RACOM SYSTEMS INC, 424B2, 1997-03-14

RACOM SYSTEMS INC
424B2, 1997-03-14
SEMICONDUCTORS & RELATED DEVICES

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<PAGE>
FILED PURSUANT TO RULE 424(b)(2)
1,500,000 UNITS REGISTRATION NO. 333-18351

[LOGO]

RACOM SYSTEMS, INC.

Racom Systems, Inc. (the "Company") is offering (the "Offering") through
Spencer Edwards, Inc. as the representative (the "Representative") of the
underwriters herein named (the "Underwriters") 1,500,000 Units of the Company's
securities ("Unit(s)"), each Unit consisting of one share of $.01 par value
common stock ("Common Stock") and one redeemable common stock purchase warrant
("Warrant(s)") at a purchase price of $4.75 per unit (the "Unit Price"). The
Common Stock and Warrants are separately transferable as of the date of the
Prospectus. Each Warrant is exercisable to purchase one share of Common Stock at
$5.94 per share (125% of the Unit Price) for a period of two years from the date
hereof and may be redeemed by the Company for $.01 per Warrant on 30 days'
written notice to the Warrantholders if the closing price of the Common Stock on
the NASDAQ SmallCap Market ("NASDAQ") is at least $7.13 per share (150% of the
Unit Price) for 20 consecutive trading days, ending not earlier than five days
before the Warrants are called for redemption. The Unit Price and Warrant
exercise price have been determined by negotiations between the Company and the
Representative and such prices are not necessarily related to the Company's
financial condition, net worth or other established criteria of value. For a
description of the factors considered in determining the Unit Price and the
exercise price of the Warrants, see "Risk Factors" and "Underwriting."

This Prospectus also covers 260,000 common stock purchase warrants (the
"Bridge Warrants") held by certain Bridge Warrantholders ("Selling
Stockholders") and 260,000 shares of Common Stock issuable upon exercise of the
Bridge Warrants. The terms and conditions of the Bridge Warrants are identical
to those of the Warrants. The Bridge Warrants and underlying Common Stock may be
sold from time to time (subject to a one year lock-up agreement) in public or
private open market transactions directly to purchasers or through brokerage
firms at prevailing market prices less customary commissions. See "Selling
Stockholders."

There is no trading market for Common Stock and Warrants and there can be no
assurance that a trading market will develop in any of these securities upon
completion of the Offering. The Common Stock and Warrants have been approved for
listing on NASDAQ under the symbols "RCOM" and "RCOMW," respectively.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS ABLE TO SUSTAIN A TOTAL LOSS
OF THEIR INVESTMENT. SEE "RISK FACTORS."

The Units are offered on a "firm commitment" basis by the Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to certain conditions, including the right of the
Underwriters to reject orders in whole or in part. It is expected that delivery
of certificates representing the Common Stock and Warrants will be made against
payment therefor in Greenwood Village, Colorado, on or about March 18, 1997.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)(3)
<S> <C> <C> <C>
Per Unit.............................................. $4.75 $.43 $4.32
Total(3).............................................. $7,125,000 $641,250 $6,483,750
</TABLE>

(1) Excludes (i) a nonaccountable expense allowance payable to the
Representative of $213,750 ($245,813 if the Overallotment Option is
exercised) equal to 3% of the gross proceeds of the Offering, and (ii) the
issuance of warrants to the Representative (the "Representative's Unit
Warrant") to purchase up to 150,000 Units at $7.36 per Unit (155% of the
Unit Price) at any time after 12 months from the date hereof and for a
period of four years thereafter. The Company has granted certain
antidilution and registration rights with respect to the Units underlying
the Representative's Unit Warrant and has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "1933 Act"). See "Underwriting."

(2) Before deducting costs of the Offering estimated to be $300,000, excluding
the Representative's nonaccountable expense allowance.

(3) Assumes no exercise of the Representative's option, exercisable within 30
days from the date of this Prospectus, to purchase from the Company up to
225,000 Units on the same terms as the Units offered hereby solely to cover
overallotments, if any (the "Overallotment Option"). If the Overallotment
Option is exercised in full, the Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $8,193,750, $737,438 and
$7,456,312, respectively. See "Underwriting."

SPENCER EDWARDS, INC.

THE DATE OF THIS PROSPECTUS IS MARCH 12, 1997.
<PAGE>
The Company will furnish annual reports to its stockholders which will
include audited financial statements. The Company may also furnish to its
stockholders quarterly financial statements and such other reports as may be
authorized by its Board of Directors. See "Available Information."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
WARRANTS AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET
AND, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

FOR CALIFORNIA RESIDENTS

Investment in the securities of the Company described in this Prospectus by
California investors is expressly limited to investors who have an adjusted
gross income of at least $65,000 for the calendar year ended December 31, 1996
and an equal amount of adjusted gross income anticipated for the calendar year
ended December 31, 1997, together with a minimum of $250,000 of liquid net worth
(excluding home, home furnishings and automobile). In the event the California
investor does not have an adjusted gross income of $65,000 and liquid net worth
of $250,000, such investor may nevertheless purchase the Company's securities if
he or she has a liquid net worth of $600,000 or more.

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PROSPECTUS SUMMARY

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS SET
FORTH IN THIS PROSPECTUS INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES
THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. THESE RISKS AND
UNCERTAINTIES ARE DETAILED THROUGHOUT THE PROSPECTUS AND WILL BE FURTHER
DISCUSSED FROM TIME TO TIME IN THE COMPANY'S PERIODIC REPORTS FILED WITH THE
COMMISSION. THE FORWARD-LOOKING STATEMENTS INCLUDED IN THE PROSPECTUS SPEAK ONLY
AS OF THE DATE HEREOF.

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION PRESENTED DOES NOT
REFLECT EXERCISE OF THE WARRANTS, THE OVERALLOTMENT OPTION OR THE
REPRESENTATIVE'S UNIT WARRANT. SEE "UNDERWRITING."

THE COMPANY

The Company is a leading developer and marketer of contactless smart card
systems ("Smart Card(s)" or "Smart Card System(s)") used primarily in electronic
commerce. Generally the size of a credit card, Smart Cards are used in a number
of consumer applications including (i) access to restricted areas (replacing
keys and identification cards), (ii) public transportation fare collection
(replacing bus tokens, taxi cab charge cards, airline and railway tickets),
(iii) point of sale purchases (replacing cash or credit cards at cafeterias,
newsstands and related point of sale locations where speed of purchase is
important), and (iv) miscellaneous small monetary transactions (replacing coins
and cash at parking lots, in vending machines, public telephones, and the like).
Smart Card technology is also used in industrial applications such as attaching
a "tag" containing the Smart Card technology to a manufactured product in order
to track the product from the assembly line through quality control,
warehousing, inventory control, distribution and warranty.

The Company's Smart Cards are "contactless" and therefore do not require the
use of a magnetic stripe or insertion in a terminal as is required by contacted
cards ("Contacted Card(s)"). Instead, the Company's Smart Card System involves
direct wireless radio frequency communication between a ferroelectric random
access memory ("FRAM") chip in the Smart Card and a terminal. The Company's FRAM
chip does not require battery power and allows for processing the Smart Card
transaction in a fraction of a second by waving the Smart Card near the
terminal. Moreover, the Smart Card does not require insertion in the terminal or
the use of a keypad and therefore may be used by all members of the population
regardless of age or physical health and in both indoor and outdoor locations.

For consumers and goods and services providers, the Company's Smart Cards
offer the convenience and accuracy of high speed contactless transaction
processing without the requirement of carrying cash, checks or credit cards,
thereby reducing the threat of theft, inventory shrinkage, and payment fraud
resulting from the handling of cash or the counterfeiting of cash or credit
cards. Goods and services providers do not have to risk loss resulting from (i)
accepting cash or checks which may be subsequently stolen from them after
payment by consumers or (ii) accepting credit cards which may have been stolen
prior to such payment. Consumer loss is limited because the Smart Card is
programmed to be used to purchase only specific goods or services which is not
as attractive to a thief when compared to the broader illegal uses for stolen
cash, checks or credit cards. The Smart Card is designed to complement credit
cards rather than replace them in that Smart Card applications involve the
storage and handling of substantially more data than credit cards and can
therefore be used for other applications (rather than just purchase and sale
transactions) such as electronic purses, identification of the user and other
portable data functions.

The Company sells its Smart Card Systems through its own direct sales force
through a combination of joint ventures and strategic alliances and through
selective licensing and distributorship arrangements and agreements with
independent sales representatives in foreign countries. Since 1993, the Company
has designed Smart Card Systems for over 100 customers in cities throughout the
world including Singapore,

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<PAGE>
Macau, Hong Kong, Tokyo, Manchester, Paris, Milan, Los Angeles, Chicago and
Denver. The Company's Smart Card users have included the new Hong Kong
International Airport, the Los Angeles Department of Transportation, the Lubbock
International Airport, the Chicago Transit Authority and Yamatake Honeywell
Limited (Japan).

The Company's business strategy is to (i) expand the Company's Smart Card
Systems applications, (ii) grow revenues through strategic alliances, joint
ventures and selective licensing, (iii) emphasize marketing of the Company's
Smart Card products in North America, and (iv) continue to outsource
manufacturing to control fixed costs.

The Company was incorporated in Delaware in June 1991 and initially issued
2,000,000 shares of its Common Stock to each of Ramtron International
Corporation ("Ramtron"), Intag International Limited ("Intag") and AWA Limited
("AWA") in connection with the Company's organization. Subsequently, AWA sold
its 2,000,000 shares of the Company's Common Stock to Intag. As a result of
subsequent Common Stock sales, Ramtron and Intag (which are U.S. and Australian
publicly-held companies, respectively) currently own 4,800,000 shares and
5,262,532 shares, respectively, of the Company's Common Stock representing 41.6%
and 45.6%, respectively, of the total shares of Common Stock outstanding. As
indicated under "Certain Transactions," Ramtron and Intag have entered into a
number of related party transactions with the Company including the issuance of
license rights to the Company from Ramtron, the issuance of license rights
between Ramtron and Intag and the issuance of Common Stock and Warrants to
Ramtron and Intag in exchange for loans and other financings extended by Ramtron
and Intag to the Company. Ramtron and Intag control the Company's operations,
elect all of the Company's directors and will continue to control the Company
upon completion of the Offering. See "Principal Stockholders" and "Certain
Transactions."

In December 1996, the Company completed the borrowing of an aggregate of
$1,040,000 from a group of lenders (the "Bridge Loan") evidenced by promissory
notes bearing interest at 2% over the prime interest rate and due the earlier of
December 1997 or the closing date of the Offering. As additional consideration
for the Bridge Loan, the Company issued one Bridge Warrant for each $4.00 loaned
to the Company or a total of 260,000 Bridge Warrants. Each Bridge Warrant
entitles the holder to purchase one share of Common Stock at $5.94 per share for
a period of two years from the date hereof. The Bridge Warrants and the Common
Stock underlying the Bridge Warrants are being registered by this Prospectus.
See "Selling Stockholders."

The Company's executive offices are located at 6080 Greenwood Plaza Blvd.,
Greenwood Village, Colorado 80111 and its telephone number is (303) 771-2077.

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THE OFFERING

<TABLE>
<S> <C>
Securities offered................ 1,500,000 Units, each Unit consisting of one share of
Common Stock and one Warrant

Offering price.................... $4.75 per Unit

Common Stock outstanding prior to
the Offering.................... 11,532,532 shares

Common Stock outstanding after the
Offering(1)..................... 13,032,532 shares

Description of the Warrants....... Each Warrant is exercisable to purchase one share of
Common Stock at $5.94 per share for a period of two
years from the date hereof and may be redeemed by the
Company for $.01 per Warrant on 30 days' written notice
to the Warrantholders if the closing price of the Common
Stock on NASDAQ is at least $7.13 per share for 20
consecutive trading days ending not earlier than five
days before the Warrants are called for redemption.

Use of proceeds................... Repayment of debt, sales and marketing expenses,
research and development expenses, and working capital.
See "Use of Proceeds."

NASDAQ symbols.................... RCOM (Common Stock); RCOMW (Warrants)

Transfer and Warrant Agent........ American Securities Transfer, Inc.
</TABLE>

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(1) Does not include shares issuable upon exercise of (i) the Warrants, the
Overallotment Option and the Representative's Unit Warrant, (ii) 1,559,000
stock options issued under the Company's 1993 Employee Stock Option Plan,
(iii) the 260,000 Bridge Warrants, or (iv) other outstanding stock options,
common stock purchase warrants and convertible securities. See "Dilution,"
"Capitalization" and "Management--1993 Employee Stock Option Plan."

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SUMMARY FINANCIAL INFORMATION

The following tables set forth certain summary financial data of the
Company. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Financial Statements of the Company and Notes thereto
included elsewhere in this Prospectus. The summary financial data as of December
31, 1996, 1995 and 1994, and for the years ended December 31, 1996, 1995 and
1994, have been derived from the Company's financial statements which have been
audited by Arthur Andersen LLP, independent public accountants, and are included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................................... $ 2,427,285 $ 1,147,915 $ 354,586
Gross margin....................................................... 1,375,408 501,446 177,369
Loss from operations............................................... (1,223,572) (2,837,935) (2,682,589)
Net loss........................................................... (1,303,837) (2,878,034) (3,480,171)
Weighted average shares outstanding................................ 11,844,793 10,853,633 8,254,344
Net loss per share................................................. $ (.11) $ (.27) $ (.42)
Pro forma supplemental net loss per share(1)....................... $ (.10) $ (.25) --
</TABLE>

<TABLE>
<CAPTION>
AS
HISTORICAL ADJUSTED(2)
------------- ------------
<S> <C> <C>
BALANCE SHEET DATA AT DECEMBER 31, 1996:
Working capital (deficit).......................................................... $ (1,846,523) $ 4,123,477
Total assets....................................................................... 3,885,851 7,742,851
Total liabilities.................................................................. 3,651,587 1,538,587
Stockholders' equity............................................................... 234,264 6,204,264
</TABLE>

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(1) Reflects retirement of approximately $2,070,000 of debt outstanding at
December 31, 1996 at an offering price of $4.75 per share, which will be
repaid with proceeds from the Offering. Retirement of debt is assumed to
occur at the beginning of each respective period.

(2) As adjusted to reflect the sale of 1,500,000 Units offered hereby (after
deducting underwriting discounts and commissions and estimated Offering
expenses) and the application of the net proceeds therefrom for repayment of
$2,113,000 of debt. See "Use of Proceeds" and "Capitalization."

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<PAGE>
RISK FACTORS

PROSPECTIVE PURCHASERS OF THE COMMON STOCK SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS AND THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
BEFORE MAKING AN INVESTMENT IN THE COMMON STOCK. INFORMATION CONTAINED IN THIS
PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE
USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES," "EXPECTS," "MAY,"
"SHOULD" OR "ANTICIPATES" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY. SEE, E.G., "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS-- STRATEGY." NO ASSURANCE CAN BE GIVEN THAT THE FUTURE RESULTS COVERED
BY THE FORWARD-LOOKING STATEMENTS WILL BE ACHIEVED. THE FOLLOWING MATTERS
CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO
SUCH FORWARD-LOOKING STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT
COULD CAUSE ACTUAL RESULTS TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN
SUCH FORWARD-LOOKING STATEMENTS. OTHER FACTORS COULD ALSO CAUSE ACTUAL RESULTS
TO VARY MATERIALLY FROM THE FUTURE RESULTS COVERED IN SUCH FORWARD-LOOKING
STATEMENTS.

LIMITED OPERATING HISTORY AND LIMITED REVENUES; LOSSES; DEFICIT IN WORKING
CAPITAL AND INDEPENDENT PUBLIC ACCOUNTANTS GOING CONCERN OPINION. The Company
began operations in June 1991 and has a limited operating history upon which
potential investors may base an evaluation of its performance. Since inception,
the Company has focused its efforts and resources on developing its technology
and on identifying products and applications for introduction into the market.
The Company has only recently begun generating revenues from its operations and
therefore the Company has historically incurred significant operating losses and
cash flow deficits. For the years ended December 31, 1996 and 1995, the Company
had revenues of $2,427,285 and $1,147,915, respectively, and net losses of
$1,303,837 and $2,878,034, respectively. Moreover, at December 31, 1996, the
Company had a deficit in working capital of $1,846,523 and had an accumulated
deficit of $10,153,652 as of December 31, 1996. Accordingly, substantial doubt
exists regarding the Company's ability to continue as a going concern. The
Report of Independent Public Accountants covering the Company's December 31,
1996 financial statements, included elsewhere in this Prospectus, contains an
explanatory paragraph about the Company's ability to continue as a going
concern. There can be no assurance that the Company's operations will generate
sufficient revenues to fund its operations and to allow it to become profitable.
The likelihood of the Company's success must be considered relative to the
problems, experiences, difficulties, complications and delays frequently
encountered in connection with the operation and development of a new business
and the competitive environment in which the Company operates. See "Business"
and "Financial Statements."

DEVELOPING MARKET; UNPROVEN MARKET FOR THE COMPANY'S SMART CARD
PRODUCTS. Smart Card products and markets have only recently begun to develop,
are rapidly evolving and are characterized by an increasing number of market
entrants who have developed or are developing a wide variety of products. As is
typical in a new and rapidly evolving industry, demand and market acceptance for
new products are subject to a high level of uncertainty. There can be no
assurance that the Smart Cards designed by the Company will become widely
accepted. Because the market for the Company's Smart Cards is new and evolving,
it is also difficult to predict with any assurance the future growth rate, if
any, and size of the market. If a market fails to develop, develops more slowly
than expected or becomes saturated with competitors, or if the Company's Smart
Cards do not achieve market acceptance, the Company's business, operating
results and financial condition will be materially adversely affected. See
"Business--Marketing."

COMPETITION; FREQUENT PRODUCT INTRODUCTIONS. The market for Smart Card
products is new, intensely competitive, quickly evolving and subject to rapid
technological change. Competitors may develop superior Smart Card products or
products of similar quality for sale at lower prices. Moreover, there can be no
assurance that the Company's Smart Cards will not be rendered obsolete by
changing technology or new industry standards. The Company expects competition
to persist and increase in the future. The Company's current and potential
competitors are primarily subsidiaries of multinational companies with
established Contacted Card and contactless Smart Card businesses which have
longer operating histories,

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greater name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than the Company. This intense
level of competition could materially adversely affect the Company's future
business, operating results and financial condition.

Competitive factors in the industry include transaction speed, the extent
and flexibility of Smart Card memory, reliability, transaction accuracy and
cost. Current competitors include such multinational firms as Gemplus,
Schlumberger and Group Bull, which primarily offer Contacted Cards, and Philips
GmbH, Sony Corporation and Micron Communications, Inc., which offer primarily
contactless Smart Cards. Moreover, Matsushita Electronics Corporation intends to
market a contactless ferroelectric chip-based Smart Card in the spring of 1997.

There can be no assurance that the Company will be able to compete
successfully against current or future competitors or that competitive pressures
faced by the Company will not materially adversely affect its business,
operating results and financial condition. Many of the Company's competitors
have the financial resources necessary to enable them to withstand substantial
price and product competition, which are expected to increase, and to implement
extensive advertising and promotional programs, both generally and in response
to efforts by other competitors to enter into existing markets or introduce new
products. The industry is also characterized by frequent introductions of new
products. The Company's ability to compete successfully will be largely
dependent on its ability to anticipate and respond to various competitive
factors affecting the industry, including new products which may be introduced,
changes in customer preferences, demographic trends and pricing strategies by
competitors, which could adversely affect the Company's operating margins. See
"Business--Competition."

RISKS OF NEW PRODUCT DEVELOPMENT. The Company may experience difficulties
that could delay or prevent the development, introduction and marketing of new
Smart Card products. The Company will be substantially dependent in the near
future upon Smart Card products that are currently being developed. There can be
no assurance that, despite testing by the Company, errors will not be found in
the Company's Smart Card products, or, if errors are discovered, corrected in a
timely manner. If the Company is unable to develop on a timely basis existing or
new Smart Card products or enhancements to existing products, or if its Smart
Card products do not achieve market acceptance, the Company's business,
operating results and financial condition will be materially adversely affected.
See "Business."

RISKS ASSOCIATED WITH EXPANSION. The Company will seek to develop and
expand its Smart Card products and increase its marketing operations using
proceeds from the Offering. Expansion will place substantial strains on the
Company's management and its operational, accounting and information resources
and systems. Successful management of growth will require the Company to improve
its financial controls, operating procedures and information systems, and to
hire, train, motivate and manage its employees. The Company's failure to manage
growth effectively would have a material adverse effect on its results of
operations and its ability to execute its business strategy. See
"Business--Strategy."

OBSOLESCENCE AND TECHNOLOGICAL CHANGE. The markets for Smart Card products
are characterized by rapidly changing technology and evolving industry standards
which result in product obsolescence and short product life cycles. Accordingly,
the Company's success is dependent upon its ability to anticipate technological
changes in the industry and to continually identify, develop and successfully
market new Smart Card products that satisfy evolving technologies, customer
preferences and industry requirements. There can be no assurance that
competitors will not market Smart Card products which have perceived advantages
over those of the Company or which render the Company's Smart Card products
obsolete or less marketable. See "Business--Marketing."

IMPEDIMENTS TO MARKET ACCEPTANCE OF PRODUCTS. As with other new products
designed to replace existing products or change product designs, potential
customers may be reluctant to integrate the Company's Smart Card products into
their systems unless the products are proven to be both reliable and available
at a competitive price in an assured quantity. Even assuming product acceptance,
the Company's

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customers may be required to redesign their systems to effectively use the
Company's Smart Card products. The time and costs necessary for such redesign
could delay or prevent market acceptance of the Company's Smart Card products. A
lack of, or delay in, market acceptance of one or more of the Company's Smart
Card products could adversely affect the Company's operations. See "Business--
Marketing."

DEPENDENCE ON MANUFACTURERS AND SUPPLIERS. The Company purchases FRAM
semiconductor chips for its Smart Card products from two affiliated
manufacturers, Ramtron and Rohm Co., Ltd., and purchases other components used
in assembly of its Smart Cards from other key suppliers. The Company's reliance
upon outside manufacturers and suppliers is expected to continue and involves
several risks, including limited control over the availability of components,
delivery schedules, pricing and product quality. The Company may also
experience, delays, expenses and lost sales should it be required to locate and
qualify alternative suppliers. See "Business--Manufacturing and Assembly."

RELIANCE UPON PATENTS AND TRADE SECRETS. The Company relies on its patents,
trade secrets and copyrights and the patents, trade secrets and copyrights of
its licensors to protect its Smart Card technology. Although the Company intends
to enforce its patents, trade secrets and copyrights aggressively, there can be
no assurance that such protection will be available in any particular instance
or that the Company will have the financial resources necessary to adequately
enforce its rights. The unavailability of such protection or the inability to
enforce adequately such rights could materially adversely affect the Company's
business and operating results. The Company operates in a competitive
environment in which it would not be unlikely for a third party to claim that
certain of the Company's present or future Smart Card products may infringe the
patents or rights of such third parties. If any such infringements exist or
arise in the future, the Company may be exposed to liability for damages and may
be required to obtain licenses relating to technology incorporated into the
Company's products. The Company's inability to obtain such licenses on
acceptable terms or the occurrence of related litigation could materially
adversely affect the Company's operations. See "Business--Patents and Trade
Secrets."

NEED FOR ADDITIONAL FINANCING. The Company anticipates, based on currently
proposed plans and assumptions relating to its operations, that the proceeds of
the Offering, together with projected cash flow from operations, will be
sufficient to satisfy its contemplated cash requirements for at least 12 months
following the Offering. In the event that the Company's plans change, its
assumptions prove to be inaccurate or if the proceeds of the Offering or its
cash flow prove to be insufficient (due to unanticipated expenses, inadequate
revenues, difficulties, problems or otherwise), the Company may be required to
seek additional financing or curtail its activities. Any issuance of equity
securities would result in dilution to the interests of the Company's
stockholders and any issuance of debt securities would subject the Company to
risks that interest rates may increase or cash flow may be insufficient to repay
such indebtedness. The Company has no arrangements or understandings for
additional financing and there can be no assurance that additional financing
will be available to the Company if required. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE UPON CUSTOM SYSTEM DEVELOPMENT PROJECTS. The Company relies upon
custom system development projects for a significant part of its revenues. The
inability of the Company to replace completed projects with new projects would
adversely affect the Company's operations. See "Business-- Marketing."

RISKS ASSOCIATED WITH GOVERNMENT REGULATIONS. The Company's Smart Card
products use radio frequency technologies, emit radio frequency energy emissions
and their assembly may require the disposal of chemicals and gases during the
assembly process. Current and future U.S. and foreign governmental regulations
concerning radio frequency technologies, energy emissions and waste disposal
could adversely affect the Company's business operations and results of
operations. See "Business--Regulation."

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<PAGE>
OFFERING TO BENEFIT INSIDERS. A substantial portion of the proceeds of the
Offering will be used to repay outstanding indebtedness to the Company's two
principal stockholders (aggregating $1,045,000 or 14.7% of the gross proceeds of
the Offering) and to the Selling Stockholders (aggregating $1,068,000 or 15.0%
of the gross proceeds of the Offering). See "Use of Proceeds."

DEPENDENCE UPON QUALIFIED PERSONNEL AND EXECUTIVE OFFICERS. The Company's
operations depend in part upon its ability to retain and hire qualified
personnel, of which there can be no assurance. The Company's operations are also
dependent upon the continued services of Richard L. Horton, its Chief Executive
Officer and President, and certain other executive officers. The loss of
services of any of the Company's executive officers, whether as a result of
death, disability or otherwise, could have a material adverse effect upon the
Company's operations. The Company does not have employment agreements with any
of its executive officers but intends to apply for key person insurance upon Mr.
Horton's life in the amount of $1,000,000. See "Management."

CONTROL BY PRINCIPAL STOCKHOLDERS; AUTHORIZATION AND ISSUANCE OF PREFERRED
STOCK; PREVENTION OF CHANGES IN CONTROL. Upon completion of the Offering,
Ramtron and Intag will together own approximately 77.2% of the then issued and
outstanding shares of Common Stock (assuming no exercise of the Warrants, the
Representative's Overallotment Option or the Representative's Unit Warrant) and
will continue to elect all of the Company's directors and control the affairs of
the Company. The Company's Certificate of Incorporation authorizes the issuance
of up to 5,000,000 shares of Preferred Stock with such rights and preferences as
may be determined from time to time by the Board of Directors. Accordingly,
under the Certificate of Incorporation, the Board of Directors may, without
shareholder approval, issue Preferred Stock with dividend, liquidation,
conversion, voting, redemption or other rights which could adversely affect the
voting power or other rights of the holders of the Common Stock. The issuance of
any shares of Preferred Stock having rights superior to those of the Common
Stock may result in a decrease in the value or market price of the Common Stock
and could further be used by the Board of Directors as a device to prevent a
change in control of the Company. The Company has no other anti-takeover
provisions in its Certificate of Incorporation or Bylaws. Holders of the
Preferred Stock may have the right to receive dividends, certain preferences in
liquidation and conversion rights. See "Principal Stockholders" and "Description
of Securities."

LACK OF PUBLIC MARKET; DETERMINATION OF OFFERING PRICE. Prior to the
Offering, there has been no public trading market for the Units, Common Stock or
Warrants. The Offering price of the Units and exercise price of the Warrants
were determined by negotiations between the Company and the Representative and
do not necessarily bear any relationship to recognized criteria for the
valuation of such securities. There can be no assurance that a regular trading
market for the Common Stock or Warrants will develop or continue after the
Offering or, if such a market develops, that the market prices of the component
securities will exceed the Unit Price. See "Underwriting."

IMMEDIATE AND SUBSTANTIAL DILUTION. The Offering involves an immediate and
substantial dilution of $4.43 per share of Common Stock, or a 93.3% reduction
between the Offering price of $4.75 per share of Common Stock (ascribing no
value to the Warrants included in the Units) and the net tangible book value of
$.32 per share of Common Stock upon completion of the Offering, assuming no
exercise of the Warrants, the Overallotment Option, the Representative's Unit
Warrant or other outstanding stock options, common stock purchase warrants or
convertible securities. See "Dilution."

NO DIVIDENDS. The Company has not paid any dividends on its Common Stock
and does not intend to pay dividends in the foreseeable future. See "Description
of Securities--Dividends."

POSSIBLE VOLATILITY OF SECURITIES PRICES. The market price of the Common
Stock and Warrants following the Offering may be highly volatile, as has been
the case recently with the securities of other companies completing initial
public offerings. Factors such as the Company's operating results or public
announcements by the Company or its competitors may have a significant effect on
the market price of the

10
<PAGE>
securities. In addition, market prices for the securities of many small
capitalization companies have experienced wide fluctuations due to variations in
quarterly operating results, general economic conditions and other factors
beyond the Company's control.

SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the open market or the availability of such shares for sale following
the Offering could adversely affect the market price of the securities offered
hereby. Following the Offering, all 1,500,000 shares of Common Stock offered
hereby, together with 1,500,000 Warrants, may be purchased and sold in the open
market without restriction or further registration under the 1933 Act. The
Bridge Warrants have also been registered hereby, but are subject to a one year
lock-up agreement. (See "Selling Stockholders") The currently outstanding
11,532,532 shares of Common Stock are "restricted securities" as that term is
defined under Rule 144 of the 1933 Act, all of which are currently eligible for
resale. However, all of the Company's officers, directors and 5% or greater
stockholders have agreed, pursuant to a lock-up agreement with the
Representative, not to sell or otherwise dispose of any of their shares of
Common Stock for a period of 12 months from the date of this Prospectus and to
sell no more than 50% of their shares of Common Stock during the following
12-month period without the prior written consent of the Representative. There
are no arrangements, agreements or understandings with respect to a release of
the lock-up agreement by the Representative and it is not the Representative's
general policy to grant such a release. Nevertheless, the Representative will
consider requests for such releases on an individual basis and may in the future
grant such requests in connection with this or other offerings. See "Description
of Securities--Common Stock Eligible for Future Sale" and "Underwriting."

UNDERWRITERS' INFLUENCE ON THE MARKET. A significant amount of the Common
Stock and Warrants offered hereby may be sold to customers of the Representative
and the Underwriters. Such customers subsequently may engage in transactions for
the sale or purchase of these securities through or with the Underwriters.
Although it has no obligation to do so, the Representative intends to make a
market or otherwise effect transactions in the securities, although this
market-making activity may terminate at any time. The Representative may exert a
dominating influence on the market, if one develops, for the securities. The
price and liquidity of the securities may be significantly affected by the
degree, if any, of the Underwriters' participation in such market.

LIMITATIONS ON LIABILITY OF DIRECTORS. The Company's Certificate of
Incorporation substantially limits the liability of the Company's directors to
the Company and its stockholders for breach of fiduciary or other duties to the
Company. See "Description of Securities--Limitation on Liabilities."

REDEMPTION OF WARRANTS. The Warrants may be redeemed by the Company under
certain circumstances upon 30 days' written notice to the Warrantholders at $.01
per Warrant. In such event, the Warrants will be exercisable until the close of
business on the date fixed for redemption in such notice. Any Warrants not
exercised by that time will cease to be exercisable, and the holders will be
entitled only to the redemption price, which is likely to be substantially less
than the market value of the Warrants. Accordingly, such redemption could force
the Warrantholders to exercise the Warrants and pay the exercise price at a time
when it might be disadvantageous for them to do so or sell the Warrants at the
then market price when they might otherwise prefer to hold the Warrants. See
"Description of Securities--Warrants."

NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES OF COMMON STOCK
UNDERLYING THE WARRANTS AND BRIDGE WARRANTS. The Warrants and Bridge Warrants
are not convertible or exercisable unless, at the time of exercise, the Company
has a current prospectus covering the shares of Common Stock issuable upon
exercise of the Warrants and Bridge Warrants and such shares of Common Stock
have been registered, qualified or deemed to be exempt under the securities laws
of the states of residence of the holders of such Warrants and Bridge Warrants.
There can be no assurance that the Company will have or maintain a current
prospectus or that the securities will be qualified or registered under any
state laws.

11
<PAGE>
The Common Stock and the Warrants, which comprise the Units offered hereby,
are detachable and separately transferable as of the date hereof. Purchasers of
the Warrants or Bridge Warrants may reside in jurisdictions in which the shares
of Common Stock underlying the Warrants and Bridge Warrants are not registered
or qualified during the period that the Warrants and Bridge Warrants are
exercisable. In this event, the Company would be unable to issue Common Stock to
those persons desiring to exercise their Warrants and Bridge Warrants unless and
until such shares could be qualified for sale in jurisdictions in which the
purchasers reside, or an exemption from qualification exists in such
jurisdiction. Accordingly, Warrantholders would have no choice but to attempt to
sell the Warrants or Bridge Warrants in a jurisdiction where such sale is
permissible, or allow them to expire unexercised. See "Description of
Securities--Warrants."

REPRESENTATIVE'S LIMITED UNDERWRITING EXPERIENCE. The Representative was
organized in Colorado in June 1992 and was registered as a broker-dealer under
the name World Securities Corporation in March 1994. In April 1994, the
Representative changed its name to Spencer Edwards, Inc. To date, the
Representative's business has primarily been limited to open market purchases
and sales of securities as a broker-dealer on behalf of its customers. The
Representative has acted as a representative of underwriters in only one prior
public offering although it has participated as a dealer in offerings
underwritten by others. The Representative's limited underwriting experience may
(i) adversely affect the development or continuation of a trading market for the
Company's Common Stock, (ii) limit the effectiveness of the Representative's due
diligence responsibilities to review and verify the information in the
Prospectus, or (iii) influence the after market price of the Common Stock. The
Representative had no material relationship with the Company or its promoters
prior to the Offering except for acting as the Selling Agent for the Bridge
Loan. See "Selling Stockholders," "Description of Securities--Bridge Warrants"
and "Underwriting."

12
<PAGE>
DILUTION

At December 31, 1996, the negative net tangible book value of the Company's
Common Stock was $(1,741,442), or $(.15) per share. Net tangible book value per
share represents the total amount of tangible assets of the Company, less the
total amount of liabilities of the Company, divided by the number of shares of
Common Stock outstanding. Without taking into account any changes in net
tangible book value after December 31, 1996, other than to give effect to the
sale by the Company of the 1,500,000 Units offered hereby, less underwriting
discounts and commissions and estimated costs of the Offering, the net tangible
book value of the Company at December 31, 1996 would have been $4,228,558, or
approximately $.32 per share. This represents an immediate increase in net
tangible book value of $.47 per share of Common Stock to existing stockholders
and an immediate dilution of $4.43 per share to new stockholders. "Dilution" per
share represents the difference between the price to be paid by the new
stockholders of $4.75 per share (ascribing no value to the Warrants included in
the Units) and the net tangible book value per share of Common Stock immediately
after the Offering.

The preceding discussion is illustrated in the following table:

<TABLE>
<S> <C> <C>
Public offering price per share of Common Stock included
in the Units........................................... $ 4.75
Negative net tangible book value per share of Common
Stock before the Offering............................ $ (.15)
Increase in net tangible book value per share of Common
Stock attributable to new investors purchasing in the
Offering............................................. $ .47
---------
Net tangible book value per share of Common Stock after
the Offering........................................... $ .32
---------
Dilution of net tangible book value per share of Common
Stock to new investors................................. $ 4.43
---------
---------
</TABLE>

The following table sets forth the number of shares of Common Stock
purchased, the total consideration and the average price per share paid by
existing stockholders of the Company as of December 31, 1996, and by new
investors purchasing the shares of Common Stock included in the Units offered
hereby:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
New investors................... 1,500,000 11.5% $ 7,125,000 41.7% $ 4.75
Existing stockholders........... 11,532,532 88.5% 9,958,798 58.3% $ .86
------------ ----- ------------- -----
Totals........................ 13,032,532 100.0% $ 17,083,798 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>

The preceding discussion and tables do not include shares issuable upon
exercise of (i) the Warrants, the Overallotment Option and the Representative's
Unit Warrant, (ii) 1,559,000 stock options issued under the Company's 1993
Employee Stock Option Plan, (iii) the 260,000 Bridge Warrants, or (iv) other
outstanding stock options, common stock purchase warrants and convertible
securities issuable into an aggregate of 817,653 shares. See "Dilution,"
"Capitalization" and "Management--1993 Employee Stock Option Plan."

13
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at December
31, 1996, as adjusted to give effect to the sale by the Company of 1,500,000
Units offered hereby at $4.75 per Unit and application of the estimated net
proceeds, without giving effect to the exercise of (i) the Warrants, the
Overallotment Option and the Representative's Unit Warrant, (ii) an aggregate of
1,559,000 shares issuable under the Company's 1993 Employee Stock Option Plan,
(iii) the 260,000 Bridge Warrants, or (iv) other outstanding stock options,
common stock purchase warrants and convertible securities issuable into an
aggregate of 817,653 shares. See "Use of Proceeds" and "Description of
Securities."

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL AS ADJUSTED
------------- -------------
<S> <C> <C>
Stockholders' equity
Preferred Stock, no par value, 5,000,000 shares authorized, none issued or
outstanding.................................................................... $ -- $ --
Common Stock, $.01 par value, 20,000,000 shares authorized, 11,532,532 issued and
outstanding, 13,032,532 shares issued and outstanding, as adjusted............. 115,325 130,325
Additional paid in capital....................................................... 10,272,591 16,227,591
Accumulated deficit.............................................................. (10,153,652) (10,153,652)
------------- -------------
Total stockholders' equity..................................................... 234,264 6,204,264
Total capitalization......................................................... $ 234,264 $ 6,204,264
------------- -------------
------------- -------------
</TABLE>

14
<PAGE>
USE OF PROCEEDS

The net proceeds of the Offering are estimated to be $5,970,000 ($6,910,500
if the Overallotment Option is exercised). The Company intends to use the net
proceeds of the Offering in the following order of priority:

<TABLE>
<CAPTION>
PERCENT OF
PURPOSE AMOUNT NET PROCEEDS
- --------------------------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Repayment of debt(1)................................................................... 2,113,000 35.4%
Sales and marketing expenses(2)........................................................ 1,600,000 26.8%
Research and development expenses...................................................... 1,530,000 25.6%
Working capital........................................................................ 727,000 12.2%
---------- -----
TOTALS............................................................................... 5,970,000 100.0%
---------- -----
---------- -----
</TABLE>

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

(1) Comprised of $949,000 principal and interest due on promissory notes payable
to Intag, $96,000 principal and interest due on promissory notes payable to
Ramtron and $1,068,000 of bridge loan principal and interest payable to the
Selling Stockholders. The Intag and Ramtron promissory notes bear annual
interest at 10% and prime plus 2%, respectively, and are due on demand. The
Bridge Loan notes bear interest at 2% over the prime interest rate and are
due the earlier of December 1997 or the closing date of the Offering. The
funds borrowed were used for working capital. Intag and Ramtron are
principal stockholders of the Company. Does not include repayment of a
$400,000 non-interest bearing convertible note issued to Intag which is due
if and only if the Company receives sublicense revenue from Intag. See
"Certain Transactions."

(2) Includes salaries, wages, advertising and travel expenses to be incurred in
connection with the expansion of the Company's North American marketing
activities. See "Business--Strategy."

The Company estimates that the net proceeds of the Offering, together with
its anticipated operating revenues, will be sufficient to fund its cash
requirements for at least 12 months from the date of the Prospectus. There may
be changes in the Company's proposed use of net proceeds due to the availability
of other business opportunities or modifications to the Company's plan of
operation. Management is not currently aware of any such business opportunities
or planned modifications to its operations. Pending use, the net proceeds will
be invested in bank certificates of deposit and other fully insured investment
grade securities.

Any funds received by the Company upon exercise of the Warrants, the
Overallotment Option or the Representative's Unit Warrant and any funds not
applied to sales and marketing or research and development expenses will be
added to working capital. The Company will not receive any proceeds from the
sale of the Bridge Warrants by the Selling Stockholders. Any proceeds received
by the Company upon exercise of the Warrants, the Overallotment Option, the
Representative's Unit Warrant or the Bridge Warrants will be added to working
capital.

15
<PAGE>
SELECTED FINANCIAL DATA

The following tables set forth certain selected financial data of the
Company. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Financial Statements of the Company and Notes thereto
included elsewhere in this Prospectus. The selected financial data as of
December 31, 1996, 1995 and 1994, and for the years ended December 31, 1996,
1995 and 1994, have been derived from the Company's financial statements which
have been audited by Arthur Andersen LLP, independent public accountants, and
are included elsewhere in this Prospectus.

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

16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company is a leading developer and marketer of contactless smart card
systems ("Smart Card(s)" or "Smart Card System(s)") used primarily in electronic
commerce. Generally the size of a credit card, Smart Cards are used in a number
of consumer applications including (i) access to restricted areas (replacing
keys and identification cards), (ii) public transportation fare collection
(replacing bus tokens, taxi cab charge cards, airline or railway tickets and the
like), (iii) point of sale purchases (replacing cash or credit cards at
cafeterias, newsstands and related point of sale locations where speed of
purchase is important), and (iv) miscellaneous small monetary transactions
(replacing coins and cash at parking lots, in vending machines and public
telephones, etc.). Smart Card technology is also used in industrial applications
by attaching a "tag" containing the Smart Card technology to the manufactured
product in order to track the product from the assembly line through quality
control, warehousing, inventory control, distribution and warranty.

The Company principally generates revenues from licensing, fee based custom
product development projects and sale of its Smart Card products. In the future,
the Company anticipates that a substantial portion of its revenues will be
generated from custom product development projects and the sale of its Smart
Card products. For instance, revenues from one licensing transaction (which
involved the sale of a FRAM technology license to Racom Japan, a joint venture
with Nittetsu Shoji Co., Ltd. of Japan and the subsequent sublicensing of the
technology to an unrelated Japanese company) and one product development
contract (which involved the development for Bull CP8, a division of Group Bull,
of a Smart Card which can be used as a contacted or contactless card),
represented 59.0% and 24.7%, respectively, of the Company's revenues for the
year ended December 31, 1996. See "--Year Ended December 31, 1996 Compared to
Year Ended December 31, 1995--Revenues" and "Business--Current Operations" for a
discussion of both the licensing transaction and the product development
project. If the Company is unable to continually replace larger custom product
development projects as these projects are completed, its operations will be
adversely affected. Custom product development projects are billed in stages
based on certain agreed upon performance milestones. Accordingly, financial
results for any calendar quarter may fluctuate widely depending on the stage of
a custom product development project or the amount of licensing payments in a
particular quarter.

As reflected in the Company's Financial Statements, the Company has
generated substantial operating losses since inception and has yet to generate
sufficient revenues to fund its operations. To date, the Company has completed a
series of smaller scale projects; however, the Company has not yet completed a
significant number of larger projects, and as a result, it is uncertain whether
the Company will be able to successfully market and sell its Smart Card products
in sufficient quantities and at sufficient prices and volumes to fund its
operations. During 1995 and 1996, the Company experienced significant cash flow
deficits and liquidity shortages and funded its operations primarily through the
sale of nonexclusive sublicenses to its technology, through proceeds from the
sale of its Common Stock, through bridge loan borrowings and through borrowings
from affiliates.

During 1997, the Company anticipates that increased operating revenues will
be achieved through a combination of product sales, custom product development
projects and the sale of non-exclusive licenses. In addition, the Company
anticipates incurring increased operating and research and development
expenditures in order to further develop and market its Smart Card products.

All of the Company's custom product development revenues for the years ended
December 31, 1995 and 1994 were the result of a development contract with Nippon
Steel Information and Communications Systems, Inc. All custom product
development revenues for the year ended December 31, 1996 were the

17
<PAGE>
result of a development contract with Bull CP8, a division of Group Bull. For
the years ended December 31, 1996, 1995 and 1994, two customers, three customers
and three customers, respectively, accounted for 10% or more of the Company's
revenues. See "Business--Marketing."

Prospective purchasers of the Common Stock should carefully consider the
following information as well as other information contained in this Prospectus
before making an investment in the Common Stock. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by the
use of forward-looking terminology such as "believes," "expects," "may,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g.,
"Business--Strategy." No assurance can be given that the future results covered
by the forward-looking statements will be achieved. The following matters
constitute cautionary statements identifying important factors with respect to
such forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.

RESULTS OF OPERATIONS

The following table sets forth statement of operations data expressed as a
percentage of revenues for the periods indicated:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue...................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................. 43.3% 56.3% 50.0% 22.9%
Gross margin................................. 56.7% 43.7% 50.0% 77.1%
Research and development expenses............ 20.8% 91.4% 244.6% 477.4%
General and administrative expenses.......... 34.4% 109.2% 350.8% 449.7%
Sales and marketing expenses................. 35.8% 61.7% 138.8% 214.6%
Equity in loss of joint venture.............. 8.6% 13.9% 37.8% --%
Amortization expense......................... 7.5% 14.7% 34.6% 106.4%
Loss from operations......................... (50.4)% (247.2)% (756.6)% (1,171.0)%
Other income (expense)....................... (3.3)% (3.5)% (224.9)% 8.9%
Net loss..................................... (53.7)% (250.7)% (981.5)% (1,162.1)%
</TABLE>

YEAR ENDED DECEMBER 31, 1996, COMPARED TO YEAR ENDED DECEMBER 31, 1995

REVENUES. Revenues increased 111.5% to $2,427,285 for the year ended
December 31, 1996 from $1,147,915 for the year ended December 31, 1995. This
increase reflects the initial payment and completion of one milestone under a
custom product development contract totaling $600,000 and recognition of
revenues on a license from Racom Japan ("RJ"), the Company's joint venture with
Nittetsu Shoji Co., Ltd. ("NS"), for the manufacture and sale of FRAM based
radio frequency products in Japan of $537,031. The amount received for the
license was $933,968. At the time of sale, the Company owned a 50% interest in
RJ and, accordingly, 50% of this amount (representing the Company's intercompany
profit due to its 50% equity ownership in RJ on the date of the sublicense) was
deferred and is being recognized over the life of the related technology license
asset owned by RJ, which is five years, commencing on the date of sale, of which
$70,047 had been recognized as of December 31, 1996. During the year ended
December 31, 1996, the Company consented to RJ entering into a custom product
development project with a Japanese company, pursuant to the technology license
discussed above, under which the Company is entitled to 50% of all sublicense
revenue earned by RJ. This sublicense resulted in the Company recognizing
$893,909 in additional licensing revenues. See "Certain Transactions".

18
<PAGE>
COST OF REVENUES AND GROSS MARGIN. As a percentage of revenues, gross
margin increased to 56.7% in 1996 from 43.7% in 1995. The gross margin is
primarily a result of license revenues which have no associated cost of
revenues. The Company has not generated high profit margins on product sales in
part because of competition the Company encounters with Contacted Cards which
typically are sold at a lower price than the Company's Smart Cards. The Company
expects to be able to lower its prices to compete more directly in price with
Contacted Card products as it builds manufacturing volumes for its Smart Cards
and ferroelectric technology becomes available from additional licensed
semiconductor manufacturers. Cost of revenues for 1996 also includes $521,540 of
costs associated with a custom product development project.

RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). R&D decreased 51.8% to $505,266
in 1996 from $1,049,162 in 1995. R&D efforts relating to the Company's Smart
Card expanded significantly in 1995 and continued through 1996. During 1996, the
Company began work on a joint development project with Bull CP8. Engineering
personnel resources and development costs totalling $388,158 were directly
related to the project and are included in cost of revenues for 1996.

GENERAL AND ADMINISTRATIVE EXPENSES ("G&A"). G&A decreased 33.5% to
$833,879 for 1996 from $1,253,252 for 1995. For 1995, the Company incurred
salary, travel and consulting expenses of approximately $465,000 including
$105,848 of consolidated expenses of ISI which was sold in June 1995. In
addition, the Company's legal fees decreased approximately $76,000 between the
years. Finally, the Company eliminated monthly fee payments to directors in
early 1995, resulting in a decrease of expenses of $12,000.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 22.7%
to $869,401 in 1996 from $708,566 in 1995. This increase is due to the hiring of
the Vice President of Product Development in June 1996. The Company also
increased its travel spending in conjunction with sales activities by
approximately $30,000 between years. Additionally, the Company paid $5,000 per
month beginning in July 1995 for consulting fees related to developing its
products for use in the airline industry.

EQUITY IN LOSS OF JOINT VENTURE. The Company currently owns 40% of RJ,
decreased from 50% as of March 29, 1996. RJ was formed in 1993 for the purpose
of marketing, distributing and supporting the Company's Smart Card products to
be sold in Japan. The Company accounts for its investment on the equity method
and has recorded its share of RJ's losses in its financial statements to the
extent of capital invested in RJ by the Company. The equity in the losses of RJ
increased 31.3% in 1996 to $209,248 from $159,403 in 1995. In early 1996, the
Company and NS invested an additional $466,984 each in RJ. Subsequently, third
parties also invested in RJ reducing the Company's ownership to 40%. During
1995, the Company's portion of the net losses in RJ exceeded the carrying value
of the investment. During 1996, the Company recognized $141,953 of previously
unrecognized losses from the prior year in excess of its investment through
December 31, 1995. RJ's losses were primarily related to ongoing research and
development activities as well as longer sales cycles and trial tests demanded
by Japanese customers.

AMORTIZATION EXPENSE. The Company's primary asset is a technology license
("Technology License") related to the design and manufacture of its Smart Card
products. The Company originally purchased the technology from Ramtron pursuant
to a technology license agreement (See "Certain Transactions.") for $2,000,000
in cash and 2,000,000 shares of the Company's Common Stock. The technology
license was recorded at the original cash acquisition cost of $2,000,000. In
1995, the Company acquired certain additional rights with respect to the
technology. The net cost of obtaining the additional rights was $400,000 and was
capitalized in 1995. The asset is amortized over its estimated useful life on a
straight line basis.

OTHER INCOME (EXPENSE). During 1996, the Company incurred $64,400 in
interest expense on various notes payable to Intag International Limited
("Intag") and Ramtron. The notes are due on demand and bear annual interest of
10% and prime plus 2%, respectively. The Company also recorded $28,367 in

19
<PAGE>
exchange rate losses due to exchange rate fluctuations at the end of the year
related to the license revenue receivable due from RJ. Other income and expense
in 1995 primarily included $143,645 in interest expense related to the notes
payable to Intag, a $170,647 gain on the sale of Intag Systems, Inc., a
wholly-owned subsidiary ("ISI") to Intag, and $70,000 in taxes withheld by
Australia and Japan related to the foreign licensing revenues earned by the
Company.

NET LOSS. The Company is a C Corporation under the Internal Revenue Code
and for income tax reporting purposes as of December 31, 1996, has approximately
$9,600,000 of net operating loss carryforwards that expire at various dates
through the year 2011. The Tax Reform Act of 1986 contains provisions which may
limit the net operating loss carryforwards available to the Company in any given
year if certain events occur, including significant changes in ownership
interests.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

The results of operations for the year ended December 31, 1994 consolidate
ISI, which was formed in October, 1994, had limited operations and generated no
significant revenues from its inception until its sale to Intag in June, 1995.

REVENUES. Revenues increased 223.7% to $1,147,915 for the year ended
December 31, 1995 ("1995") from $354,586 for the year ended December 31, 1994
("1994"). This increase reflects the completion of a development contract of
$90,000, initial payments of $500,000 on the sale of a license to Rohm for the
manufacture and sale of FRAM based radio frequency products in Japan only and
increased sales of the Company's Smart Card products.

COST OF REVENUES AND GROSS MARGIN. As a percentage of revenues, gross
margin decreased to 43.7% in 1995 from 50.0% in 1994. During 1995, the gross
margin is primarily a result of the license revenues which have no associated
cost of revenues. The Company has not generated high profit margins on product
sales. Additionally, the Company incurred increased manufacturing overhead as it
hired the Director of Manufacturing and Quality during 1995.

RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). R&D increased 21.0% to
$1,049,162 in 1995 from $867,237 in 1994. R&D efforts relating to the Company's
Smart Card products significantly expanded in 1995, and efforts relating to the
Company's newer Smart Card products began in 1995. Additionally, the Company
incurred $182,000 in development costs related to a joint development project
with a related party. See "Certain Transactions."

GENERAL AND ADMINISTRATIVE EXPENSES ("G&A"). G&A was consistent between
1995 and 1994, with expenses of $1,253,252 and $1,244,016 in each year,
respectively. Salaries and wages increased as a result of the hiring of a Chief
Financial Officer in April 1994 and an Accounting Manager in July 1994.
Consulting and professional fees decreased between 1995 and 1994 upon the
resignation of the Company's former Chairman.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 44.0%
to $708,566 in 1995 from $492,053 in 1994. The increase was attributable to the
hiring of a Vice President of Sales and Marketing and a Marketing/Communications
manager in late 1994. Marketing efforts were expanded through trade shows,
public relations efforts, the establishment of an Internet web site and e-mail
capability.

EQUITY IN LOSS OF JOINT VENTURE. The Company's equity in the losses of RJ
were consistent between 1995 and 1994 with equity in losses of RJ of $159,403
and $133,862, respectively. As of December 31, 1995, the Company's unrecognized
share of RJ's losses in excess of its investment was $141,953. RJ's losses
increased 125.1% as a result of operations including expanded research and
development as well as sales and marketing activities. RJ began operations in
1994.

20
<PAGE>
AMORTIZATION EXPENSE. As discussed above, the Company's cash acquisition
cost of the Technology License is amortized over its estimated useful life on a
straight line basis.

OTHER INCOME (EXPENSE). In 1995, other income and expense included $143,645
in interest expense related to the notes payable to Intag, $170,647 gain on the
sale of ISI to Intag and $70,000 in taxes withheld by Australia and Japan
related to the foreign licensing revenues earned by the Company. Other income
and expense in 1994 included $108,864 in interest expense on notes payable to
Intag. 1994 also included a bad debt write off of $753,317 from a note
receivable from a related party. In February 1995, Concord Services, Inc.
("CSI"), a corporation owned by a significant stockholder of Ramtron, filed for
protection under Chapter 11 of the United States Bankruptcy Code. Prior to the
bankruptcy filing, the Company had numerous transactions with CSI, including
advances to and repayments from CSI under the terms of various secured note
agreements. Under United States bankruptcy laws, certain repayments received by
the Company may have been deemed to be preferential transfers. If such
repayments had been deemed to be preferential transfers and subject to any
defenses or counterclaims of the Company, the Company could have been required
to repay certain material amounts. During 1996, the Company returned the
security granted under the notes in consideration for the bankruptcy court
releasing the Company from any potential claims for preferential transfer.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

The results of operations for the year ended December 31, 1994 consolidate
the wholly owned subsidiary, ISI. The subsidiary was formed on October 17, 1994.
The subsidiary had limited operations and generated no significant revenues from
its inception until its sale to Intag on June 30, 1995.

REVENUES. Revenues increased 207.2% to $354,586 for the year ended December
31, 1994 ("1994") from $115,412 for the year ended December 31, 1993 ("1993").
This increase reflects the initial payment on a development contract of $45,000
and the introduction to the market of the Company's second generation Smart Card
products.

COST OF REVENUES AND GROSS MARGIN. As a percentage of revenues, gross
margin decreased to 50.0% in 1994 from 77.1% in 1993. The decrease is primarily
due to the increased production costs of newer Smart Card products.
Additionally, the Company expanded its manufacturing capabilities during 1994 by
adding two manufacturing technicians and increasing the lab facilities. License
revenues and custom product development projects were not material during 1994
and 1993.

RESEARCH AND DEVELOPMENT EXPENSES ("R&D"). R&D increased 57.4% to $867,237
in 1994 from $550,988 in 1993. R&D efforts relating to the Company's Smart Card
products began in 1994 and included the hiring of several engineers. The Company
also incurred $256,298 for consulting and professional fees.

GENERAL AND ADMINISTRATIVE EXPENSES ("G&A"). G&A increased 139.7% to
$1,244,016 in 1994 from $519,024 in 1993. During 1994, the Company incurred
approximately $640,000 in consulting, management and professional fees and hired
a Chief Financial Officer and an accounting manager.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 98.7%
to $492,053 in 1994 from $247,654 in 1993. The increase was partially
attributable to the hiring of a Director of Sales in late 1993. The Company also
hired a marketing/communications manager and two sales managers and expanded its
sales and marketing efforts through trade shows, magazine articles, and the
product data sheets. Travel expenses increased as a result of increased product
inquiries.

EQUITY IN LOSS OF JOINT VENTURE. The Company made its initial investment in
RJ in 1993. The operations of RJ were not material until 1994, when the Company
recognized its equity in the losses of RJ of $133,862.

21
<PAGE>
AMORTIZATION EXPENSE. As discussed above, the Company's cash acquisition
cost of the Technology License is amortized over its estimated useful life on a
straight line basis.

OTHER INCOME (EXPENSE). Other income and expense in 1994 primarily included
the bad debt write off of $753,317 described above and $108,864 in interest
expense on notes payable to Intag. In 1993, the other income and expense
included $8,768 in interest expense related to the notes payable to Intag, and
$19,117 in interest income on notes receivable and other income.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary need for capital has been to finance expansion of
research and development of new Smart Card products, sales and marketing of its
products and operations. Annual product revenues growth has been limited due to
limited financial resources and an inability to expand receivables, build
inventory and effectively sell and market Smart Card products. The following
table sets forth for the periods presented certain items from the Statement of
Cash Flows of the Company.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Cash used in Operating Activities.................. $ (736,852) $ (2,089,990) $ (2,410,354) $ (1,161,243)
Net Cash used in Investing Activities.................. (491,959) (25,410) (1,779,133) (130,197)
Net Cash provided by Financing Activities.............. 1,030,578 2,399,160 4,358,089 1,222,531
</TABLE>

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

OPERATING ACTIVITIES. Net cash used in operations decreased to $736,852 in
1996 from $2,089,990 in 1995. This is a result of the improved operating results
(see "Results of Operations") in addition to the funding of approximately
$279,561 of the Company's FRAM chip purchases by Ramtron.

INVESTING ACTIVITIES. Net cash used in investing activities increased to
$491,959 in 1996 from $25,410 in 1995. During 1996, the Company invested an
additional $466,984 in RJ and $25,572 in fixed assets. In 1995, the Company
increased its investment in the Ramtron technology license by $400,000,
purchased $63,440 in fixed assets, and received $237,116 from a related party on
repayments of notes receivable. The Company also received $200,000 from Intag
for a technology sublicense.

FINANCING ACTIVITIES. Net cash provided by financing activities decreased
to $1,030,578 in 1996 from $2,399,160 in 1995. During 1996, the Company borrowed
$90,000 and $170,000 (net of repayments) from Ramtron and Intag, respectively.
Additionally, in December 1996, the Company completed the borrowing of an
aggregate of $1,040,000 from a group of lenders (the "Bridge Loan(s)") evidenced
by promissory notes bearing interest at 2% over the prime interest rate and due
the earlier of December 1997 or the closing date of the Offering. As additional
consideration for the Bridge Loans, the Company issued one Bridge Warrant for
each $4.00 loaned to the Company or a total of 260,000 Bridge Warrants. Each
Bridge Warrant entitles the holder to purchase one share of Common Stock at
$5.94 per share for a period of two years from the date hereof. The Bridge
Warrants and the Common Stock underlying the Bridge Warrants are being
registered by this Prospectus. The Company incurred $106,587 and $161,948 in
1996 for debt issuance costs related to the Bridge Loan financing and costs
related to the Offering, respectively. During 1995, the Company sold 500,000
shares of its Common Stock at $3.00 per share. Also, the Company borrowed
$900,000 (net of repayments) from Intag on short term convertible notes bearing
interest at 10% during 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

OPERATING ACTIVITIES. Net cash used in operations decreased to $2,089,990
for the year ended December 31, 1995 ("1995") from $2,410,354 for the year ended
December 31, 1994 ("1994"). The

22
<PAGE>
decrease is consistent with the improved operating results (see "Results of
Operations"). Similar to 1996, Ramtron funded the Company's FRAM chip purchases
during 1995, increasing related party payables by $193,253.

INVESTING ACTIVITIES. Net cash used in investing activities decreased to
$25,410 in 1995 from $1,779,133 in 1994. In 1995, the Company increased its
investment in the Ramtron technology license $400,000, purchased $63,440 in
fixed assets, received $200,000 from Intag on sublicense revenues and received
$237,116 on repayments of notes receivable. In 1994, the Company increased its
investment in RJ by $153,000, purchased fixed assets related to its facilities
expansion of $236,225, made a deposit of $400,000 with Intag on a technology
license and loaned $990,433 (net of repayments) to a related party.

FINANCING ACTIVITIES. Net cash provided by financing activities decreased
to $2,399,160 in 1995 from $4,358,089 in 1994. During 1995, the Company sold
500,000 shares of its Common Stock at $3.00 per share. Also, the Company
borrowed $900,000 (net of repayments) from Intag on short term convertible notes
bearing interest at 10%. During 1994, the Company completed a private placement
of 970,000 shares of its Common Stock at $2.50 per share, for net proceeds of
$2,154,118, borrowed $1,203,971 (net of repayments) from Intag and received
$1,000,000 on a deposit for a technology license from Intag.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

OPERATING ACTIVITIES. Net cash used in operations increased to $2,410,354
for the year ended December 31, 1994 ("1994") from $1,161,243 for the year ended
December 31, 1993 ("1993") The increase is consistent with increased operations
in terms of labor costs, consulting and professional fees, production and
marketing of the Company's Smart Card products.

INVESTING ACTIVITIES. Net cash used in investing activities increased to
$1,779,133 in 1994 from $130,197 in 1993. In 1994, the Company increased its
investment in RJ in Japan by $153,000, purchased fixed assets related to its
facilities expansion of $236,225, made a deposit of $400,000 with Intag on a
technology license and loaned $990,433 (net of repayments) to a related party.
In 1993, the Company made its initial investment in RJ in Japan of $140,265,
purchased fixed assets totaling $43,959 and received $54,027 on loans made to a
related party.

FINANCING ACTIVITIES. Net cash provided by financing activities increased
to $4,358,089 in 1994 from $1,222,531 in 1993. During 1994, the Company
successfully completed a private placement of 970,000 shares of its Common Stock
at $2.50 per share, for net proceeds of $2,154,118, borrowed $1,203,971 (net of
repayments) from Intag and received $1,000,000 on a deposit for a technology
license from Intag. In 1993, the Company borrowed $497,531 from Intag and
received $725,000 on the sales of its Common Stock.

The Company currently has minimal capital expenditure requirements.
Management plans to continue to outsource substantially all of its manufacturing
operations for the foreseeable future. Management believes that the Company's
cash reserves and the net proceeds of the Offering are sufficient to fund its
cash requirements for the next 12 months. If and only if such funds are
insufficient to satisfy the Company's needs will the Company seek to offer
additional equity or debt securities or obtain new credit facilities. The
Company has no current intention to seek any such financings. The sale of
additional equity securities will result in dilution to the Company's
stockholders and the sale of debt securities will involve ongoing interest
expense and the risk of loss of assets if such debt is not repaid.

23
<PAGE>
BUSINESS

CURRENT OPERATIONS

The Company is a leading developer and marketer of contactless smart card
systems ("Smart Card(s)" or "Smart Card System(s)") used primarily in electronic
commerce. Generally the size of a credit card, Smart Cards are used in a number
of consumer applications including (i) access to restricted areas (replacing
keys and identification cards), (ii) public transportation fare collection
(replacing bus tokens, taxi cab charge cards, airline or railway tickets), (iii)
point of sale purchases (replacing cash or supplementing credit cards at
cafeterias, newsstands and related point of sale locations where speed of
purchase is important), and (iv) miscellaneous small monetary transactions
(replacing coins and cash at parking lots, in vending machines and public
telephones and the like). Smart Card technology is also used in industrial
applications such as attaching a "tag" containing the Smart Card technology to a
manufactured product in order to track the product from the assembly line
through quality control, warehousing, inventory control, distribution and
warranty.

For consumers and goods and services providers, the Company's Smart Cards
offer the convenience and accuracy of high speed transaction processing without
the requirement of carrying cash, checks or credit cards, thereby reducing the
threat of theft, inventory shrinkage, and payment fraud resulting from the
handling of cash or the counterfeiting of cash or credit cards. Goods and
services providers do not have to risk loss resulting from (i) accepting cash or
checks which may be subsequently stolen from them after payment by consumers or
(ii) accepting credit cards which may have been stolen prior to such payment.
Consumer loss is limited because the Smart Card is programmed to be used to
purchase only specific goods or services which is not as attractive to a thief
when compared to the broader illegal uses for stolen cash, checks or credit
cards. The Smart Card is designed to complement credit cards rather than replace
them in that Smart Card applications involve the storage and handling of
substantially more data than credit cards and can therefore be used for other
applications (rather than just purchase and sale transactions) such as
electronic purses, identification of the user and other portable data functions.

The Company sells its Smart Card Systems through its own direct sales force,
through a combination of joint ventures and strategic alliances and through
selective licensing and distributorship arrangements and agreements with
independent sales representatives in foreign countries. Since 1993, the Company
has designed Smart Card Systems for over 100 customers in cities throughout the
world including Singapore, Macau, Hong Kong, Tokyo, Manchester, Paris, Milan,
Los Angeles, Chicago and Denver. Examples of the

24
<PAGE>
Company's Smart Card projects (the first three of which are discussed below as
representative of the Company's projects) include the following:

<TABLE>
<CAPTION>
USER (LOCATION) DESCRIPTION OF INSTALLATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Chep Lap Kok International Airport--(Hong Kong) access control, point of sale and payroll

City of Lompoc and Ventura County, California-- (United
States) automatic fare collection

Lubbock International Airport--(United States) parking facility fee collection

Chicago Transit Authority--(United States) automatic fare collection

Yamatake Honeywell Limited--(Japan) factory automation

City of Winston-Salem Transit Authority--(United States) automatic fare collection

LWD, Inc.--(United States) hazardous waste tracking

Microlise Engineering Limited--(United Kingdom) access control

Boreal Ridge Corp.--(United States) maintenance tracking

Nittetsu Shoji Co., Ltd.--(Japan) point of sale/cafeteria and access control

ST Electronic & Engineering Limited-- (Singapore) access control

UVM s.r.l. Ufficio Vendita Macchine--(Italy) point of sale

Transmac Transportes Urbanos DeMacau, S.A.R.L.--(Macau) automatic fare collection
</TABLE>

The Company implemented a Smart Card System at the Chep Lap Kok
International Airport under construction in Hong Kong which accepts Smart Cards
as a form of access by employees onto the airport site and is the only form of
payment accepted at airport cafeterias, in vending machines, and at other
employee facilities. The Smart Cards may be used to charge expenses to the
employee's employer and offer an additional purse for the employee's own
purchases.

A Smart Card System installed by the Company in the City of Lompoc and in
Ventura County, California collects bus fares using a Smart Card. Passengers
purchase Smart Cards loaded with bus fares and wave the Smart Card near a
terminal as they board the bus. The Company has been advised that bus dwell time
has been reduced and passenger boarding has become more efficient.

A parking facility payment system developed by the Company at Lubbock
International Airport uses Smart Cards for access into parking areas and for fee
collection. The Smart Card System allows parkers to enter the facility by
presenting the Smart Card at the gate. When leaving, the customer again presents
the Smart Card, which is debited for the parking fees. The Company has been
advised that the Smart Card System has lowered overhead costs and decreased
waiting times at the parking gates.

In April 1996, the Company began customer testing a new Smart Card, designed
to be used for both contacted and contactless applications. The Company believes
the new Smart Card will be of interest to Smart Card System providers who wish
to install contactless systems without substantially modifying their Contacted
Card applications software or eliminating expensive Contacted Card terminals and
related hardware.

25
<PAGE>
SMART CARD INDUSTRY OVERVIEW

Smart card products, including the Company's Smart Card (collectively
referred to as "generic smart cards"), are credit card size pieces of plastic
containing an integrated circuit chip ("chip") which can process and store
information. Today's generic smart cards typically have the processing power of
an early 1980's vintage personal computer, minus a keyboard, display and power
supply. Because generic smart cards are really portable computers, they can be
programmed to perform virtually any function which can be implemented by
software. Generic smart cards benefit directly from ongoing advances in
semiconductor technology making available continuously increasing performance
and features at declining cost.

There are two basic types of generic smart cards, memory cards and
microprocessor cards, each of which can interface between the generic smart card
and a terminal on a contacted or contactless basis. Memory cards are typically
used to store and retrieve information only and do not have the capability of
performing complex processing of information. Microprocessor cards are true
"smart" cards in that they contain a central processing unit within a chip which
can perform a number of functions, including complex arithmetic operations
required for security. In excess of 90% of all generic smart cards sold in 1995
were memory cards with contacted interfaces requiring alignment and insertion of
the generic smart card into a terminal to complete an electrical circuit with
the metal contacts on the surface of the card. While contacted generic smart
cards have found broad use in high volume, cost sensitive applications such as
pay phones, systems using contacted generic smart cards are expensive to
maintain, less reliable and are too slow for applications such as
transportation. To address the perceived shortcomings of the contacted generic
smart card, a contactless generic smart card was first developed and introduced
in the early 1990's.

According to the U.S. Federal Reserve, 68% of the approximately 360 billion
financial transactions completed in 1995 were for transactions of less than
$2.00 each. Electronic commerce using electronic funds transfer, magnetic stripe
cards and generic smart cards accounted for less than ten percent of all such
transactions with an annual growth rate of seventeen percent versus one percent
growth for transactions using cash, coin and checks. The Company believes that
the evolution of personal computers, the Internet and generic smart cards
represent technologies which will contribute to the growth of electronic
commerce in the future.

By the year 2000, over four billion generic smart cards are expected to be
in circulation worldwide, up from approximately 500 million in 1996. In the
United States an estimated 25 percent of households are expected to be using
generic smart cards to access information from computers or television sets, to
communicate by cell phones, to access healthcare and to make electronic
payments. Generic smart card based phone cards are now used in over 60 countries
accounting for the issuance of over 200 million such cards per year.

According to the SMART CARD GROWTH FORECAST, by the year 2000, generic smart
cards used in transportation are expected to increase from 2 million to 150
million and identity/access generic smart cards are expected to increase from 3
million to 300 million.

STRATEGY

The Company's business strategy is to:

CONTINUE TO DEVELOP NEW SMART CARD SYSTEMS. The Company believes it was the
first to introduce contactless Smart Cards using FRAM technology and batteryless
powered radio frequency communication. The Company intends to continue to design
and develop Smart Card Systems in order to maintain what it believes to be its
leadership in Smart Card technology. The Company's research and development
efforts will focus on developing new Smart Card products for automating
financial transactions and further enhancing Smart Card performance, reliability
and cost effectiveness.

EXPAND THE COMPANY'S SMART CARD SYSTEMS APPLICATIONS. The Company will seek
to expand the applications for its existing Smart Card products and to develop
new Smart Card products. Emphasis will

26
<PAGE>
be placed on developing Smart Card products outside the fare collection and
access control industries, including new point of sale Smart Card products as
well as expanded industrial applications.

GROW REVENUES THROUGH STRATEGIC ALLIANCES, JOINT VENTURES AND SELECTIVE
LICENSING. The Company will continue to pursue strategic alliances, joint
ventures and licensing agreements with firms such as Nippon Steel Information
and Communication Systems, Inc., Perot Systems Corporation, General Signal, Inc.
and Rohm Co., Ltd. in order to gain access to new markets. The Company will also
continue to license its technology in order to generate revenue from operations,
develop royalty income and gain access to the manufacturing facilities and
complimentary technologies of its licensees.

EMPHASIZE MARKETING OF THE COMPANY'S SMART CARD PRODUCTS IN NORTH
AMERICA. Although the Smart Card market, as well as the Company's own marketing
efforts, has generally been focused on Europe and Asia, the Company will seek to
participate in new Smart Card projects being developed in such North American
cities as Los Angeles, San Francisco and Seattle. In order to enhance the
Company's efforts in the North American market, the Company recently reorganized
its North American sales activities along industry market segments including (i)
transportation, (ii) automation and control in industrial applications, and
(iii) point of sale for entertainment and leisure.

CONTINUE TO OUTSOURCE MANUFACTURING TO CONTROL FIXED COSTS. Since
inception, the Company has subcontracted substantially all of its manufacturing
operations. The Company will continue to contract with third parties to
manufacture the Company's Smart Card products in order to avoid capital
intensive investments and to focus the Company's limited resources on new
product applications and software development.

COMPETITION

The market for Smart Card products is new, intensely competitive, quickly
evolving and subject to rapid technological change. Competitors may develop
superior products or products of similar quality for sale at lower prices.
Moreover, there can be no assurance that the Company's Smart Card will not be
rendered obsolete by changing technology or new industry standards. The Company
expects competition to persist and increase in the future. The Company's current
and potential competitors are primarily subsidiaries of multinational companies
with established Contacted Card and contactless Smart Card businesses who have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than the
Company. This intense level of competition could materially adversely affect the
Company's future business, operating results and financial condition.

Competitive factors in the industry include transaction speed, the extent
and flexibility of Smart Card memory, reliability, transaction accuracy and
cost, all of which are discussed below. There can be no assurance that the
Company will be able to compete successfully against current or future
competitors or that competitive pressures faced by the Company will not
materially adversely affect its business, operating results and financial
condition. Many of the Company's competitors have the financial resources
necessary to enable them to withstand substantial price and product competition,
which are expected to increase, and to implement extensive advertising and
promotional programs, both generally and in response to efforts by other
competitors to enter into existing markets or introduce new products. The
industry is also characterized by frequent introductions of new products. The
Company's ability to compete successfully will be largely dependent on its
ability to anticipate and respond to various competitive factors affecting the
Smart Card industry, including new products which may be introduced, changes in
customer preferences, demographic trends, pricing strategies by competitors and
consolidation in the industry where smaller companies with leading edge
technologies may be acquired by larger multinational companies.

Contacted Cards represent the Company's primary competition in electronic
commerce applications. Contacted Card competitors include such multinational
firms as Gemplus, Schlumberger and Group Bull.

27
<PAGE>
The Company believes that it is able to compete favorably against Contacted
Cards because the Company's contactless Smart Cards (i) operate at higher
speeds, (ii) do not require the time and effort involved in inserting the Smart
Card in a terminal or removing the Smart Card from a wallet or purse, (iii) use
reliable solid state electronics with no moving parts, exposed contact points or
magnetic stripes which can be erased by a magnetic field, and (iv) are lower in
cost over the product life.

The Company also competes against contactless Smart Cards designed by
Philips GmbH, Sony Corporation, Gemplus and Micron Communications, Inc., which
use contactless technologies other than the Company's FRAM technology. The
Company believes that its Smart Cards compete favorably against these other
contactless technologies because the Company's contactless Smart Cards operate
at higher speeds and do not require batteries for power.

The Company's Smart Cards are priced at parity with competitors' contactless
Smart Card products but sell at a premium to Contacted Cards. The Company
expects, but cannot assure, that its Smart Card manufacturing costs will
diminish as anticipated volumes increase and as other semiconductor
manufacturers begin to offer FRAM chips for use in the Company's Smart Cards.

Recently, Matsushita Electronics Corporation ("Matsushita"), a multinational
semiconductor manufacturer, announced it intends to market a ferroelectric
chip-based Smart Card which will also communicate by radio frequency. The
Company believes that Matsushita's initial Smart Cards will offer smaller
memories than those of the Company, but there can be no assurance that the
introduction of these competitive Smart Cards (anticipated in Spring 1997) will
not materially adversely affect the Company's operations.

MARKETING

The Company sells its Smart Card Systems through its direct sales force
based at its corporate headquarters in Greenwood Village, Colorado, through a
combination of joint ventures and strategic alliances and through selective
licensing and distributorship arrangements and agreements with independent sales
representatives in foreign countries.

In North America, the Company's direct sales force is organized by market
segment with primary emphasis on the transportation industry and to a lesser
extent industrial applications, health care and entertainment and leisure. At
December 31, 1996, the Company's direct sales force included nine full-time
employees.

Examples of the Company's joint ventures and strategic alliances include (i)
the Company's arrangement with Perot Systems Corporation and the GFI-GENFARE
unit of General Signal, Inc. to develop automatic fare collection systems and
services for public transportation projects in North America which combine the
subsystems of each company, and (ii) a joint product development agreement with
Rohm Co., Ltd. ("Rohm") to design custom FRAM based Smart Card products solely
in Japan.

In Japan, the Company has formed Racom Japan, Inc. ("RJ"), a joint venture
based in Tokyo, with Nittetsu Shoji Co., Ltd. ("NS"), a subsidiary of Nippon
Steel Information and Communication Systems, Inc., to market and sell the
Company's Smart Card Systems in Japan. RJ is 40% owned by the Company and acts
as the exclusive distributor in Japan of certain of the Company's Smart Card
products.

In France, the Company has entered into a non-exclusive distribution
agreement with Bull CP8, a division of Group Bull. Bull CP8 distributes the
Company's Smart Card products worldwide, with emphasis on the European market.

In Canada, Mexico, Germany, Italy, the Netherlands, the United Kingdom and
South America, the Company uses commissioned independent sales representatives.

The Company also markets its Smart Card Systems through participation in
trade shows, publication of trade articles, participation in industry forums and
technological standard-setting organizations, and

28
<PAGE>
through distribution of sales literature. The Company encourages customer
referrals and has used certain customer Smart Card installations as
demonstration sites for its Smart Card products. The Company has also
established an Internet web site and e-mail capabilities.

Two customers (Racom Japan and Transmac) accounted for 10% or more of the
Company's net product sales for year ended December 31, 1996; three customers
(Bull CP8, Impulse Enterprises, Inc. and Echelon Industries, Inc.) accounted for
10% or more of such product sales for the year ended December 31, 1995; and
three customers (Intag International, Inc., Deutsche Aerospace AG and Nittetsu
Shoji Co., Ltd.) accounted for 10% or more of such product sales for the year
ended December 31, 1994.

The selling process for the Company's Smart Card Systems often involves a
team comprised of individuals from the Company's sales, marketing, engineering
and operations departments as well as senior management. Teams frequently engage
in combined sales efforts directed toward a variety of customers such as systems
integrators, financial services providers and end users. The selling period
often exceeds a year because some customers require Smart Card Systems to be
tested against various performance standards and competitive products. The
Company is also frequently required to complete field trials of its Smart Card
Systems as a pre-condition to purchase.

MANUFACTURING AND ASSEMBLY

The Company's manufacturing and assembly operations consist primarily of
final assembly, test, burn-in and quality control of Smart Card terminals as
well as programming, testing and quality control of the Smart Cards themselves
(and tags in the case of industrial applications). The Company subcontracts
assembly of Smart Cards, terminals and card lamination to multiple United
States, Japanese, and Asian based companies who specialize in this kind of
contract work. Should production volumes increase, the Company intends to
consolidate its outside contract manufacturing in order to gain greater
economies of scale and to better control product quality. The Company's current
capacity through its contract manufacturers is approximately 25,000 Smart
Cards/tags and 200 terminals per month. The Company also operates its own
prototype Smart Card manufacturing facility to support new product introductions
and lower volume customer requirements.

The Company purchases a wide variety of electrical and mechanical components
as well as sub-assemblies for integration into the Company's Smart Card Systems.
With two notable exceptions, most materials are available from several supply
sources. The FRAM chips used in the Company's Smart Cards and tags are currently
supplied by two sources, Ramtron located in Colorado Springs, Colorado, and Rohm
located in Kyoto, Japan. Ramtron and Rohm own 41.6% and 4.3%, respectively, of
the Company's Common Stock. By 1998, the Company expects that two additional
semiconductor manufacturers will be available to supply the Company's FRAM
chips. The Company is dependent on maintaining at least one reliable source of
supply for its FRAM chips and its business would be materially adversely
affected if no such source were available. Currently, all of the Company's
terminals include a component manufactured by only one United States company. If
necessary, the Company could redesign its terminals to use a similar component
available from other semiconductor manufacturers, although such a redesign would
be time-consuming and expensive and would adversely affect the Company's
operations.

PATENTS AND TRADE SECRETS

The Company relies on its own patents, trade secrets and copyrights as well
as the patents, trade secrets and copyrights of its licensors to protect its
Smart Card technology. Due to rapid changes in the generic smart card industry,
the Company believes that development of trade secrets and unpatented
proprietary knowledge in connection with new products and technologies are
generally as important as patent and copyright protection in establishing and
maintaining a competitive advantage. Nevertheless, the Company has obtained
patents and copyrights on certain of its Smart Card technologies and will
continue

29
<PAGE>
to aggressively pursue patents and copyrights when available. To date, the
Company has been awarded six United States patents and is pursuing additional
patents, both in the U.S. and in certain foreign countries.

There can be no assurance that any of the Company's future patent
applications will be granted, that any current or future patent or patent
application will provide significant protection for the Company's products or
technology, be of commercial benefit to the Company, or that the validity of
such patents or patent applications will not be challenged. Moreover, there can
be no assurance that foreign patent, trade secret or copyright laws will protect
the Company's technologies or that the Company will not be vulnerable to
competitors who attempt to copy or use the Company's Smart Card products or
processes.

The Company has a license with certain exclusive rights, including the right
to grant a limited number of sublicenses, to use Ramtron's FRAM chip technology,
patents and improvements specifically for the development, manufacture and sale
of radio frequency identification devices, including the Company's contactless
Smart Cards. The exclusive provisions of the Company's license with Ramtron
become non-exclusive on January 1, 2006. The Company may in the future agree
with Ramtron to further amend the Technology License, although there are no such
agreements currently.

REGULATION

The Company's Smart Card products use radio frequency communications and
other technologies which make them subject to regulation by the Federal
Communications Commission ("FCC") in the United States and to export licensing
by the United States Government when sold internationally. Smart Card products
are subject to similar regulation by some foreign governments for use within
their countries. All of the Company's products currently comply with FCC
regulations, similar regulations of the foreign countries in which the Company
sells its products and United States export license requirements. Future
compliance with FCC regulations, similar regulations in foreign countries and
United States export license requirements may be costly and time-consuming.
Moreover, a failure to comply with such regulations and requirements could
result in the Company being denied the right to sell its Smart Card products in
the jurisdiction of non-compliance.

Market needs and competitive pressures will require that the Company's
products contain certain regulated cryptographic algorithms in order to protect
information and cash substitutes stored in the Smart Cards. Export, import and
usage of such cryptographic algorithms is covered by a large and rapidly
changing body of regulations in the United States.

Contactless Smart Cards and terminal devices produced by the Company emit
radio frequency energy in order to function. Such emissions are governed by
federal and other regulations in most countries including the United States. The
Company's products currently comply with United States regulations. While
similar regulations exist in most countries where sales of the Company's
products are anticipated, regulations can vary significantly from country to
country and can change frequently. Approvals can only be obtained after product
development is complete and therefore variations with United States regulations
or significant changes in each country's regulations could hinder product sales
to that country and thereby adversely affect the Company's business and
operating results.

Federal, state and local regulations impose various environmental controls
on the discharge of chemicals and gases which may be used in the Company's
present or future assembly processes. Moreover, changes in such environmental
rules and regulations may require the Company to invest in capital equipment and
implement compliance programs in the future. Any failure by the Company to
comply with environmental rules and regulations, including the discharge of
hazardous substances, could subject it to serious liabilities and could
materially adversely affect its operations.

30
<PAGE>
PROPERTIES

The Company's headquarters are located in an 8,900 square foot leased
facility in Greenwood Village, Colorado, a suburb of Denver, Colorado. The
current lease (with a nonaffiliated landlord) requires a base monthly rental of
$8,419 and expires in November 1998. The Company has the right to renew the
lease for an additional three years at then-current rental market rates on 180
days prior written notice to the landlord. The Company has no rights of first
refusal or purchase options under the lease. The base rental may be increased
during the term of the lease to reflect the Company's share of any increases in
specified operating expenses for the facility, such as real estate taxes,
insurance, utilities and the like. The Company believes its existing facility is
adequate for its current needs and that suitable additional or substitute space
will be available as needed on commercially reasonable terms.

EMPLOYEES

The Company employs an aggregate of 26 employees, including its five
salaried executive officers, and believes its relations with its employees are
satisfactory.

31
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company's directors and executive officers are as follows.

<TABLE>
<CAPTION>
OFFICER/DIRECTOR
NAME AGE POSITION SINCE
- ------------------------- --- ---------------------------------------------------------------- -----------------
<S> <C> <C> <C>
Charles A. Fear(1) 43 Chairman of the Board of Directors 1995
Richard L. Horton 51 Chief Executive Officer, President, Chief Financial Officer and 1992
Director

Mark R. Davison 51 Director 1995

L. David Sikes 56 Director 1995

George J. Stathakis(1) 65 Director 1995

Charles R. Broshous 56 Vice President of Transportation 1996

Michael M. Malmer 56 Vice President of Engineering 1992

William H. Jacobs 40 Vice President of Business Development 1996

Douglas J. Sheldon 37 Vice President of Operations 1996
</TABLE>

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

(1) Members of the Compensation Committee

Directors are elected at the Company's annual meeting of shareholders and
serve a term of one year or until their successors are elected and qualified.
Officers are appointed by the Board of Directors and serve at the discretion of
the Board of Directors, subject to the bylaws of the Company.

The Company's Compensation Committee administers the Company's 1993 Employee
Stock Option Plan and makes recommendations to the full Board of Directors
concerning compensation, including incentive arrangements, of the Company's
officers and key employees. The Compensation Committee is comprised of at least
two independent directors.

Upon the closing of the Offering, the Company will establish an Audit
Committee composed of at least two independent directors. The Audit Committee
will review the engagement and independence of the Company's independent
accountants, the audit and non-audit fees of the independent accountants and the
adequacy of the Company's internal accounting controls.

The Company has agreed with the Representative that, for a period of 24
months from the date of closing of the Offering, the Company will allow an
observer designated by the Representative and acceptable to the Company to
attend all meetings of the Board of Directors. The observer will have no voting
rights, will be reimbursed for out-of-pocket expense incurred in attending
meetings and will be indemnified against any claims arising out of participation
at the meetings, including claims based on liabilities arising under the
securities laws.

The principal occupation of each director and executive officer of the
Company, for at least the past five years, is as follows:

CHARLES A. FEAR was appointed Chairman of Intag International Limited
("Intag"), a publicly-held Australian developer and marketer of data capture
technologies, in April 1995. Intag was a promoter and founder of the Company, is
currently one of its principal stockholders and also holds an exclusive license
from the Company to use the Company's FRAM technology in connection with certain
airline, postal and courier applications. Since 1992, Mr. Fear has been an
Executive Director of Poynton Corporate Limited, the corporate advisory arm of
Hartley Poynton Limited, a regional Australian stockbroker, of which he is also
a shareholder. He is a director of Intag Systems Pty Limited and Intag
Microelectronics Pty Limited. Mr. Fear is a Fellow of the Institute of Chartered
Accountants and a Fellow of the Australian Institute of

32
<PAGE>
Company Directors. From 1985 to 1992 he was a partner of KPMG Peat Marwick
("KPMG"), where he provided corporate advisory services for KPMG clients
involving business valuations, mergers, acquisitions, corporate reconstructions
and capital raisings.

RICHARD L. HORTON joined the Company as President in June 1992 and has acted
as its Chief Executive Officer since May 1995 and its Chief Financial Officer
since January 1996. From 1988 to June 1992, he was President of Ramtron
International Corporation ("Ramtron"), a publicly-held specialty semiconductor
manufacturer. Ramtron was a promoter and founder of the Company and is currently
a principal stockholder and licensor to the Company of the FRAM technology upon
which the Company's Smart Card products are based. From 1981 to 1987, Mr. Horton
founded two start-up ventures in the computer systems and semiconductor
industries, which were subsequently acquired by other firms. From 1985 to 1987,
Mr. Horton also acted as the Director of the digital products division for
Honeywell, Inc. Mr. Horton served in the United States Navy from 1962 to 1966
and earned B.S.E.E. and M.B.A. degrees from Southern Methodist University and
Pepperdine University, respectively.

MARK R. DAVISON was a partner with the law firm of Freehill Hollingdale &
Page from 1978 to 1984, a Director of Rothschild Australia Limited from 1984 to
1985 and a founding Director of Gresham Partners Limited from 1985 to 1991. He
has been a director of Intag since July 1992. In December 1991 Mr. Davison
founded the AusAsean Group, which provides investment banking, development and
venture capital funds management. Mr. Davison is also a director of BRL Hardy
Limited, Tasmanian Univalve Pty Limited and other Australian public and private
companies. Mr. Davison is an investment banker and has been a solicitor of the
Supreme Court of New South Wales. He holds a degree in Arts (1971) and Law
(1973) from the Australian National University, a Masters of Laws from the
University of London (1976) and has completed the Advanced Management Programme
at Harvard School of Business Administration (1983).

L. DAVID SIKES became Chairman of the Board and Chief Executive Officer of
Ramtron in April 1995 and has been a director of Ramtron since September 1992.
Prior to becoming Chairman of the Board and Chief Executive Officer of Ramtron,
he was its President and Chief Operating Officer from July 1992 until January
1995, at which time he left Ramtron and joined Micro Component Technology Inc.,
a semiconductor equipment manufacturer, as Chairman, President and Chief
Executive Officer from January 1995 until April 1995. Mr. Sikes was President
and Chief Executive Officer of ASM America, Inc. ("ASM America"), a
semiconductor equipment company, from January 1991 until June 1992, and
Executive Vice President and General Manager of ASM Epitaxy, a semiconductor
equipment manufacturer, from February 1989 until December 1990. Prior to his
tenure with ASM, Mr. Sikes spent 18 years with Motorola, Inc. ("Motorola") in
various management and executive positions including Vice President and Director
of the Semiconductor Research and Development Lab. His experience also includes
several management and engineering roles with Eastman Kodak and National
Semiconductor Corporation. Mr. Sikes received his Bachelor of Science degree in
Electrical Engineering from the Massachusetts Institute of Technology.

GEORGE J. STATHAKIS has been a director of Ramtron since March 1990. Mr.
Stathakis also served as Chairman of the Board and Chief Executive Officer of
Ramtron from March 1990 until June 1994 and, in an interim capacity, from
February 1995 until April 1995. Since 1991, he has acted as a consultant to
Calpine Corporation, a publicly-held independent power company. From 1986 until
1989, Mr. Stathakis served as Chairman of the Board and Chief Executive Officer
of International Capital Corporation, a subsidiary of American Express. Mr.
Stathakis retired from General Electric Corporation ("GE") after 32 years in
management and executive positions. In 1971, he was appointed Vice President of
GE and General Manager of the Nuclear Energy Division. His responsibilities
included technology research and development, engineering design, manufacturing,
construction and marketing, as well as strategic business planning and
investments for an organization of approximately 10,000 people. In 1977, he was
appointed General Manager of GE's International Trading Operations, an
organization of approximately 35,000 people. Mr. Stathakis founded the General
Electric Trading Company in 1982 and was appointed its first President and Chief
Executive Officer. The General Electric Trading Company was instrumental in

33
<PAGE>
developing export opportunities for countertrade and barter. Mr. Stathakis
graduated from the University of California at Berkeley with Bachelor of Science
and Master of Science degrees in engineering. In 1985, Mr. Stathakis was
appointed by President Reagan as a member of the President's Export Council, and
he served on such Council until 1987.

CHARLES R. BROSHOUS, the Company's Vice President for Transportation, is
responsible for managing the Company's transportation-related Smart Card
business, including its automated fare collection (AFC) systems for public
transit. From August 1993 until he joined the Company in January 1996, Mr.
Broshous served as the first President of the MTA Card Company, a fare
collection subsidiary of the New York Metropolitan Transportation Authority
("Authority"). From 1982 to August 1993, Mr. Broshous served the Authority in a
variety of capacities, completing service as its Senior Vice President for
Operations Support. In this capacity, Mr. Broshous managed the logistics
portfolio of the Authority, overseeing among other functions a $2 billion per
year fare collection operation which covered approximately 60% of the
Authority's operating expenses. During his tenure, he converted the Authority
from its historic reliance on tokens to a new, all-electronic AFC system. Mr.
Broshous is a West Point graduate and U.S. Army veteran who holds Masters
degrees in civil engineering and in economics from Princeton University.

MICHAEL L. MALMER is the Company's Vice President of Engineering and is
responsible for the engineering development of the Company's Smart Card
products. Prior to joining the Company in February 1992, he was Engineering Vice
President of Destron/IDI, an early participant in radio frequency identification
technologies, from July 1986 to October 1991. In 1980, he was a founder of
Prolink Corporation and acted as its Vice President from 1980 to 1984. Mr.
Malmer held engineering positions at Unisys and Boeing from 1961 to 1973. He
holds a B.S.E.E. degree from Case Institute of Technology and engaged in
computer engineering masters degree work at the University of Michigan (Ann
Arbor) and other universities.

WILLIAM H. JACOBS is the Company's Vice President of Business Development
and is responsible for the development and marketing of new Smart Card products.
From March 1990 until he joined the Company in June 1996, he was Director of
Product Marketing for Netwise, Inc. Mr. Jacobs marketed the Netwise, Inc. line
of network software integration tools to support personal computers, UNIX
systems and IBM mainframes systems until the line was sold to Microsoft in
November of 1995. Prior to his employment with Netwise, Inc., Mr. Jacobs managed
computer operating system product lines for 11 years as an employee of Apple
Computer, Inc. and Hewlett Packard Co. He holds a B.S.E.E. degree from the
University of Missouri.

DOUGLAS J. SHELDON is the Company's Vice President of Operations. Prior to
joining the Company in August 1995, he had over 14 years experience in the
semiconductor manufacturing industry. From 1994 to 1995, he led the
manufacturing engineering activities of a family of advanced nonvolatile memory
products for Atmel Corporation and from 1988 to 1994 he was the Manager of
Reliability and Quality Assurance for Ramtron. Mr. Sheldon has a Bachelors and
Masters degree in Physics from University of Colorado and University of Oregon,
respectively, and is completing a Doctorate degree in Systems Management.

34
<PAGE>
EXECUTIVE COMPENSATION

The following table discloses certain compensation paid to the Company's
executive officers for the years ended December 31, 1996, 1995 and 1994.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
-----------------------------------------------------------------
(E) (F)
(A) (B) (C) (D) STOCK OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS COMPENSATION($)
- ------------------------------------------------------- --------- --------- ----------- --------- -------------------
<S> <C> <C> <C> <C> <C>
Richard L. Horton, President........................... 1996 179,122 0 0 0
1995 158,244 0 0 0
1994 158,244 0 0 0

Michael M. Malmer, Vice President of Engineering....... 1996 107,850 0 0 0
1995 104,200 0 0 0
1994 102,200 0 0 0
John Shoemaker, Vice President of Sales and
Marketing............................................ 1996 139,977 25,000 0 0
1995 104,958 0 150,000 0
1994 0 0 0 0
</TABLE>

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

(1) The Company has not paid or granted any long-term compensation awards or
payouts.

The Company's independent directors do not receive compensation for
attending Board meetings but are reimbursed for out-of-pocket expenses incurred
in connection therewith.

1993 EMPLOYEE STOCK OPTION PLAN

In May 1993, the Company's stockholders adopted the Company's 1993 Employee
Stock Option Plan (the "Plan"), which provides for the grant of stock options
intended to qualify as "incentive stock options" and "nonqualified stock
options" (collectively "stock options") within the meaning of Section 422 of the
United States Internal Revenue Code of 1986 (the "Code"). Stock options are
issuable to any officer, director, key employee or consultant of the Company.
The Plan also allows for the granting of limited stock appreciation rights upon
a change of control as defined in the Plan.

The Company has reserved 1,700,000 shares of Common Stock for issuance under
the Plan. The Plan is administered by the Compensation Committee of the Board of
Directors, which, subject to approval by the Board of Directors, determines
which individuals shall receive stock options, the time period during which the
stock options may be exercised, the number of shares of Common Stock that may be
purchased under each stock option and the stock option price.

The per share exercise price of incentive stock options may not be less than
the fair market value of the Common Stock on the date the option is granted. The
aggregate fair market value (determined as of the date the stock option is
granted) of the Common Stock that any person may purchase under an incentive
stock option in any calendar year pursuant to the exercise of incentive stock
options may not exceed $100,000. No person who owns, directly or indirectly, at
the time of the granting of an incentive stock option, more than 10% of the
total combined voting power of all classes of stock of the Company is eligible
to receive incentive stock options under the Plan unless the stock option price
is at least 110% of the fair market value of the Common Stock subject to the
stock option on the date of grant.

35
<PAGE>
No incentive stock options may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the stock option may only be exercisable by the optionee. Stock
options may be exercised only if the stock option holder remains continuously
associated with the Company from the date of grant to the date of exercise. The
exercise date of a stock option granted under the Plan cannot be later than ten
years from the date of grant. Any stock options that expire unexercised or that
terminate upon an optionee's ceasing to be employed by the Company become
available once again for issuance. Shares issued upon exercise of a stock option
will rank equally with other shares then outstanding.

As of the date of this Prospectus, 1,559,000 stock options have been granted
under the Plan, including an aggregate of 1,090,000 stock options granted to
officers and directors of the Company at exercise prices ranging from $1.00 to
$2.50 per share.

36
<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to the
ownership of the Company's Common Stock as of the date of the Prospectus, by (i)
each person who is known by the Company to own of record or beneficially more
than 5% of the Company's Common Stock, (ii) each of the Company's directors and
(iii) all directors and officers of the Company as a group. The stockholders
listed in the table have sole voting and investment powers with respect to the
shares of Common Stock.

<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF CLASS(1)
SHARES ------------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
- --------------------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Charles A. Fear(2)......................................................... 25,000 .2% .2%
Level 22 Allendale Square
77 St. Georges Terrace
Perth, Western Australia 6000

Richard L. Horton(3)....................................................... 500,000 4.2% 3.7%
6080 Greenwood Plaza Blvd.
Greenwood Village, CO 80111

Mark R. Davison(4)......................................................... 25,000 .2% .2%
9th Floor, Kyle House
27-31 Macquarie Place
Sydney NSW 2000
Australia

L. David Sikes(5).......................................................... 25,000 .2% .2%
1850 Ramtron Drive
Colorado Springs, CO 80921

George J. Stathakis(5)..................................................... 25,000 .2% .2%
One Bush Street, 15th Floor
San Francisco, CA 94104

Intag International Limited(6)(8).......................................... 5,828,733 48.2% 42.9%
9th Floor, Kyle House
27-31 Macquarie Place
Sydney NSW 2000
Australia

Ramtron International Corporation(7)....................................... 5,051,452 42.9% 38.0%
1850 Ramtron Drive
Colorado Springs, CO 80921

All directors and officers as a group (9 persons)(2)(3)(4)(5).............. 860,000 6.9% 6.2%
</TABLE>

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

(1) Does not include shares issuable upon exercise of the Warrants, the
Representative's Overallotment Option or the Representative's Unit Warrant.
Includes all stock options and common stock purchase warrants exercisable
within 60 days from the date hereof.

(2) Includes options to purchase 25,000 shares of Common Stock at $2.50 per
share until October 26, 2000, or 90 days after termination, whichever is
earlier, issued under the Company's 1993 Employee Stock Option Plan. Does
not include 5,262,532 shares or 321,766 common stock purchase warrants held
by Intag, a publicly-held Australian company for which Mr. Fear serves as
Chairman.

(3) Comprised of options to purchase 500,000 shares of Common Stock at $1.00 per
share until May 25, 1998 issued under the Company's 1993 Employee Stock
Option Plan.

37
<PAGE>
(4) Includes options to purchase 25,000 shares of Common Stock at $2.50 per
share until May 15, 2001, or 90 days after termination, whichever is
earlier, issued under the Company's 1993 Employee Stock Option Plan. Does
not include 5,262,532 shares or 321,766 common stock purchase warrants held
by Intag, a publicly-held Australian company for which Mr. Davison serves as
a director. See "Management--Directors and Executive Officers."

(5) Includes options to purchase 25,000 shares of Common Stock at $2.50 per
share until October 26, 2000, or 90 days after termination, whichever is
earlier, issued under the Company's 1993 Employee Stock Option Plan. Does
not include 4,800,000 shares or 251,452 common stock purchase warrants held
by Ramtron, a publicly-held company for which Mr. Sikes serves as Chairman
and Chief Executive Officer and for which Mr. Stathakis serves as a
director. See "Management--Directors and Executive Officers."

(6) Includes 200,000 common stock purchase warrants exercisable at $2.50 per
share at any time until June 13, 1999 and 121,766 common stock purchase
warrants exercisable at $2.50 per share at any time until October 4, 2001.
Also includes 182,181 shares issuable upon the conversion of $455,452 of
debt and accrued interest at $2.50 per share and 62,254 shares issuable upon
the conversion of $93,380 of accrued interest at $1.50 per share.

(7) Includes 251,452 common stock purchase warrants exercisable at $2.50 per
share at any time until October 4, 2001.

(8) The following individuals are officers and directors of Intag International
Ltd. ("Intag"); Charles A. C. Fear (Chairman), Allan Bull (Chief Operating
Officer), Andreas D. Alexandrou (Secretary), Mark R. Davison (Director),
Andrew J. Kroger (Director) and Nathan Spatt (Director)." There are no
individual or corporate principal stockholders, although two Australian
custodial firms, Westpac Custodian Nominees Limited and National Nominees
Limited each hold of record more than 10% of Intag's outstanding common
stock.

38
<PAGE>
SELLING STOCKHOLDERS

In December 1996, the Company completed the borrowing of an aggregate of
$1,040,000 from a group of lenders (the "Bridge Loan") evidenced by promissory
notes bearing interest at 2% over the prime interest rate and due the earlier of
December 1997 or the closing date of the Offering. As additional consideration
for the Bridge Loans, the Company issued one Bridge Warrant for each $4.00
loaned to the Company, or a total of 260,000 Bridge Warrants. Each Bridge
Warrant entitles the holder to purchase one share of Common Stock at $5.94 per
share for a period of two years from the date hereof.

The Company is registering by this Prospectus all 260,000 Bridge Warrants
and the 260,000 shares of Common Stock issuable upon exercise of the Bridge
Warrants. The Bridge Warrants and underlying shares of Common Stock may be sold
from time to time after the date hereof in public or private open market
transactions directly to purchasers or through brokerage firms at prevailing
market prices less customary commissions. However, in order to list the
Company's securities on NASDAQ, the Selling Stockholders agreed not to sell,
pledge or otherwise assign any of the Bridge Warrants or underlying Common
Stock, or exercise the Bridge Warrants, for a period of one year from the date
of this Prospectus. The Underwriters and Selling Stockholders have no plans,
proposals, arrangements or understandings with respect to any transactions
involving the Selling Stockholders' securities. If there are changes to the
stated plan of distribution, including any plans, proposals, arrangements or
understandings involving the Underwriters or the distribution of the securities,
a post-effective amendment with current information will first be filed with and
declared effective by the Commission. The names and addresses of the Selling
Stockholders who hold the Bridge Warrants and the number of Bridge Warrants held
by them are set forth below. None of the Selling Stockholders are officers or
directors of the Company or own any other securities of the Company and all
Selling Stockholders intend to sell all Bridge Warrants and/or Common Stock
underlying the Bridge Warrants upon termination of the one year lock-up period.
The Selling Stockholders may be deemed to be "underwriters" within the meaning
of the 1933 Act.

<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
BRIDGE WARRANTS AND BRIDGE WARRANTS AND
UNDERLYING SHARES UNDERLYING SHARES
OWNED AND TO BE OWNED
NAME AND ADDRESS OF SELLING STOCKHOLDER OFFERED FOR SALE AFTER OFFERING
- ----------------------------------------------------------------------- ------------------- -----------------------
<S> <C> <C>
Michael M. Arnouse..................................................... 25,000 0
Three Edward Lane
Syosset, NY 11791

William P. Bennett..................................................... 12,500 0
P.O. Box 4240
Boulder, CO 80306

Steven Bloechl......................................................... 6,250 0
4540 S. Decatur Street
Englewood, CO 80110

Roland J. Christensen.................................................. 12,500 0
192 E. 100N
Fayette, UT 84630

Ellis V. Couch......................................................... 6,250 0
2926 Rocky Oak Street
San Antonio, TX 78232

Thomas L. Dutcher...................................................... 6,250 0
P.O. Box 897
Montrose, CO 81402-0897
</TABLE>

39
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
BRIDGE WARRANTS AND BRIDGE WARRANTS AND
UNDERLYING SHARES UNDERLYING SHARES
OWNED AND TO BE OWNED
NAME AND ADDRESS OF SELLING STOCKHOLDER OFFERED FOR SALE AFTER OFFERING
- ----------------------------------------------------------------------- ------------------- -----------------------
John A. Duke Trust..................................................... 25,000 0
<S> <C> <C>
9100 Boyd Road
P.O. Box 430
Rogue River, OR 97537

Frederick M. Galloway.................................................. 6,250 0
375 Ammons Street
Lakewood, CO 80226

John R. Hannifan....................................................... 12,500 0
1366 S.W. Tamarind Way
Boca Raton, FL 33486

Arthur Kassoff......................................................... 6,250 0
7600 State Street
E. St. Louis, IL 62203

Kaufmann Survivors Trust............................................... 6,250 0
(c/o Carl J. Kaufmann)
2000 Royal Marco Way #906
Marco Island, FL 34145-1800

Gary A. Mosko.......................................................... 12,500 0
234 Garfield
Denver, CO 80206

Heribert Obser......................................................... 12,500 0
P.O. Box 697
Quogue, NY 11959

Mitchell & Elizabeth Pearlman.......................................... 6,250 0
27157 Highlands Lane
Valencia, CA 91354

Robert R. Peterson..................................................... 6,250 0
P.O. Box 3460
Estes Park, CO 80517

Max Quimby & Armond Quimby............................................. 6,250 0
Revocable Living Trust
(c/o Max Quimby)
10409 Riverside Drive #302
Toluca Lake, CA 91602

S. G. Construction Company............................................. 12,500 0
(c/o Ronald W. Massner)
2850 Mt. Pleasant St., Suite 102
Burlington, IA 52601

David M. Schneider..................................................... 12,500 0
721 Redwood Drive
Lincoln, NE 68510-5219
</TABLE>

40
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
BRIDGE WARRANTS AND BRIDGE WARRANTS AND
UNDERLYING SHARES UNDERLYING SHARES
OWNED AND TO BE OWNED
NAME AND ADDRESS OF SELLING STOCKHOLDER OFFERED FOR SALE AFTER OFFERING
- ----------------------------------------------------------------------- ------------------- -----------------------
Shepler & Thomas, Inc.................................................. 6,250 0
<S> <C> <C>
Profit Sharing Plan FBO
(c/o William R. Bell)
28650 Cavan Lane
Evergreen, CO 80439

Deloris J. Sherwood.................................................... 6,250 0
15111 Bushard Street #84
Westminster, CA 92683

Charles W. Wafer....................................................... 37,500 0
P.O. Box 2174
Rancho Santa Fe, CA 92067

David Wank............................................................. 10,000 0
5200 White Oak Ave. #35
Encino, CA 91316

Barbara L. Westrick.................................................... 6,250 0
11786 Decatur Drive
Denver, CO 80234-2554
</TABLE>

41
<PAGE>
CERTAIN TRANSACTIONS

In January 1992, the Company initially issued 2,000,000 shares of its Common
Stock to each of Ramtron International Corporation ("Ramtron"), Intag
International Limited ("Intag") and AWA Limited ("AWA") in connection with the
Company's organization. In June 1993, AWA sold its 2,000,000 shares to Intag for
$1.50 per share. Ramtron and Intag, which are publicly-held companies, are
founders, promoters and principal stockholders of the Company. Subsequently, in
November 1994, Ramtron sold 200,000 shares of the Company's Common Stock to
Intag for $3.00 per share. See "Principal Stockholders."

In October 1991, the Company entered into a technology license agreement
with Ramtron (the "Technology License") which was amended in March 1994,
February 1995 and May 1995. Under the Technology License and amendments thereto,
Ramtron granted the Company the worldwide, nonexclusive, nontransferable right
to design, manufacture, sell, lease and distribute products which incorporate
FRAM and contactless technologies regardless of memory size (the "Contactless
Products"). As a part of the Technology License, the Company also acquired the
rights to any and all improvements in the FRAM technology developed by Ramtron
and the right, through December 31, 2005, on an exclusive basis, to design,
manufacture, sell, lease and distribute certain contactless products which
functionally incorporate a microprocessor. The Company may in the future agree
with Ramtron to further amend the Technology License, although there are no such
agreements currently.

In February 1995, the Company agreed to pay $1,000,000 and agreed to issue
1,000,000 shares of its Common Stock to Ramtron in connection with a February
1995 amendment to the Technology License which provided the Company with certain
additional rights thereunder. The Company paid $400,000 in cash and was relieved
of the $600,000 balance owed on the transaction upon Intag paying $600,000 to
Ramtron under the MOU discussed below.

In May 1995, the Company signed and executed a Memorandum of Understanding
("MOU") with Intag and Ramtron relating to certain amendments to the Technology
License, the granting of certain rights to Intag and the conversion to equity of
certain of Intag's loans to the Company. Under the MOU, the Company consented to
Ramtron granting to Intag, a principal stockholder of the Company, an exclusive
right to use (but not manufacture) the FRAM and contactless technology solely
for use in conveyor fed or tunnel reader equipped airline, postal and courier
applications which do not incorporate a microprocessor. In turn, Ramtron agreed
to pay the Company royalties, as defined in the Agreement, on any contactless
products which Ramtron sells, leases or distributes to third parties. Ramtron is
also obligated to pay the Company 50% of any license fees it receives on
contactless products. The Company may sublicense its rights up to five times
with Ramtron's consent and to date has sublicensed its rights two times. The
Company is required to purchase certain minimum quantities of FRAM chips from
Ramtron. As consideration for the rights granted to Intag under the MOU, Intag
agreed to pay a total of $1,200,000. Intag paid Ramtron $600,000, paid the
Company $200,000 and agreed to pay $400,000 to the Company upon further
sub-licensing of the technology to third parties. As additional consideration
for the Company approving the granting of rights to Intag under the MOU, Intag
converted an aggregate of $2,033,798 of debt due from the Company in exchange
for the issuance of 1,062,532 shares of the Company's Common Stock at the
respective fair market values of the Company's Common Stock at the date the debt
was converted (an average price of $1.91 per share). The $600,000 paid to
Ramtron by Intag on behalf of the Company, together with an unrealized deposit
from Intag of $100,000, resulted in a $700,000 increase in the Company's paid-in
capital.

In July 1993, the Company entered into a joint venture agreement with
Nittetsu Shoji Co. Ltd. ("NS") pursuant to which the Company and NS each
purchased a 50% ownership interest in Racom Japan ("RJ"), a Japanese
corporation. RJ was formed for the purpose of marketing, distributing and
supporting the Company's FRAM technology in Japan. Under the terms of the joint
venture agreement, the Company and NS each invested $140,265 in RJ.
Subsequently, in August 1994, both parties invested an additional

42
<PAGE>
$153,000. In March 1996 the Company entered into a technology licensing supply
agreement (the "Supply Agreement") with RJ pursuant to which RJ paid the Company
$933,968 for the nonexclusive right and license to use the Company's FRAM
technology and for the limited right to design, develop and manufacture FRAM
Smart Card products for sale and use in Japan only. The license specifically
excludes the right to use FRAM technology in connection with the airline, postal
and courier applications granted to Intag. Under the Supply Agreement, RJ is
obligated to pay a portion of its sublicense revenues and a royalty on net sales
of FRAM Smart Card products to the Company. Also in March 1996, the Company and
NS each made a further equity investment in RJ of $466,984 each, and third
parties invested $373,587 in RJ, reducing the Company's ownership of RJ to 40%.

Between April and December 1994, Intag loaned the Company $300,000 which was
repaid by the Company in December 1994.

In February 1995, the Company sold a license to Intag covering marketing
rights to sell FRAM technology for Smart Cards in certain Middle Eastern
countries.

In August and December 1995, the Company sold an aggregate of 500,000 shares
of its Common Stock to Rohm as a part of a license agreement pursuant to which
the Company granted to Rohm a nonexclusive, nonsublicensable, nontransferable
right and license to use the FRAM technology in connection with the design,
development, manufacture and sale of custom FRAM Smart Card products, solely in
Japan. In addition to the Common Stock purchased, Rohm agreed to pay a
$1,000,000 license fee to the Company in four equal installments upon reaching
certain sales milestones. As of December 31, 1996, the Company had received
$500,000 in license fees from Rohm.

Between August and October 1996, Intag loaned the Company $255,000 and
deferred payments of miscellaneous payables due to Intag totalling $49,414 in
exchange for which Intag received warrants to purchase 121,766 shares of the
Company's Common Stock at $2.50 per share any time until October 4, 2001. During
the same time period, Ramtron loaned the Company an aggregate of $175,000 and
deferred payments for product purchases which, to date, have totalled $453,630
in exchange for which Ramtron received warrants to purchase 251,452 shares of
the Company's Common Stock at $2.50 per share at any time until October 4, 2001.

At December 31, 1996, the Company was indebted to Intag and Ramtron in the
aggregate amount of $935,028 and $94,568, respectively. The Company will repay
to Intag and Ramtron from proceeds of the Offering $949,000 and $96,000,
respectively, which represents the net amounts due as of the date hereof and
estimated additional interest. See "Use of Proceeds."

The Company owes Intag $400,000 for funds it borrowed in order to pay
Ramtron a fee in connection with an amendment to the Technology License. The
loan is to be repaid upon the Company receiving $400,000 in sublicense revenues
from Intag as discussed above. However, as the Company believed it will not
receive the sublicense revenues from Intag and thus will not repay the loan, the
Company recorded the $400,000 as a reduction in the Technology License as of
December 31, 1995. The loan is convertible into the Company's Common Stock at
$2.50 per share at any time, but in no event later than, June 30, 1997. Accrued
interest on loans previously converted of $55,452 and $93,380 is also
convertible into Common Stock at $2.50 and $1.50 per share, respectively.

The Company believes the terms of the above transactions were fair,
reasonable and consistent with terms that could be obtained from nonaffiliated
third parties. Any future transactions with affiliates of the Company will be
approved by the disinterested members of the Company's Board of Directors.
Moreover, the Company's securities (other than stock options under the Company's
1993 Employee Stock Option Plan) may not be issued to management, promoters or
their respective associates or affiliates without obtaining (i) a fairness
opinion from a qualified brokerage firm or appraiser confirming the fairness of
the consideration to be received by the Company for the issuance of any such
securities and (ii) the written approval of the transaction by a majority of the
Company's disinterested directors.

43
<PAGE>
DESCRIPTION OF SECURITIES

UNITS

Each Unit offered hereby consists of one share of Common Stock and one
Warrant. The Common Stock and Warrants have been approved for listing on NASDAQ
and are separately transferable as of the date of this Prospectus. The Units
have not been listed with, and will not trade on, NASDAQ.

COMMON STOCK

The Company is authorized to issue 20,000,000 shares of $.01 par value
Common Stock, of which 11,532,532 shares are outstanding as of the date of this
Prospectus. Upon issuance, the shares of Common Stock are not subject to further
assessment or call. The holders of Common Stock are entitled to one vote for
each share held of record on each matter submitted to a vote of stockholders.
Cumulative voting for election of directors is not permitted. Subject to the
prior rights of any series of preferred stock which may be issued by the Company
in the future, holders of Common Stock are entitled to receive ratably such
dividends that may be declared by the Board of Directors out of funds legally
available therefor, and, in the event of the liquidation, dissolution or winding
up of the Company, are entitled to share ratably in all assets remaining after
payment of liabilities. Holders of Common Stock have no preemptive rights or
rights to convert their Common Stock into any other securities. The outstanding
Common Stock is, and the Common Stock to be outstanding upon completion of the
Offering will be, validly issued, fully paid and nonassessable.

WARRANTS

Each Warrant represents the right to purchase one share of Common Stock at
an initial exercise price of $5.94 per share for a period of two years from the
date hereof. The exercise price and the number of shares issuable upon exercise
of the Warrants are subject to adjustment in certain events, including the
issuance of Common Stock as a dividend on shares of Common Stock, subdivisions
or combinations of the Common Stock or similar events. The Warrants do not
contain provisions protecting against dilution resulting from the sale of
additional shares of Common Stock for less than the exercise price of the
Warrants or the current market price of the Company's securities.

Warrants may be redeemed in whole or in part, at the option of the Company,
upon 30 days' notice, at a redemption price equal to $.01 per Warrant if the
closing price of the Company's Common Stock on NASDAQ is at least $7.13 per
share for 20 consecutive trading days, ending not earlier than five days before
the Warrants are called for redemption.

Holders of Warrants may exercise their Warrants for the purchase of shares
of Common Stock only if a current prospectus relating to such shares is then in
effect and only if such shares are qualified for sale, or deemed to be exempt
from qualification, under applicable state securities laws. The Company is
required to use its best efforts to maintain a current Prospectus relating to
such shares of Common Stock at all times when the market price of the Common
Stock exceeds the exercise price of the Warrants until the expiration date of
the Warrants, although there can be no assurance that the Company will be able
to do so.

The shares of Common Stock issuable upon exercise of the Warrants will be,
when issued in accordance with the Warrants, fully paid and non-assessable. The
holders of the Warrants have no rights as stockholders until they exercise their
Warrants.

For the life of the Warrants, the holders thereof are given the opportunity
to profit from a rise in the market for the Company's Common Stock, with a
resulting dilution in the interest of all other stockholders. So long as the
Warrants are outstanding, the terms on which the Company could obtain additional
capital may be adversely affected. The holders of the Warrants might be expected
to exercise them at a

44
<PAGE>
time when the Company would, in all likelihood, be able to obtain any needed
capital by a new offering of securities on terms more favorable than those
provided by the Warrants.

BRIDGE WARRANTS

In December 1996, the Company completed the borrowing of an aggregate of
$1,040,000 from a group of lenders (the "Bridge Loans") evidenced by promissory
notes bearing interest at 2% over the prime interest rate and due the earlier of
December 1997 or the closing date of the Offering. As additional consideration
for the Bridge Loans, the Company issued one Bridge Warrant for each $4.00
loaned to the Company, or a total of 260,000 Bridge Warrants. Each Bridge
Warrant entitles the holder to purchase one share of Common Stock at $5.94 per
share for a period of two years from the date hereof. The remaining terms and
conditions of the Bridge Warrants are identical to the terms and conditions of
the Warrants. The Bridge Warrants and shares underlying the Bridge Warrants are
being registered by this Prospectus, subject to a one year lock-up agreement.
See "Selling Stockholders."

OTHER WARRANTS

The Company has issued to Intag common stock purchase warrants to purchase
200,000 shares at $2.50 per share at any time until June 13, 1999 and common
stock purchase warrants to purchase 121,766 shares at $2.50 per share at any
time until October 4, 2001. The Company has issued to Ramtron common stock
purchase warrants to purchase 251,452 shares at $2.50 per share at any time
until October 4, 2001.

CONVERTIBLE LOAN AND INTEREST

The Company owes Intag $400,000 for funds borrowed in order to pay Ramtron
in connection with an amendment to the Technology License. The loan is to be
repaid upon the Company receiving $400,000 in sublicense revenues from Intag.
However, the Company believes it will not receive the sublicense revenue from
Intag and thus will not be required to repay the loan. The Company recorded the
$400,000 as a reduction in the Technology License as of December 31, 1995. The
loan is convertible into the Company's Common Stock at $2.50 per share at any
time, but in any event, no later than June 30, 1997. Accrued interest on loans
previously converted of $55,452 and $93,380 is also convertible into Common
Stock at $2.50 and $1.50 per share, respectively.

PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of preferred stock, no
par value (the "Preferred Stock"). The Preferred Stock may, without action by
the stockholders of the Company, be issued by the Board of Directors from time
to time in one or more series for such consideration and with such relative
rights, privileges and preferences as the Board may determine. Accordingly, the
Board has the power to fix the dividend rate and to establish the provisions, if
any, relating to voting rights, redemption rate, sinking fund, liquidation
preferences and conversion rights for any series of Preferred Stock issued in
the future.

It is not possible to state the actual effect of any other authorization of
Preferred Stock upon the rights of holders of Common Stock until the Board
determines the specific rights of the holders of any other series of Preferred
Stock. The Board's authority to issue Preferred Stock also provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock. Accordingly, the issuance of
Preferred Stock may be used as an "anti-takeover" device without further action
on the part of the stockholders of the Company, and may adversely affect the
holders of the Common Stock. The Company has not issued any Preferred Stock and
has no current intention to do so.

45
<PAGE>
COMMON STOCK ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, there will be 13,032,532 shares of Common
Stock outstanding (excluding shares issuable upon issuance of the Warrants, the
Overallotment Option or the Representative's Unit Warrant), of which 1,500,000
shares are being registered in the Offering and will be freely tradeable without
restriction under the 1933 Act (unless purchased by "affiliates" of the Company
as this term is defined under the 1933 Act). The remaining 11,532,532 shares
have not been registered under the 1933 Act and are therefore "restricted
securities" under Rule 144 of the 1933 Act. ("Rule 144")

In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one-year holding period, subject to certain
requirements concerning the availability of public information and the manner
and notice of sale, may sell within any three-month period, a number of shares
which does not exceed the greater of one percent of the then outstanding common
shares (approximately 130,325 shares immediately after the Offering assuming no
exercise of the Warrants, the Overallotment Option or the Representative's Unit
Warrant) or the average weekly trading volume during the four calendar weeks
prior to such sale. Rule 144 also permits, under certain circumstances, the sale
of shares by a person without any quantity limitation, so long as such person is
not an affiliate of the Company, has not been an affiliate for three months
prior to the sale and has beneficially owned the shares for at least two years.
An aggregate of 11,532,532 shares are currently available for resale under Rule
144, all subject to the lock-up agreements described below. The Company is
unable to predict the effect that any sales, under Rule 144 or otherwise, may
have on the then prevailing market price of the Common Stock.

The Company's officers, directors and 5% or greater stockholders have agreed
not to sell or otherwise dispose of any of their shares of Common Stock for a
period of 12 months from the date of this Prospectus and to sell no more than
50% of their shares of Common Stock for the next 12-month period without the
prior written consent of the Representative. No prediction can be made as to the
effect, if any, that sales of Common Stock or the availability of such shares
for sale will have on the market price of the Common Stock. Nevertheless, the
possibility that substantial amounts of Common Stock may be sold in the public
market with the Representative's consent soon after completion of the Offering,
may adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities.

The Company has also registered pursuant to this Prospectus the Warrants,
the Bridge Warrants, (which are subject to a one year lock-up agreement) and the
shares issuable upon exercise of the Warrants and Bridge Warrants. The Company
has granted certain demand and piggy-back registration rights to the
Representative with respect to the Representative's Unit Warrant as well as the
Common Stock issuable upon exercise of the Representative's Unit Warrant. The
Company may also register Common Stock underlying its 1993 Employee Stock Option
Plan in the future. See "Management--1993 Employee Stock Option Plan," "Selling
Stockholders" and "Underwriting."

TRANSFER AGENT AND WARRANT AGENT

The Company has appointed American Securities Transfer, Inc., 1825 Lawrence
Street, Suite 444, Denver, Colorado 80202, as its transfer agent and warrant
agent.

DIVIDENDS

The Company has not paid dividends on its Common Stock since inception and
does not plan to pay dividends in the foreseeable future. Earnings, if any, will
be retained to finance growth.

LIMITATION ON LIABILITY

The Company's Certificate of Incorporation provides that a director shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director. The

46
<PAGE>
effect of this provision in the Certificate of Incorporation is to eliminate the
rights of the Company and its stockholders, through stockholders' derivative
suits on behalf of the Company, to recover monetary damages from a director for
breach of the fiduciary duty of care as a director including breaches resulting
from negligent or grossly negligent behavior. This provision does not limit or
eliminate the rights of the Company or any stockholder to seek non-monetary
relief such as an injunction or rescission in the event of a breach of a
director's duty of care or to seek monetary damages for (i) violations of the
federal securities laws, (ii) unlawful payment of dividends or (iii) acts or
omission not in good faith or that involve intentional misconduct or a knowing
violation of law.

47
<PAGE>
UNDERWRITING

The Underwriters named below have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase on a firm commitment basis
from the Company the number of Units set forth opposite their names.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
Spencer Edwards, Inc....................................................................... 490,000
Neidiger/Tucker/Bruner, Inc................................................................ 450,000
Joseph Charles & Associates, Inc........................................................... 400,000
W.B. McKee Securities, Inc................................................................. 160,000
----------
Total.................................................................................. 1,500,000
----------
----------
</TABLE>

The Company has been advised by the Representative that the Underwriters
propose to offer the Units purchased by them directly to the public at the
public offering price set forth on the cover page of this Prospectus and to
certain dealers at a maximum price of $4.51 per Unit. Any changes in the price
of the Units or selling terms after the initial distribution of the Units
offered hereby will not affect the amount of net proceeds to be received by the
Company as set forth on the cover page of this Prospectus. The Underwriters are
obligated to purchase and pay for all of the Units, if any Units are taken.
After the initial public offering of the Units, the offering price and the
selling terms may be changed by the Underwriters.

The Company has granted the Representative an Overallotment Option,
exercisable within 30 days from the date of this Prospectus, to purchase up to
225,000 Units solely to cover overallotments.

The Underwriters will purchase the Units (including Units subject to the
Overallotment Option) from the Company at a price of $4.75 per Unit. In
addition, the Company has agreed to pay to the Representative a 3%
nonaccountable expense allowance on the aggregate initial public offering price
of the Units, including Units subject to the Overallotment Option. The
Overallotment Option may only be exercised by the Representative.

The offering price of the Units and the exercise price of the Warrants were
determined by negotiations between the Company and the Representative based upon
such factors as the Company's historical revenues and earnings, the percentage
of the Company's outstanding securities to be offered hereby, the experience of
the Company's management and the prospects for the Company and its competitors
within its industry.

The Company has agreed to issue the Representative's Unit Warrant to the
Representative for a consideration of $100. The Representative's Unit Warrant is
exercisable at any time during the four-year period commencing one year from the
date of this Prospectus to purchase up to 150,000 Units for $7.36 per Unit. The
terms of the Warrants comprising a part of the Representative's Unit Warrant are
identical to the terms of the Warrants. The Representative's Unit Warrant is not
transferable for one year from the date of this Prospectus except (i) to an
Underwriter or a partner or officer of an Underwriter or (ii) by will or
operation of law. During the term of the Representative's Unit Warrant, the
holders thereof are given the opportunity to profit from a rise in the market
price of the Company's securities. The Company may find it more difficult to
raise additional equity capital while the Representative's Unit Warrant is
outstanding. At any time at which the Representative's Unit Warrant is likely to
be exercised, the Company would probably be able to obtain additional equity
capital on more favorable terms. Any profit realized on the sale of the
Representative's Unit Warrant or the underlying securities may be deemed
additional underwriting compensation. The Company has registered the Units
underlying the Representative's Unit Warrant under the 1933 Act. If the Company
files a registration statement under the provisions of the 1933 Act at any time
for a period of four years commencing one year from the date of this Prospectus,
the

48
<PAGE>
holders of the Representative's Unit Warrant or underlying Units will have the
right, subject to certain conditions, to include in such registration statement,
at the Company's expense, all or part of the underlying Units at the request of
the holders. Additionally, the Company has agreed, for a period of four years
commencing one year from the date of this Prospectus, on demand of the holders
of a majority of the Representative's Unit Warrant or the Units issued
thereunder, to register the Units underlying the Representative's Unit Warrant
one time at the Company's expense. The registration of securities pursuant to
the Representative's Unit Warrant may result in substantial expense to the
Company at a time when it may not be able to afford such expense and may impede
future financing. The Company may find that the terms on which it could obtain
additional capital may be adversely affected while the Representative's Unit
Warrant is outstanding. The number of Units issuable under the Representative's
Unit Warrant and the exercise price are subject to adjustment under certain
events to prevent dilution.

The Company's officers, directors and 5% or greater stockholders have
agreed, pursuant to a lock-up agreement with the Representative, not to sell or
otherwise dispose of any of their shares of Common Stock for a period of 12
months from the date of this Prospectus and to sell no more than 50% of their
shares of Common Stock during the following 12-month period without the prior
written consent of the Representative. There are no plans, proposals,
arrangements or understandings by or with the Representative to waive or shorten
any lock-up agreements with the Company's officers, directors or 5% or greater
stockholders.

The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Representative, the Company and the Commission. See "Available
Information."

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the 1933 Act, or to contribute to
payments that any Underwriter may be required to make in respect thereof. The
Representative does not intend to sell the Units to any accounts over which it
exercises discretionary authority.

LEGAL MATTERS

The validity of the Common Stock and Warrants comprising the Units offered
hereby will be passed upon for the Company by the Law Office of Gary A. Agron,
Englewood, Colorado. Certain legal matters in connection with the Offering will
be passed upon for the Representative by Michael J. Tauger, Esq., Englewood,
Colorado. Mr. Agron and Mr. Tauger maintain separate law practices although they
share office space and from time to time may represent the same client on a
particular matter or may refer clients to each other.

EXPERTS

The financial statements of the Company for the years ended December 31,
1996 and 1995, appearing in this Prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in accounting and auditing in giving said report. Reference is
made to said report which includes an explanatory paragraph that discusses
substantial doubt about the Company's ability to continue as a going concern.

49
<PAGE>
AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the 1933 Act with
respect to the Units offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Units,
reference is hereby made to the Registration Statement and such exhibits and
schedules filed as a part thereof, which may be inspected without charge at the
public reference section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at the regional offices of the
Commission located at 7 World Trade Center, New York, New York 10048 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of all or any portion of the Registration Statement may
be obtained from the Public Reference Section of the Commission upon payment of
prescribed fees.

The Company will be subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information may be
inspected at the public reference facilities of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material
can be obtained at prescribed rates from the Commission at such address. Such
reports, proxy statements and other information can also be inspected at the
Commission's regional offices at the addresses indicated above.

50
<PAGE>
RACOM SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------

<S> <C>
Report of Independent Public Accountants............................................. F-3

Balance Sheets as of December 31, 1995 and 1996...................................... F-4

Statements of Operations for the Years Ended December 31, 1995 and 1996.............. F-6

Statements of Stockholders' Equity for the Years Ended December 31, 1994, 1995 and
1996................................................................................ F-7

Statements of Cash Flows for the Years Ended December 31, 1995 and 1996.............. F-8

Notes to Financial Statements........................................................ F-10
</TABLE>

F-1
<PAGE>
(This page intentionally left blank)

F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Racom Systems, Inc.:

We have audited the accompanying balance sheets of RACOM SYSTEMS, INC. (a
Delaware corporation) as of December 31, 1995 and 1996, and the related
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 the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Racom Systems, Inc. as of
December 31, 1995 and 1996, and the results of its operations and its 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 discussed in Note 2 to the
financial statements, the Company has generated significant operating losses and
operating cash flow deficits since inception which raise substantial doubt about
the ability of the Company to continue as a going concern. Management's plans in
regard to these matters are described in Note 2. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amounts and classification of
liabilities that might result should the Company be unable to continue as a
going concern.

ARTHUR ANDERSEN LLP

Denver, Colorado,
February 19, 1997.

F-3
<PAGE>
RACOM SYSTEMS, INC.
BALANCE SHEETS

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................... $ 512,435 $ 314,202
Accounts receivable--
Trade............................................................................. 158,191 79,201
Related parties (Note 8).......................................................... 28,090 33,558
Inventory (Note 3).................................................................. 221,694 428,401
License revenue receivable--related party (Note 6).................................. -- 646,162
------------ ------------
Total current assets............................................................ 920,410 1,501,524
------------ ------------
PROPERTY AND EQUIPMENT, at cost (Note 3):
Machinery and equipment............................................................. 327,337 351,120
Furniture and fixtures.............................................................. 56,704 56,801
Leasehold improvements.............................................................. 3,328 3,328
------------ ------------
387,369 411,249
Less--Accumulated depreciation...................................................... (157,475) (260,364)
------------ ------------
229,894 150,885
------------ ------------
INVESTMENT IN JOINT VENTURE (Note 4).................................................. -- 257,736
------------ ------------
OTHER ASSETS (Notes 2, 3 and 6):
Technology license from related party, net of accumulated amortization of $517,646
and $684,898, respectively........................................................ 1,882,354 1,715,102
Organization costs, net of accumulated amortization of $19,727 and $24,873,
respectively...................................................................... 6,003 857
Deferred offering costs............................................................. -- 161,948
Debt issuance costs, net of accumulated amortization of $0 and $8,788,
respectively...................................................................... -- 97,799
------------ ------------
1,888,357 1,975,706
------------ ------------
$ 3,038,661 $ 3,885,851
------------ ------------
------------ ------------
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

F-4
<PAGE>
RACOM SYSTEMS, INC.
BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1996
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued liabilities........................................... $ 398,200 $ 631,425
Accounts payable--related parties (Note 8)......................................... 392,167 552,298
Current portion of deferred license revenue--related party (Notes 3, 4 and 6)...... -- 93,397
Notes and interest payable--related parties (Note 8)............................... 707,975 1,029,596
Bridge notes payable (Note 9)...................................................... -- 1,040,000
Capital lease obligation........................................................... 2,218 1,331
------------ -------------
Total current liabilities........................................................ 1,500,560 3,348,047
------------ -------------
DEFERRED LICENSE REVENUE--RELATED PARTY
(Notes 3, 4 and 6)................................................................. -- 303,540

COMMITMENTS AND CONTINGENCIES
(Notes 2, 8, 10, 12 and 13)........................................................

STOCKHOLDERS' EQUITY (Notes 5 and 6):
Preferred stock, no par value, 5,000,000 shares authorized, no shares issued or
outstanding...................................................................... -- --
Common stock, $.01 par value, 20,000,000 shares authorized, 11,532,532 shares
issued and outstanding........................................................... 115,325 115,325
Additional paid-in capital......................................................... 10,272,591 10,272,591
Accumulated deficit................................................................ (8,849,815) (10,153,652)
------------ -------------
Total stockholders' equity....................................................... 1,538,101 234,264
------------ -------------
$ 3,038,661 $ 3,885,851
------------ -------------
------------ -------------
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.

F-5
<PAGE>
RACOM SYSTEMS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
REVENUES:
Product sales.................................................................... $ 425,327 $ 282,070
Product sales--related parties................................................... 103,738 114,275
Import license revenues--related party........................................... 28,850 --
Custom product development projects.............................................. 90,000 600,000
License revenues--related parties (Notes 4 and 6)................................ 500,000 1,430,940
------------- -------------
1,147,915 2,427,285
COST OF REVENUES................................................................... 646,469 1,051,877
------------- -------------
GROSS MARGIN....................................................................... 501,446 1,375,408
------------- -------------
EXPENSES:
Research and development......................................................... 1,049,162 505,266
General and administrative....................................................... 1,253,252 833,879
Sales and marketing.............................................................. 708,566 869,401
Equity in loss of joint venture (Notes 3 and 4).................................. 159,403 209,248
Amortization expense............................................................. 168,998 181,186
------------- -------------
3,339,381 2,598,980
------------- -------------
LOSS FROM OPERATIONS............................................................... (2,837,935) (1,223,572)
OTHER INCOME (EXPENSE):
Interest expense--related parties................................................ (143,645) (64,400)
Interest income.................................................................. 2,899 13,426
Gain on sale of subsidiary (Note 6).............................................. 170,647 --
Other............................................................................ (70,000) (29,291)
------------- -------------
NET LOSS .......................................................................... $ (2,878,034) $ (1,303,837)
------------- -------------
------------- -------------
NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE.................................... $ (.27) $ (.11)
------------- -------------
------------- -------------
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 3).......... 10,853,633 11,844,793
------------- -------------
------------- -------------
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-6
<PAGE>
RACOM SYSTEMS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------------------------------------------
CLASS A CLASS B CLASS C
-------------------- -------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993....................... 2,000,000 $ 20,000 2,000,000 $ 20,000 2,000,000 $ 20,000
Issuance of common stock for amended Technology
License and Supply Agreements (Note 2)......... -- -- -- -- -- --
Cancellation of Classes A, B and C common stock
and issuance of common stock (Note 5).......... (2,000,000) (20,000) (2,000,000) (20,000) (2,000,000) (20,000)
Issuance of common stock for cash of $2.50 per
share, net of issuance costs of $270,882 (Note
5)............................................. -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
---------- -------- ---------- -------- ---------- --------
BALANCES, December 31, 1994....................... -- -- -- -- -- --
Issuance of common stock for amended Technology
License and Supply Agreements (Note 6)......... -- -- -- -- -- --
Shareholder contributions (Note 6).............. -- -- -- -- -- --
Conversion of shareholder debt of $933,798,
$700,000 and $400,000 to common stock at $1.50
per share, $2.50 per share and $2.50 per share,
respectively (Notes 5 and 6)................... -- -- -- -- -- --
Sale of common stock for cash of $3.00 per share
(Note 6)....................................... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
---------- -------- ---------- -------- ---------- --------
BALANCES, December 31, 1995....................... -- -- -- -- -- --
Net loss........................................ -- -- -- -- -- --
---------- -------- ---------- -------- ---------- --------
BALANCES, December 31, 1996....................... -- $ -- -- $ -- -- $ --
---------- -------- ---------- -------- ---------- --------
---------- -------- ---------- -------- ---------- --------

COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
---------- -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993....................... -- $ -- $ 3,940,000 $(2,491,610 ) $ 1,508,390
Issuance of common stock for amended Technology
License and Supply Agreements (Note 2)......... 2,000,000 20,000 (20,000) -- --
Cancellation of Classes A, B and C common stock
and issuance of common stock (Note 5).......... 6,000,000 60,000 -- -- --
Issuance of common stock for cash of $2.50 per
share, net of issuance costs of $270,882 (Note
5)............................................. 970,000 9,700 2,144,418 -- 2,154,118
Net loss........................................ -- -- -- (3,480,171 ) (3,480,171)
---------- -------- ----------- ------------ -----------
BALANCES, December 31, 1994....................... 8,970,000 89,700 6,064,418 (5,971,781 ) 182,337
Issuance of common stock for amended Technology
License and Supply Agreements (Note 6)......... 1,000,000 10,000 (10,000) -- --
Shareholder contributions (Note 6).............. -- -- 700,000 -- 700,000
Conversion of shareholder debt of $933,798,
$700,000 and $400,000 to common stock at $1.50
per share, $2.50 per share and $2.50 per share,
respectively (Notes 5 and 6)................... 1,062,532 10,625 2,023,173 -- 2,033,798
Sale of common stock for cash of $3.00 per share
(Note 6)....................................... 500,000 5,000 1,495,000 -- 1,500,000
Net loss........................................ -- -- -- (2,878,034 ) (2,878,034)
---------- -------- ----------- ------------ -----------
BALANCES, December 31, 1995....................... 11,532,532 115,325 10,272,591 (8,849,815 ) 1,538,101
Net loss........................................ -- -- -- (1,303,837 ) (1,303,837)
---------- -------- ----------- ------------ -----------
BALANCES, December 31, 1996....................... 11,532,532 $115,325 $10,272,591 $(10,153,652) $ 234,264
---------- -------- ----------- ------------ -----------
---------- -------- ----------- ------------ -----------
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-7
<PAGE>
RACOM SYSTEMS, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $ (2,878,034) $ (1,303,837)
Adjustments to reconcile net loss to net cash used in operating activities--
Depreciation and amortization................................................... 266,234 284,244
Return of deposit to INTAG...................................................... (100,000) --
Equity in loss of joint venture................................................. 159,403 209,248
Loss (gain) on disposal of fixed assets......................................... (700) 926
Decrease (increase) in--
Accounts receivable--trade.................................................... (117,031) 78,990
Accounts receivable--related parties.......................................... 12,261 (5,468)
Inventory..................................................................... (144,731) (206,707)
License revenue receivable.................................................... -- (646,162)
Prepaid expenses and other.................................................... 4,375 --
Increase (decrease) in--
Accounts payable and accrued liabilities...................................... 215,176 233,225
Accounts payable--related parties............................................. 381,636 160,131
Deferred license revenue--related party....................................... -- 396,937
Deferred import license revenue............................................... (28,850) --
Interest payable--related parties............................................. 140,271 61,621
------------- -------------
Net cash used in operating activities....................................... (2,089,990) (736,852)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment................................................ (63,440) (25,572)
Proceeds on sale of fixed assets.................................................. 914 597
Acquisition of technology license from related party.............................. (400,000) --
Payments from INTAG offset against cost of technology license
(Note 6)........................................................................ 200,000 --
Investment in joint venture....................................................... -- (466,984)
Repayments of loan from related party............................................. 237,116 --
------------- -------------
Net cash used in investing activities....................................... (25,410) (491,959)
------------- -------------
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-8
<PAGE>
RACOM SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock............................................ $ 1,500,000 $ --
Proceeds from bridge loan financing............................................... -- 1,040,000
Deferred offering costs........................................................... -- (161,948)
Payment of debt issuance costs.................................................... -- (106,587)
Proceeds from notes payable--related parties...................................... 1,113,000 515,000
Payments on notes payable--related parties........................................ (213,000) (255,000)
Payments on capital lease obligation.............................................. (840) (887)
------------- -------------
Net cash provided by financing activities....................................... 2,399,160 1,030,578
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 283,760 (198,233)

CASH AND CASH EQUIVALENTS, beginning of period...................................... 228,675 512,435
------------- -------------

CASH AND CASH EQUIVALENTS, end of period............................................ $ 512,435 $ 314,202
------------- -------------
------------- -------------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
No cash was paid for interest or income taxes during 1995 or 1996

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During 1995, the Company purchased equipment under a capital lease totaling
$3,058.

During 1995, notes payable to INTAG of $933,798 and $700,000 were converted to
common stock at $1.50 per share and $2.50 per share, respectively. In addition,
net liabilities of $400,000 were also exchanged for common stock at $2.50 per
share in satisfaction of a deposit from INTAG of $1,000,000, less Company
deposits held by INTAG of $500,000 and a receivable from INTAG of $100,000
relating to the sale of ISI. A $600,000 payment (together with an unrelated
$100,000 deposit) relating to the Technology License and Supply Agreements was
made by INTAG to Ramtron on the Company's behalf and was treated as a capital
transaction (Note 6).
</TABLE>

The accompanying notes to financial statements are an integral part of these
statements.

F-9
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(1) ORGANIZATION AND BUSINESS

Racom Systems, Inc. (the "Company") is a developer and marketer of
contactless smart cards and radio frequency identification ("RFID") contactless
smart card systems. The Company was initially formed as a joint venture between
INTAG International Limited ("INTAG"), AWA Limited ("AWA") and Ramtron
International Corporation ("Ramtron"). In June 1993, INTAG acquired AWA's
2,000,000 shares of common stock. The Company was incorporated in the State of
Delaware on June 3, 1991 and commenced operations in February 1992. Sales of the
Company's initial two products utilizing ferroelectric random access memory
("FRAM") commenced in 1993. The Company's latest product, currently under
development, is scheduled for market introduction in 1997. Prior to 1995, the
Company was in the development stage.

(2) GOING CONCERN AND ASSET REALIZATION

As reflected in the accompanying financial statements, the Company has
generated substantial operating losses since inception and has yet to generate
sufficient revenues to fund its operations. To date, the Company has completed a
series of smaller-scale projects; however, the Company has not yet completed a
significant number of substantial sales transactions covering the application of
its products and, as a result, an uncertainty exists as to whether the Company
will be able to successfully market and sell its products to third parties at
sufficient prices and volumes to fund its operations. During 1995 and 1996, the
Company experienced significant cash flow deficits and liquidity shortages and
funded its operations primarily through the sale of non-exclusive sublicenses to
its technology, proceeds from the sale of its common stock, bridge loan
borrowings and related party borrowings. As of December 31, 1996 the Company had
a working capital deficit of $1,846,523.

During 1997, the Company anticipates that increased operating revenues will
be achieved through a combination of product sales, development contracts and
the sale of non-exclusive licenses. In addition, the Company also anticipates
increased operating expenses and research and development expenditures which are
required for the Company to further develop and market its third generation
products and achieve successful operations. However, there is no assurance the
Company will be successful in developing and marketing its products.

To date, the Company has funded its operations primarily through the
issuance of shares of its common stock and related party borrowings. The related
party borrowings are due on demand and the Bridge Notes (Note 9) become due and
payable during 1997. The Company does not currently have the financial resources
to repay any of its debt, if demanded or as scheduled. Management of the Company
intends to fund its 1997 operations through a combination of product sales and
technology sublicensing and offerings of its common stock. There is no assurance
that sales of common stock will occur or that additional proceeds will be
received from such offerings. Further, there is no assurance that the Company's
two principal stockholders will continue to fund the cash needs of the Company.

These factors, among others, raise substantial doubt about the ability of
the Company to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

F-10
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(2) GOING CONCERN AND ASSET REALIZATION (CONTINUED)
ASSET REALIZATION

One of the Company's primary assets is a technology license related to the
design and manufacture of its products. The Company originally purchased the
technology from Ramtron pursuant to a technology license agreement (the
"Technology License"), for $2,000,000 in cash and 2,000,000 shares of the
Company's class B common stock (Note 5). The Company also entered into a supply
agreement in conjunction with the Technology License (collectively, the
"Technology License and Supply Agreements"), which requires the Company to
purchase from Ramtron minimal annual quantities of ferroelectric RFID
semiconductor chips (Note 10). See Note 6 for amendments to Technology License
and Supply Agreements. The Technology License is protected by patents owned by
Ramtron and is further protected by the Company's own patents. As part of the
Technology License, the Company acquired the rights to any and all improvements
in the underlying technology through 2005.

The Technology License was recorded at the original cash acquisition cost of
$2,000,000. In connection with a Memorandum of Understanding ("MOU") signed in
May 1995, the Company acquired certain additional rights with respect to the
technology. The net $400,000 cost of obtaining the additional rights was
capitalized in 1995 (Note 6). The net book value of the Technology License was
$1,882,354 and $1,715,102, as of December 31, 1995 and 1996, respectively.
Although the Company is currently marketing products utilizing the technology
covered by this Technology License and believes the underlying technology, which
is protected by a series of patents, has certain long-term proprietary value,
given the Company's current financial position, the ultimate recovery of the
carrying amount is uncertain. No provision for any loss that may result should
the carrying amount of the license not be recovered has been made in the
accompanying financial statements.

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The December 31, 1994 financial statements were consolidated and included
the accounts of the Company and its wholly-owned subsidiary, Intag Systems, Inc.
("ISI"). All significant intercompany accounts and transactions were eliminated
in consolidation. During 1995, the Company sold its investment in the subsidiary
(Note 6).

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include investments in highly liquid investments
with original maturities of three months or less.

F-11
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY

Inventory is stated at the lower of cost or market using the first-in,
first-out ("FIFO") method of accounting. Inventories at December 31, 1995 and
1996 consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Raw materials......................................................... $ 147,222 $ 206,992
Work in process....................................................... 49,232 75,359
Finished goods........................................................ 25,240 146,050
---------- ----------
$ 221,694 $ 428,401
---------- ----------
---------- ----------
</TABLE>

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciation is provided using
the straight-line method over the estimated useful lives of three to five years
for the respective assets. Maintenance and repairs are expensed as incurred and
improvements are capitalized.

INVESTMENT IN FOREIGN JOINT VENTURE

The functional currency for the Company's joint venture (Note 4) is the
Japanese yen, the applicable local currency of the joint venture. The joint
venture's financial statements are translated to U.S. dollars at the exchange
rate in effect at year end and its revenues and expenses are translated at the
average exchange rate during the year. Unrealized gains or losses resulting from
the translation process are included in the joint venture's equity as cumulative
translation adjustments. Exchange rate differences for the years ended December
31, 1995 and 1996 were not material. If significant, the Company reflects in
equity its proportionate interest of the joint venture's cumulative translation
adjustments.

INTANGIBLE ASSETS

Intangible assets are recorded at cost and are amortized using the
straight-line method over the following estimated useful lives:

<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
(IN YEARS)
-------------
<S> <C>
Technology license............................................................... 10-17
Organization costs............................................................... 5
</TABLE>

The amortization lives assigned to the Technology License are based on the
remaining lives of the patents protecting the licensed technology. The Company
reviews its amortization lives on a periodic basis.

DEFERRED IMPORT LICENSE REVENUE

In June 1993, the Company entered into an import agreement with Nittetsu
Shoji Co. Ltd. ("NS"). The terms of the import agreement stated that for a
period of two years, in exchange for cash consideration of approximately
$138,000, NS had exclusive import rights to the Company's products in Japan.

F-12
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue relating to the import agreement was recognized on a straight-line basis
during the two-year exclusivity right under the import agreement. The agreement
was not renewed in June 1995.

DEFERRED LICENSE REVENUE

Deferred license revenue represents the amount of profit deferred on the
March 1996 sublicensing of the Company's Technology License to an equity
investee (Notes 4 and 6). The deferred license revenue will be recognized on a
straight-line basis over a term of five years, corresponding with the
amortization period assigned to the sublicense by the equity investee.

REVENUE RECOGNITION

Revenue from product sales to direct customers is recognized upon shipment.

Royalty revenue is recognized upon the Company's fulfillment of its
contractual obligations and determination of a fixed royalty amount, or, in the
case of ongoing unit royalties, upon sales by the licensee of royalty-bearing
products, as estimated by the Company.

Revenue from the sale of licenses of technology which are nonrefundable and
for which no significant future obligations exist, is recognized when the
license is signed. Revenue from the sale of licenses which are refundable or for
which future obligations exist, is recognized when the Company has completed its
obligations under the license. Certain research and development activities are
conducted for third parties and such revenue is recognized as the services are
performed.

Revenue from development contracts where costs are insignificant or cannot
be reasonably estimated are recognized as the contractual events are achieved.

RESEARCH AND DEVELOPMENT

Research and development costs are charged to operations when incurred and
are included in operating expenses. Research and development costs amounted to
approximately $1,049,162 and $505,266 for the years ended December 31, 1995 and
1996, respectively.

DEFERRED OFFERING COSTS

Costs incurred with the Company's anticipated initial public offering are
being deferred and will be charged against the net proceeds of the offering, if
successful, or to expense if unsuccessful.

DEBT ISSUANCE COSTS

Costs incurred with the issuance of the Bridge Notes (Note 9) are being
deferred and amortized over the life of the related debt.

NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE

Net loss per common and common equivalent share has been computed based upon
the weighted average number of common shares and common share equivalents
outstanding. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common stock and common stock equivalent shares issued by the
Company at prices below the initial public offering price during the twelve
month

F-13
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
period prior to the offering (using the treasury stock method for common stock
equivalents and an assumed offering price of $4.75 per share) have been included
in the calculation as if they were outstanding for all the periods presented
regardless of whether they were antidilutive.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company's financial instruments consist of cash and cash equivalents,
short-term trade receivables and payables, notes receivable and notes payable to
related parties. The carrying values of cash and cash equivalents, short-term
trade receivables and payables, and notes receivable approximate fair value. The
fair value of notes payable to related parties is estimated based on current
rates available for similar debt with similar maturities and collateral, and at
December 31, 1995 and 1996, approximates the carrying value.

USE OF ESTIMATES

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

LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangibles to be held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Any long-lived assets and certain identifiable intangibles to be
disposed of are reported at the lower of carrying amount or fair value less cost
to sell.

CONCENTRATION OF CREDIT RISK/TRANSACTIONS DENOMINATED IN FOREIGN CURRENCIES

The Company has no significant off balance sheet concentrations of credit
risk such as foreign exchange contracts, options contracts or other foreign
hedging arrangements. The Company maintains the majority of its cash with
financial institutions, in the form of demand deposits.

The Company enters into contracts denominated in foreign currency. At
December 31, 1996, the Company has recorded a license revenue receivable of
$646,162 related to a license contract denominated in Japanese yen. Transaction
gains and losses are included in income (loss) in the period in which the
exchange rate changes. As of December 31, 1996, the Company has recorded a
transaction loss of $28,367 which is included in other income (expense) in the
statement of operations.

The Company performs ongoing evaluations of its customers' financial
condition and generally does not require collateral. Its trade accounts
receivable balances are primarily domestic and are concentrated among
institutions within the high-technology industry.

INCOME TAXES

The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of temporary
differences between the financial reporting and tax

F-14
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
bases of assets, liabilities and carryforwards. Deferred tax assets are reduced,
if deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not, based on current circumstances, are not expected to
be realized (Note 12).

(4) INVESTMENT IN JOINT VENTURE

In July 1993, the Company entered into a joint venture agreement with NS
pursuant to which NS and the Company each received a 50% ownership interest in
Racom Japan, Inc. ("RJ"), a Japanese Corporation. RJ was formed for the purpose
of marketing, distributing and supporting the Company's RFID products to be sold
in Japan. Upon formation, NS and the Company each purchased 300 shares of common
stock at a purchase price of 50,000 Japanese yen ($466.67) per share, or
$140,265. In August 1994, NS and the Company each purchased an additional 300
shares of common stock at a purchase price of 50,000 Japanese yen ($510) per
share, or $153,000. RJ has the exclusive right to distribute the Company's
products in Japan for two years commencing August 1995, with the Company
providing marketing and sales support to RJ. In March 1996, the Company
purchased an additional 1,000 shares of common stock in RJ at a purchase price
of 50,000 Japanese yen ($466.98) per share, or $466,984. Additionally, in March
1996, NS and third parties purchased additional shares of common stock,
decreasing the Company's ownership of RJ to 40%.

The investment in RJ is accounted for using the equity method and the
Company has recorded its share of RJ's losses in 1995 and 1996 of $159,403 and
$209,248, respectively, as equity in loss of joint venture in the accompanying
financial statements to the extent of capital invested in RJ by the Company. The
losses recorded for the year ended December 31, 1996, include previously
unrecognized losses which had not been recorded as the Company's investment had
been reduced to zero and it had no obligation to fund such losses. However, upon
the 1996 investment of $466,984, previously unrecognized losses of $141,953 were
recorded.

(5) STOCKHOLDERS' EQUITY

During 1994, the Company amended and restated its Certificate of
Incorporation and Bylaws to combine all classes of outstanding common stock into
a single voting class of common stock. All existing stockholder certificates
were canceled and reissued on a one-for-one basis.

In June 1994, 970,000 shares of the Company's common stock were issued
pursuant to a Private Placement Memorandum ("PPM") at $2.50 per share. The
proceeds received by the Company were $2,154,118, net of issuance costs of
$270,882. The Company reimbursed Ramtron and INTAG $50,000 each for issuance
costs incurred relating to the PPM. Of the total shares issued, 20,000 were
purchased by directors of the Company.

On November 14, 1994, Ramtron sold 200,000 of its shares of Company common
stock to INTAG at $3.00 per share.

In connection with the MOU (Notes 2 and 6), INTAG converted debt due from
the Company of $933,798, $700,000 and $400,000 into common stock at $1.50 per
share, $2.50 per share and $2.50 per share, respectively, resulting in 1,062,532
shares of common stock being issued to INTAG (Note 6).

During 1996, the Company authorized 5,000,000 shares of preferred stock with
no par value. No preferred stock has been issued as of December 31, 1996.

F-15
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(6) AMENDMENTS TO THE TECHNOLOGY LICENSE AND SUPPLY AGREEMENTS

In 1994, Ramtron was issued an additional 2,000,000 shares of common stock
in connection with an amendment to the Technology License and Supply Agreements.
In February 1995, the Company and Ramtron entered into a second amendment to the
Technology License and Supply Agreements. In May 1995, the Company signed and
executed the MOU (Note 2) with INTAG and Ramtron relating to further amendments
to the Technology License and Supply Agreements and the conversion to equity of
certain of INTAG's loans to the Company (Notes 5 and 8). As a result of these
amendments, the Company received certain additional rights and agreed to make
certain payments as discussed below.

The Company has the worldwide, non-exclusive, non-transferable right to
design, manufacture, sell, lease and distribute smart card products which
monolithically incorporate FRAM and contactless technologies regardless of
memory size ("Contactless Products"). In addition, the Company has the rights to
any and all improvements in the FRAM technology. The Company, through 2005, has
certain exclusive rights to design, manufacture, sell, lease and distribute
certain Contactless Products which functionally incorporate a microprocessor.
The Company may sublicense its manufacturing right up to five times with
Ramtron's consent. The Company consented to Ramtron granting to INTAG an
exclusive right to use (but not manufacture) the technology for use in conveyor
fed or tunnel reader equipped airline, postal and courier applications. The
Company may in the future agree with Ramtron to further amend the Technology
License, although there are no such agreements currently.

Further to the Technology License and Supply Agreements, Ramtron is
obligated to pay to the Company royalties, as defined in the agreement, on any
Contactless Products which Ramtron sells, leases or distributes to third
parties. Ramtron will also be obligated to pay to the Company 50% of any license
fees on Contactless Products. As of December 31, 1996, the Company had not
received any royalties or licensing fees as there were no sales of Contactless
Products by Ramtron through December 31, 1996. The amendments extend the
requirements that the Company purchase from Ramtron minimal quantities of
ferroelectric RFID semiconductor chips (Note 10). For the years ended December
31, 1995 and 1996, the Company made purchases from Ramtron of approximately
$281,000 and $279,561, respectively, which satisfied the minimum purchase
requirements.

As further consideration for the additional rights obtained through the
amendments to the Technology License and Supply Agreements, the Company issued
to Ramtron 1,000,000 shares of Company common stock and caused Ramtron to be
paid cash of $1,000,000. The common shares issued to Ramtron were assigned no
value because the amendments were viewed as a modification of the original
transfer (Note 2) by a principal stockholder of intangible rights for which
Ramtron had no capitalized historical cost basis. INTAG paid $600,000 of the
cash consideration directly to Ramtron, which together with an unrelated deposit
of $100,000 received from INTAG has been reflected as an addition to the
Company's paid-in capital. The remaining $400,000 balance paid to Ramtron was
loaned to the Company by INTAG, carried a 10% interest rate and was to be repaid
only from future sublicense fees earned by INTAG, totaling $400,000, which would
be due the Company from INTAG should INTAG be successful in further sublicensing
the technology. INTAG and the Company have agreed that the loan is no longer
subject to accrued interest and may be converted, at INTAG's option, into shares
of the Company's common stock at a rate of $2.50 per share, no later than June
1997. INTAG simultaneously paid the Company $200,000 for a sublicense. The
Company believes the loan amount effectively represents an additional
nonrefundable payment for the sublicense. Consequently, the Company has netted
both the loan amount of $400,000 and the $200,000 sublicense payment against the
$1,000,000 cash paid to Ramtron, resulting in a net increase to

F-16
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(6) AMENDMENTS TO THE TECHNOLOGY LICENSE AND SUPPLY AGREEMENTS (CONTINUED)
the Technology License of $400,000 as of December 31, 1995. Should INTAG convert
the loan to common stock of the Company, the transaction will be assigned no
value.

INTAG agreed to convert to equity the principal balances of the $933,798
related party notes payable and $700,000 working capital notes at $1.50 and
$2.50 per share, respectively (Note 8). INTAG purchased ISI from the Company for
$100,000 and assumed ISI's net liabilities of $70,467. The net balance of all
related party deposits between the Company and INTAG (Note 8) combined with the
ISI purchase price, totaled $400,000 and was converted to equity at $2.50 per
share.

The MOU is subject to formal consummation through execution of certain
definitive agreements. Management of the Company believes that the terms of the
definitive agreements will be substantially the same as those described in the
MOU.

In June 1995, the Company entered into a Cooperative Agreement for Licensed
Manufacturing of Ferroelectric RFID Products with Rohm Co., Ltd. ("ROHM") of
Japan. The license gives ROHM a non-exclusive, non-sublicenseable,
non-transferable right and license to use the RFID technology in connection with
the design, development, manufacture and sale of Custom Ferroelectric RFID
Products for use within a defined territory (Japan). In consideration of this
license, ROHM purchased 300,000 shares of the Company's common stock, at $3.00
per share. ROHM also purchased 200,000 additional shares of the Company's common
stock, for a purchase price of $3.00 per share upon reaching certain sales
milestones. ROHM is also to pay a $1,000,000 license fee to the Company in four
equal installments upon reaching certain sales milestones. As of December 31,
1995, the Company has received $500,000 in license fees as it had achieved
certain milestones. As of December 31, 1996, no new milestones had been reached.

On March 22, 1996, the Company entered into a technology license and supply
agreement with its affiliate, RJ, for the common purpose of more fully
developing the Japanese market for ferroelectric RFID products. RJ paid $933,968
in cash to the Company for the non-exclusive right and license to use its
patented ferroelectric RFID technology and all improvements, for the limited
right to design, develop and manufacture ferroelectric RFID products for sale
and use in Japan only. This license specifically excludes the right to use the
ferroelectric RFID technology in conveyor fed, airline, postal and courier
applications (as the rights to this technology were already previously licensed
to INTAG). Under the agreement, RJ is obligated to pay 50%, to the Company, of
all sublicense revenues and royalties, as defined in the agreement, on net sales
of ferroelectric RFID products which are sold to third parties.

In connection with the sale of the sublicense, $466,984 (representing the
Company's intercompany profit due to its 50% equity ownership in RJ on the date
of the sublicense) of the profit was deferred. The deferred license revenue is
being recognized over the life of the related technology license asset purchased
by RJ, which is five years. As of December 31, 1996, $70,047 of the original
deferred license revenue (Note 3) of $466,984 has been recognized.

In October 1996, the Company consented to allow RJ to enter into a custom
product development project with a Japanese company, pursuant to the technology
license and supply agreement granted to RJ on March 22, 1996, under which the
Company is entitled to 50% of all sublicense revenue earned by RJ. The
sublicense is for a specified amount, as defined in the contract, a portion of
which is to be paid upon execution of the agreement and the remainder to be paid
upon RJ meeting certain performance criteria. Under the agreement with the
Japanese company, RJ will be entitled to royalties, as defined in the contract,
over the next five years. As of December 31, 1996, $893,909 has been recorded by
the Company

F-17
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(6) AMENDMENTS TO THE TECHNOLOGY LICENSE AND SUPPLY AGREEMENTS (CONTINUED)
related to its respective portion of sublicense revenue, of which $646,162
remains outstanding at December 31, 1996, and is recorded as license revenue
receivable in the accompanying financial statements. Revenue due to the Company
of approximately $215,000 remaining under the agreement between RJ and the
Japanese Company has not been recognized, as management believes the revenue
recognition criteria have not been met as of December 31, 1996.

(7) DEVELOPMENT AND SUPPLY AGREEMENT

On January 29, 1996, the Company signed an agreement with an unaffiliated
third party to develop a multi-application "smart card" based on the Company's
contactless smart card technology and the third party's bank and electronic
purse operating system. In combination, the two technologies form the basis for
a new product family which will combine contact and contactless operation on a
single, microprocessor smart card. Under the terms of the agreement, the Company
received an initial cash payment of $500,000 and will receive approximately an
additional $1,300,000 based upon the achievement of certain production
milestones and delivery of specified products. As of December 31, 1996, the
Company has recognized $600,000 of revenue as a result of the initial cash
payment of $500,000 and reaching the first milestone.

(8) OTHER RELATED PARTY TRANSACTIONS

During 1995 and 1996, INTAG advanced approximately $1,113,000 and $340,000,
respectively, to the Company under various notes payable agreements, which bear
interest at 10% per annum and are due on demand. Amounts due under the notes
prior to 1996 were convertible into common stock of the Company at the fair
value of the Company's common stock at the date the advances were made. In 1995,
$933,798 of advances were converted to equity in connection with the MOU (Note
6) at a rate of $1.50 per share. Unpaid accrued interest of $93,380 on the
advances, prior to conversion, was not converted to equity in connection with
the MOU (Note 6), and at the discretion of INTAG, is convertible into common
stock at $1.50 per share or is to be repaid to INTAG within 30 days of
notification by INTAG that repayment is required. As of December 31, 1995 and
1996, the related party notes payable to INTAG had total principal and interest
outstanding of $652,523 and $879,576 respectively. In 1996, Ramtron advanced
$175,000 to the Company under a note payable agreement which bears interest at
prime plus 2% (10.25% at December 31, 1996) and is due on demand. As of December
31, 1996, the related party note payable to Ramtron had total principal and
interest outstanding of $94,568.

During 1994, INTAG loaned the Company $1,000,000 under a $1,000,000 working
capital facility agreement. Of the $1,000,000 drawn during 1994, $300,000 had
been repaid as of December 31, 1994. Amounts due under the working capital
facility agreement were convertible into common stock of the Company at the fair
value of the Company's common stock at the date the advances were made. The
facility carried interest at 10% per annum and in May 1995, the $700,000 balance
outstanding was converted to common stock in connection with the MOU (Note 6) at
a rate of $2.50 per share. Unpaid accrued interest of $55,452 on the advances,
prior to conversion, was not converted to equity in connection with the MOU
(Note 6) and, at the discretion of INTAG, is convertible into common stock at
$2.50 per share or is to be repaid to INTAG within 30 days of notification by
INTAG that repayment is required. As of December 31, 1995 and 1996, the related
party line of credit had total interest outstanding of $55,452. As consideration
for INTAG advancing the working capital facility in June 1994, the Company
granted INTAG 200,000 warrants for the Company's common stock at an exercise
price of $2.50 per share, which

F-18
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(8) OTHER RELATED PARTY TRANSACTIONS (CONTINUED)
vested immediately and are exercisable over a five-year term. The Company
determined that these warrants had a nominal value at the date of issuance.

On March 23, 1995, the Company and INTAG entered into an assignment and
security agreement whereby all current and future debt owed by the Company to
INTAG is secured by all of the Company's assets and agreements.

In October 1996, the Company issued 121,766 and 251,452 warrants to purchase
the Company's common stock at an exercise price of $2.50 per share to INTAG and
Ramtron, respectively. The warrants were approved in consideration of
approximately $933,000 of short-term loans from Ramtron and INTAG and deferred
payment terms on product purchases from Ramtron made to the Company. The
warrants, which vested immediately, are exercisable for a period of five years
after the date of issuance. The Company determined that these warrants had a
nominal value at the date of issuance.

For the years ended December 31, 1995 and 1996 the statements of operations
include amounts attributable to related party transactions as follows:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1995 1996
---------- ------------
<S> <C> <C>
PRODUCT SALES
Sales to INTAG.................................................... $ 33,747 $ --
---------- ------------
---------- ------------
Sales to NS....................................................... $ 21,593 $ --
---------- ------------
---------- ------------
Sales to RJ....................................................... $ 48,398 $ 113,575
---------- ------------
---------- ------------
Sales to Ramtron.................................................. $ -- $ 700
---------- ------------
---------- ------------
IMPORT LICENSE REVENUES
NS................................................................ $ 28,850 $ --
---------- ------------
---------- ------------
LICENSE REVENUES
Rohm.............................................................. $ 500,000 $ --
RJ................................................................ -- 1,430,940
---------- ------------
$ 500,000 $ 1,430,940
---------- ------------
---------- ------------
GENERAL AND ADMINISTRATIVE EXPENSES
Management fees paid to related parties........................... $ 15,575 $ --
---------- ------------
---------- ------------
Director travel expenses.......................................... $ 46,730 $ 29,111
---------- ------------
---------- ------------
Directors fees $ 12,000 $ --
---------- ------------
---------- ------------
OTHER INCOME AND EXPENSE
Interest expense on notes payable to INTAG........................ $ 143,645 $ 59,833
---------- ------------
---------- ------------
Interest expense on notes payable to Ramtron...................... $ -- $ 4,567
---------- ------------
---------- ------------
</TABLE>

F-19
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(8) OTHER RELATED PARTY TRANSACTIONS (CONTINUED)
DEPOSIT FROM RELATED PARTY

In April 1994, the Company and INTAG signed a letter of intent to enter into
a license agreement. As of December 31, 1994, $1,000,000 had been received as a
deposit on the license fee. Under the MOU (Note 6), the $1,000,000 deposit, net
of deposits with INTAG of $500,000 and an INTAG receivable of $100,000 related
to the ISI purchase, were converted into common stock of the Company at a rate
of $2.50 per share and negotiations in connection with the license agreement
ceased.

DEPOSIT WITH RELATED PARTY

In 1993 and 1994, the Company paid deposits of $100,000 and $400,000,
respectively, to INTAG to purchase BagTag and Intertrak technology licenses. In
connection with the execution of the MOU (Note 6), these deposits were offset
against amounts due INTAG as described above.

(9) BRIDGE FINANCING

In December 1996, the Company completed a private offering of $1,040,000 of
promissory notes (the "Bridge Notes"). The Bridge Notes bear interest at prime
plus 2% per annum, computed as of the date of issuance (the "Bridge Date"), and
thereafter on a quarterly basis commencing December 31, 1996.

The Bridge Notes mature the earlier of one year from the Bridge Date or upon
the closing date of any initial public offering ("IPO") of the Company's
securities. On the Bridge Date, the Company also granted warrants (the "Bridge
Warrants") entitling the holder to purchase shares of the Company's common stock
at 125% of the IPO price per unit, beginning on the effective date of the IPO
and continuing for two years thereafter. The holders of the Bridge Notes
received one warrant for every $4 of Bridge Note principal purchased, resulting
in 260,000 Bridge Warrants being issued in connection with the offering of the
Bridge Notes. The Company determined that these warrants had a nominal value at
the date of issuance.

(10) COMMITMENTS AND CONTINGENCIES

The Company leases its facilities and certain equipment under noncancelable
operating lease agreements. Minimum future annual lease payments under these
leases as of December 31, 1996, are as follows:

Total rent expense for noncancelable, cancelable and month-to-month
operating leases for the years ended December 31, 1995 and 1996 was
approximately $115,561 and $124,929, respectively.

The Company leases equipment under a 36-month capital lease. The lease
commenced in February 1995 and bears interest at a rate of 15%.

The amended Technology License and Supply Agreements require the Company to
purchase from Ramtron minimal annual quantities of ferroelectric RFID
semiconductor chips. The minimum purchases increase in future years, in
accordance with the Technology License and Supply Agreements. The requirement
continues through 1998. In the event the Company does not purchase the minimum
annual quantities, Ramtron will be released from all sales restrictions under
the Supply Agreement.

F-20
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(11) MAJOR CUSTOMERS

The Company's product sales from non-related party customers in excess of
10% of non-related party product sales for the years ended December 31, 1995 and
1996 are as follows:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Customer A..................................................................... 4% 21%
Customer B..................................................................... 15% 5%
Customer C..................................................................... 26% 13%
Customer D..................................................................... 14% 12%
</TABLE>

The Company's custom product development project revenue for the years ended
December 31, 1995 and 1996 were from two different customers.

The Company's accounts receivable balances from non-related party customers
in excess of 10% of the accounts receivable balance from non-related parties for
the years ended December 31, 1995 and 1996 are as follows:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Customer C..................................................................... 42% 37%
Customer D..................................................................... 19% 0%
Customer E..................................................................... 14% 0%
Customer F..................................................................... 0% 42%
</TABLE>

(12) INCOME TAXES

For income tax return reporting purposes, the Company has approximately
$9,600,000 of net operating loss carryforwards that expire at various dates
through the year 2011. The net operating loss for tax purposes differs from that
for financial reporting purposes due to differences in reporting certain
transactions for income tax and financial reporting purposes. These differences
primarily relate to the Technology License.

The Tax Reform Act of 1986 contains provisions which may limit the net
operating loss carryforwards available to be used in any given year if certain
events occur, including significant changes in ownership interests.

The Company has determined that approximately $4,742,000 and $6,182,000 of
deferred tax assets as of December 31, 1995 and 1996, respectively, did not
satisfy the realization criteria set forth in SFAS No. 109. Accordingly, a
valuation allowance was recorded against the entire net deferred tax asset.

F-21
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(12) INCOME TAXES (CONTINUED)
The components of the net deferred income tax asset at December 31, 1995 and
1996 were as follows:

<TABLE>
<CAPTION>
1995 CHANGE 1996
----------- ----------- -----------
<S> <C> <C> <C>
Technology license...................................... $ 1,351,000 $ 654,000 $ 2,005,000
Net operating loss carryforwards........................ 3,192,000 438,000 3,630,000
Research and development tax credits.................... 158,000 (22,000) 136,000
Loss in equity investee................................. -- 191,000 191,000
Deferred license revenue................................ -- 151,000 151,000
Other................................................... 41,000 28,000 69,000
Less--Valuation allowance............................... (4,742,000) (1,440,000) (6,182,000)
----------- ----------- -----------
$ -- $ -- $ --
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

The difference between the statutory rate and the effective rate is
primarily a result of the increase in the valuation allowance.

(13) EMPLOYEE BENEFIT PLANS

STOCK OPTION PLAN

In May 1993, the Company adopted the 1993 Employee Stock Plan which
authorized the granting of incentive and nonqualified stock options and
restricted stock (collectively, the "stock options") to acquire up to 1,700,000
shares of the Company's common stock, of which 141,000 are available to be
granted as of December 31, 1996. The exercise terms for the stock options
granted are determined by the Board of Directors at the time the stock options
are granted. Stock options may be granted at an exercise price not less than the
fair market value on the date of grant with a maximum term of 10 years. The 1993
Employee Stock Plan also permits the granting of limited stock appreciation
rights ("SAR's") which, upon a change in control, as defined, entitle the
holders to exercise SAR's in an amount equal to the number of stock options held
and at terms similar to the terms of the related stock options. As of December
31, 1995 and December 31, 1996, the Company has issued 900,000 and 1,100,000
SAR's respectively, none of which are exercised. The Company accounts for the
1993 Employee Stock Plan under Accounting Principles Board ("APB") Opinion No.
25, under which no compensation cost has been recognized.

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation". SFAS 123 defines a fair value-based method of
accounting for employee stock options and similar equity instruments. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value-based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma disclosures
of net income and earnings per share, as if the fair value-based method of
accounting defined in SFAS 123 had been applied. The Company has elected to make
the pro forma disclosures in accordance with SFAS 123 as set forth below.

F-22
<PAGE>
RACOM SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(13) EMPLOYEE BENEFIT PLANS (CONTINUED)
Had compensation cost for the 1993 Employee Stock Plan been determined
consistent with SFAS 123, the Company's net loss and loss per share would have
been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net Loss:
As Reported........................................... $(2,878,034) $(1,303,837)
----------- -----------
----------- -----------
Pro Forma............................................. $(3,002,758) $(1,580,465)
----------- -----------
----------- -----------
Net Loss Per Common and Common Equivalent Share:
As Reported........................................... $ (.27) $ (.11)
----------- -----------
----------- -----------
Pro Forma............................................. $ (.28) $ (.13)
----------- -----------
----------- -----------
</TABLE>

Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.

A summary of the status of the Company's 1993 Employee Stock Plan at
December 31, 1995 and 1996 and changes during the years then ended is presented
in the table and narrative below:

<TABLE>
<CAPTION>
1995 1996
------------------------ ------------------------
WTD. AVG EX WTD. AVG EX
SHARES PRICE SHARES PRICE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year........................ 1,665,000 $ 1.25 1,512,000 $ 1.60
Granted............................................... 550,000 $ 2.50 289,000 $ 2.50
Forfeited............................................. (703,000) $ 1.48 (242,000) $ 2.17
----------- -----------
Outstanding at end of year.............................. 1,512,000 $ 1.60 1,559,000 $ 1.67
----------- -----------
----------- -----------
Exercisable at end of year.............................. 981,250 $ 1.35 1,065,250 $ 1.34
----------- -----------
----------- -----------
Weighted average fair value of options granted during
year.................................................. $ 1.08 $ 1.30
</TABLE>

The 1,559,000 options outstanding at December 31, 1996 have exercise prices
between $1.00 and $2.50, with a weighted average remaining contractual life of
2.13 years.

The fair value of each option grant is estimated on the date of grant using
the Black Scholes option pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996, respectively: risk-free interest
rates of 6.16% and 6.40%; no expected dividend yields; expected lives of 3.05
years and 3.54 years; expected volatility of 66.9% and 68.1%.

DEFINED CONTRIBUTION PLAN

The Company has a defined contribution plan (the "Plan") intended to qualify
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), in which substantially all full-time employees are participants.
Participants in the Plan may make pre-tax contributions subject to limitations
imposed by the Code. The Company may make, at the Board of Directors'
discretion, an annual contribution on behalf of each participant. No amounts
have been contributed by the Company under the Plan.

F-23
<PAGE>
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- --------------------------------------------------------------------------------

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING DESCRIBED HEREIN, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR THE SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Dilution....................................... 13
Capitalization................................. 14
Use of Proceeds................................ 15
Selected Financial Data........................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 17
Business....................................... 24
Management..................................... 32
Principal Stockholders......................... 37
Selling Stockholders........................... 39
Certain Transactions........................... 42
Description of Securities...................... 44
Underwriting................................... 48
Legal Matters.................................. 49
Experts........................................ 49
Available Information.......................... 50
Financial Statements........................... F-1
</TABLE>

UNTIL APRIL 6, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

1,500,000 UNITS

[LOGO]

RACOM SYSTEMS, INC.
---------------------

PROSPECTUS

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

SPENCER EDWARDS, INC.

MARCH 12, 1997

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