shares  of its  newly
designated  Series  A  Preferred  Stock  to  former  principal  stockholders  in
satisfaction of $759,505 in promissory  notes due October 1996 and in conversion
of 36,364 shares of previously  designated Series A Preferred Stock. On June 28,
1996,  the Company  redeemed all 95,950  shares of Series A Preferred  Stock for
$1,000,000.  The  $1,000,000  cash  payment was  principally  provided  from the
proceeds of the Series F Private Placement.

            On February  15,  1995,  the Company  issued all 111,800  shares of
Series B Preferred  Stock to GIS in connection with that  acquisition  (see Note
4). On April 12,  1996,  all  111,800  shares of Series B  Preferred  Stock were
redeemed by the  Company as part of the  settlement  of the related  acquisition
obligation. (See Note 10).

            In October 1995, the Company  completed the private placement of all
208,600 shares of Series D Convertible Preferred Stock. As of December 31, 1996,
all  208,600  Series D shares have  converted  into  1,664,463  shares of common
stock.  For discussion of Series E and F Shares see Issuance of Stock -- Private
Placements.



                                      F-22

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



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 PLACEMENT

            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 has a face value of $1,000,
and is  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  price shall be 96% of such average market
price,  and on or after June 6, 1998, the conversion  price shall be 94% of such
average market price,  but if such average market price is more than $1.00,  the
conversion  price will be $1.00, and one preferred share will convert into 1,000
shares of common stock; and if such average market price is less than $0.45, the
conversion  price will be $0.45, and one preferred share will convert into 2,222
shares of common stock.  Thus,  the 8,000 Series F shares are  convertible  into
between  8,000,000 and 17,777,778 shares of common stock. The entire Series F is
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 have a liquidation value of $1,000 per share.

RESERVATION AND AUTHORIZATION OF COMMON STOCK

            Upon the sale of 8,000  shares  of  Series F  Convertible  Preferred
Stock,  the Company  reserved  8,000,000  shares of common  stock to provide for
their conversion.  If the average market price of the Company's common stock for
the five  trading  days prior to  conversion  is less than $1.00 per share (thus
permitting the holders of the Company's Series F Preferred Stock to convert such
shares into more than 8,000,000  shares of common stock),  the Company would not
have a  sufficient  number  of  authorized  shares  of  common  stock to  permit
conversion to all the Series F Preferred  Stock. The Board of Directors plans to
recommend  to  the  Company's   stockholders  at  the  1996  Annual  Meeting  of
Stockholders  than 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 9,777,778 additional shares to allow for the possibility of the Series F
shares into as many as 17,777,778 common shares.


                                      F-23

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



STOCK OPTION PLANS

            In  February   1994,   the  Board  of   Directors   authorized   the
establishment  of the  Company's  1994 Stock Option  Plan.  The plan permits the
grant of  options  which  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 which 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 which 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 1994 Stock Option Plan (the "Plan")  which  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.  Accordingly,  Frank W. Swacker (an
outside Director) was granted 15,000 options on December 21, 1995 at an exercise
price of $2.76 of which 5,000 shares  vested on December 21, 1995,  5,000 vested
on December 21, 1996 and 5,000 will vest on December 21, 1997.

            The Company granted an additional 37,500 options outside of the Plan
to each of John J. Chluski (an outside  Director)  and Bruce D.  Barrington  (an
outside  Director)  shortly after their appointment to the Board of Directors as
an inducement  for them to join the Board.  The options are  exercisable  for 10
years at exercise  prices  ranging from $0.425 to $0.65625 and were  immediately
vested.

NON-QUALIFIED STOCK OPTIONS

            In October 1994 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 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 1995 of $562,500 and
$187,500 in 1996.








                                      F-24

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



            A summary of the status of the Company's  outstanding  stock options
as of December 31, 1996,  and 1995, and changes during the years ending on those
dates is presented below:

                                                                Weighted Average
                                                   Shares        Exercise Price
                                                  --------       --------------

Options outstanding, December 31,  1994            443,300          $  2.13

Options granted                                        --

Options canceled or forfeited                      (18,300)         $  7.00
                                                  --------

Options outstanding, December 31, 1995             425,000          $  1.92

Options granted                                    205,000          $   .77

Options canceled or forfeited                          --                --
                                                  --------          -------
Options outstanding, December 31, 1996             630,000          $  1.55
                                                  ========          =======



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

                                                 Weighted Average
                                                     Remaining       Weighted
                         Range of        Number       Contract       Average
                     Exercise Prices  Outstanding   Life (Years)     Exercise
                     ---------------  -----------   ------------     --------

Outstanding Options:
                        $  0.66         100,000          1.0          $ 0.66
                        $1.00-$2.76     529,000          7.1          $ 1.92
                        $ 13.00           1,000          2.0          $13.00

Exercisable Options:
                        $  0.66         100,000          1.0          $ 0.66
                        $1.00-$2.76     529,000          7.1         $ 1.92
                        $ 13.00           1,000          2.0          $13.00

     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   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 per common share would be increased to the pro forma
amounts indicated below for the years ended December 31:

                                                  1996           1995
Net loss            As reported              $4,997,962          $4,206,782
                    Pro forma (unaudited)    $5,097,962          $4,216,782

Loss per common share    As reported         $     .82          $         1.39
                    Pro forma (unaudited)    $     .84          $         1.39

     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 1996 and 1995,  respectively,  no dividend yield
for all years,  expected  volatility of approximately  112%;  risk-free interest
rates of approximately  6.0%, and expected lives of approximately 2.5 years. The
Company's common stock activity has had an extremely  volatile history since and
including  1994.  Because of the  insignificat  effect on the pro forma  amounts
presented  above,  the Company has elected not to attempt to adjust  (lower) the
volatility factor used. Such adjustment would account for the various factors or
conditions  that probably  impacted the Company's  common stock prices and which
are possibly non-recurring.  Such an adjustment which would lower the volatitity
factor used would further reduce the calculated fair value of the options.


                                      F-25

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995


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.

            Additionally,  a warrant  to  purchase  276,000  shares at $9.08 was
granted to the  underwriter,  exercisable  during the four years  commencing one
year from the closing date of the offering.

            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 and granted warrants to purchase 900 shares of the Company's common
stock at an exercise  price of $3.75 per share,  which  expire in July 1997,  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 for $.55,  the
exercise price.

            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

                                      F-26

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



volatility of 112%, risk-free rate of 6.0%, and expected holding period of three
years.   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
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, 1996,  and 1995, and changes during the years ending on those dates
is presented below:

                                                             Weighted Average
                                                  Shares      Exercise Price
                                                  ------      --------------

Warrants outstanding, December 31, 1994          2,121,067       $   5.90
Warrants granted                                      --          --
Warrants canceled or forfeite                         --          --
Warrants outstanding, December 31, 1995          2,121,067       $   5.90

Warrants granted                                   500,000       $    .55
Warramts camceled or forfeited                        --          --
Warrants outstanding, December 31, 1996          2,621,067       $   4.88


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

                                                 Weighted Average
                                                     Remaining       Weighted
                         Range of        Number       Contract       Average
                     Exercise Prices  Outstanding   Life (Years)     Exercise
                     ---------------  -----------   ------------     --------

Outstanding Warrants:
                       $  0.55           500,000         4.5          $ 0.55
                       $3.75-$5.50     1,845,067         2.8          $ 5.50
                       $ 13.00           184,000         2.8          $ 9.08

Exercisable Warrants:
                       $  0.55           500,000         4.5          $ 0.55
                       $3.75-$5.50     1,845,067         2.8          $ 5.50
                       $ 13.00           184,000         2.8          $ 9.08


                                      F-27

<PAGE>


                    Lasergate Systems, Inc. and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 1996 and 1995



NOTE 14 - SALES TO MAJOR CUSTOMERS

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

            In  1995,  there  were  no  customers  representing  10% or  more of
revenues.

NOTE 15 - 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 Plan during 1995 or 1996.

            In order to reduce its overhead  costs,  the Company entered into an
agreement  effective  January 1, 1996,  with a firm that  provides  all employee
leasing  administrative  services  relating to payroll,  personnel  and employee
benefits,  including  those provided by the leasing  company's  401(k) plan. 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 16 - RELATED PARTY TRANSACTIONS

            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 has a financial interest.











                                      F-28