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+ RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. In evaluating the Company's business, prospective investors should carefully consider the following factors in addition to the other information presented in this Prospectus. Early Stage of Product Development. The Company's pathogen inactivation systems are in the research and development stage and will require additional preclinical and clinical testing prior to submission of any regulatory application for commercial use. The Company currently does not expect to file a product approval application with the United States Food and Drug Administration (the "FDA") or corresponding regulatory filings in Europe for its platelet pathogen inactivation system or for any of its other planned products prior to 1998. The estimated dates related to the Company's regulatory submissions set forth herein and elsewhere in this Prospectus are forward-looking statements that involve risks and uncertainties. There can be no assurance that these regulatory submissions will not be delayed as a result of certain factors set forth in this "Risk Factors" section and elsewhere in this Prospectus. The Company's products are subject to the risks of failure inherent in the development of pharmaceutical, biological and medical device products and products based on new technologies. These risks include the possibility that the Company's approach to pathogen inactivation will not be safe or effective, that the Company's products will not be easy to use or cost-effective, that third parties will develop and market superior or equivalent products, that any or all of the Company's products will fail to receive any necessary regulatory approvals, that such products will be difficult or uneconomical to manufacture on a commercial scale, that proprietary rights of third parties will preclude the Company from marketing such products and that the Company's products will not achieve market acceptance. As a result of these risks, there can be no assurance that the Company's research and development activities will result in any commercially viable products. See "Business -- Products Under Development" and "-- Government Regulation." Uncertainty Associated with Preclinical and Clinical Testing. The regulatory process includes preclinical and clinical testing of each product to establish its safety and efficacy, and may include post-marketing studies requiring expenditure of substantial resources. The results from preclinical studies and early clinical trials conducted by the Company may not be predictive of results obtained in later clinical trials, and there can be no assurance that clinical trials conducted by the Company will demonstrate sufficient safety and efficacy to obtain the requisite approvals or that marketable products will result. The rate of completion of the Company's clinical trials may be delayed by many factors, including slower than anticipated patient enrollment or any other adverse event occurring during the clinical trials. Completion of testing, studies and trials may take several years, and the length of time generally varies substantially with the type, complexity, novelty and intended use of the product. Data obtained from preclinical and clinical activities are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. In addition, delays or rejections may be encountered based upon many factors, including changes in regulatory policy during the period of product development. The Company's products require significant additional research and development efforts. No assurance can be given that any of the Company's development programs will be successfully completed, that any further investigational new drug applications ("IND") will become effective or that additional clinical trials will be allowed by the FDA or other regulatory authorities, that clinical trials will commence as planned, that required United States or foreign regulatory approvals will be obtained on a timely basis, if at all, or that any products for which approval is obtained will be commercially successful. As a result of FDA reviews or complications that may arise in any phase of the clinical trial program, there can be no assurance that the proposed schedules for IND and clinical protocol submissions to the FDA, initiations of studies and completions of clinical trials can be maintained. Any delays in the Company's clinical trials or failures to obtain required regulatory approvals would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Products Under Development" and "-- Government Regulation." No Assurance of Market Acceptance; Concentrated Market. The Company believes that market acceptance of the Company's pathogen inactivation systems will depend, in part, on the Company's ability to provide acceptable evidence of the safety, efficacy and cost-effectiveness of its products, as well as the ability of blood centers to obtain FDA approval and adequate reimbursement for such products. The Company believes that market acceptance of its pathogen inactivation systems also will depend upon the extent to which physicians, patients and health care payors perceive that the benefits of using blood components treated with the Company's systems justify the systems' additional costs and processing requirements in a blood supply that has become safer in recent years. While the Company believes that its pathogen inactivation systems are able to inactivate pathogens up to concentrations that the Company believes are present in contaminated blood components when the blood is donated, there can be no assurance that contamination will never exceed such concentrations. The Company does not expect that its planned products will be able to inactivate all known and unknown infectious pathogens, and there can be no assurance that the inability to inactivate certain pathogens will not affect the market acceptance of its products. There can be no assurance that the Company's pathogen inactivation systems will gain any significant degree of market acceptance among blood centers, physicians, patients and health care payors, even if clinical trials demonstrate safety and efficacy and necessary regulatory approvals and health care reimbursement approvals are obtained. The Company's target customers are the limited number of national and regional blood centers, which collect, store and distribute blood and blood components. In the United States, the American Red Cross collects and distributes approximately 42% of the nation's supply of blood and blood components. Other major United States blood centers include the New York Blood Center and United Blood Services, each of which distributes approximately 6% of the nation's supply of blood and blood components. In Western Europe and Japan, various national blood transfusion services or Red Cross organizations collect, store and distribute virtually all of their respective nations' blood and blood components supply. As a result, the failure to penetrate even a small number of these customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Marketing, Sales and Distribution." Reliance on Baxter. Under the terms of the Company's agreements with Baxter, the Company relies on Baxter for significant funding, product development support, the manufacture and supply of certain system components and the marketing of its planned products. The Company anticipates that, prior to commencement of product sales, if any, the Company's principal source of revenue will be payments under its development and commercialization agreements with Baxter. See "Business -- Alliance with Baxter." The Baxter agreements provide for joint development by Baxter and the Company of pathogen inactivation systems that include the Company's proprietary compounds and processes and Baxter's blood collection, processing and storage technology, as well as the instrument technology of each party. The sharing by Baxter of development expenses is conditioned upon receipt of regulatory approval to begin Phase 3 clinical trials of the platelet pathogen inactivation system. The development programs under the Baxter agreements may be terminated by Baxter on 90 days' notice. If the Company's agreements with Baxter were terminated or if Baxter's product development efforts were unsuccessful, the Company may need to obtain additional funding from other sources and would be required to devote additional resources to the development of its products, delaying the development of its products. Any such delay would have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that disputes will not arise in the future with respect to the Baxter agreements. Possible disagreements between Baxter and the Company could lead to delays in the research, development or commercialization of certain planned products or could require or result in time-consuming and expensive litigation or arbitration and would have a material adverse effect on the Company's business, financial condition and results of operations. Under the terms of the Baxter agreements, Baxter is responsible for manufacturing the disposable units, such as blood storage containers and related tubing, as well as any devices associated with the inactivation processes. If the Company's agreements with Baxter were terminated or if Baxter otherwise failed to deliver an adequate supply of components, the Company would be required to identify other third-party component manufacturers. There can be no assurance that the Company would be able to identify such manufacturers on a timely basis or enter into contracts with such manufacturers on reasonable terms, if at all. Any delay in the availability of devices or disposables from Baxter could adversely affect the timely submission of products for regulatory approval or the market introduction and subsequent sales of such products and would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the inclusion of components manufactured by others could require the Company to seek new approvals from government regulatory authorities, which could result in delays in product delivery. There can be no assurance that the Company would receive any such required regulatory approvals. Any such delay would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing and Supply." If appropriate regulatory approvals are received, Baxter will be responsible for the marketing, sales and distribution of the Company's pathogen inactivation systems for blood components worldwide. The Company does not currently maintain, nor does it intend to develop, its own marketing and sales organization but instead expects to rely on Baxter to market and sell its pathogen inactivation systems. There can be no assurance that the Company will be able to maintain its relationship with Baxter or that such marketing arrangements will result in payments to the Company. Revenues to be received by the Company through any marketing and sales arrangement with Baxter will be dependent on Baxter's efforts, and there can be no assurance that the Company will benefit from Baxter's present or future market presence or that such efforts will otherwise be successful. If the Company's agreements with Baxter were terminated or if Baxter's marketing efforts were unsuccessful, the Company's business, financial condition and results of operations would be materially adversely affected. See "Business -- Marketing, Sales and Distribution." There can be no assurance that Baxter will not elect to pursue alternative technologies or product strategies for FFP and/or red blood cell pathogen inactivation systems, or that its corporate interests and plans will remain consistent with those of the Company. Under the terms of the agreement covering the development of pathogen inactivation systems for FFP and red blood cells, Baxter has reserved the right to market competing products not within the field of psoralen or Anchor-Linker-Effector ("ALE") inactivation. The Company is aware that Baxter is developing an alternative pathogen inactivation system for FFP based on a compound known as methylene blue. Other companies are currently marketing methylene blue-based pathogen inactivation systems for FFP in Europe. The development and commercialization of the Company's pathogen inactivation systems could be materially adversely affected by competition with Baxter or by Baxter's election to pursue alternative strategies or technologies in lieu of those of the Company. See "Business -- Competition." Government Regulation. All of the Company's products under development and anticipated future products are or will be subject to extensive and rigorous regulation by the federal government, principally the FDA, and state, local and foreign governments. Such regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-market clearance or approval, advertising, promotion, sale and distribution of such products. The process of obtaining regulatory approvals or clearances is generally lengthy, expensive and uncertain. To date, none of the Company's products has been approved for sale in the United States or any foreign market. Satisfaction of pre-market approval or clearance or other regulatory requirements of the FDA, or similar requirements of foreign regulatory agencies, typically takes several years, and may take longer, depending upon the type, complexity, novelty and intended purpose of the product. There can be no assurance that the FDA or any other regulatory agency will grant approval or clearance for any product being developed by the Company on a timely basis, if at all. The Company believes that, in deciding whether a pathogen inactivation system is safe and effective, the FDA is likely to take into account whether it adversely affects the therapeutic efficacy of blood components as compared to the therapeutic efficacy of blood components not treated with the system, and that the FDA will weigh the system's safety and other risks against the benefits of using the system in a blood supply that has become safer in recent years. The Company's clinical development plan assumes that only data from in vitro studies, not from human clinical studies, will be required to demonstrate the system's efficacy in inactivating pathogens and that human clinical studies will instead focus on demonstrating therapeutic efficacy, safety and tolerability of blood components treated with the system. Although the Company has had discussions with the FDA concerning the Company's proposed clinical plan, there can be no assurance that these means of demonstrating safety and efficacy will ultimately be acceptable to the FDA or that the FDA will continue to believe that this clinical plan is appropriate. Moreover, even if the FDA considers these means of demonstrating safety and efficacy to be acceptable in principle, there can be no assurance that the FDA will find the data submitted sufficient to demonstrate safety and efficacy. In particular, there can be no assurance that the FDA will consider in vitro data an appropriate means of demonstrating efficacy of pathogen inactivation, and any requirement to provide other than in vitro data would adversely affect the timing and could affect the success of the Company's efforts to obtain regulatory approval. If regulatory approval of a product is granted, such approval may impose limitations on the indicated uses for which a product may be marketed. For example, the Company does not believe that it will be able to make any labeling claims that the Company's pathogen inactivation systems may inactivate any pathogens for which it does not have in vitro data supporting such claims. Further, even if regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions on the product, including withdrawal of the product from the market. The policies of the FDA and foreign regulatory bodies may change, and additional regulations may be promulgated, which could prevent or delay regulatory approval of the Company's planned products. Delay in obtaining or failure to obtain regulatory approvals could have a material adverse effect on the Company's business, financial condition and results of operations. Among the conditions for FDA approval of a pharmaceutical, biologic or device is the requirement that the manufacturer's quality control and manufacturing procedures conform to current Good Manufacturing Practices ("cGMP"), which must be followed at all times. The FDA enforces cGMP requirements through periodic inspections. There can be no assurance that the FDA will determine that the facilities and manufacturing procedures of Baxter or any other third-party manufacturer of the Company's planned products will conform to cGMP requirements. See "Business -- Manufacturing and Supply." Blood centers and others that ship blood and blood products interstate will likely be required to obtain approved license supplements from the FDA before shipping products processed with the Company's pathogen inactivation systems. This requirement and/or FDA delays in approving such supplements may deter some blood centers from using the Company's products, and blood centers that do submit supplements may face disapproval or delays in approval that could provide further disincentives to use the systems. The regulatory impact on potential customers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, transfusion units of random donor platelets, which currently represent approximately one-half of the platelets transfused in the United States, contain platelets pooled from six different donors. The Phase 3 European clinical trial is being designed to assess the therapeutic efficacy of the platelet pathogen inactivation system for use in treating apheresis platelets and pooled random donor platelets. The Phase 3 United States clinical trial is being designed to assess the therapeutic efficacy of the platelet pathogen inactivation system for use in treating apheresis platelets, not pooled random donor platelets. In order to obtain FDA approval of the platelet pathogen inactivation system for use in treating pooled random donor platelets, the Company may be required by the FDA to conduct additional clinical studies. In addition, because of the risk of bacterial growth, current FDA rules require that pooled platelets be transfused within four hours of pooling and, as a result, most pooling occurs at hospitals. However, the Company's platelet pathogen inactivation system is being designed to be used at blood centers, not at hospitals, and requires a processing time of approximately eight hours. Therefore, in order for the Company's platelet pathogen inactivation system to be effectively implemented and accepted at blood centers as planned, the FDA-imposed limit on the time between pooling and transfusion would need to be lengthened or eliminated for blood products treated with the Company's systems, which are being designed to inactivate bacteria that would otherwise contaminate pooled platelets. There can be no assurance, however, that the FDA will change this requirement and, if such a change is not made, the Company's business, financial condition and results of operations would be materially adversely affected. See "Business -- Government Regulation." Rapid Technological Change; Significant Competition. The biopharmaceutical field is characterized by rapid and significant technological change. Accordingly, the Company's success will depend in part on its ability to respond quickly to medical and technological changes through the development and introduction of new products. Product development involves a high degree of risk, and there can be no assurance that the Company's product development efforts will result in any commercially successful products. Technological developments may result in the Company's products becoming obsolete or non-competitive before the Company is able to generate any significant revenue. Any such occurrence would have a material adverse effect on the Company's business, financial condition and results of operations. The Company expects to encounter competition in the sale of products it may develop. If regulatory approvals are received, the Company's products may compete with other approaches to blood safety currently in use, as well as with future products developed by biotechnology and pharmaceutical companies, hospital supply companies, national and regional blood centers, and certain governmental organizations and agencies. Many companies and organizations that may be competitors or potential competitors have substantially greater financial and other resources than the Company and may have greater experience in preclinical testing, human clinical trials and other regulatory approval procedures. The Company's ability to compete successfully will depend, in part, on its ability to develop proprietary products, develop and maintain products that reach the market first, are technologically superior to and/or are of lower cost than other products on the market, attract and retain scientific personnel, obtain patent or other proprietary protection for its products and technologies, obtain required regulatory approvals, and manufacture, market and sell any product that it develops. In addition, other technologies or products may be developed that have an entirely different approach or means of accomplishing the intended purposes of the Company's products, or that might render the Company's technology and products uncompetitive or obsolete. Furthermore, there can be no assurance that the Company's competitors will not obtain patent protection or other intellectual property rights that would limit the Company's ability to use the Company's technology or commercialize products that may be developed. Several companies are developing technologies which are, or in the future may be, the basis for products that will directly compete with or reduce the market for the Company's pathogen inactivation systems. A number of companies are specifically focusing on alternative strategies for pathogen inactivation in various blood components, such as treatment of FFP with solvent-detergent or methylene blue. The Blood Products Advisory Committee, an advisory panel to the FDA, has recently unanimously recommended that solvent-detergent be approved for use in treating FFP. Although recommendations of advisory committees are not binding, unanimous recommendations are generally followed by the FDA. If approved by the FDA, there can be no assurance that the treatment of FFP by solvent-detergent will not become a widespread practice prior to any commercialization of the Company's FFP pathogen inactivation system. Under the terms of the agreement covering the development of pathogen inactivation systems for FFP and red blood cells, Baxter has reserved the right to market competing products not within the field of psoralen or ALE inactivation. The Company is aware that Baxter is developing an alternative pathogen inactivation system for FFP based on a compound known as methylene blue. Other companies are currently marketing methylene blue-based pathogen inactivation systems for FFP in Europe. Other groups are developing synthetic blood product substitutes or products to stimulate the growth of platelets. If any of these technologies is successfully developed, it could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Alliance with Baxter" and "-- Competition." Dependence on Key Employees. The Company is highly dependent on the principal members of its management and scientific staff. The loss of the services of one or more of these employees could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that its future success will depend in large part upon its ability to attract and retain highly skilled scientific and managerial personnel. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining such personnel and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, a substantial portion of the stock options currently held by many of the Company's key employees are vested and may be fully vested over the next several years before the Company achieves significant revenues or profitability. The Company intends to grant additional options and provide other forms of incentive compensation to attract and retain such key personnel. See "Management." Patent and License Uncertainties. The Company's success depends in part on its ability to obtain patents, to protect trade secrets, to operate without infringing upon the proprietary rights of others and to prevent others from infringing on the proprietary rights of the Company. The Company's policy is to seek to protect its proprietary position by, among other methods, filing United States and foreign patent applications related to its proprietary technology, inventions and improvements that are important to the development of its business. Proprietary rights relating to the Company's planned and potential products will be protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are effectively maintained as trade secrets. There can be no assurance that any patents owned by, or licensed to, the Company will afford protection against competitors or that any pending patent applications now or hereafter filed by, or licensed to, the Company will result in patents being issued. In addition, the laws of certain foreign countries do not protect the Company's intellectual property rights to the same extent as do the laws of the United States. The patent positions of biopharmaceutical companies involve complex legal and factual questions and, therefore, their enforceability cannot be predicted with certainty. There can be no assurance that any of the Company's patents or patent applications, if issued, will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to the Company against competitors with similar technology. Furthermore, there can be no assurance that others will not independently develop similar technologies or duplicate any technology developed by the Company. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of the Company's products can be commercialized, any related patent may expire or remain in existence for only a short period following commercialization, thus reducing any advantage of the patent, which could adversely affect the Company's ability to protect future product development and, consequently, its operating results and financial position. Because patent applications in the United States are maintained in secrecy until patents issue and because publication of discoveries in the scientific or patent literature often lag behind actual discoveries, the Company cannot be certain that it was the first to make the inventions covered by each of its issued or pending patent applications or that it was the first to file patent applications for such inventions. There can be no assurance that the Company's planned or potential products will not be covered by third-party patents or other intellectual property rights, in which case continued development and marketing of such products would require a license under such patents or other intellectual property rights. There can be no assurance that such required licenses will be available to the Company on acceptable terms, if at all. If the Company does not obtain such licenses, it could encounter delays in product introductions while it attempts to design around such patents, or could find that the development, manufacture or sale of products requiring such licenses is foreclosed. Litigation may be necessary to defend against or assert such claims of infringement, to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company or to determine the scope and validity of the proprietary rights of others. In addition, interference proceedings declared by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to patent applications of the Company. Litigation or interference proceedings could result in substantial costs to and diversion of effort by the Company, and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that these efforts by the Company would be successful. The Company may rely, in certain circumstances, on trade secrets to protect its technology. However, trade secrets are difficult to protect. The Company seeks to protect its proprietary technology and processes, in part, by confidentiality agreements with its employees and certain contractors. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. To the extent that the Company's employees or its consultants or contractors use intellectual property owned by others in their work for the Company, disputes may also arise as to the rights in related or resulting know-how and inventions. In August 1996, the Company received correspondence from Circadian Technologies, Inc., an Australian entity, alleging that unspecified trade secrets and know-how jointly owned by Circadian and the Auckland Division Cancer Society of New Zealand were, without the consent of Circadian, used in the development by the Cancer Society and the Company of unspecified compounds for the Company's red cell program. In subsequent correspondence, Circadian has indicated that it is seeking compensation in the form of royalties or a lump sum payment. Based on its investigation of the matter to date, the Company does not believe that the claims are meritorious. Any future litigation involving these allegations, however, would be subject to inherent uncertainties, especially in cases where complex technical issues are decided by a lay jury. There can be no assurance that, if a lawsuit were commenced, it would not be decided against the Company, which could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business -- Patents, Licenses and Proprietary Rights." Limited Operating History; History of Losses and Expectation of Future Losses. The Company's net losses in fiscal years December 31, 1992, 1993, 1994, 1995 and 1996 were $2.3 million, $3.5 million, $1.8 million, $2.4 million and $10.2 million, respectively. As of December 31, 1996, the Company had an accumulated deficit of approximately $20.2 million. The Company has not received any revenues from product sales, and all revenues recognized by the Company to date have resulted from the Company's agreements with Baxter and federal research grants. All of the Company's planned pathogen inactivation systems are in the research and development stage. The Company will be required to conduct significant research, development, testing and regulatory compliance activities on these products that, together with anticipated general and administrative expenses, are expected to result in substantial losses at least through 1998. The estimates above and elsewhere in this Prospectus of the minimum period through which the Company expects to incur continuing losses are forward-looking statements that involve risks and uncertainties. There can be no assurance that the Company will not incur substantial losses beyond such period as a result of certain factors set forth in this "Risk Factors" section and elsewhere in this Prospectus. The Company expects that the amount of such losses will fluctuate from quarter to quarter as a result of differences in the timing of expenses incurred and potential revenues from its agreements with Baxter, and such fluctuations may be significant. The Company's ability to achieve a profitable level of operations will depend on successfully completing development, obtaining regulatory approvals and achieving market acceptance of its pathogen inactivation systems. There can be no assurance that the Company will ever achieve a profitable level of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Reliance on Third-Party Manufacturing; Dependence on Key Suppliers. The Company has in the past utilized, and intends to continue to utilize, third parties to manufacture and supply the inactivation compounds for its systems and Baxter for other system components for use in clinical trials and for the potential commercialization of its products in development. The Company has no experience in manufacturing products for commercial purposes and does not have any manufacturing facilities. Consequently, the Company is dependent on contract manufacturers for the production of compounds and on Baxter for other system components for development and commercial purposes. Under the Company's agreements with Baxter, the Company is responsible for supplying compounds to Baxter for inclusion in the pathogen inactivation systems. The Company has contracted with two manufacturing facilities that have provided sufficient amounts of S-59 to address the anticipated clinical trial requirements of both the platelet and FFP pathogen inactivation systems. Only one of the manufacturers is currently performing the complete synthesis of S-59. If such manufacturer is unable to continue to produce S-59 in commercial quantities, the Company could experience material delays and shortfalls in compound supply while the alternative manufacturer validated the complete process and increased its production capabilities or while the Company identified another manufacturer and such manufacturer prepared for production. There can be no assurance that the existing manufacturers or any new manufacturer will be able to provide commercial quantities of S-59 needed for the Company's pathogen inactivation systems in the future. The Company has produced S-303 for use in its red cell pathogen inactivation system in only limited quantities for its research and preclinical development requirements. The Company has contracted with a manufacturing facility for the supply of S-303 for preclinical and clinical studies. No assurance can be given that this or any new manufacturer will be able to produce S-303 on a commercial scale or that the Company will be able to enter into arrangements for the commercial-scale manufacture of S-303 on reasonable terms, if at all. In the event that the Company is unable to obtain or retain third-party manufacturing, it will not be able to commercialize its products as planned. The Company's dependence upon third parties, including Baxter, for the manufacture of critical portions of its pathogen inactivation systems may adversely affect the Company's operating margins and its ability to develop, deliver and sell products on a timely and competitive basis. Failure of any third-party manufacturer to deliver the required quantities of products on a timely basis and at commercially reasonable prices would materially adversely affect the Company's business, financial condition and results of operations. In addition, inclusion of components manufactured by other third parties could require the Company to seek new approvals from government regulatory authorities, which could result in delays in product delivery. There can be no assurance that such approval would be obtained. In the event the Company undertakes to establish its own commercial manufacturing capabilities, it will require substantial additional funds, manufacturing facilities, equipment and personnel. The Company purchases certain key components of its compounds from a limited number of suppliers. While the Company believes that there are alternative sources of supply for these components, establishing additional or replacement suppliers for any of the components in the Company's compounds, if required, may not be accomplished quickly and could involve significant additional costs. Any failure by the Company to obtain any of the components used to manufacture the Company's compounds from alternative suppliers, if required, could limit the Company's ability to manufacture its compounds and would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing and Supply" and "-- Government Regulation." Risk of Product Liability. The testing, marketing and sale of the Company's products will entail an inherent risk of product liability, and there can be no assurance that product liability claims will not be asserted against the Company. The Company intends to secure limited product liability insurance coverage prior to the commercial introduction of any product, but there can be no assurance that the Company will be able to obtain product liability insurance on acceptable terms or that insurance subsequently obtained will provide adequate coverage against any or all potential claims. Any product liability claim against the Company, regardless of its merit or eventual outcome, could have a material adverse effect upon the Company's business, financial condition and results of operations. Environmental Regulation; Use of Hazardous Substances. The Company is subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. There can be no assurance that the Company will not be required to incur significant costs to comply with environmental and health and safety regulations in the future. The Company's research and development involves the controlled use of hazardous materials, including certain hazardous chemicals and radioactive materials. Although the Company believes that its safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. Uncertainty Regarding Health Care Reimbursement and Reform. The future revenues and profitability of biopharmaceutical and related companies as well as the availability of capital to such companies may be affected by the continuing efforts of the United States and foreign governments and third-party payors to contain or reduce costs of health care through various means. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, it is likely that the U.S. Congress and state legislatures will continue to focus on health care reform and the cost of pharmaceuticals and on the reform of the Medicare and Medicaid systems. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's ability to commercialize its products successfully will depend in part on the extent to which appropriate reimbursement levels for the cost of the products and related treatment of blood components are obtained from governmental authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Third-party payors are increasingly challenging the prices charged for medical products and services. The trend toward managed health care in the United States and other countries and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for the Company's products. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially adversely affect the Company's ability to operate profitably. See "Business -- Health Care Reimbursement and Reform." Control by Existing Stockholders. Upon the closing of this offering and the Baxter Private Placement, the Company's present directors and executive officers and their respective affiliates will beneficially own approximately 29.5% of the outstanding Common Stock. In addition, Baxter will own approximately 14.0% of the outstanding Common Stock. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of the Company. See "Principal Stockholders" and "Description of Capital Stock -- Antitakeover Effects of Provisions of Charter Documents and Delaware Law." Need for Additional Funds. Through December 31, 1996, Baxter has provided funding to the Company in the form of equity investments, research funding, license fees and milestone payments, aggregating approximately $20.7 million. The Company's cash requirements may vary materially from those now planned as a result of additional research and development, product testing results, regulatory requirements, competitive pressures and technological advances. In addition, the Company may require substantial funds for its long-term product development, marketing programs and operating expenses. There can be no assurance that any required funds will be available on acceptable terms, if at all. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Shares Eligible for Future Sale. Sales of substantial numbers of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon the closing of this offering and the Baxter Private Placement, the Company will have outstanding an aggregate of 8,885,878 shares of Common Stock, based upon the number of shares outstanding as of December 31, 1996. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such shares are held by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act ("Affiliates"), in which case they will be subject to the volume, manner of sale and other conditions of Rule 144. The remaining 6,885,878 shares of Common Stock held by existing stockholders (the "Restricted Shares") and the shares sold pursuant to the Baxter Private Placement are "restricted securities" as that term is defined in Rule 144. Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 promulgated under the Securities Act. As a result of contractual restrictions and the provisions of Rule 144 and Rule 701, additional shares will be available for sale in the public market as follows: (i) no Restricted Shares will be eligible for immediate sale on the date of this Prospectus, (ii) 5,892,000 Restricted Shares, 164,665 shares of Common Stock issuable upon exercise of currently outstanding options and 52,152 shares of Common Stock issuable upon exercise of currently outstanding warrants will be eligible for sale upon expiration of certain lock-up agreements 180 days after the date of this Prospectus and (iii) the remainder of the Restricted Shares will be eligible for sale from time to time thereafter upon expiration of their respective two-year holding periods. Pursuant to an agreement between the Company and the holders (or their permitted transferees) of approximately 4,512,345 shares of Common Stock (plus 496,878 shares sold pursuant to the Baxter Private Placement), these holders are entitled to certain rights with respect to the registration of such shares under the Securities Act. See "Description of Capital Stock" and "Shares Eligible for Future Sale." Effects of Certain Charter and Bylaw Provisions. The Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate") authorizes the Board of Directors to issue up to five million shares of Preferred Stock and to determine the price, rights, preferences and privileges, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The Restated Certificate and Bylaws, among other things, provide for a classified Board of Directors, require that stockholder actions occur at duly called meetings of the stockholders, limit who may call special meetings of stockholders, do not permit cumulative voting in the election of directors and require advance notice of stockholder proposals and director nominations. These provisions contained in the Company's charter documents and certain applicable provisions of Delaware law could serve to depress the Company's stock price. In addition, these and other provisions could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, discourage a hostile bid or delay, prevent or deter a merger, acquisition or tender offer in which the Company's stockholders could receive a premium for their shares, or a proxy contest for control of the Company or other change in the Company's management. See "Management" and "Description of Capital Stock." Lack of Prior Public Market; Possible Volatility of Stock Price. Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or be sustained. The initial public offering price for the Common Stock to be sold in this offering will be determined by agreement between the Company and the Underwriters and may bear no relationship to the price at which the Common Stock will trade after the closing of this offering. The market price of the shares of Common Stock, like that of the common stock of many other companies in similar industries, is likely to be highly volatile. Factors such as the announcements of scientific achievements or new products by the Company or its competitors, governmental regulation, health care legislation, developments in patent or other proprietary rights of the Company or its competitors, including litigation, fluctuations in the Company's operating results and market conditions for health care stocks in general could have a significant impact on the future price of the Common Stock. In addition, the stock market has from time to time experienced extreme price and volume fluctuations, which may be unrelated to the operating performance of particular companies. In the past, securities class action litigation has often been instituted following periods of volatility in the market price for a company's securities. Such litigation could result in substantial costs and a diversion of management attention and resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Underwriters." Dilution. Purchasers of the Common Stock offered hereby will suffer an immediate dilution in the net tangible book value per share. Such purchasers will experience additional dilution upon the exercise of outstanding stock options and warrants. Future capital funding transactions may also result in dilution to purchasers in this offering. See "Dilution."

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+ RISK FACTORS In addition to the other information in this Prospectus, prospective investors should consider carefully the following risk factors in evaluating the Company and its business before purchasing Common Stock in the Offerings. Certain statements included in this Prospectus are forward-looking statements and the factors discussed below could cause actual results to be materially different from those expressed in or implied by such statements. CONCENTRATION OF POTENTIAL CUSTOMERS; DEPENDENCE ON MAJOR CUSTOMERS The Company is currently dependent on two customers and has only a few potential customers, consisting almost exclusively of long distance and other telecommunications carriers using fiberoptic networks. There are only a small number of long distance telecommunications carriers, and that number may decrease if and as customers merge with or acquire one another. The Company's business will for the foreseeable future be dependent on a small number of existing and potential customers. Substantially all of the Company's revenue for fiscal 1997 continues to be expected to be derived from Sprint and WorldCom. WorldCom may terminate all or any part of an outstanding purchase order upon the payment of a termination fee and the Company's agreement with WorldCom does not require minimum purchase commitments. Although the Company now has five customers, there can be no assurance that the Company will be able to develop additional customers or that the Company will not continue to be dependent on Sprint and WorldCom. The reduction, delay or cancellation of orders, or a delay in shipment of the Company's products to Sprint or WorldCom, or the inability of the Company to develop additional customers, could and likely would have a material adverse affect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". The Company's dependence on sizable orders from very few customers makes the relationship between the Company and each customer critically important to the Company's business. While each customer relationship is typically structured around a detailed, heavily negotiated contract, as the relationship evolves over time, adjustments to such items as product specifications, laboratory and field testing plans, customer forecasts and delivery timetables, and installation and field support requirements may be required in response to customer demands and expectations. The inability of the Company to manage its customer relationships successfully would have a material adverse effect on the Company's business, financial condition and results of operations. RECENT PRODUCT INTRODUCTION The Company first began commercial shipments of its MultiWave 1600 system in May 1996 and its first operational systems began carrying live traffic in October 1996. Accordingly, the Company's systems do not have a history of live traffic operation over an extended period of time. If reliability, quality or network monitoring problems should develop, a number of material and adverse effects could result, including manufacturing rework costs, high service and warranty expense, high levels of product returns, delays in collecting accounts receivable, reduced orders from existing customers and declining level of interest from potential customers. The Company is aware of instances in which installation and activation of certain MultiWave 1600 systems have been delayed due to faulty components found in certain portions of these systems. Although the Company maintains accruals for product warranties, there can be no assurance that actual costs will not exceed these amounts. There is a considerable number of the Company's systems scheduled to be turned up for live traffic operation by WorldCom and Sprint over the next three to five months. The Company expects there will be interruptions or delays from time to time in the activation of the systems, particularly because the Company does not control all aspects of the installation and activation activities. If significant interruptions or delays occur, or if their cause is not promptly identified, diagnosed and resolved, confidence in the MultiWave system could be undermined. An undermining of confidence in the MultiWave system would have a material adverse effect on the Company's customer relationships, business, financial condition and results of operations. MANAGEMENT OF EXPANSION The Company is experiencing rapid expansion in all areas of its operations, particularly in manufacturing, and the Company anticipates that this expansion will continue in the near future. Total personnel grew from 225 at October 31, 1997 to 499 at May 31, 1997. Total facilities' space has increased from 50,500 square feet in one facility as of October 31, 1996, to approximately 210,000 square feet in three facilities by the end of May 1997. This expansion, and the attendant separation and relocation of various operating functions to different facilities, has placed strains on the material, financial and personnel resources of the Company and will continue to do so. The pace of the Company's expansion, in combination with the complexity of the technology involved in the manufacture of the Company's systems, demands an unusually high level of managerial effectiveness in anticipating, planning, coordinating and meeting the operational needs of the Company and the needs of the Company's customers for quality, reliability, timely delivery and post-installation field support. The rapid pace and volume of new hiring, and the accelerated ramp up in manufacturing capacity, if not effectively managed, could adversely affect the quality or efficiency of the Company's manufacturing process. The Company continues to increase its flow of materials, optical assembly, final assembly and final component module and system test functions in anticipation of a level of customer orders that has not been historically experienced by the Company and that may not be achieved. Given the small number of existing and potential customers for the Company's systems, the adverse effect on the Company resulting from a lack of effective management in any of these areas will be magnified. Inability to manage the expansion of the Company's business would have a material adverse effect on its business, financial condition and results of operations. The Company is also seeking to achieve ISO 9001 certification for its manufacturing facilities. The Company's failure to achieve such certification would have a material adverse effect on its competitive position. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". DEPENDENCE ON A SINGLE PRODUCT LINE -- THE MULTIWAVE SYSTEM The MultiWave 1600 system is the Company's only product that has generated revenue and is focused exclusively on providing additional bandwidth to long distance telecommunications carriers. The MultiWave Sentry has only recently been introduced and has generated no revenue to date. A softening or slowdown in demand for the Company's product or for additional bandwidth by long distance telecommunications carriers would materially and adversely affect the Company's business, financial condition and results of operations. Patent litigation recently brought against the Company by a competitor could also adversely affect demand for MultiWave systems. There can be no assurance that the Company will be successful in developing any other products or taking other steps to reduce the risk associated with any softening or slowdown in the demand for additional bandwidth, nor is there any assurance the Company will be able to leverage successfully its DWDM technology into other network applications. Conversely, if the demand for additional bandwidth accelerates, there is no assurance that the Company's MultiWave systems will deliver sufficient capacity as rapidly as needed, or that competing DWDM products from other vendors offering higher capacity would not displace or render obsolete the MultiWave system. FLUCTUATION IN QUARTERLY AND ANNUAL RESULTS The Company's revenue and operating results are likely to vary significantly from quarter to quarter and from year to year as a result of a number of factors, including the size and timing of orders, product mix and shipments of systems. The timing of order placement, size of orders, satisfaction of contractual customer acceptance criteria, as well as order delays or deferrals and shipment delays and deferrals, may cause material fluctuations in revenue. Delays or deferrals in purchasing decisions may increase as the Company develops other DWDM products. The Company's dependence on a small number of existing and potential customers increases the revenue impact of each customer's actions relative to these factors. The Company's expense levels in the future will be partially based on its expectations of long term future revenue and as a result net income for any quarterly period in which material orders are shipped or delayed or are not forthcoming could vary significantly. Quarter-to-quarter sequential growth rates in the first two or three years of operations are likely to vary widely and therefore may not be reliable indicators of annual performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". LONG AND UNPREDICTABLE SALES CYCLES The Company expects that the period of time between initial customer contact and an actual purchase order may span a year or more. In addition, even when committed to proceed with deployment of equipment, long distance telecommunications carriers typically undertake extensive and lengthy product evaluation and factory acceptance and field testing of new equipment before purchasing and installing any of it in their networks. Additionally, the purchase of network equipment such as DWDM equipment is typically carried out by network operators pursuant to multiyear purchasing programs which may increase or decrease annually as the operators adjust their capital equipment budgets and purchasing priorities. The Company's customers do not typically share information on the duration or magnitude of planned purchasing programs, nor do they consistently provide to the Company advance notice of contemplated changes in their capital equipment budgets and purchasing priorities. These uncertainties substantially complicate the Company's manufacturing planning. Curtailment or termination of customer purchasing programs, decreases in customer capital budgets or reduction in the purchasing priority assigned to equipment such as DWDM equipment, particularly if significant and unanticipated by the Company, could have a material adverse effect on the Company's business, financial condition and results of operations. Long distance carriers may also encounter delays in their build out of new routes or in their installation of new equipment in existing routes, with the result that orders for MultiWave systems may be delayed or deferred. Any delay or deferral of orders for MultiWave systems would have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The Company believes the rapid pace at which the need for higher and more cost-effective bandwidth has developed was not widely anticipated in the telecommunications industry. However, competition in the global telecommunications industry is intense and historically has been dominated by a small number of very large companies, each of which have greater financial, technical and marketing resources, greater manufacturing capacity and more established customer relationships with network operators than the Company. Each of Lucent Technologies Inc., formerly part of AT&T ("Lucent"), Alcatel Alsthom Group ("Alcatel"), Northern Telecom Inc. ("Nortel"), NEC Corporation ("NEC"), Pirelli SpA ("Pirelli"), Siemens AG ("Siemens") and Telefon AB LM Ericsson ("Ericsson") among others are expected to move aggressively to capture market share in the DWDM market. The Company expects that such competitive moves may include early announcement of competing or alternative products, and significant price discounting. In addition, Lucent, Alcatel, Nortel, NEC and Siemens are already providers of a full complement of switches, fiberoptic transmission terminals and fiberoptic signal regenerators and thereby can position themselves as vertically integrated, "one-stop shopping" solution providers to potential customers. Further, in certain cases, competitors have offered the Company's target customers, on an immediate delivery basis, off-the-shelf time division multiplexing ("TDM") transmission equipment at comparatively lower prices, with a promise to upgrade to DWDM or other improved equipment in the future. The substantial system integration resources and manufacturing capability of the TDM suppliers, in combination with any difference in timeliness of delivery, can be important to long distance network operators. Finally, as and when these competitors are able to offer DWDM systems in combination with their own fiberoptic transmission terminals, they can be expected to press further on the attractiveness of a "one-stop shopping" solution. While competition in general is broadly based on varying combinations of price, manufacturing capacity, timely delivery, system reliability, service commitment and installed customer base, as well as on the comprehensiveness of the system solution in meeting immediate network needs and foreseeable scaleability requirements, the Company's customers are themselves under increasing competitive pressure to deliver their services at the lowest possible cost. This pressure may result in pricing for DWDM systems becoming a more important factor in customer decisions. Intellectual property disputes may also be asserted as part of a competitive effort to reduce the Company's leadership position and limit its ability to achieve greater market share, even if the merits of specific disputes are doubtful. See "Business -- Legal Proceedings". There can be no assurance that the Company will be able to compete successfully with its competitors or that aggressive competitive moves faced by the Company will not result in lower prices for the Company's products, decreased gross profit margins, and otherwise have a material adverse effect on its business, financial condition and results of operations. TECHNOLOGICAL CHANGE AND NEW PRODUCTS The Company expects that new technologies will emerge as competition in the telecommunications industry increases and the need for higher and more cost efficient bandwidth expands. The Company's ability to anticipate changes in technology, industry standards, customer requirements and product offerings and to develop and introduce new and enhanced products will be significant factors in the Company's ability to remain a leader in the deployment of open architecture DWDM systems. The market for telecommunications equipment is characterized by substantial capital investment and diverse and competing technologies such as fiberoptic, cable, wireless and satellite technologies. The accelerating pace of deregulation in the telecommunications industry will likely intensify the competition for improved technology. Many of the Company's competitors have substantially greater financial, technical and marketing resources and manufacturing capacity with which to compete for new technologies and for market acceptance of their products. The introduction of new products embodying new technologies or the emergence of new industry standards could render the Company's existing product uncompetitive from a pricing standpoint, obsolete or unmarketable. Any of these outcomes would have a material and adverse effect on the Company's business, financial condition and results of operations. PROPRIETARY RIGHTS The Company relies on patents, contractual rights, trade secrets, trademarks and copyrights to establish and protect its proprietary rights in its product. While the Company does not expect that its proprietary rights in its technology will prevent competitors from developing technologies and products functionally similar to the Company's, the Company believes many aspects of its DWDM technologies and know-how are proprietary, and intends to monitor closely the DWDM products introduced by competitors for any infringement of the Company's proprietary rights. Additionally, the Company expects that DWDM technologies and know-how in general will become increasingly valuable intellectual properties as the competition to achieve higher and more cost effective bandwidth intensifies. The Company believes this increasing value in an industry marked by a few very large competing suppliers represents a competitive environment where intellectual property disputes are likely. On December 20, 1996, a U.S. affiliate of Pirelli filed a lawsuit against the Company alleging infringement of certain U.S. patents held by Pirelli (the "Pirelli Litigation"). Intellectual property disputes may be initiated by competitors against the Company for tactical purposes to gain competitive advantage or overcome competitive disadvantage, even if the merits of a specific dispute are doubtful. In the future, the Company may be required to bring or defend against other litigation to enforce any patents issued or assigned to the Company, to protect trademarks, trade secrets and other intellectual property rights owned by the Company, to defend the Company against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. Any litigation, including the Pirelli Litigation, could be costly and a diversion of management's attention, which could have a material adverse effect on the Company's business, financial condition and results of operations. Adverse determinations in litigation, including in the Pirelli Litigation, could result in the loss of the Company's proprietary rights, subject the Company to significant liabilities, require the Company to seek licenses from third parties or prevent the Company from manufacturing or selling its products, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has received, and may receive in the future, notices from holders of patents in the optical technology field that raise issues as to possible infringement by the Company's products. Pirelli sent a notice in December 1995 identifying eleven patents it possesses in the field of optical communications. The Company believes the MultiWave system does not infringe any valid patents cited in the notices received. However, questions of infringement in the field of DWDM technologies involve highly technical and subjective analyses. There can be no assurance that any such patent holders or others will not in the future initiate legal proceedings against the Company or that, if any such proceedings were initiated, the Company would be successful in defending against these actions. On December 20, 1996, a U.S. affiliate of Pirelli filed a lawsuit against the Company alleging infringement of certain U.S. patents. Even if the Company is successful in defending against the Pirelli Litigation or any other such actions, these actions could have an adverse effect on existing and potential customer relationships and therefore could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's existing customer agreements provide for indemnification of customers for liability that may be incurred in connection with the infringement of a third party's intellectual property rights, and the Company expects that it will be requested to agree to indemnify other customers in the future. There can be no assurance that such indemnification against alleged liability will not be required from the Company in the future. Patent applications in the United States are not publicly disclosed until the patent issues. The Company anticipates, based on the size and sophistication of its competitors and the history of rapid technological advances in its industry, that several competitors may have patent applications in progress in the United States that, if issued, could relate to the Company's products. If such patents were to issue, there can be no assurance that the patent holders or licensees will not assert infringement claims against the Company or that such claims will not be successful. The Company could incur substantial costs in defending itself and its customers against any such claims, regardless of the merits of such claims. Parties making such claims may be able to obtain injunctive or other equitable relief which could effectively block the Company's ability to sell its products, and each claim could result in an award of substantial damages. In the event of a successful claim of infringement, the Company and its customers may be required to obtain one or more licenses from third parties. There can be no assurance that the Company or its customers could obtain necessary licenses from third parties at a reasonable or acceptable cost or at all. Substantial inventories of intellectual property are held by a few industry participants, such as Bell Laboratories (now owned by Lucent) and major universities and research laboratories. This concentration of intellectual property in the hands of a few major entities also poses certain risks to the Company in seeking to hire qualified personnel. The Company has on a few occasions recruited such personnel from competitors. The Company has in the past received letters from counsel to Lucent asserting that the hiring of their personnel compromises Lucent's intellectual property. There can be no assurance that other companies will not claim the misappropriation or infringement of their intellectual property, particularly when and if employees of these companies leave to work for the Company. To date, the Company has not experienced litigation concerning the assertions by Lucent, and believes there is no basis for claims against the Company. Nevertheless, there can be no assurance that the Company will be able to avoid litigation in the future, particularly if new employees join the Company after having worked for a competing company. Such litigation could be very expensive to defend, regardless of the merits of the claims. The successful resolution of intellectual property disputes may depend, in part, on the extent of the Company's portfolio of intellectual property rights which could be available for cross-licensing as a means of settling disputes. The Company's current portfolio of patents is not as broad or extensive as those of its major competitors, and there is no assurance the Company will be able to add to its patent portfolio. As the Company seeks to expand internationally, the Company will need to take steps to protect its proprietary rights under foreign patent and trademark laws. Many of these laws are not as well developed or do not afford the same degree of protection as United States laws and no assurance can be given that the Company will not encounter difficulties in protecting its proprietary rights outside the United States or will not infringe the rights of others outside the United States. LITIGATION Pirelli Litigation. On December 20, 1996, a U.S. affiliate of Pirelli filed suit in U.S. District Court in Delaware, alleging willful infringement by the Company of certain U.S. patents held by Pirelli. The lawsuit seeks treble damages, attorneys' fees and costs, as well as preliminary and permanent injunctive relief against the alleged infringement. On February 10, 1997, the Company filed its answer denying infringement, alleging inequitable conduct on the part of Pirelli in the prosecution of certain of its patents, and stating a counterclaim against the relevant Pirelli parties for a declaratory judgment finding the Pirelli patents invalid and/or not infringed. Following the filing of the Company's answer, Pirelli dedicated to the public and withdrew from the lawsuit all infringement claims relating to one of the five patents. Discovery proceedings are ongoing, and are currently expected to be completed by January 31, 1998, with trial expected no earlier than February 1998. The Company has filed a complaint against Pirelli with the International Trade Commission ("ITC"), based on the Company's belief that a 32 channel DWDM system announced by Pirelli infringes at least two of the Company's patents. The Company's complaint seeks a ban on the importation by Pirelli into the U.S. of any infringing 32 channel system. A formal investigative proceeding was instituted by the ITC on April 3, 1997. Discovery proceedings are now ongoing, and a full hearing of the matter is currently scheduled for December 1997. On March 14, 1997, the Company filed suit against Pirelli in U.S. District Court in the Eastern District of Virginia, alleging willful infringement by Pirelli of three U.S. patents held or co-owned by the Company. The lawsuit seeks treble damages, attorneys' fees and costs, as well as permanent injunctive relief against the alleged infringement. The patents at issue relate to certain of Pirelli's cable television equipment, to Pirelli's 4 and 8 channel WDM systems, and to certain Pirelli fiberoptic communications equipment announced by Pirelli in January 1997 as being deployed in a field trial in the MCI network. Pirelli's motion to dismiss or transfer for lack of jurisdiction was denied April 28, 1997. Discovery proceedings are now ongoing, with trial expected by late fall 1997. The Company continues to believe its MultiWave 1600 system does not infringe any claim of the four remaining Pirelli patents, and believes certain claims of the Pirelli patents may be invalid. The Company intends to defend itself vigorously, and is planning on all litigation proceeding through trial. In light of the complexity and likely time-consuming nature of the litigation, including the Company's counterclaim, the ITC proceeding, and the Company's patent infringement lawsuit against Pirelli in the Eastern District of Virginia, the Company accrued during the first fiscal quarter of 1997 approximately $5.0 million in estimated legal and related costs associated with these proceedings. While the Company believes its estimate of legal and related costs is adequate based on its current understanding of the overall facts and circumstances, the estimate may be increased depending on the course of the legal proceedings. The Company expects that the Pirelli proceedings will not only be costly but will also involve a substantial diversion of the time and attention of some members of management. Further, the Company believes Pirelli and other competitors have used the existence of the Delaware litigation to raise questions in customers' and potential customers' minds as to the Company's ability to manufacture and deliver the MultiWave 1600 system. There can be no assurance that such efforts by Pirelli and others will not disrupt the Company's existing and prospective customer relationships. There can be no assurance that the Company will be successful in the Pirelli litigation, and an adverse determination in the Delaware court could result from a finding of infringement of only one claim of a single patent. The Company may consider settlement due to the costs and uncertainties associated with litigation in general and patent infringement litigation in particular and due to the fact that an adverse determination in the litigation could preclude the Company from producing the MultiWave 1600 system until it were able to implement a non-infringing alternative design to any portion of the system to which such a determination applied. There can be no assurance that any settlement will be reached by the parties. An adverse determination in, or settlement of, the Pirelli litigation could involve the payment of significant amounts, or could include terms in addition to such payments, which could have a material adverse effect on the Company's business, financial condition and results of operations. Other Litigation. The Company and certain directors are defendants in another lawsuit brought in November 1996 by a stockholder of the Company and entities controlled by him concerning alleged entitlement to additional shares of Series C Convertible Preferred Stock. No assurance can be given that this lawsuit will not result in an adverse effect on the Company's business, financial condition and results of operations. See "Business -- Legal Proceedings." DEPENDENCE ON SUPPLIERS Suppliers in the specialized, high technology sector of the optical communications industry are generally not as plentiful or, in some cases, as reliable, as suppliers in more mature industries. The Company is dependent on a limited number of suppliers for components of the MultiWave system as well as equipment used to manufacture the MultiWave system. The MultiWave system has over 600 components, and certain key optical and electronic components are currently available only from a sole source, where the Company has identified no other supplier for the component. While alternative suppliers have been identified for certain other key optical and electronic components, those alternative sources have not been qualified by the Company. The Company has to date conducted its business with suppliers through the issuance of conventional purchase orders against the Company's forecasted requirements. The Company is seeking to negotiate long term supply agreements with key suppliers, but currently has only a few such agreements. The Company has from time to time experienced minor delays in the receipt of key components, and any future difficulty in obtaining sufficient and timely delivery of them could result in delays or reductions in product shipments which, in turn, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company's strategy to have portions of its product assembled and, in certain cases, tested, by third parties involves certain risks, including the potential absence of adequate capacity, the unavailability of or interruptions in access to certain process technologies, and reduced control over delivery schedules, manufacturing yields, quality and costs. In the event that any significant supplier or subcontractor were to become unable or unwilling to continue to manufacture and/or test the Company's systems in required volumes, the Company would have to identify and qualify acceptable replacements. This process could also be lengthy and no assurance can be given that any additional sources would become available to the Company on a timely basis. A key item of equipment, the E-2000 Diamond connector, which is used to manufacture a portion of the MultiWave system, is available only from a sole source -- the Diamond Company. A delay or reduction in component or equipment shipments, an increase in component or equipment costs or a delay or increase in costs in the assembly and testing of products by third party subcontractors could materially and adversely affect the Company's business, financial condition and results of operations. NEW PRODUCT DEVELOPMENT DELAYS The Company's ability to anticipate changes in technology, industry standards, customer requirements and product offerings and to develop and introduce new and enhanced products will be significant factors in the Company's ability to remain a market leader in the deployment of DWDM systems. The complexity of the technology involved in product development efforts in the DWDM field can result in unanticipated delays. The failure in the future to deliver new and improved products in a timely fashion relative to customer expectations could have a material adverse effect on the Company's competitive position. COMPETITORS AS SUPPLIERS Certain of the Company's component suppliers are both primary sources for such components and major competitors in the market for system equipment. For example, the Company buys certain key components from Lucent, Alcatel, Nortel, NEC and Siemens, each of which offers optical communications systems and equipment which are competitive with the Company's DWDM systems. Lucent is the sole source of two integrated circuits and is one of two suppliers of Erbium- doped fiber. Alcatel and Nortel are suppliers of lasers used in the MultiWave system. NEC is a supplier of certain testing equipment. The Company's business, financial condition and results of operations could be materially and adversely affected if these supply relationships were to decline in reliability or otherwise change in any manner adverse to the Company. Although the Company has not experienced to date any decline in reliability among these vendors, this risk factor increases in importance given the Company's expansion efforts and the increasingly competitive environment in which the Company operates. LIMITED OPERATING HISTORY; HISTORY OF LOSSES The Company was founded in November 1992 and introduced its MultiWave 1600 system in field trials in May 1996. Accordingly, the Company has only a limited operating history upon which an evaluation of the Company, its product and prospects can be based. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development, particularly companies in new and rapidly evolving markets and companies experiencing rapid expansion in their operations. To address these risks, the Company must, among other things, respond to competitive developments, continue to attract, retain and motivate qualified management and other employees, continue to upgrade its technologies and commercialize products and services which incorporate such technologies and achieve market acceptance for its MultiWave system. There can be no assurance that the Company will be successful in addressing such risks. The Company incurred net losses in each quarter from inception through the second quarter of fiscal 1996. While the Company reported net income for fiscal 1996 and the first two fiscal quarters of 1997, there can be no assurance that the Company will sustain profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".

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+ RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in the New Notes offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, the risk factors set forth below. RECENT NET LOSSES For the fiscal years ended July 31, 1994 and July 31, 1996, and for the five-month period ended December 31, 1996, Holdings had net losses of approximately $3.0 million, $8.1 million and $4.8 million, respectively. For the fiscal year ended July 31, 1995, Holdings had net income of $745,000. After giving pro forma effect to the Transactions, Holdings would have had a net loss of approximately $3.6 million, or $0.05 per share, for the twelve months ended December 31, 1996 and a net loss of $26,000 for the six months ended June 30, 1997. SUBSTANTIAL LEVERAGE AND DEBT SERVICE Holdings and Hedstrom incurred a substantial amount of indebtedness in connection with the Transactions. As of June 30, 1997, Holdings had $255.4 million of consolidated indebtedness and $44.3 million of consolidated shareholders' equity, and Hedstrom had $231.3 million of consolidated indebtedness and $67.5 million of consolidated shareholder's equity. For the twelve months ended December 31, 1996, Holdings and Hedstrom had deficiencies of earnings to fixed charges of $7.0 million and $6.7 million, respectively. After giving pro forma effect to the Transactions, Holdings' deficiency of earnings to fixed charges would have been $4.3 million for the twelve months ended December 31, 1996, and Hedstrom's deficiency of earnings to fixed charges would have been $0.7 million for the twelve months ended December 31, 1996. See "Capitalization", "Summary Historical Consolidated 'Financial Data of Holdings" and "Unaudited Pro Forma Consolidated Financial Information." Holdings and Hedstrom may incur additional indebtedness in the future, subject to certain limitations contained in the instruments and documents governing their respective indebtedness. See "Description of Senior Credit Facilities," "Description of the New Senior Subordinated Notes" and "Description of the New Discount Notes." Accordingly, Holdings and Hedstrom will have significant debt service obligations. Holdings' and Hedstrom's high degree of leverage could have important consequences to holders of the New Notes, including the following: (i) a substantial portion of Hedstrom's cash flow from operations will be dedicated to the payment of principal of, premium (if any) and interest on its indebtedness, thereby reducing the funds available for operations, distributions to Holdings for payments with respect to the Discount Notes, future business opportunities and other purposes and increasing the vulnerability of Hedstrom to adverse general economic and industry conditions; (ii) the ability of Holdings and Hedstrom to obtain additional financing in the future may be limited; (iii) certain of Hedstrom's borrowings (including, without limitation, amounts borrowed under the Senior Credit Facilities) will be at variable rates of interest, which will expose Hedstrom to increases in interest rates; and (iv) all the indebtedness incurred in connection with the Senior Credit Facilities will be secured and will become due prior to the time the principal payments on the New Notes will become due. Holdings' and Hedstrom's ability to make scheduled payments of the principal of, or to pay interest on, or to refinance their respective indebtedness (including the New Notes) will depend on Hedstrom's future performance, which to a certain extent will be subject to economic, financial, competitive and other factors beyond its control. Notwithstanding Holdings' and Hedstrom's deficiencies of earnings to fixed charges for the twelve months ended December 31, 1996, management believes that based upon Hedstrom's current operations and anticipated growth, future cash flow from operations, together with Hedstrom's available borrowings under the Revolving Credit Facility, will be adequate to meet Holdings' and Hedstrom's respective anticipated requirements for capital expenditures, interest payments and scheduled principal payments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Hedstrom and Holdings -- Results of Operations" and "-- Liquidity and Capital Resources." There can be no assurance, however, that Hedstrom's business will continue to generate sufficient cash flow from operations in the future to service its and Holdings' respective indebtedness and make necessary capital expenditures. If unable to do so, Holdings and Hedstrom may be required to refinance all or a portion of their respective indebtedness, including the New Notes, to sell assets or to obtain additional financing. There can be no assurance that any such refinancing would be possible, that any assets could be sold (or, if sold, of the timing of such sales and the amount of proceeds realized therefrom) or that additional financing could be obtained. SUBSTANTIAL RESTRICTIONS AND COVENANTS The Credit Agreement (as defined), the Senior Subordinated Notes Indenture and the Discount Notes Indenture contain numerous restrictive covenants, including, but not limited to, covenants that restrict Holdings' and Hedstrom's ability to incur indebtedness, pay dividends, create liens, sell assets, engage in certain mergers and acquisitions and refinance indebtedness. In addition, the Credit Agreement will also require Hedstrom to maintain certain financial ratios. The ability of Holdings and Hedstrom to comply with the covenants and other terms of the Credit Agreement, the Senior Subordinated Notes Indenture and the Discount Notes Indenture, to make cash payments with respect to the New Notes and to satisfy their other respective debt obligations (including, without limitation, borrowings and other obligations under the Credit Agreement) will depend on the future operating performance of Hedstrom. In the event Holdings or Hedstrom fails to comply with the various covenants contained in the Credit Agreement, the Senior Subordinated Notes Indenture or the Discount Notes Indenture, as applicable, it would be in default thereunder, and in any such case, the maturity of substantially all of its long-term indebtedness could be accelerated. A default under either the Senior Subordinated Notes Indenture or the Discount Notes Indenture would also constitute an event of default under the Credit Agreement. The Credit Agreement will prohibit the repayment, purchase, redemption, defeasance or other payment of any of the principal of the New Notes at any time prior to their stated maturity. See "Description of the Senior Credit Facilities," "Description of the New Senior Subordinated Notes" and "Description of the New Discount Notes." Holdings and Hedstrom currently are in compliance with all covenants contained in the Credit Agreement, the Senior Subordinated Notes Indenture and the Discount Notes Indenture. RANKING OF THE NEW NOTES AND GUARANTIES The indebtedness evidenced by the New Senior Subordinated Notes will be unsecured senior subordinated obligations of Hedstrom and the indebtedness evidenced by each Subsidiary Guaranty will be senior subordinated indebtedness of the relevant Subsidiary Guarantor. The payment of principal of, premium (if any), and interest on the New Senior Subordinated Notes and the payment of any Subsidiary Guaranty will be subordinated in right of payment to all Senior Indebtedness of Hedstrom or all Subsidiary Guarantor Senior Indebtedness of the relevant Subsidiary Guarantor, as the case may be, including all indebtedness and obligations of Hedstrom under the Senior Credit Facilities, and such Subsidiary Guarantor's guaranty of such obligations. The indebtedness evidenced by the Holdings Guaranty will be an unsecured senior obligation of Holdings and will rank pari passu in right of payment with all unsecured Senior Indebtedness of Holdings. Holdings currently conducts no business and has no significant assets other than the capital stock of Hedstrom, all of which is pledged to secure the Senior Credit Facilities. See "-- Structural Subordination of Holdings." As of June 30, 1997, Senior Indebtedness of Hedstrom, Holdings Senior Indebtedness and Subsidiary Guarantor Senior Indebtedness were approximately $117.7 million, $244.3 million and $112.7 million, respectively, and Senior Subordinated Indebtedness of Hedstrom and Subsidiary Guarantor Senior Subordinated Indebtedness were approximately $110.0 million and $110.0 million, respectively. The Senior Subordinated Notes Indenture permits Hedstrom to incur additional Senior Indebtedness, provided that certain conditions are met, and Hedstrom expects from time to time to incur additional Senior Indebtedness. In addition, the Senior Subordinated Notes Indenture permits Senior Indebtedness to be secured. By reason of the subordination provisions of the Senior Subordinated Notes Indenture, in the event of insolvency, liquidation, reorganization, dissolution or other winding-up of Hedstrom or a Subsidiary Guarantor, holders of Senior Indebtedness of Hedstrom or Subsidiary Guarantor Senior Indebtedness, as the case may be, will have to be paid in full before Hedstrom makes payments in respect of the New Senior Subordinated Notes or such Subsidiary Guarantor makes payments in respect of its Subsidiary Guaranty. In addition, no payment will be able to be made in respect of the New Senior Subordinated Notes during the continuance of a payment default under any Designated Senior Indebtedness (as defined). Accordingly, there may be insufficient assets remaining after such payments to pay amounts due on the New Senior Subordinated Notes. Furthermore, if certain non-payment defaults exist with respect to Designated Senior Indebtedness, the holders of such Designated Senior Indebtedness will be able to prevent payments on the New Senior Subordinated Notes for certain periods of time. See "Description of New Senior Subordinated Notes -- Ranking and Subordination." The New Discount Notes will be unsecured senior obligations of Holdings and will rank pari passu in right of payment with all unsecured Senior Indebtedness of Holdings, including the Holdings Guaranty and Holdings' guarantee of the Senior Credit Facilities. As a result of the holding company structure, the holders of the New Discount Notes will effectively rank junior in right of payment to all creditors of Hedstrom and its subsidiaries, including, without limitation, the lenders under the Senior Credit Facilities, holders of the New Senior Subordinated Notes and trade creditors. See "-- Structural Subordination of Holdings." In the event of the dissolution, bankruptcy, liquidation or reorganization of Holdings or Hedstrom, the holders of the New Discount Notes may not receive any amounts in respect of the New Discount Notes until after the payment in full of all claims of the creditors of Hedstrom and its subsidiaries. As of June 30, 1997, the New Discount Notes were effectively subordinated to approximately $282.4 million of aggregate liabilities (consisting of Indebtedness and trade payables) of Hedstrom and its subsidiaries. See "Capitalization" and "Description of the New Discount Notes -- Ranking." STRUCTURAL SUBORDINATION OF HOLDINGS Holdings is a holding company whose only material asset is the capital stock of Hedstrom. Holdings currently conducts no business (other than in connection with its ownership of the capital stock of Hedstrom and the performance of its obligations with respect to the New Discount Notes, the Holdings Guaranty and the Senior Credit Facilities) and will depend on distributions from Hedstrom to meet its debt service obligations. Because of the substantial leverage of both Holdings and Hedstrom and the dependence of Holdings upon the operating performance of Hedstrom to generate distributions to Holdings, there can be no assurance that any such distributions will be adequate to fund Holdings' obligations when due. In addition, the Credit Agreement, the Senior Subordinated Notes Indenture and applicable federal and state law will impose restrictions on the payment of dividends and the making of loans by Hedstrom to Holdings. As a result of the foregoing restrictions, Holdings may be unable to gain access to the cash flow or assets of Hedstrom in amounts sufficient to pay cash interest on the New Discount Notes on and after December 1, 2002, the date on which cash interest thereon first becomes payable, and principal of the New Discount Notes when due or upon a Change of Control or the occurrence of any other event requiring the repayment of principal. In such event, Holdings may be required to (i) refinance the New Discount Notes, (ii) seek additional debt or equity financing, (iii) cause Hedstrom to refinance all or a portion of Hedstrom's indebtedness with indebtedness containing covenants allowing Holdings to gain access to Hedstrom's cash flow or assets, (iv) cause Hedstrom to obtain modifications of the covenants restricting Holdings' access to cash flow or assets of Hedstrom contained in Hedstrom's financing documents (including, without limitation, the Credit Agreement and the Senior Subordinated Notes Indenture), (v) merge Hedstrom with Holdings, which merger would be subject to compliance with applicable debt covenants and the consents of certain lenders or (vi) pursue a combination of the foregoing actions. The measures Holdings may undertake to gain access to sufficient cash flow to meet its future debt service requirements will depend on general economic and financial market conditions, as well as the financial condition of Holdings and Hedstrom and other relevant factors existing at the time. No assurance can be given that any of the foregoing measures can be accomplished. ENCUMBRANCES ON ASSETS TO SECURE SENIOR CREDIT FACILITIES Hedstrom's obligations under the Senior Credit Facilities are secured by a first priority pledge of, or a first priority security interest in, as the case may be, substantially all of the assets (including 100% of the common stock) of Hedstrom and its domestic subsidiaries, as well as a first priority pledge of 65% of the capital stock of each foreign subsidiary of Hedstrom or any subsidiary thereof. If Hedstrom becomes insolvent or is liquidated, or if payment under any of the Senior Credit Facilities or in respect of any other secured Senior Indebtedness is accelerated, the lenders under the Senior Credit Facilities or holders of such other secured Senior Indebtedness will be entitled to exercise the remedies available to a secured lender under applicable law (in addition to any remedies that may be available under documents pertaining to the Senior Credit Facilities or such other Senior Indebtedness). The New Notes will not be secured. Accordingly, holders of such secured Senior Indebtedness will have a prior claim with respect to the assets securing such indebtedness. See "Description of Senior Credit Facilities", "Description of the New Senior Subordinated Notes" and "Description of the New Discount Notes." CERTAIN SUBSIDIARIES NOT INCLUDED AS SUBSIDIARY GUARANTORS The Subsidiary Guarantors include only Hedstrom's domestic subsidiaries. However, the historical consolidated financial information (including the consolidated financial statements of Holdings and ERO included elsewhere in this Prospectus) and the pro forma consolidated financial information included in this Prospectus are presented on a consolidated basis, including both domestic and foreign subsidiaries of Hedstrom and ERO. After giving pro forma effect to the Transactions, the aggregate annual net sales for the year ended December 31, 1996 of the subsidiaries of Hedstrom which are Subsidiary Guarantors and those which are not Subsidiary Guarantors would have been approximately $211.6 million and $71.7 million, respectively. The aggregate total assets as of June 30, 1997 of the subsidiaries of Hedstrom which are Subsidiary Guarantors and those which are not Subsidiary Guarantors were $324.4 million and $24.5 million, respectively. In reliance upon certain Staff Accounting Bulletins of the Commission, interpretations of the staff of the Commission and no-action relief granted by the staff of the Commission to unrelated third parties, the Issuers intend to seek no-action relief permitting Hedstrom and the Subsidiary Guarantors to not file periodic reports under the Exchange Act separately from Holdings, and in lieu thereof, to set forth in Holding's periodic reports selected financial information and certain other information with respect to Holdings, Hedstrom, the Subsidiary Guarantors and the subsidiaries of Hedstrom which are not guarantors of the Senior Subordinated Notes. See footnote 16 to the audited consolidated financial statements of Holdings and footnote 13 to the audited consolidated financial of ERO contained elsewhere herein. ORIGINAL ISSUE DISCOUNT; APPLICABLE HIGH YIELD DISCOUNT OBLIGATIONS The Old Discount Notes were issued at a substantial discount from their stated principal amount at maturity. Consequently, although cash interest on the New Discount Notes generally will not accrue or be payable prior to June 1, 2002, OID will be includable in the gross income of a holder of the New Discount Notes for U.S. federal income tax purposes in advance of the receipt of such cash payments on the New Discount Notes. Because $3.4 million of the issue price of the Units was allocated for U.S. federal income tax purposes to the Shares (although no assurance can be given that the value allocated to the Shares is indicative of the price at which the Shares may actually trade), the amount of OID was $3.4 million greater than the difference between the principal amount at maturity of the Old Discount Notes and the purchase price of the Units. See "Certain United States Federal Income Tax Considerations with Respect to the New Notes" for a more detailed discussion of the U.S. federal income tax consequences of the purchase, ownership and disposition of the New Discount Notes. If a bankruptcy case is commenced by or against Holdings under the U.S. Bankruptcy Code after the issuance of the New Discount Notes, the claim of a holder of New Discount Notes with respect to the principal amount thereof may be limited to an amount equal to the sum of (i) the initial offering price and (ii) that portion of the OID that is not deemed to constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code. Any OID that was not accrued as of any such bankruptcy filing would constitute "unmatured interest." Because the New Discount Notes appear to provide initial holders with a yield to maturity (for federal income tax purposes) which exceeds 11.99% (a federally mandated interest rate for June 1997 plus five percentage points), OID with respect to the New Discount Notes will not be deductible by Holdings until paid. To the extent that such yield to maturity equals or exceeds 12.99% (a federally mandated interest rate plus six percentage points), a portion of such OID will not be deductible by Holdings. See "Certain United States Federal Income Tax Considerations -- U.S. Holders -- Applicable High Yield Discount Obligations." LIMITATION ON CHANGE OF CONTROL Upon a Change of Control (which excludes acquisitions of stock or assets by Hicks Muse, Arnold E. Ditri and their respective affiliates), (i) each Issuer will have the option, at any time on or prior to June 1, 2002, to redeem such Issuer's New Notes, in whole but not in part, at a redemption price equal to 100% of (A) in the case of the New Senior Subordinated Notes, the principal amount thereof, and (B) in the case of the New Discount Notes, the Accreted Value thereof, plus, in each case, the Applicable Premium and accrued and unpaid interest, if any, to the date of redemption, and (ii) if an Issuer does not redeem its New Notes pursuant to clause (i) above, each holder of a New Note may require the Issuer thereof to repurchase such New Note at a purchase price equal to 101% of (A) in the case of the New Senior Subordinated Notes, the principal amount thereof and (B) in the case of the New Discount Notes, the Accreted Value thereof, plus, in each case, accrued and unpaid interest, if any, to the date of repurchase. There can be no assurance that Holdings and Hedstrom will be able to raise sufficient funds to meet their repurchase obligations upon a Change of Control or that in any event, Holdings and Hedstrom would be permitted under the terms of the Credit Agreement and/or the Indentures to fulfill such obligations. The failure to fulfill such obligations would constitute an event of default under the Indentures See "Description of the New Senior Subordinated Notes -- Change of Control" and "Description of the New Discount Notes -- Change of Control." RELIANCE ON KEY CUSTOMERS After giving pro forma effect to the Transactions, the Company's pro forma net sales to Toys "R" Us, Wal-Mart, Kmart and Target (its four largest customers) during the twelve-month period ended December 31, 1996 would have accounted for 16%, 17%, 10% and 7%, respectively, of the Company's pro forma net sales during such period. Although the Company has well-established relationships with its key customers, the Company does not have long-term contracts with any of them. A decrease in business from any of its key customers could have a material adverse effect on the Company's results of operations and financial condition. See "Business -- Customers." DEPENDENCE ON KEY LICENSES AND ON OBTAINING NEW LICENSES After giving pro forma effect to the Transactions, approximately 28% of the Company's pro forma net sales for the twelve months ended December 31, 1996 would have been derived from sales of licensed products. Approximately 67% of such net sales would have been attributable to licenses covering ten licensed characters and approximately 44% of such net sales would have been derived from licenses with Disney Enterprises, Inc. and its affiliates. Although the Company intends to renew key existing licenses and to obtain new licenses, there can be no assurance that the Company will be able to do so. The failure to renew key existing licenses or obtain new licenses could inhibit the Company's ability to effectively compete in the licensed product market, which could in turn have a material adverse effect on the Company. A significant segment of the Company's business is dependent on obtaining new licenses for its products. The Company believes that the introduction of products with new licenses and the introduction of new licenses for existing products are material to its continued growth and profitability. In addition, the success of the Company's products bearing a particular licensed character is based on the popularity of the character, the level of which changes from year to year. Consequently, the success of the Company's licensed products business is dependent upon obtaining new licenses for popular characters. No assurance can be given that the Company will be able to acquire new licenses for popular characters. See "Business -- Technology and Licensing." RAW MATERIALS PRICES The principal raw materials in most of the Company's products are plastic resins, plastic components, steel and corrugated cardboard. The prices for such raw materials are influenced by numerous factors beyond the control of the Company, including general economic conditions, competition, labor costs, import duties and other trade restrictions and currency exchange rates. Changing prices for such raw materials may cause the Company's results of operations to fluctuate significantly. Although the Company has not experienced material adverse effects from price changes in the past, a large, rapid increase in the price of raw materials could have a material adverse effect on the Company's operating margins unless and until the increased cost can be passed along to customers. INTEGRATION OF ERO AND IMPLEMENTATION OF BUSINESS STRATEGY Hedstrom has no previous experience acquiring and integrating a business as large as ERO. Successful integration of ERO's operations will depend primarily on Hedstrom's ability to manage ERO's manufacturing facilities and to eliminate redundancies and excess costs. There can be no assurance that Hedstrom can successfully integrate ERO's operations and any failure or inability to do so may have a material adverse effect on the Company's results of operations. In addition, the Company intends to continue the implementation of its business strategy, an element of which is to achieve significant annual cost savings. The Company's ability to successfully implement its business strategy, and to achieve the estimated cost savings, is subject to a number of factors, many of which are beyond the control of the Company. There can be no assurance that the Company will be able to continue to successfully implement its business strategy or that the Company will be able to achieve the estimated cost savings. A failure to successfully implement its business strategy or to achieve the estimated cost savings may have a material adverse effect on the Company's results of operations. See "Prospectus Summary -- Business Strategy." COMPETITION AND IMPORTANCE OF NEW PRODUCT INTRODUCTIONS AND ENHANCEMENTS The children's leisure and activity product market is highly competitive. Notwithstanding the competitive nature of the market, the Company has been able to establish itself as the market share leader in certain niche markets within the overall children's leisure and activity product market by introducing innovative new products and regularly enhancing existing products. The Company believes that new product introductions and enhancements of existing products are material to its continued growth and profitability. No assurance can be given that the Company will continue to be successful in introducing new products or further enhancing existing products. See "Business -- Competition." INVENTORY MANAGEMENT; DISTRIBUTION The Company's key customers use inventory management systems to track sales of particular products and rely on reorders being rapidly filled by suppliers, rather than maintaining large on-hand inventories to meet consumer demand. While these systems reduce a retailer's investment in inventory, they increase pressure on suppliers like the Company to fill orders promptly and shift a portion of the retailer's inventory risk onto the supplier. Production of excess products by the Company to meet anticipated demand could result in increased inventory carrying costs for the Company. In addition, if the Company fails to anticipate the demand for its products, it may be unable to provide adequate supplies of popular products to retailers in a timely fashion and may consequently lose potential sales. Moreover, disruptions in shipments from the Company's vendors or from the Company's warehouse facilities could have a material adverse effect on the business, financial condition and results of operations of the Company. GOVERNMENT REGULATIONS The Company is subject to the provisions of, among other laws, the Federal Hazardous Substances Act and the Federal Consumer Product Safety Act. Those laws empower the Consumer Product Safety Commission (the "CPSC") to protect consumers from hazardous products and other articles. The CPSC has the authority to exclude from the market products which are found to be unsafe or hazardous and can require a manufacturer to recall such products under certain circumstances. Similar laws exist in some states and cities in the United States and in Canada and Europe. While the Company believes that it is, and will continue to be, in compliance in all material respects with applicable laws, rules and regulations, there can be no assurance that the Company's products will not be found to violate such laws, rules and regulations, or that more restrictive laws, rules or regulations will not be adopted in the future which could make compliance more difficult or expensive or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. PRODUCT LIABILITY RISKS The Company's products are used for and by small children. The Company carries product liability insurance in amounts which management deems adequate to cover risks associated with such use; however, there can be no assurance that existing or future insurance coverage will be sufficient to cover all product liability risks. See "Business -- Legal Proceedings." DEPENDENCE ON KEY PERSONNEL The Company's success will depend largely on the efforts and abilities of, among others, Arnold E. Ditri, David F. Crowley, Alastair H. McKelvie, John D. Dellos and Alfred C. Carosi, its executive officers. There can be no assurance that the Company will be able to retain all of such executive officers. The failure of such executive officers to remain active in the Company's management could have a material adverse effect on the Company's operations. See "Management." SEASONALITY Historically, Hedstrom and ERO each experienced a significant seasonal pattern in sales and cash flow. During each of the twelve-month periods ended July 31, 1994, July 31, 1995 and July 31, 1996, approximately 67%, 74% and 76%, respectively, of Hedstrom's net sales were realized during the first and second calendar fiscal quarters. During each of the twelve month periods ended December 31, 1994, December 31, 1995, and December 31, 1996, approximately 59%, 59% and 69%, respectively, of ERO's net sales were realized during the third and fourth calendar quarters. Although one of the Company's business strategies is to pursue opportunities for counter-seasonal sales (including new product and OEM sales) and the Company expects decreased exposure to seasonality as a result of the Acquisition, the Company expects that its business will continue to experience a seasonal pattern for the foreseeable future. Because of such seasonality, the sales of a substantial portion of each of the Company's product categories are concentrated in relatively short periods of time during the year. As a result, a failure by the Company to ship any such product to the marketplace within the limited selling period would have a material adverse effect on sales of such product and could in turn have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Hedstrom and Holdings -- Seasonality" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of ERO -- Seasonality." FOREIGN OPERATIONS, COUNTRY RISKS AND EXCHANGE RATE FLUCTUATIONS As part of the Company's business strategy, it is seeking to expand its international sales base. International operations and exports to foreign markets are subject to a number of special risks, including currency exchange rate fluctuations, trade barriers, exchange controls, national and regional labor strikes, political risks and risks of increases in duties, taxes and governmental royalties, as well as changes in laws and policies governing operations of foreign-based companies. In addition, earnings of foreign subsidiaries and intercompany payments are subject to foreign income tax rules that may reduce cash flow available to meet required debt service and other obligations of the Company. In 1996, ERO's sales to customers outside the United States were approximately $21.3 million, or approximately 13% of ERO's total sales. However, $25.8 million, or 26.5%, of ERO's cost of sales were denominated in Canadian dollars. Foreign denominated selling, general, and administrative expense and interest expense were $5.8 million and $0.5 million, respectively. Accordingly, the Company's revenues, cash flows and earnings may be affected by fluctuations in certain foreign exchange rates, principally between the United States dollar and the Canadian dollar, which may also have adverse tax effects. In addition, because a portion of the Company's sales, costs of goods sold and other expenses are denominated in Canadian dollars, the Company has a translation exposure to fluctuations in the Canadian dollar against the U.S. dollar. Although the Company has not experienced material adverse consequences from currency fluctuations in the past, there can be no assurance that currency fluctuations would not have a material impact on the Company in the future as increases in the value of the Canadian dollar have the effect of increasing the U.S. dollar equivalent of cost of goods sold and other expenses with respect to the Company's Canadian production facilities. The company does not have any hedging programs in place that would reduce its exposure to currency fluctuations. FRAUDULENT CONVEYANCE The incurrence of indebtedness (such as the Old Notes) in connection with the Transactions and payments to consummate the Transactions with the proceeds thereof are subject to review under relevant federal and state fraudulent conveyance statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of Hedstrom or Holdings. Under these statutes, if a court were to find that obligations (such as the Old Notes) were incurred with the intent of hindering, delaying or defrauding present or future creditors or that Hedstrom or Holdings received less than a reasonably equivalent value or fair consideration for those obligations and, at the time of the occurrence of the obligations, the obligor either (i) was insolvent or rendered insolvent by reason thereof, (ii) was engaged or was about to engage in a business or transaction for which its remaining unencumbered assets constituted unreasonably small capital or (iii) intended to or believed that it would incur debts beyond its ability to pay such debts as they matured or became due, such court could void Hedstrom's or Holdings' obligations under the Old Notes or the New Notes, subordinate the Old Notes or the New Notes to other indebtedness of Hedstrom or Holdings, or take other action detrimental to the holders of the Old Notes or the New Notes. The measure of insolvency for purposes of a fraudulent conveyance claim will vary depending upon the law of the applicable jurisdiction. Generally, however, a company will be considered insolvent at a particular time if the sum of its debts at that time is greater than the then fair value of its assets or if the fair saleable value of its assets at that time is less than the amount that would be required to pay its probable liability on its existing debts as they become absolute and mature. Hedstrom and Holdings believe that (i) neither Hedstrom nor Holdings will be insolvent or rendered insolvent by the incurrence of indebtedness in connection with the Transactions, (ii) each of Hedstrom and Holdings will be in possession of sufficient capital to run its business effectively and (iii) each of Hedstrom and Holdings will have incurred debts within its ability to pay as the same mature or become due. There can be no assurance, however, as to what standard a court would apply to evaluate the parties' intent or to determine whether Hedstrom or Holdings was insolvent at the time of, or rendered insolvent upon consummation of, the Transactions or that, regardless of the standard, a court would not determine that Hedstrom or Holdings was insolvent at the time of, or rendered insolvent upon consummation of, the Transactions. In addition, the Guaranties may be subject to review under relevant federal and state fraudulent conveyance and similar statutes in a bankruptcy or reorganization case or a lawsuit by or on behalf of creditors of any of the Guarantors. In such a case, the analysis set forth above generally would apply. A court could avoid a Guarantor's obligation under its Guaranty, subordinate the Guaranty to other indebtedness of such Guarantor or take other action detrimental to the holders of the Senior Subordinated Notes. CONTROL BY EXISTING STOCKHOLDERS Hicks Muse and certain of its affiliates control approximately 68% of the outstanding shares of Holdings Common Stock (approximately 80% on a fully-diluted basis) and thereby directly control the election of the Board of Directors and the direction of the affairs of Holdings, and indirectly control the election of the Board of Directors and the direction of the affairs of Hedstrom. Pursuant to the Stockholder's Agreement (as defined), Hicks Muse and its affiliates have preemptive rights with respect to certain offerings by Holdings of Holdings Common Stock (or equivalents thereof), as well as tag-along and drag-along rights with respect to sales of Holdings Common Stock by the other parties to the Stockholders Agreement. As a result, Hicks Muse and its affiliates will be entitled to maintain, and possibly increase, their ownership percentage of Holdings Common Stock. See "Stock Ownership and Certain Transactions."

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+ RISK FACTORS An investment in the shares of Class A Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors, as well as the other information in this Prospectus, before investing in shares of the Class A Common Stock offered hereby. This Prospectus contains certain forward-looking statements that involve risks and uncertainties. Future events and the Company's actual results could differ materially from the results reflected in these forward-looking statements. HIGHLY CYCLICAL INDUSTRY The domestic steel industry and the Company's business are highly cyclical in nature. The Company is particularly sensitive to the presence or absence of sustained economic growth and accompanying construction activity since rebar is used to reinforce concrete in the construction of high rise commercial buildings, highways, bridges and dams, and other public and private construction projects. Demand for the Company's merchant bar products is tied less to construction activity and more to general economic activity. Future economic downturns or a slowdown in construction activity could adversely affect the Company's results of operations and financial condition. AVAILABILITY AND COST OF RAW MATERIALS The Company's principal raw material is ferrous scrap metal derived from, among other sources, junked automobiles, railroad cars, appliances and demolition scrap. Scrap comprised approximately 42% of the Company's cost of sales in fiscal 1997. The purchase price for scrap is subject to market forces beyond the control of the Company, including demand by domestic and foreign steel producers, freight costs, speculation by scrap brokers and other conditions. As minimills have steadily increased their share of supplying U.S. steel demand, demand for scrap has also increased. The ability to pass on increases in raw material prices to the Company's customers is, to a large extent, dependent on market conditions. There may be periods of time in which increases in raw material prices are not recoverable by the Company due to an inability to increase the selling prices of its products because of weakness in the demand for, or an oversupply of, such products. Increases in raw material prices, during such periods, may have a material adverse effect on the Company's results of operations and financial condition. See "Business -- Raw Materials". The Company buys substantially all of the scrap it requires through one broker, The David J. Joseph Company, which also operates shredders for the Company at the Jacksonville and Jackson mills. The Company believes that it could readily obtain adequate supplies of scrap, if warranted, from a number of other sources at competitive prices. HIGHLY COMPETITIVE INDUSTRY; EXCESS PRODUCTION CAPACITY The domestic and foreign steel industries are characterized by intense competition. The Company competes primarily with domestic minimill producers of commodity grade steel bar products, although foreign competition can also be a factor depending on the level of domestic prices, foreign government subsidies and exchange rates. The Company competes primarily on the basis of price, product quality, and reliability of service and delivery. The Company believes that its competitive production costs, the proximity of its mills to major markets and customers, and its long-standing reputation for quality products and service will ensure its competitive position in the industry, although there can be no assurance that competition will not have an adverse effect in the future. Overall consumption of steel products in the U.S. has not grown with the economy as a whole during the past decade. Although the operations of domestic steel producers have been scaled back as a result of corporate reorganizations and bankruptcies, there still exists, taking into account current levels of imports and announced capacity additions, significant excess production capacity in the domestic steel industry as a whole. There can be no assurance that such excess production capacity will not have a material adverse effect on the Company's results of operation and financial condition. SEASONALITY; VARIABILITY OF QUARTERLY RESULTS The Company has historically experienced and expects to continue to experience seasonal fluctuations in its revenues and net income. Revenues can fluctuate significantly between quarters due to factors such as the seasonal slowdown in the construction industry, which is an important market for the Company's finished steel products. In the past, the Company has generally experienced its lowest sales during the third and fourth quarters of its fiscal year. DEPENDENCE ON SOUTHEASTERN MARKET Sales to customers in the southeastern U.S. in recent years have accounted for approximately one-third of the Company's total sales. Due to the relatively high transport costs associated with the delivery of the Company's products beyond this region, the Company does not believe that it can expand sales significantly outside of the region without the acquisition of additional facilities. Accordingly, the Company believes the economic condition of this regional market will continue to have a material effect on sales and profitability of the Company. POTENTIAL COSTS OF ENVIRONMENTAL COMPLIANCE The Company is subject to federal, state and local laws and regulations governing the remediation of environmental contamination associated with past releases of hazardous substances and to extensive federal, state, and local laws and regulations governing discharges to the air and water as well as the handling and disposal of solid and hazardous wastes and employee health and safety (collectively, "Environmental Laws"). Governmental authorities have the power to enforce compliance with these requirements, and violators may be subject to civil or criminal penalties, injunctions or both. Third parties also may have the right to sue for damages to enforce compliance. The electric arc furnaces at each of the Company's four mills are classified as generators of hazardous waste because the melting operation produces dust containing heavy metals (principally zinc, lead, chromium and cadmium). The Company also owns or has owned properties, and conducts or has conducted operations at properties, which have been assessed as contaminated with hazardous or other regulated substances, or as otherwise requiring remedial action under Environmental Laws. Moreover, environmental legislation has been enacted, and may in the future be enacted, to create liability for past actions that were lawful at the time taken but that have been found to affect the environment and to create public rights of action for environmental conditions and activities. Under some of these Environmental Laws a company that has sent waste to a third party waste disposal site could be held liable for the entire cost of remediating such site regardless of fault or the lawfulness of the original disposal activity. Over the past three years, the Company has spent in excess of $30 million for remediation under Environmental Laws for certain on-site and off-site locations. The Company has estimated its potential costs for further remediation under Environmental Laws at on-site and off-site locations to be approximately $14.9 million and has included this amount in the Company's recorded liabilities as of September 30, 1997. Although the Company has established reserves for environmental remediation, there is no assurance regarding the cost of remedial action authorities might eventually require, or that additional environmental hazards, requiring further remedial expenditures, might not be assessed by these authorities or private parties. Accordingly the costs of remedial measures may exceed the amounts reserved. In addition, the Company may be subject to legal proceedings brought by private parties or governmental agencies with respect to environmental matters. Although it is the Company's policy to comply with all Environmental Laws and the Company believes that it is currently in material compliance with all Environmental Laws, there can be no assurance that material environmental liabilities will not be incurred by the Company in the future or that future compliance with Environmental Laws (whether those currently in effect or enacted in the future) will not require additional expenditures by the Company or require changes to the Company's current operations, any of which could have a material adverse effect on the Company's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Compliance with Environmental Laws and Regulations" and "Note E to the September 30, 1997 unaudited condensed financial statements -- Environmental". VOTING CONTROL BY PRINCIPAL STOCKHOLDER Upon completion of the Offerings, Kyoei, through its wholly owned subsidiary, FLS Holdings Inc. ("FLS"), will be the beneficial owner of 9,000,000 shares of the Class B Common Stock, which Class B Common Stock is entitled to two votes per share and will represent approximately 74.4% of the combined voting power of all classes of voting stock (72.7% if the Underwriters' over-allotment options are exercised in full). As a result, Kyoei has, and will continue to have, sufficient voting power to elect the entire Board of Directors of the Company and, in general, to determine (without the consent of the Company's other stockholders) the outcome of any corporate transaction or other matters submitted to the stockholders for approval. In addition, pursuant to terms of the Company's Articles of Incorporation, additional shares of Class B Common Stock may be issued to Kyoei or its wholly-owned subsidiaries. See "Management", "Principal Stockholders" and "Description of Capital Stock". RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS Although the Company's business strategy includes growing its business through acquisitions, there can be no assurance that the Company will be able to identify attractive or willing acquisition candidates, or that the Company will be able to complete acquisitions if such candidates are identified. Future acquisitions by the Company may result in potentially dilutive issuances of equity securities, and the incurrence of additional debt and amortization expenses related to goodwill and other intangible assets, each of which could materially adversely affect the Company's business and results of operations. In addition, acquisitions involve numerous risks, including difficulties in assimilating the operations, products and personnel of the acquired company, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no direct prior experience and the potential loss of key employees of both the acquired company and the Company. The Company has no present agreements or commitments with respect to any material acquisitions of other businesses, products or assets or present intention to apply any portion of the proceeds of the Offerings to any such acquisition. NO PRIOR MARKET FOR CLASS A COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offerings, there has been no public market for the Class A Common Stock, and there can be no assurance that an active market will develop or be sustained after the completion of the Offerings. Consequently, the initial public offering price of the Class A Common Stock will be determined by negotiations among the Company and the Underwriters. See "Underwriting" for a description of the factors to be considered in determining the initial public offering price. The market price of the Class A Common Stock may be significantly affected by, and could be subject to significant fluctuations in response to, such factors as the Company's operating results, changes in any earnings estimates publicly announced by the Company or by securities analysts, announcements of significant business developments by the Company or its competitors, other developments affecting the Company, its clients or its competitors, and various factors affecting the Company's business, the financial markets or the economy in general, some of which may be unrelated to the Company's performance. In addition, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies, especially companies that have recently completed initial public offerings, have experienced wide price fluctuations not necessarily related to the operating performance of such companies. Because the number of shares of Class A Common Stock being offered hereby is small relative to the average number of shares traded of many other publicly held companies, the market price of Class A Common Stock may be more susceptible to fluctuation. SHARES ELIGIBLE FOR FUTURE SALE Future sales of a substantial number of shares of the Class A Common Stock in the public market could adversely affect the market price of the Class A Common Stock and could impair the Company's ability to raise capital through the sale of equity or equity-related securities. Upon completion of the Offerings, the Company will have 3,950,000 shares of Class A Common Stock outstanding and 10,114,385 shares of Class B Common Stock outstanding. All shares of Class B Common Stock are convertible into shares of Class A Common Stock on a one-for- one basis. Of such shares, 72,508 shares of Class B Common Stock, representing less than 1.0% of the issued and outstanding shares of Common Stock, will be freely tradeable without restriction or further registration under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act ("Rule 144"). The remaining 10,041,877 shares of Class B Common Stock, representing approximately 71.4% of the issued and outstanding shares of Common Stock (approximately 68.5% if the Underwriters' over-allotment options are exercised in full), are beneficially owned by affiliates of the Company and are therefore "restricted securities" as that term is defined in Rule 144 and as such are subject to certain holding period, volume limitation and other restrictions prescribed by Rule 144. The Company, certain of its executive officers and Kyoei have agreed that, during the period beginning from the date of this Prospectus and continuing to and including the date 180 days after the date of this Prospectus, they will not offer, sell, contract to sell, pledge, hypothecate, grant any option, right or warrant to purchase, or otherwise dispose of, directly or indirectly, (which shall be deemed to include, without limitation, the entering into of a cash-settled or Common Stock settled derivative instrument) any shares of Common Stock, any securities of the Company that are substantially similar to the Class A Common Stock or any securities that are convertible into or exchangeable for, or that represent the right to receive, Common Stock, or any such substantially similar securities, (other than pursuant to employee stock option plans existing on, or upon the conversion or exchange of convertible or exchangeable securities outstanding as of, the date of this Prospectus), without the prior written consent of the representatives, except for the shares of Class A Common Stock offered in connection with the Offerings. Upon expiration of such 180 day period, an aggregate of 10,041,877 shares will be eligible for sale subject to the timing, volume and manner of sale restrictions of Rule 144. See "Shares Eligible for Future Sale" and "Underwriting". IMMEDIATE AND SUBSTANTIAL DILUTION Investors in the Offerings will experience immediate and substantial dilution in net tangible book value per share of Common Stock of $10.00 per share. In addition, any future issuance of shares of Common Stock or the grant of options to purchase Common Stock could cause further dilution. See "Dilution".

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+ RISK FACTORS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY. SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT The Company is highly leveraged. At September 28, 1997, on a pro forma basis after giving effect to the Recapitalization and the Related Transactions, the Company's total consolidated long-term debt and capital lease obligations (including current maturities) would have been $293.0 million and the Company's total consolidated stockholders' deficit would have been $73.5 million. Upon completion of the Recapitalization, the Company's total available borrowings under the New Credit Facility are estimated to be $55.0 million, excluding $2.1 million of availability under the Letter of Credit Facility (compared to $27.0 million as of September 28, 1997 under the Old Credit Facility, excluding $2.1 million of letter of credit availability). Additional borrowings may, subject to certain limitations, be used for capital expenditures and general corporate purposes, thereby increasing the Company's leverage. The Company's ability to pay principal on the Senior Notes when due or to repurchase the Senior Notes upon a Change of Control will be dependent upon the Company's ability to generate cash from operations sufficient for such purposes or its ability to refinance the Senior Notes. In addition, under the New Credit Facility, in the event of circumstances which are similar to a Change of Control, repayment of borrowings under the New Credit Facility will be subject to acceleration. See "Description of New Credit Facility." The degree to which the Company is leveraged could have important consequences, including the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may be impaired, (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of the principal of and interest on its indebtedness and, because borrowings under the New Credit Facility in part will bear interest at floating rates, the Company could be adversely affected by any increase in prevailing rates, (iii) the New Credit Facility and the Indenture relating to the Senior Notes will impose significant financial and operating restrictions on the Company and its subsidiaries which, if violated, could permit the Company's creditors to accelerate payments thereunder or foreclose upon the collateral securing the New Credit Facility, (iv) the Company is more leveraged than certain of its principal competitors, which may place the Company at a competitive disadvantage and (v) the Company's substantial leverage may limit its ability to respond to changing business and economic conditions and make it more vulnerable to a downturn in general economic conditions. See "Use of Proceeds," "Business--Competition," "Description of New Credit Facility" and "Description of Senior Notes." HISTORY OF LOSSES The Company has reported net losses of $13.3 million, $61.4 million, $3.9 million, $58.7 million and $7.8 million for 1992, 1993, 1994, 1995 and 1996, respectively, and earnings of $2.4 million for the nine months ended September 28, 1997. There can be no assurance that the Company's profitability will be sustained. The Company's earnings were insufficient to cover fixed charges by $12.2 million, $30.8 million, $8.8 million, $25.3 million, and $13.7 million for 1992, 1993, 1994, 1995 and 1996, respectively, and there can be no assurance that the Company's earnings will be sufficient to cover fixed charges in the future. See "Selected Consolidated Financial Information," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes thereto. RESTRICTIONS IMPOSED UNDER NEW CREDIT FACILITY; SECURITY INTEREST The New Credit Facility will impose significant operating and financial restrictions on the Company's ability to, among other things, incur indebtedness, create liens, sell assets, engage in mergers or consolidations, pay dividends and engage in certain transactions with affiliates. The New Credit Facility limits the amount which the Company may spend on capital expenditures and requires the Company to comply with certain financial ratios. These requirements may limit the ability of the Company to meet its obligations, including its obligations with respect to the Senior Notes. The ability of the Company to comply with the covenants in the New Credit Facility and the Senior Notes may be affected by events beyond the control of the Company. Failure to comply with any of these covenants could result in a default under the New Credit Facility and the Senior Notes, and such default could result in acceleration thereof. The New Credit Facility will restrict the Company's ability to repurchase, directly or indirectly, the Senior Notes. In addition, under the New Credit Facility, in the event of circumstances which are similar to a Change of Control, repayment of borrowings under the New Credit Facility will be subject to acceleration, which could further restrict the Company's ability to repurchase the Senior Notes. There can be no assurance that the Company will be permitted or have funds sufficient to repurchase the Senior Notes when it would otherwise be required to offer to do so. It is expected that the obligations of the Company under the New Credit Facility will be (i) secured by a first priority security interest in substantially all material assets of the Company and all other assets owned or hereafter acquired and (ii) guaranteed, on a senior secured basis, by the Friendly's Restaurants Franchise, Inc. subsidiary and the Friendly's International, Inc. subsidiary and may also be so guaranteed by certain subsidiaries created or acquired after consummation of the Recapitalization. The Senior Notes will be effectively subordinated to all existing and certain future secured indebtedness of the Company, including indebtedness under the New Credit Facility, to the extent of the value of the assets securing such secured indebtedness. The Senior Notes will rank PARI PASSU to any future senior indebtedness of the Company and be structurally subordinated to all existing and future indebtedness of any subsidiary of the Company that is not a guarantor of the Senior Notes. Lenders under the New Credit Facility will also have a prior claim on the assets of subsidiaries of the Company that are guarantors under the New Credit Facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Description of New Credit Facility" and "Description of Senior Notes." RISKS RELATING TO THE IMPLEMENTATION OF NEW BUSINESS CONCEPTS AND STRATEGIES The Company has recently initiated several new business concepts and strategies, including the remodeling and re-imaging of selected restaurants, the upgrading of its menu and the development of modified restaurant formats in non-traditional locations. There can be no assurance that the Company will continue to develop such concepts and strategies, that such concepts and strategies will be successful or profitable or that such concepts and strategies will fill the strategic roles intended for them by the Company. See "Business--Business Strategies." RISKS ATTRIBUTABLE TO THE DEVELOPMENT OF A FRANCHISING PROGRAM The success of the Company's business strategy will also depend, in part, on the development and implementation of a franchising program. The Company does not have significant experience in franchising restaurants and there can be no assurance that the Company will continue to successfully locate and attract suitable franchisees or that such franchisees will have the business abilities or sufficient access to capital to open restaurants or will operate restaurants in a manner consistent with the Company's concept and standards or in compliance with franchise agreements. The success of the Company's franchising program will also be dependent upon certain other factors, certain of which are not within the control of the Company or its franchisees, including the availability of suitable sites on acceptable lease or purchase terms, permitting and regulatory compliance and general economic and business conditions. See "Prospectus Summary--Recent Developments" and "Business--Restaurant Operations--Franchising Program." RISKS ARISING OUT OF THE EXPANSION OF INTERNATIONAL OPERATIONS The Company has operations in South Korea, the United Kingdom and the People's Republic of China ("China"). These international operations are subject to various risks, including changing political and economic conditions, currency fluctuations, trade barriers, trademark rights, adverse tax consequences, import tariffs, customs and duties and government regulations. Government regulations, relating to, among other things, the preparation and sale of food, building and zoning requirements, wages, working conditions and the Company's relationship with its employees, may vary widely from those in the United States. There can be no assurance that the Company will be successful in maintaining or expanding its international operations. GEOGRAPHIC CONCENTRATION Approximately 85% of the Company-owned restaurants are located, and substantially all of its retail sales are generated, in the Northeast. As a result, a severe or prolonged economic recession or changes in demographic mix, employment levels, population density, weather, real estate market conditions or other factors specific to this geographic region may adversely affect the Company more than certain of its competitors which are more geographically diverse. RELATIONSHIPS WITH PERKINS; POTENTIAL CONFLICTS OF INTEREST After giving effect to the Recapitalization and the Related Transactions, approximately 10.3% and 2.1% of the Company's Common Stock would have been owned, as of October 15, 1997, by Donald N. Smith and The Equitable Life Assurance Society of the United States (the "Equitable"), respectively. These stockholders indirectly own 33.2% and 28.1%, respectively, of the general partner of Perkins Family Restaurants, L.P. ("PFR"), which, through Perkins Restaurants Operating Company, L.P. ("Perkins"), owns and franchises family-style restaurants. Mr. Smith, the Company's Chairman, Chief Executive Officer and President, is an officer of the general partner of PFR. In addition, three of the directors of the general partner of PFR serve as directors of the Company. In the ordinary course of business, the Company enters into transactions with Perkins. See "Certain Transactions." After giving effect to the Recapitalization and the Related Transactions, the directors and executive officers of the Company would have owned approximately 13.1% of the Common Stock as of October 15, 1997. Circumstances could arise in which the interests of such stockholders could be in conflict with the interests of the other stockholders of the Company and the holders of the Senior Notes. In addition, Mr. Smith serves as Chairman, Chief Executive Officer and President of the Company and as Chairman and Chief Executive Officer of Perkins and, consequently, devotes a portion of his time to the affairs of each Company and may be required to limit his involvement in those areas, if any, where the interests of the Company conflict with those of Perkins. Mr. Smith does not have an employment agreement with the Company nor is he contractually prohibited from engaging in other business ventures in the future, any of which could compete with the Company or its subsidiaries. See "Ownership of Common Stock." DEPENDENCE ON SENIOR MANAGEMENT The Company's business is managed, and its business strategies formulated, by a relatively small number of key executive officers and other personnel, certain of whom have joined the Company since Mr. Smith's arrival. The loss of these key management persons, including Mr. Smith, could have a material adverse effect on the Company. See "Management." HIGHLY COMPETITIVE BUSINESS ENVIRONMENT The restaurant business is highly competitive and is affected by changes in the public's eating habits and preferences, population trends and traffic patterns, as well as by local and national economic conditions affecting consumer spending habits, many of which are beyond the Company's control. Key competitive factors in the industry are the quality and value of the food products offered, quality and speed of service, attractiveness of facilities, advertising, name brand awareness and image and restaurant location. Each of the Company's restaurants competes directly or indirectly with locally-owned restaurants as well as restaurants with national or regional images, and to a limited extent, restaurants operated by its franchisees. A number of the Company's significant competitors are larger or more diversified and have substantially greater resources than the Company. The Company's retail operations compete with national and regional manufacturers of frozen desserts, many of which have greater financial resources and more established channels of distribution than the Company. Key competitive factors in the retail food business include brand awareness, access to retail locations, price and quality. EXPOSURE TO COMMODITY PRICING AND AVAILABILITY RISKS The basic raw materials for the Company's frozen desserts are dairy products and sugar. The Company's purchasing department purchases other food products, such as coffee, in large quantities. Although the Company does not hedge its positions in any of these commodities as a matter of policy, it may opportunistically purchase some of these items in advance of a specific need. As a result, the Company is subject to the risk of substantial and sudden price increases, shortages or interruptions in supply of such items, which could have a material adverse effect on the Company. RISKS ASSOCIATED WITH THE FOOD SERVICE INDUSTRY Food service businesses are often affected by changes in consumer tastes, national, regional and local economic conditions, demographic trends, traffic patterns, the cost and availability of labor, purchasing power, availability of products and the type, number and location of competing restaurants. The Company could also be substantially adversely affected by publicity resulting from food quality, illness, injury or other health concerns or alleged discrimination or other operating issues stemming from one location or a limited number of locations, whether or not the Company is liable. In addition, factors such as increased costs of goods, regional weather conditions and the potential scarcity of experienced management and hourly employees may also adversely affect the food service industry in general and the results of operations and financial condition of the Company. REGULATION The restaurant and food distribution industries are subject to numerous Federal, state and local government regulations, including those relating to the preparation and sale of food and building and zoning requirements. Also, the Company is subject to laws governing its relationship with employees, including minimum wage requirements, overtime, working conditions and citizenship requirements. The failure to obtain or retain food licenses or an increase in the minimum wage rate, employee benefit costs or other costs associated with employees could adversely affect the Company. In September 1997, the second phase of an increase in the minimum wage was implemented in accordance with the Federal Fair Labor Standards Act of 1996, which could adversely affect the Company. See "Business--Government Regulation."

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+ RISK FACTORS Eligible holders of Series A Notes should consider carefully, in addition to the other information contained in this Prospectus, the following risk factors before tendering Series A Notes in the Exchange Offer. RANKING; INDEBTEDNESS OF THE COMPANY All of the Notes and the related Guarantees will be senior unsecured obligations of the Company and the Subsidiary Guarantors ranking pari passu in right of payment with all existing and future unsubordinated obligations of the Company, including indebtedness incurred under the Credit Facility. Such Notes and Guarantees will be effectively subordinated to all secured indebtedness of the Company and the Subsidiary Guarantors to the extent of the value of the assets securing such indebtedness. After any realization upon the collateral or a dissolution, liquidation, reorganization or similar proceeding involving the Company or any Subsidiary Guarantor, there can be no assurance that there will be sufficient available proceeds or other assets for holders of the Notes to recover all or any portion of their claims under the Notes and the Indenture. As of May 3, 1997, on a pro forma basis, after giving effect to the issuance of the Series A Notes and the application of the net proceeds therefrom, the Company and the Subsidiary Guarantors would have had approximately $521.2 million of indebtedness outstanding, of which approximately $295.3 million would have been senior indebtedness and approximately $60.3 million would have been secured indebtedness. At such date, the Company would have had outstanding approximately $225.9 million of indebtedness subordinated in right of payment to the Exchange Notes. The prepayment of the 9 7/8% Senior Subordinated Notes due 2003 of Parisian (the "Senior Subordinated Notes") is not restricted under the Indenture. See "Description of the Notes -- Certain Covenants -- Limitation on Restricted Payments." Each Subsidiary Guarantor's Guarantee of the Notes may be subject to review under relevant federal and state fraudulent conveyance and similar law. In the event the Guarantees of any Subsidiary Guarantors are deemed to be unenforceable as a fraudulent conveyance or otherwise, all the Notes will be effectively subordinated in right of payment to all outstanding indebtedness of such Subsidiary Guarantor or Subsidiary Guarantors. A portion of the Company's cash flow from operations will be dedicated to debt service, thereby reducing funds available for operations and capital expenditures. The indebtedness and the restrictive covenants to which the Company is subject under the terms of its indebtedness (including the Notes and the Exchange Notes) may make the Company more vulnerable to economic downturns and competitive pressures, may hinder its ability to execute its growth strategy, and may reduce its flexibility to respond to changing business conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Other Indebtedness." COMPETITION The department store business is highly competitive. The Company's stores compete with national and regional department store chains, specialty apparel stores and discount store chains, some of which are larger than the Company and may be able to devote greater financial and other resources to marketing and other competitive activities. The Company also competes with local stores that carry similar categories of merchandise. The Company generally competes on the basis of pricing, quality, merchandise selection, customer service and amenities and store design. The Company's success also depends in part on its ability to anticipate and respond to changing merchandise trends and customer preferences in a timely manner. Accordingly, any failure by the Company to anticipate and respond to changing merchandise trends and customer preferences could materially adversely affect sales of the Company's private brands and product lines, which in turn could materially adversely affect the Company's business, financial condition or results of operations. There can be no assurance that the Company's stores will continue to compete successfully with such other stores or that any such competition will not have a material impact on the Company's financial condition or results of operations. See "Business -- Competition." GENERAL ECONOMIC CONDITIONS; SEASONALITY The Company's future performance is subject to prevailing economic conditions and to all operating risks normally incident to the retail industry. The Company experiences seasonal fluctuations in sales and net income, with disproportionate amounts typically realized during the fourth quarter of each year. Sales and net income are generally weakest during the first quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality," "Business -- Seasonality" and Note 17 to the Company's Consolidated Financial Statements. INTEGRATION OF ACQUIRED COMPANIES As part of its business strategy, the Company has consummated several acquisitions and will regularly evaluate future acquisition opportunities including acquisitions of other regional department store chains and individual stores or locations. The Company's future operations and earnings will be affected by its ability to continue to successfully integrate the operations of any acquired businesses or store locations. While the Company has in the past been successful at effectively integrating the operations of acquired businesses, there can be no assurance that the Company will be able to continue to do so. In addition, the successful integration of operations will be subject to numerous contingencies, some of which are beyond the Company's control. The failure to successfully integrate any such operations with those of the Company could have a material adverse effect on the Company's financial position, results of operations and cash flows. RESTRICTIONS ON RESALE The Series A Notes have not been registered under the Securities Act or any state securities laws and, unless so registered or qualified, may not be offered or sold except pursuant to an exemption from, or in transactions not subject to, the registration requirements of the Securities Act or any applicable state securities laws. The Exchange Notes have been registered under the Securities Act and, generally, will be freely tradable. See "Exchange Offer" and "Plan of Distribution." ABSENCE OF AN ESTABLISHED TRADING MARKET FOR THE NOTES The Series A Notes are new securities that were first issued on May 21, 1997. There is currently no established trading market for the Notes. Although the Initial Purchasers have informed the Company that they currently intend to make a market in the Series A Notes and, upon issuance, the Exchange Notes, they are not obligated to do so and any such market making may be discontinued at any time without notice. Accordingly, there can be no assurance as to the development or liquidity of any market for the Notes. To the extent Series A Notes are exchanged in this Exchange Offer, the liquidity of the market for the remaining Series A Notes may be reduced. The Series A Notes have been designated eligible for trading in the Private Offerings, Resale and Trading through Automatic Linkages (PORTAL) market. The Company does not intend to apply for listing of the Exchange Notes on any securities exchange or for quotation through Nasdaq. There is no assurance that an active public or other market will develop for the Exchange Notes, and it is expected that the market, if any, that develops for the Exchange Notes will be similar to the limited market that currently exists for the Series A Notes. LIMITED REGISTRATION RIGHTS EXCEPT AS OTHERWISE PROVIDED HEREIN, FOLLOWING THE CONSUMMATION OF THE EXCHANGE OFFER, ANY HOLDERS OF SERIES A NOTES NOT TENDERED THEREIN WHO ARE NOT ENTITLED TO RESELL THE SAME PURSUANT TO A RESALE PROSPECTUS, IF ANY, REQUIRED TO BE FILED AS A POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT OR PURSUANT TO A SHELF REGISTRATION STATEMENT, WILL HAVE NO FURTHER EXCHANGE OR REGISTRATION RIGHTS, AND SUCH NOTES WILL CONTINUE TO BE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER.

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+ RISK FACTORS IN ADDITION TO THE OTHER INFORMATION AND FINANCIAL DATA SET FORTH ELSEWHERE IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE NOTES OFFERED HEREBY. SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT The Company has substantial leverage. As of March 31, 1997, on an as adjusted basis after giving effect to the Offerings and the application of the net proceeds therefrom, the total consolidated indebtedness of the Issuer would have been $216.1 million (or 50.5% of the total capitalization of the Issuer and its subsidiaries) and the total liabilities of the Issuer's subsidiaries (including trade payables and accrued liabilities) would have been approximately $136.4 million, of which $66.1 million would have been indebtedness. As of March 31, 1997, after giving effect to the Debt Offering only and the application of the net proceeds therefrom, the total consolidated indebtedness of the Issuer would have been $268.5 million (or 62.8% of the total capitalization of the Issuer and its subsidiaries) and the total liabilities of the Issuer's subsidiaries (including trade payables and accrued liabilities) would have been approximately $188.8 million, of which $118.5 million would have been indebtedness. See "Capitalization." The degree to which the Company is leveraged may adversely affect the Company's ability to finance its future operations, to compete effectively against better capitalized companies and to withstand downturns in its business or the economy generally, and could limit its ability to pursue business opportunities that may be in the best interests of the Company and its security holders. Following the Offerings, the Company's subsidiary, GCI Holdings, Inc. ("Holdings"), will have approximately $216.4 million of available borrowings under the Credit Facility, subject to certain limitations, and it expects to continue to borrow funds under such facility. The Credit Facility is secured by substantially all of the assets of the Company and is structurally senior to the Notes. See "--Holding Company Structure" and "Description of Credit Facilities." The Credit Facility and the Notes impose restrictions on the operations and activities of the Company. Generally, the most significant restrictions relate to debt incurrence, investments, capital expenditures, sales of assets and the use of proceeds therefrom and cash distributions from the Company. These restrictions require the Company to comply with certain financial covenants including financial ratios. The Company is currently in compliance with such covenants and ratios. The restrictions in the Indenture will be subject to a number of important qualifications and exceptions. As long as the Issuer and its Restricted Subsidiaries (as defined in the Indenture) comply with specified leverage ratios, the Issuer and its Restricted Subsidiaries are permitted to incur an unlimited amount of additional indebtedness to finance the acquisition of telecommunications and cable assets, equipment and inventory and for capital expenditures and working capital for the telecommunications and cable businesses and up to $90.0 million of other indebtedness. The Indenture will also permit the Issuer to secure any such indebtedness, subject to equally and ratably securing the Notes. The Indenture will also permit the Company's Unrestricted Subsidiaries (as defined in the Indenture) to incur an unlimited amount of indebtedness, $75 million of which is currently contemplated to be incurred as project financing to construct an undersea fiber optic cable. The ability of Holdings to comply with the restrictions and covenants in the Credit Facility, and of the Issuer to comply with the restrictions and covenants in the Indenture, will be dependent upon the Company's future performance and various other factors, including factors beyond its control. If the Issuer fails to comply with the restrictions and covenants in the Indenture or if Holdings fails to comply with the restrictions and covenants in the Credit Facility, the Issuer's obligation to repay the Notes and Holdings' obligation to repay its indebtedness under the Credit Facility may be accelerated. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Description of Credit Facilities" and "Description of Notes--Certain Covenants." The ability of the Issuer to repay the Notes at maturity depends in part on the Issuer's ability to generate cash flows from operations at currently anticipated levels. Should the Issuer's operating cash flows fall below the levels required to generate sufficient funds to repay the Notes, the Notes may need to be refinanced. The Issuer's ability to refinance the Notes will depend upon, among other things, its financial condition at the time, the restrictions in the agreements governing its and its subsidiaries' indebtedness and other factors, including market conditions. There can be no assurance that any such refinancing will be possible on terms that would be acceptable to the Issuer or that any additional financing could be obtained. If such refinancing were not possible, or if additional financing were not available, the Issuer could be forced to dispose of assets under circumstances that might not be favorable to realizing the highest price for them or could be in default on its obligations with respect to its indebtedness. See "Description of Credit Facilities." HOLDING COMPANY STRUCTURE The Notes will be obligations exclusively of the Issuer and not of Parent or the Issuer's subsidiaries. The Issuer is a holding company with no material business operations or sources of income or assets of its own other than the stock of its subsidiaries. The Issuer and Holdings must rely on dividends, loan repayments and other intercompany cash flows from their subsidiaries to generate the funds necessary to meet their debt service obligations, including the Notes. The Credit Facility is guaranteed by all of the subsidiaries of Holdings and limits the ability of Holdings' subsidiaries to pay dividends or make loans or other distributions to Holdings, the Issuer or Parent. See "Description of Credit Facilities." The ability of Holdings' subsidiaries to pay dividends to Holdings is also limited by provisions of the Alaska Corporations Code. The Notes will be effectively subordinated to indebtedness under the Credit Facility, to any other secured indebtedness that Parent, the Issuer or Holdings hereafter incurs and to all other liabilities and commitments of the Issuer's subsidiaries, including trade payables and lease obligations. In the event of a default on the Notes or a bankruptcy, liquidation or reorganization of the Issuer, the assets of the Issuer will be available to satisfy its secured obligations before any payment could be made on the Notes. Accordingly, there may be a limited amount of assets available to satisfy any claims of the holders of the Notes upon an acceleration of the Notes. Any right of the Company to participate in the distribution of assets of a subsidiary upon its liquidation or reorganization will be effectively subordinated to the claims of that subsidiary's creditors (including tax authorities, trade creditors, and lenders to those subsidiaries). As of March 31, 1997, after giving effect to the Offerings, the Issuer's subsidiaries would have had approximately $136.4 million of total liabilities, of which $66.1 million would have been indebtedness. As of March 31, 1997, after giving effect to the Debt Offering only, the Issuer's subsidiaries would have had approximately $188.8 million of total liabilities, of which $118.5 million would have been indebtedness. The Indenture will permit the Issuer's subsidiaries to incur substantial additional liabilities and indebtedness, including $75 million of project financing currently contemplated to be incurred by Unrestricted Subsidiaries (as defined in the Indenture) of the Issuer for the construction of an undersea fiber optic cable. See "Description of Notes." SIGNIFICANT CAPITAL REQUIREMENTS; CONCURRENT OFFERINGS Development and expansion of the Company's telecommunications and cable operations will require substantial capital. The Company estimates that its aggregate capital requirements for the next five years will be approximately $445 to $505 million, including approximately $165 million for the purchase of new satellite transponders and the construction of new undersea fiber optic cable facilities through GCI Transport Company, an Unrestricted Subsidiary under the Indenture. The Company's estimated capital requirements include, among other things, the estimated costs (i) to continue the expansion of the Company's long distance facilities and services; (ii) to develop and deploy the Company's entry into local exchange services and its PCS network; and (iii) to upgrade, expand and integrate the Cable Systems into its telecommunications services business. The Company expects that the net proceeds from the Offerings, together with internally generated cash flows and borrowings under the Credit Facility and its separate committed financing facility for GCI Transport Company, will provide sufficient funds for the Company to expand its business as currently planned. The amount of the Company's future capital requirements will depend upon many factors, however, including regulatory, technological and competitive developments in the telecommunications and cable television industries, and may differ materially from the Company's estimates. Concurrently with the Issuer's offering of the Notes, Parent is separately offering approximately 7.0 million shares of Class A Common Stock pursuant to the Stock Offering (excluding approximately 6.4 million shares for the account of certain selling shareholders). Consummation of one Offering is not contingent upon consummation of the other Offering, and there can be no assurance that the Stock Offering will be consummated and, if so, on what terms. Without the proceeds from the Stock Offering, the Company may have to seek alternative financing for a portion of its business plan. In particular, if the Stock Offering is not consummated, the Company may need to obtain additional financing for its planned purchase of seven transponders on the Galaxy X satellite that is expected to be launched in mid-1998. In addition, the Company may be required to seek additional capital if its actual capital requirements exceed its estimates and it is unable to generate sufficient funds internally or borrow sufficient funds under the Credit Facility. If the Company were to require additional financing, there can be no assurance that additional financing would be available to the Company or, if available, that it would be on terms acceptable to the Company. The Debt Offering is contingent upon the Company refinancing its existing credit facilities. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Business--Business Strategy" and "Description of Credit Facilities." POTENTIAL ADVERSE EFFECT ON THE COMPANY IF THE FIBER FACILITY IS NOT CONSUMMATED As described under "Description of Credit Facilities," subsidiaries of the Company plan to incur up to $75 million in additional indebtedness to finance the construction of an undersea fiber optic cable (the "Fiber Facility"). The Company requires the Fiber Facility in order to construct new undersea fiber optic cable facilities, and although the Company has received executed commitments from lenders to provide the Fiber Facility, there can be no assurance that the Fiber Facility will be consummated. DEVELOPMENT AND EXPANSION RISKS The Company's ability to become the first significant provider in Alaska of an integrated package of telecommunications and cable television services will depend in large part on its ability to enter into and succeed in the local exchange service market, to establish PCS networks in Alaska, and to upgrade or convert the Cable Systems from their present coaxial distribution system to a hybrid fiber optic/coaxial distribution system so that additional cable and telecommunications services can be offered and can be integrated with the Company's existing telecommunications services. The entry into local exchange service, the implementation of its PCS networks and the upgrade of the Cable Systems are critical to the Company's ability to provide new services and products to its customers. See "Business--Overview," "--Business Strategy" and "--PCS." The successful implementation of the Company's expansion strategy is subject to a variety of risks, including changes in the competitive climate in which the Company operates, technological changes and compatibility risks, and legal and regulatory risks (including possible delays in the full implementation of deregulation under the federal Telecommunications Act of 1996 (the "1996 Telecom Act")). The Company's expansion plans also depend on factors such as its ability to obtain and maintain required governmental licenses and authorizations, its ability to enter into interconnection agreements with established LECs, and its ability to obtain financing, all in a timely manner, at reasonable costs and on terms and conditions acceptable to the Company. There can be no assurance that the Company's contemplated expansion of services will take place as planned or that the expanded services will become profitable or generate positive cash flows. See "Business--Business Strategy" and "--Competition." ABILITY TO MANAGE GROWTH The Company's aggressive growth in telecommunication services, its acquisition of a state-wide license for development of PCS services, and its acquisition of cable television systems in Alaska have placed, and may continue to place, a significant strain on the Company's administrative, operational and financial resources and have increased demands on the Company's systems and controls. The Company's ability to continue to manage its growth successfully will require the Company to further enhance its operational, management, financial and information systems and controls and to expand, train and manage its employee base. In addition, as the Company increases its service offerings and expands its targeted markets, there will be additional demands on the Company's customer support, sales, marketing, and administrative resources and infrastructure. There can be no assurance that the Company's administrative, operating and financial resources, systems and controls will be adequate to effectively manage the Company's growth. The inability of the Company to manage its growth successfully could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Business Strategy." RELIANCE ON SIGNIFICANT CUSTOMERS For the year ended December 31, 1996, the Company provided services to MCI and to Sprint resulting in substantial revenues to the Company of approximately 29% of total revenues for 1996. These two customers are free to seek out long distance communication services from competitors of the Company upon expiration of their contracts (in 2001 in the case of MCI and in 1999 in the case of Sprint) or earlier upon a default or the occurrence of a force majeure event or a substantial change in applicable law or regulation under the applicable contract. Loss of one or both of these major customers, or a considerable number of other customers, would have a material adverse effect on the financial condition and results of operations of the Company. See "Business--Long Distance Operations." RAPID CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS The telecommunications and cable television industries have been characterized by rapid technological changes, frequent new service introductions and evolving industry standards. The Company believes that its future success will depend on its ability to anticipate such changes and to offer services that meet these standards on a timely basis. There can be no assurance that the Company will have sufficient resources to make necessary investments or to introduce new services that would satisfy its customers. See "Business--Competition." GEOGRAPHIC CONCENTRATION AND ALASKAN ECONOMY The Company offers a variety of voice, video and data services to residential, commercial and governmental customers in the State of Alaska. As a result of this geographic concentration, the Company's growth and operations depend in part upon economic conditions in Alaska. The economy of Alaska is dependent upon the natural resource industries, in particular oil production, as well as tourism, government and United States military spending. Any deterioration in these markets could have an adverse impact on the demand for telecommunications and cable television services and on the Company's results of operations and financial condition. In addition, the customer base in Alaska is limited. Alaska has a population of approximately 600,000 people, approximately one-half of whom are located in the Anchorage area. No assurance can be given that the Alaskan economy will continue to grow and to generate increased demand for the Company's services. See "Business--Alaskan Voice, Video and Data Markets" and "--Alaskan Economy." RECENT CABLE SYSTEM ACQUISITIONS As of October 31, 1996, the Company acquired the Cable Systems for a total purchase price of $280.1 million. On a pro forma basis, giving effect to the acquisition of the Cable Systems as if it had occurred on January 1, 1996, the Cable Systems' revenues and Adjusted EBITDA before management fees would have comprised 26.3% of the Company's consolidated revenues and 54.9% of the Company's operating cash flow for the year ended December 31, 1996. In acquiring the Cable Systems, the Company obtained a substantial portion of the existing cable television distribution systems in Alaska and gained entry into the cable television business, in which it had no prior operating experience. In connection with the acquisition, the Company entered into the Prime Management Agreement with Prime Management to assist in the management of the Cable Systems. The Company currently relies on Prime Management, which had managed the Prime cable television systems prior to their acquisition by the Company, to assist in the management of the Cable Systems, and there can be no assurance that the Company's cable television business would not be adversely affected should Prime Management's services become unavailable. Either party may terminate the Prime Management Agreement in its discretion after October 31, 1998. In addition, given the Company's lack of experience in the cable television industry, there can be no assurance that the Company will achieve improved operating results, synergies and other benefits expected as a result of the acquisition of the Cable Systems. See "Business--Cable Television." COMPETITION The long distance telecommunications industry is highly competitive. Competition in the long distance business is based upon pricing, customer service, billing services and perceived quality. The Company's principal competitor in long distance service, AT&T Alascom (the other leading long distance provider in Alaska), has substantially greater resources than the Company and its interstate rates are integrated with those of a nationwide communications firm, AT&T Corp. While the Company initially competed in long distance services based upon offering substantial discounts, those discounts have been eroded in recent years due to lowering of prices by AT&T Alascom. If competition for long distance services forces the Company to offer its services at greater discounts, the consequent loss of revenues could have a material adverse effect on the Company's financial condition and results of operations. Recent changes in the regulation of the telecommunications industry may affect the Company's competitive position as a provider of long distance services. The 1996 Telecom Act effectively opened the local and long distance markets to competition. Incumbent local exchange carriers may enter the market for long distance services. In fact, the incumbent LEC in Anchorage has, as of April 1997, begun providing long distance services in the Anchorage area on a non-facilities-based basis. The Company is unable to predict the extent to which this may have an adverse effect on the Company's financial condition and results of operations. The cable television industry is also highly competitive. In certain areas of the United States, cable television systems face competition from other cable operators offering cable television services in the same areas. Currently, the Company believes it is not subject to competition from other cable operators in the areas served by the Cable Systems. However, applicable law permits cable operators to compete directly with incumbent cable systems. Cable television systems also face competition from alternative methods of receiving and distributing television signals such as traditional broadcast television, direct broadcast satellite systems, satellite master antennae television systems and wireless cable systems, and from other sources of news, information and entertainment. The extent to which a cable television system is competitive depends, in part, upon the cable system's ability to provide quality programming and other services at competitive prices. Recent published reports indicate that there has been a substantial increase in the number of DBS subscribers in the United States in recent years. Thus, although it is difficult to assess the ultimate impact that DBS will have on the cable industry or the Company's financial condition and results of operations, DBS services may pose a significant competitive threat to cable television systems. Regulatory changes may also make it easier for LECs and others, including utility companies, to provide video services competitive with services provided by cable systems and to provide cable services directly to subscribers. Prior to the 1996 Telecom Act, LECs were statutorily barred from providing video services to subscribers in their service areas, with certain exceptions. The 1996 Telecom Act repealed this statutory telephone/cable cross-ownership prohibition, and recognizes several multiple entry options for telephone companies to provide competitive video programming. LECs, including the Regional Bell Operating Companies ("RBOCs"), generally will be allowed to compete with cable operators both inside and outside the LECs' telephone service areas with certain limitations. The local exchange services market is also likely to become competitive. AT&T has announced plans to enter the local exchange services market in Alaska on a non-facilities-based basis. The 1996 Telecom Act mandates that states allow local exchange competition and requires LECs, among other things, to take steps to ensure local competition by allowing adequate interconnection and network access to competing carriers. In addition, in the PCS industry, the Company may face competition from other PCS providers as well as other providers offering similar services, such as cellular carriers. Management of the Company has no control over the possible future entry into the Alaskan telecommunications or cable television markets of other potential competitors, many of whom may be much larger than the Company and have much greater resources than the Company. Aggressive competition for customers in communities served by the Company could also result in increased marketing expenditures by the Company. Resulting reductions in the Company's customer base and rates and increases in the Company's costs could have a material adverse effect on the Company's financial condition and results of operations. Because of the high level of competition, the Company's ability to expand its operations and increase market share is uncertain. Therefore, no assurance can be given that the Company can achieve growth in products or revenues or that the Company will not lose market share due to competitive pricing, greater resources of its competitors or other factors. See "Business--Competition." REGULATION The Company is subject to regulation by the Federal Communications Commission ("FCC") and by the APUC as a non-dominant provider of long distance services. Among other regulatory requirements, the Company is required to file tariffs with the FCC for interstate and international service, and with the APUC for intrastate services, but such tariffs routinely become effective without intervention by the FCC, the APUC or other third parties since the Company is a non-dominant carrier. The Company received approval from the APUC in February 1997 to provide local exchange services in and around Anchorage and Hope, Alaska. Military franchise requirements also affect the Company in its provision of telecommunications and cable television services to military bases. Substantial changes in the federal regulation of the telecommunications and the cable television industries were accomplished through the 1996 Telecom Act which became law in February 1996. Certain provisions of the 1996 Telecom Act could materially affect the growth and operation of the telecommunications and cable television industries and the services provided by the Company. Although the 1996 Telecom Act is expected to reduce regulatory burdens, the telecommunications and cable television industries may be subject to additional competition as a result thereof. There are numerous rulemakings that have been and that will be undertaken by the FCC, which will interpret and implement the 1996 Telecom Act's provisions. In addition, certain provisions of the 1996 Telecom Act are not immediately effective. Furthermore, certain of the 1996 Telecom Act's provisions have been, and are likely to continue to be, judicially challenged. The Company is unable to predict the outcome of such rulemakings or litigation or the substantive effect (financial or otherwise) of the 1996 Telecom Act and the rulemakings on the Company. See "Business--Regulation." The Company is also subject to federal and state regulation as a cable television operator pursuant to the Communications Act of 1934 (the "Communications Act"), the Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act" and, together with the 1984 Cable Act, the "Cable Acts"), all as amended by the 1996 Telecom Act. The 1992 Cable Act significantly expanded the scope of cable television regulation on an industry-wide basis by imposing rate regulation, carriage requirements for local broadcast stations, customer service obligations and other requirements. The 1992 Cable Act and the FCC's rules implementing the 1992 Cable Act generally have increased the administrative and operational expenses, and in certain instances required rate reductions for cable television systems, and have resulted in additional regulatory oversight by the FCC and state or local (depending on the regulatory scheme) authorities. As an authorized local exchange service provider in parts of Alaska, the Company is regulated as a LEC by the APUC. The APUC's February 1997 order requires all Alaskan LECs, including the Company, to comply with several regulatory requirements, including the filing of a local exchange service tariff and the filing of certain annual and quarterly reports. In addition, the Company is subject to other regulatory requirements, including certain obligations imposed by the 1996 Telecom Act on all LECs, which requirements include permitting resale of LEC services, number portability, dialing parity, interconnection and reciprocal compensation. See "Business--Regulation." As a PCS licensee, the Company is subject to regulation by the FCC and must comply with certain buildout and other conditions of the license, as well as with the FCC's regulations governing the PCS service. On a more limited basis, the Company may be subject to certain regulatory oversight by the APUC (E.G., in the areas of consumer protection and transfer of its license), although states are not permitted to regulate the rates of PCS and other commercial mobile service providers. PCS licensees may also be subject to regulatory requirements of local jurisdictions pertaining to, among other things, the siting of tower facilities. As a cellular reseller, the Company is deemed to be a common carrier and is subject to the requirements of Title II of the Communications Act. In light of the non-dominant market position of resellers, many of the obligations traditionally imposed on common carriers are relaxed with respect to resellers. Resellers are required to contribute to the Telecommunications Relay Services Fund and to remit annual regulatory fees to the FCC. Cellular resellers may also be subject to certain state requirements, although state regulation of mobile service providers is limited in several respects by federal law. See "Business--Regulation." Other existing federal regulations, including copyright licensing rules, are currently the subject of judicial proceedings, legislative hearings, and administrative proposals which could change, in varying degrees, the manner in which cable television systems operate. Neither the outcome of these proceedings, nor their impact upon the cable television industry in general or the Company's entry into that industry, can be predicted at this time. There can be no assurance that future regulatory actions taken by Congress, the FCC or other federal, state or local governmental authorities will not have an adverse effect on the business, financial condition or results of operations of the Company. See "Business-- Regulation." CONCENTRATION OF STOCK OWNERSHIP As of June 30, 1997, executive officers and directors of Parent and their affiliates owned approximately 59.2% of the combined outstanding Common Stock, representing 67.8% of the combined voting power of the Common Stock (45.3% and 59.1%, respectively, after giving effect to the Stock Offering). Certain of these shareholders are subject to the Voting Agreement pursuant to which eight of Parent's ten directors are currently elected (two nominations by the Voting Prime Sellers, two nominations by MCI, two nominations by TCI GCI, Inc., a wholly owned subsidiary of Tele-Communications, Inc. (together with its subsidiaries, "TCI") and one nomination by each of Mr. Duncan and Mr. Walp who currently serve as their own nominees). MCI owns 22.6% of the combined outstanding Common Stock as of June 30, 1997, representing 26.6% of the combined voting power of the Common Stock (19.4% and 24.5% after giving effect to the Stock Offering). The Voting Prime Sellers collectively own 25.7% of the combined outstanding Common Stock, representing 13.8% of the combined voting power of the Common Stock (18.0% and 10.3% after giving effect to the Stock Offering). TCI expects to sell all of its shares of Common Stock in the Stock Offering and, if it does so, it will thereafter no longer be a party to the Voting Agreement. If TCI ceases to be a party to the Voting Agreement, each other party to the Voting Agreement will have the right to withdraw from the Voting Agreement by giving written notice to the other parties, although the Company does not anticipate that any party will exercise that right. Following the Stock Offering and assuming that TCI is the only shareholder that ceases to be a party to the Voting Agreement the percentage of the combined outstanding Common Stock subject to the Voting Agreement will decrease from 54.0% to 40.7% (or from 56.3% to 44.6% of the combined voting power of the Common Stock). Not withstanding the withdrawal of TCI, the shareholders who are party to the Voting Agreement will collectively be able to control the management policy of the Company and all fundamental corporate actions, including mergers, substantial acquisitions and dispositions and election of directors to the Board. This concentration of ownership may have the effect of delaying or preventing a change of control of the Company, although the Voting Agreement does not currently cover any matters other than the election of directors. See "Principal and Selling Shareholders" and "Management--Voting Agreement." LACK OF PUBLIC MARKET FOR NOTES Because the Notes are a new issue of securities, there is currently no active trading market for the Notes. The Underwriters have advised the Company that they presently intend to make a market in the Notes, although none of them is obligated to do so, and each of them may discontinue any market-making activities with respect to the Notes at any time without notice. There can be no assurance that an active public market for the Notes will develop or be maintained. If an active trading market for the Notes does not develop, the market price and liquidity of the Notes may be adversely affected. See "Underwriting."

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+ RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors, in addition to other information contained in this Prospectus, in connection with an investment in the Common Stock offered hereby. This Prospectus contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the 1934 Act. Those statements appear in a number of places in this Prospectus and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's financing plans; (iii) the Company's business and growth strategies; (iv) the use of the proceeds to the Company of this offering; and (v) the declaration and payment of dividends. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The accompanying information contained in this Prospectus, including without limitation the information set forth under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," identifies important factors that could cause such differences. GENERAL ECONOMIC CONDITIONS. Domestic demand for the Company's upholstery fabrics is principally a function of consumer demand for, and production levels of, upholstered furniture which, in turn, fluctuate with U.S. economic conditions and consumer sentiment. For most individuals, a decision to buy upholstered furniture represents both a discretionary purchase and a relatively large expenditure. Accordingly, demand is, in general, higher during periods of economic strength and lower during periods of economic weakness or uncertainty. Key economic conditions influencing demand for Quaker's products are housing starts, sales of existing homes, consumer confidence and spending levels, population demographics, trends in disposable income, prevailing interest rates for home mortgages and the availability of consumer credit. Adverse economic conditions could have a material adverse effect on the Company. FOREIGN SALES. The Company anticipates that an increasing portion of its revenues will be derived from foreign and export sales (together "foreign sales"). In 1996, foreign sales totalled $35.7 million, or 20.2% of the Company's gross fabric sales. A reduction in the volume of international trade, fluctuations in currency exchange rates, political instability in any of the export markets important to the Company, any material restrictions on international trade, or a downturn in the international economy or the domestic economy of any of the export markets important to the Company, could have a material adverse effect on the Company. In addition, the Company's 1996 gross fabric sales to customers in four foreign countries, including Mexico, were $27.2 million in the aggregate, representing 76.2% of the Company's total foreign sales and 15.4% of the Company's gross fabric sales. Beginning in December 1994, Mexico experienced an economic crisis characterized by exchange rate instability and currency devaluation, high domestic interest and inflation rates, negative economic growth, reduced consumer purchasing and high unemployment. As a result, the Company's sales in Mexico (including sales from its distribution center in Mexico) were adversely affected in 1995. There can be no assurance that economic, political or other events in Mexico or any other foreign market will not have a material adverse effect on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Growth Strategy." PRICING AND AVAILABILITY OF RAW MATERIALS. The Company is dependent upon outside suppliers for all of its raw material needs, including dyeing services, and is subject to price increases and delays in receiving these materials and services. The raw materials are predominantly petrochemical products and their prices fluctuate with changes in the underlying petrochemical market in general. Historically, the Company has been able to pass through a substantial portion of any increases in its raw material costs; however, the Company experienced significant increases in certain raw material prices in 1995 which it was not able to pass through fully to its customers during 1995 and which contributed to a reduction in the Company's 1995 gross margin. Similar conditions in the future could have a material adverse effect on the Company. Although other sources of supply are available, the Company currently procures approximately one-half of its raw materials from two major industry suppliers, one of which is the sole supplier of a filament yarn used in the Company's chenille manufacturing operations. A shortage or interruption in the supply of any critical component could have a material adverse effect on the Company. See "Business -- Sources and Availability of Raw Materials" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION. The markets for the Company's products are highly competitive. Competitive factors in the upholstery fabric business include product design, styling, price, customer service and quality. The Company's products are predominantly Jacquard and plain woven fabrics. The Company's products compete with other upholstery fabrics and furniture coverings, including prints, flocks, tufts, velvets and leather. Several of the companies with which the Company competes have greater financial resources than the Company. Although the Company has experienced no significant competition in the United States from imports to date, changes in foreign exchange rates or other factors could make imported fabrics more competitive with the Company's products in the future. See "Business -- Competition." DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant extent upon the efforts and abilities of Larry A. Liebenow, its President and Chief Executive Officer, and other members of senior management. The loss of the services of one or more of these key employees could have a material adverse effect on the Company. The Company does not have "key man" life insurance on the life of any member of its senior management. See "Management." ENVIRONMENTAL MATTERS. The Company's operations are subject to numerous federal, state and local laws and regulations pertaining to the discharge of materials into the environment or otherwise relating to the protection of the environment. The Company's facilities are located in industrial areas, and, therefore, there is the possibility of incurring environmental liabilities as a result of historical operations at the Company's sites. Environmental liability can extend to previously owned or leased properties, properties owned by third parties, and properties currently owned or leased by the Company. Environmental liabilities can also be asserted by adjacent landowners or other third parties in toxic tort litigation. In addition, under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended ("CERCLA"), and analogous state statutes, liability can be imposed for the disposal of waste at sites targeted for cleanup by federal and state regulatory authorities. Liability under CERCLA is strict as well as joint and several. Further, certain of the Company's manufacturing areas are subject to OSHA's "Comprehensive Cotton Dust Standard." Environmental laws and regulations are subject to change in the future, and any failure by the Company to comply with present or future laws or regulations could subject it to future liabilities or interruption of production which could have a material adverse effect on the Company. Changes in environmental regulations could restrict the Company's ability to expand its facilities or require the Company to incur substantial unexpected other expenses to comply with such regulations. In particular, the Company is aware of soil and groundwater contamination relating to the use of certain underground fuel oil storage tanks at its Fall River facilities. The Company has notified the Commonwealth of Massachusetts regarding these releases. The Company's ultimate clean-up costs relating to these underground storage tanks cannot be predicted with certainty at this time. In addition, during the fourth quarter of 1993, the Company removed and encapsulated asbestos at two of its facilities and the Company has an on-going asbestos management program in place to maintain appropriately the asbestos that remains present at its facilities. At the Company's former facility in Claremont, New Hampshire, it has been determined that there is oil-contaminated soil, as well as groundwater contamination, resulting from a leak during the mid-1970s from an underground fuel storage tank. The Company has agreed to indemnify the purchaser for clean-up costs subject to certain limitations. The Company also has agreed to indemnify the purchaser of the Company's former facility in Leominster, Massachusetts for certain environmental contingencies. The Company has accrued reserves for environmental matters based on information presently available. However, there can be no assurance that these reserves will be adequate or that the costs associated with environmental matters will not increase in the future. See "Business -- Environmental Matters." SIGNIFICANT STOCKHOLDER. Upon the completion of this offering, Nortex Holdings, a corporation owned by three officers of the Company, including Larry A. Liebenow, its President and Chief Executive Officer, will beneficially own 23.3% of the outstanding Common Stock. Accordingly, Nortex Holdings will be in a position to not only influence the election of the Company's directors but also influence or determine the outcome of corporate actions requiring stockholder approval. This concentration of ownership may have the effect of delaying or preventing a change of control of the Company. ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's certificate of incorporation and bylaws may make it more difficult for a third party to acquire, or may discourage acquisition bids for, the Company and could limit the price that certain investors might be willing to pay in the future for shares of Common Stock. These provisions, among other things, (a) require the affirmative vote of the holders of at least 66 2/3% of the votes which all the stockholders would be entitled to cast at any annual election of directors or class of directors to approve any merger or consolidation of the Company with any other corporation or a sale, lease, transfer or exchange of all or substantially all the assets of the Company or the adoption of any plan for the liquidation or dissolution of the Company; (b) require the affirmative vote of 80% of the voting power of all the shares of the Company entitled to vote in the election of directors to remove a director; and (c) require the affirmative vote of 80% of the voting power of all the shares of the Company to amend or repeal certain provisions of the certificate of incorporation and the bylaws. Moreover, the Board of Directors (the "Board") has the authority to issue, at any time, without further stockholder approval, up to 50,000 shares of preferred stock, and to determine the price, rights, privileges and preferences of those shares, which may be senior to the rights of holders of the Common Stock. Such issuance could adversely affect the holders of Common Stock, and could have the effect of dissuading a potential acquiror from acquiring outstanding shares of the Common Stock at a price that represents a premium to the then current trading price. See "Description of Securities -- Preferred Stock." Under certain conditions, Section 203 of the General Corporation Law of the State of Delaware (the "DGCL") would prohibit an "interested stockholder" (in general, a stockholder owning 15% or more of the Company's outstanding voting stock) from engaging in a "business combination" with the Company for a period of three years. The Board has adopted a stockholder rights plan (the "Rights Plan"), the purpose of which is to protect stockholders against unsolicited attempts to acquire control of the Company that do not offer a fair price to all stockholders. The Rights Plan may have the effect of dissuading a potential acquiror from acquiring outstanding shares of Common Stock at a price that represents a premium to the then current trading price. The Rights Plan will not apply to certain acquisitions by MLGA Fund, Nortex Holdings and certain of their transferees. See "Description of Securities -- Stockholder Rights Plan." VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be subject to significant fluctuations in response to the Company's operating results and other factors, and there can be no assurance that the market price of the Common Stock will not decline below the public offering price herein. Developments in the upholstery and home furnishings industries or changes in general economic conditions could adversely affect the market price of the Common Stock. In addition, the stock market has from time to time experienced extreme price and volume volatility. These fluctuations may be unrelated to the operating performance of particular companies whose shares are traded and may adversely affect the market price of the Common Stock. See "Price Range of Common Stock." SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of this offering, the Company will have 8,321,097 shares of Common Stock outstanding. Of these shares, a total of 5,776,498 shares (6,286,498 shares if the Underwriters' over-allotment option is exercised in full), including the shares offered hereby, will be freely tradable without restrictions or further registration under the Securities Act. The remaining 2,544,599 shares of Common Stock are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act. In general, under Rule 144 as currently in effect, an affiliate of the Company or any person (or persons whose shares are aggregated in accordance with Rule 144) who has beneficially owned such restricted securities for at least two years (reduced to one year effective late April 1997) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the outstanding shares of Common Stock (approximately 83,211 shares based upon the number of shares outstanding after this offering) or the reported average weekly trading volume in the over-the-counter market for the four weeks preceding the sale. Sales under Rule 144 are also subjected to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning the Company. Persons who have not been affiliates of the Company for at least three months and who have held these shares for more than three years (reduced to two years effective late April 1997) are entitled to sell such restricted securities without regard to the volume, manner of sale, notice and public information requirements of Rule 144. All of these restricted securities are currently eligible for sale in the public market pursuant to Rule 144. Additional shares of Common Stock, including shares issuable upon exercise of options, will also become eligible for sale in the public market pursuant to Rule 144 from time to time. The Company has registered 306,348 shares of Common Stock issuable upon the exercise of stock options which will be available for sale in the open market upon exercise. As of February 24, 1997, an aggregate of 381,247 shares were subject to presently exercisable stock options and, upon consummation of this offering, options to purchase an additional 327,083 shares will become exercisable. The Company, its directors and executive officers and each of the Selling Stockholders, who upon completion of this offering will beneficially own in the aggregate 3,152,553 shares (2,642,553 shares if the Underwriters' over-allotment option is exercised in full), each have agreed (except as to an aggregate of 100,000 shares previously pledged) that they will not, directly or indirectly, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or other capital stock or any security convertible into, or exercisable or exchangeable for, any shares of Common Stock or other capital stock of the Company, for a period of 180 days, in the case of the Company, the Selling Stockholders and certain of their affiliates, and 90 days, in the case of other directors and executive officers, after the date of this Prospectus, without the prior written consent of Prudential Securities Incorporated on behalf of the Underwriters except for bona fide gifts or transfers effected by such stockholder other than on any securities exchange or in the over-the-counter market to donees or transferees that agree to be bound by similar agreements and except for issuances by the Company and sales by Nortex Holdings pursuant to the exercise of certain stock options outstanding upon completion of this offering. Prudential Securities Incorporated may, in its sole discretion, at any time and without prior notice, release all or any portion of the shares of Common Stock subject to such agreements. The Company is unable to predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect the market price for the Common Stock and could impair the Company's future ability to obtain capital through offerings of equity securities. See "Principal and Selling Stockholders," "Shares Eligible for Future Sale" and "Underwriting."

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+ RISK FACTORS THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. IN EVALUATING THE COMPANY'S BUSINESS, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS. LITIGATION; PRODUCT LIABILITY Inamed and/or its subsidiaries are defendants in numerous State and Federal court actions and a Federal class action in the United States District Court, Northern District of Alabama, Southern Division, under The Honorable Sam C. Pointer, Jr., Chief Judge U.S. District Court, identified as Breast Implant Products Liability Litigation, Multiple District Litigation No. 926, Master File No. CV 92-P-10000-S ("MDL 926"). One of the federal cases, Lindsey, et al., v. Dow Corning Corp., et al., Civil Action No. CV 94-11558-S was conditionally certified as a class action for purposes of settlements ("MDL Settlement") on behalf of persons having claims against certain manufacturers of breast implants. The alleged factual basis for typical lawsuits includes allegations that the plaintiffs' breast implants caused specified ailments including, among others, auto-immune disease, scleroderma, systemic disorders, joint swelling and chronic fatigue. A result of the MDL Settlement was the establishment of a Claims Administration Office in Houston, Texas under the direction of Judge Ann Cochran. Class Members who had breast implants prior to June 1993 have registered with the Claims Office. Judge Pointer certified the "Global" Settlement by Final Order and Judgment on September 1, 1994. Subsequently, a preliminary review of claims produced projected payouts greater than the amounts the breast implant manufacturers had agreed to pay. On May 15, 1995, Dow Corning Corp., formerly one of the manufacturers and a significant contributor to the Global Settlement fund, filed for federal bankruptcy protection because of lawsuits over the devices. On December 29, 1995, the Company entered into an agreement with the MDL 926 Settlement Class Counsel and certain other defendants that is now identified as the "Bristol, Baxter, 3M, McGhan & Union Carbide Revised Breast Implant Settlement Program" ("Revised Settlement"). The Revised Settlement provides a procedure to resolve claims of current claimants and ongoing claimants who are registered with the Claims Office. Due to the nature of the Revised Settlement which allowed ongoing registrations, "opt-ins", as well as a limited potential for claimants, during the life of the program, to opt-out of the Revised Settlement ("opt-outs"), the aggregate dollar amount to be received by the class of claimants under the Revised Settlement has not been fully ascertained. The Revised Settlement is an approved-claims based settlement. Therefore, to project a range of the potential cost of the Revised Settlement, the parties utilized a court-sponsored sample of claimants' registrations and claims filed through the MDL 926 Settlement Claims Office against all defendants and assumed approval of 100 percent of the claims as initially submitted. Although adequate for negotiation purposes, the sample is unsatisfactory for the purposes of determining an aggregate dollar liability for accounting purposes because the processing of current claims is not complete, the process of ongoing claims will continue for fifteen years, and the Settlement is subject to opt-ins and opt-outs. The following is a recap of the certain events involving the Company's product liability issues relating to silicone gel breast implants which the Company manufactures and markets. The claims in Silicone Gel Breast Implant Products Liability Litigation MDL 926 are for general and punitive damages relating to physical and mental injuries allegedly sustained as a result of silicone gel breast implants produced by the Company. Although the amount of claims asserted against the Company is not readily determinable, the Company believes that the stated amount of claims substantially exceeds provisions made in the Company's consolidated financial statements. The Company has been a defendant in substantial litigation related to breast implants which have adversely affected the liquidity and financial condition of the Company. This raises substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from this uncertainty. On June 25, 1992 the judicial panel on multi-district litigation in re: Silicone Gel Breast Implant Products Liability Litigation consolidated all federal breast implant cases for discovery purposes in Federal District Court for the Northern District of Alabama under the multi-district litigation rules. Several U.S.-based manufacturers negotiated a settlement with the Plaintiffs' Negotiating Committee ("PNC"), and on March 29, 1994 filed a Proposed Non-Mandatory Class Action Settlement in the Silicone Breast Implant Products Liability (the "Settlement Agreement") providing for settlement of the claims as to the class (the "Settlement") as described in the Settlement Agreement. The Settlement Agreement, upon approval, would have provided resolution of any existing or future claims, including claims for injuries not yet known, under any Federal or State law, from any claimant who received a silicone breast implant prior to June 1, 1993. The Company was not originally a party to the Settlement Agreement. However, on April 8, 1994 the Company and the PNC reached an agreement which would join the Company into the Settlement. The agreement reached between the Company and the PNC added great value to the Settlement by enabling all plaintiffs and U.S. based manufacturers to participate in the Settlement, and facilitating the negotiation of individual contributions by the Company, Minnesota Mining and Manufacturing Company ("3M"), and Union Carbide Corporation which total more than $440 million. A fairness hearing for the non-mandatory class was held before Judge Pointer on August 18, 1994. On September 1, 1994, Judge Pointer gave final approval to the non-mandatory class action settlement. The deadline for plaintiffs to enter the Settlement was March 1, 1995. Under the terms of the Settlement Agreement, the parties stipulated and agreed that all claims of the Settlement Class against the Company regarding breast implants and breast implant materials would be fully and finally settled and resolved on the terms and conditions set forth in the Settlement Agreement. Under the terms of the Settlement Agreement, the Company would have paid $1 million to the Settlement fund for each of 25 years starting three years after Settlement approval by the Court. The Settlement was approved by the court on September 1, 1994. The Company recorded a pre-tax charge of $9.1 million in October of 1994. The charge represents the present value (discounted at 8%) of the Company's settlement of $25 million over a payment period of 25 years, $1 million per year starting three years from the date of Settlement approval. Under the Settlement, $1.2 billion had been provided for "current claims" (disease compensation claims). In May 1995, Judge Pointer completed a preliminary review of current claims against all Settlement defendants which had been filed as of September 1994, in compliance with deadlines set by the court. Judge Pointer determined that based on the preliminary review, projected amounts of eligible current claims appeared to exceed the $1.2 billion provided by the Settlement. Discrete information as to each defendant was not made available by the court and the Company is not aware of any information from such findings that would affect the Company's $9.1 million accrual. The Settlement provided that in the event of such over subscription, the amounts to be paid to eligible current claimants would be reduced and claimants would have a right to "opt-out" of the Settlement at that time. On October 1, 1995, Judge Pointer finalized details of a scaled-back breast implant injury settlement involving defendants Bristol-Myers Squibb, Baxter International, and 3M, allowing plaintiffs to reject this settlement and file their own lawsuits if they believe payments are too low. On November 14, 1995, McGhan Medical and Union Carbide were added to this list of settling defendants to achieve the "Bristol, Baxter, 3M, McGhan & Union Carbide Revised Settlement Program" (the "Revised Settlement Program"). With respect to the parties thereto, the Revised Settlement Program incorporated and superseded the Settlement. The Revised Settlement Program does not fix the liability of any defendants, but established fixed benefit amounts for qualifying claims. The Company's obligations under the Revised Settlement are cancellable if the Revised Settlement is disapproved on appeal. The Company recorded a pre-tax charge of $23.4 million in the third quarter of 1995. The charge represented the present value (discounted at 8%) of the maximum additional amount that the Company then estimated it might be required to contribute to the Revised Settlement Program--$50 million over a 15-year period based on a claims-made and processed basis. Due to the uncertainty of ultimate resolution and acceptance of the Revised Settlement Program by the registrants, claimants and plaintiffs, and the lack of information related to the substance of the claims, the Company reversed this charge at year-end 1995 for the third quarter of 1995. At December 31, 1996, the Company's reasonable estimate of its liability to fund the Revised Settlement Program was a range between $9.1 million, the original accrual as noted above, and the discounted present value of the $50 million aggregate the Company estimated it might have been required to contribute under the Revised Settlement Program. Again, due to the uncertainty of the ultimate resolution and acceptance of the Revised Settlement Program by the registrants, claimants and plaintiffs (which acceptance and participation is necessary for any contributions under the Revised Settlement Program) and the limited and changing information related to the claims, no precise estimate of the possible additional loss or range of loss can be made and, consequently, the financial statements do not reflect any additional provision for the litigation settlement. However, preliminary information obtained prior to July 31, 1997, concerning claims and options filed under the Revised Settlement indicates that the range of costs to the Company of its contribution, while likely to exceed $9.1 million, will be substantially less than $50 million. This preliminary information suggests that the cost for current claims, which will be payable after the conclusion of all appeals relating to the Revised Settlement, is not likely to exceed $16 million. This estimate may change as further information is obtained. The additional cost for ongoing claims payable over the 15-year life of the program is still unknown, but is capped at approximately $6 million under the terms of the Revised Settlement. The Company has entered into a Settlement Agreement with health care providers pursuant to which the Company is required to pay, on or before December 17, 1996, or after the conclusions of any and all disapproved appeals, $1 million into the MDL Settlement Funds (the "Fund") to be administered by Edgar C. Gentle, III, Esq. ("the Fund Agent"). The charge for settlement will be applied against the $9.1 million accrual previously established by the Company. The Company, in the spirit of the Revised Settlement Program, also contributed $600,000 in 1996 and $300,000 in 1997 to the claims administration management for the settlement. The Company has opposed the plaintiffs' claims in these complaints and other similar actions, and continues to deny any wrongdoing or liability to the plaintiffs of any kind. However, the extensive burdens and expensive litigation the Company would continue to incur related to these matters prompted the Company to work toward and enter into the Settlement which insures a more satisfactory method of resolving claims of women who have received the Company's breast implants. Management's commitment to the Revised Settlement Program does not alter the Company's need for complete resolution sought under a mandatory ("non-opt-out") settlement class (the "Mandatory Class") or other acceptable settlement resolution. In 1994, the Company petitioned the United States District Court, Northern District of Alabama, Southern Division, for certification of a Mandatory Class under the provisions of the Federal Rules of Civil Procedure. Since that time, the Company has been in negotiation with the plaintiffs concerning an updated mandatory settlement class or other acceptable resolution. On July 1, 1996, the Company filed an appearance of counsel and status report on the Inamed Mandatory Class application to the United States District Court, Northern District of Alabama, Southern Division, Chief Honorable Judge Samuel C. Pointer, Jr. There can be no assurance that the Company will receive Mandatory Class certification or other acceptable settlement resolution. If the Mandatory Class is not certified, the Company will continue to be a party to the Revised Settlement Program. However, if the Company fails to meet its obligations under the program, parties in the program will be able to reinstate litigation against the Company. In addition, the Company will continue to be subject to further potential litigation from persons who are not provided for in the Revised Settlement Program and who opt out of the Revised Settlement Program. The number of such persons and the outcome of any ensuing litigation is uncertain. Failure of the Mandatory Class to be certified, absent other acceptable settlement resolution, is expected to have a material adverse effect on the Company. The Company was a defendant with 3M in a case involving three plaintiffs in Houston, Texas, in March 1994, in which the jury awarded the plaintiffs $15 million in punitive damages and $12.9 million in damages plus fees and costs. However, the matter was resolved in March 1995 resulting in no financial responsibility on the part of the Company. In connection with 3M's 1984 divestiture of the breast implant business now operated by the Company's subsidiary, McGahn Medical Corporation, 3M has a potential claim for contractual indemnity for 3M's litigation costs arising out of the silicone breast implant litigation. The potential claim vastly exceeds the Company's net worth. To date, 3M has not sought to enforce such an indemnity claim. As part of its efforts to resolve potential breast implant litigation liability, the Company has discussed with 3M the possibility of resolving the indemnity claim as part of the overall efforts for global resolution of the Company's potential liabilities. Because of the uncertain nature of such an indemnity claim, the financial statements do not reflect any additional provision for such a claim. In October 1995, the Federal District Court for the Eastern District of Missouri entered a $10 million default judgment against a subsidiary of the Company arising out of a plaintiff's claim that she was injured by certain breast implants allegedly manufactured by the subsidiary. The Company did not become aware of the lawsuit until November 1996, due to improper service. Plaintiff's attorney waited over one year to notify the Company that a default judgement had been entered. Plaintiff's attorney refused to voluntarily set aside the judgement, although it is clear from the allegations of the complaint that plaintiff sued the wrong entity, since neither the named subsidiary, the Company, nor any of its other subsidiaries manufactured the device. The Company has moved to have this judgment set aside. The Company has not made any adjustment in its 1996 financial reports to reflect this judgment. The cost of the foregoing litigation has adversely affected the Company's financial position, results of operations and cash flows. Management believes that the Company may not continue as a going concern if its efforts to resolve the breast implant litigation are not successful. Although management is optimistic that the Mandatory Class will be approved by the Court, there can be no assurances that this outcome will be achieved. NEED FOR ADDITIONAL FINANCING The net proceeds from the offering of the Securities will go to the Selling Securityholders. The Company, however, will receive proceeds upon the exercise of any Warrants. The Company's existing cash on hand will not be sufficient to fund the Company's full litigation settlement payment or to fund the Company's capital expenditure, working capital and operational needs. Based on the Company's estimates of the potential settlement terms, the Company estimates that it will need at least an additional $40 million over the next 15 years to fund the full settlement commitment, either from operations or financing activities, or both. There can be no assurance that the Company will be able to generate sufficient revenues or obtain any such additional financing or, if it is able to obtain such financing, that it will be available on terms acceptable to the Company. Such needs are in addition to funds needed for planned operations and needed capital expenditures. RESTRUCTURING; USE OF SETTLEMENT FUNDS On July 2, 1997, the Company reached a comprehensive settlement agreement with certain holders of the Company's 11% Secured Convertible Notes due 1999 (the "Notes"). As a result of this settlement, the Company has amended certain provisions of the Notes. The purpose of this restructuring was to cure and waive all past defaults and provide certainty as to the conversion price of the Notes, which the Company has agreed to fix at $5.50 per share. As part of the restructuring, the Company issued the Warrants. In connection with the issuance of the Notes in January 1997, $15 million (the "Escrow Funds") was placed in escrow for use in connection with the Settlement and to partially fund the Company's settlement commitment. As part of the Company's restructuring of the Notes, the Escrow Funds were paid over to the holders of the Notes. As such, the Escrow Funds are no longer available for use in connection with the Settlement. Those monies would be replaced when needed to fund the Settlement with the capital raised through the mandatory redemption of the Warrants, at the Company's option, if the Common Stock maintains a value of at least $10.00 per share for a specified measurement period. There can be no assurance that the Company will be able to redeem the Warrants, generate sufficient revenue or obtain additional financing to replace the Escrow Funds that were paid over to the holders of the Notes. LIMITS ON ADDITIONAL INDEBTEDNESS The Company is subject to an Indenture dated as of January 2, 1996 (as amended, the "Indenture") governing the Notes. The Indenture imposes certain operating and financial restrictions on the Company affecting, among other things, the ability of the Company to incur certain indebtedness and create liens except for Senior Indebtedness (as defined in the Indenture). Unless waived or amended by the holders of the Notes as permitted in the Indenture, these restrictions will continue so long as any Notes are outstanding. In addition, the guaranty and pledge agreements entered into by certain of the Company's subsidiaries in connection with the issuance of the Notes also impose additional limitations on the ability of the subsidiaries to incur certain indebtedness and to create liens. The covenants are subject to various exceptions that are generally designed to allow the Company to continue to operate its business without undue restraint and, therefore, are only limited prohibitions with respect to certain activities. However, these restrictions, in combination with the leveraged nature of the Company, could limit the ability of the Company to effect future financing, respond to changing market conditions and otherwise may restrict corporate activities. HOLDING COMPANY STRUCTURE The operations of the Company are currently conducted entirely through subsidiaries, the cash flow of the Company and its ability to pay dividends on the Common Stock are dependent upon the cash flows of such subsidiaries and the distributions of these subsidiaries, which are separate and distinct legal entities. In addition, the payment of dividends and certain loans and advances to the Company by such subsidiaries may be subject to certain statutory or contractual restrictions, are contingent upon the earnings of such subsidiaries and are subject to various business considerations. Any right of the Company to receive assets of any subsidiary, upon the liquidation or reorganization of any such subsidiary (and the consequent right of the holders of the Securities to participate in those assets), will be effectively subordinated to the claims of that subsidiary's creditors, except to the extent that the Company is itself recognized as a creditor of such subsidiary, in which case the claims of the Company would still be subordinate to any security in the assets of such subsidiary that is senior to any security granted in favor of the Company and any indebtedness of such subsidiary senior to that held by the Company. DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS The Company's ability to successfully develop its products, manage growth and maintain a competitive position will depend in a large part on its ability to attract and retain highly qualified scientific and management personnel, and to develop and maintain relationships with leading research institutions and consultants. The Company is highly dependent upon its Chairman and Chief Executive Officer, the principal members of its management, key employees, scientific staff and consultants which the Company may retain from time to time. There can be no assurance that the Company will be able to continue to attract and retain such personnel. This is particularly the case so long as the current product liability litigation remains unresolved. The Company's consultants may be affiliated or employed by others and some have consulting or other advisory arrangements with other entities that may conflict or compete with their obligations to the Company. The Company addresses such potential conflicts by requiring that its consultants, scientific collaborators and sponsored researchers execute confidentiality agreements upon commencement of relationships with the Company, by closely monitoring the work of such persons and by requiring material transfer and patent assignment agreements whenever possible and appropriate. Inventions or processes discovered by such persons will not necessarily become the property of the Company and may remain the property of such persons or others. COMPETITION AND TECHNOLOGICAL UNCERTAINTY The medical device industry is characterized by extensive world-wide research and development efforts and rapid technological change. Success in the medical device field is dependent upon product quality, reliability, design features, service, price, and the relationship between the Company and the physicians and group purchasing organizations utilizing the products. The Company believes that its product lines are competitive with other product lines in the market. However, competition from other domestic and foreign medical device companies and research and academic institutions in the areas of product development, product and technology acquisition, manufacturing and marketing is intense and is expected to increase. The Company's products compete with those of a number of other domestic and foreign manufacturers, many of whom have substantially greater revenues and resources than the Company's. These or other competitors may succeed in obtaining approval from the Food and Drug Administration (the "FDA") or other regulatory agencies for their products more rapidly than the Company. Competitors have also developed or are in the process of developing technologies that are, or in the future may be, the basis for competitive products. With the rapid progress of medical technology, the Company's products are always subject to the risk of obsolescence through the introduction of new products or techniques. RESEARCH AND DEVELOPMENT The medical device and product industry is characterized by rapid technological change, which requires a continuous high level of expenditures for enhancing existing products and developing new products. The Company is committed to high expenditures for research and product development. The Company also believes that a crucial factor in the success of a new product is getting it through regulatory approvals and to market quickly to respond to new user needs or advances in medical technologies, without compromising product quality. The Company is continually engaged in product development and improvement programs. During the fiscal years ended December 31, 1994, 1995 and 1996, the Company incurred expenses of approximately $3.72 million, $4.39 million, and $5.7 million, respectively, on research and development activities. There can be no assurance that the Company will be successful in enhancing existing products or developing new products that will timely achieve regulatory approval or receive market acceptance. See "Government Regulation" below. The Company has not engaged in material customer or government sponsored research. GOVERNMENT REGULATION The production and marketing of the Company's products and its ongoing research and development, preclinical testing and clinical trial activities are subject to extensive regulation and review by numerous governmental authorities in the United States, including the FDA, and in other countries. Most medical devices developed by the Company must undergo rigorous preclinical and clinical testing and an extensive regulatory approval process administered by the FDA under the Food, Drug and Cosmetic Act, as amended (the "FDC Act"), and comparable foreign authorities before they can be marketed. The FDA regulations govern the testing, marketing and registration of new medical devices, in addition to regulating manufacturing practices, labeling and record keeping procedures. The process of obtaining clearance from the FDA to market products either through pre-market approvals or pre-market notifications is costly and time consuming and can delay the marketing and sale of the Company's products. Additionally, there is no assurance that such approval will be granted. The FDA is empowered to perform unannounced inspections of the Company's facilities and operations and to restrain violations of the FDC Act. The Company has limited experience in, and limited resources available to commit to, regulatory activities. Failure to comply with the applicable regulatory requirements can, among other things, result in non-approval, suspensions of regulatory approvals, fines, product seizures and recalls, operating restrictions, injunctions and criminal prosecution. Medical device laws, ranging from device approval requirements to requests for product data and price controls, are in effect in many countries in which the Company does business outside the United States. In addition, government reimbursement policies for health care costs are becoming increasingly significant factors for medical device companies. Currently, the U.S. Congress is considering various health care reforms that are designed to reduce the cost of existing government and private insurance programs. It is uncertain at this time what impact, if any, the health care reform efforts will have on the Company. Any changes that limit or reduce reimbursement for the Company's products could have a material adverse effect on the financial condition, results of operations and cash flows of the Company. The time required for completing such testing and obtaining such approvals is uncertain and approval itself may not be obtained. In addition, delays or rejections may be encountered due to, among other reasons, regulatory review of each submitted new device application or product license application, as well as changes in regulatory policy during the period of product development. Similar delays may also be encountered in foreign countries. If regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which the product may be marketed. Further, even if such regulatory approval is obtained, a marketed product, its manufacturer and the facilities in which the product is manufactured are subject to continual review and periodic inspections. Later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer, including withdrawal of the product from the market and litigation. INTERNATIONAL OPERATIONS In addition to the Company's U.S. manufacturing operations, the Company manufactures products at its facilities overseas. The Company maintains sales and marketing offices in many European and other countries. Operations in countries outside the U.S. are subject to certain financial and other risks, including currency restrictions, currency exchange fluctuations and changes in foreign laws. Several countries in which the Company does business have enacted laws and regulations that are protectionist in nature and have resulted in increased costs and operational efforts by the Company in order to continue to effectively compete in those countries. The Company does not presently believe that such laws and regulations will have a material adverse effect on the Company's financial condition, results of operation or cash flows, although there can be no assurance that they will not in the future. LIABILITY AND RECALL EXPOSURE The use of the Company's products have in the past and may in the future expose the Company to liability claims. These claims could be made directly by patients or consumers or by companies, institutions or others using or selling such products. In addition, the Company is subject to the inherent risk that a government authority or third party may require the recall of one or more of the Company's products. The Company has not obtained liability insurance that would cover a claim relating to the use or recall of its products. In the absence of such insurance, claims made against the Company or a product recall could have a material adverse effect on the Company's financial position, results of operations, cash flows and prospects. In addition, there can be no assurance that, if the Company seeks insurance coverage in the future, such coverage will be available at reasonable cost and in amounts sufficient, if at all, to protect the Company against claims that could have a material adverse effect on the financial condition and prospects of the Company. Further, liability claims relating to the use of the Company's products or a product recall could negatively affect the Company's ability to obtain or maintain regulatory approvals for its products. POSSIBLE ADVERSE EFFECTS OF FUTURE LEGISLATION OR REGULATIONS Heightened public awareness and concerns regarding the growth in overall health care expenditures in the United States, combined with the continuing efforts of governmental authorities to contain or reduce costs of health care, may result in the enactment of national health care reform or other legislation or regulations that impose limits on the number and type of medical procedures which may be performed or which have the effect of restricting a physician's ability to select specific products for use in certain procedures. Such new legislation or regulations may materially adversely affect the demand for the Company's products. In the United States, there have been, and the Company expects that there will continue to be, a number of federal and state legislative proposals and regulations to implement greater governmental control on the health care industry. For example, the Clinton Administration and certain members of Congress have proposed health care reform legislation that may impose pricing or profitability limitations or other restrictions on companies in the health care industry. The announcement of such proposals may materially adversely affect the Company's ability to raise capital or to form collaborations, and the enactment of any such reforms could have a material adverse effect on the Company. In certain foreign markets, the pricing and profitability of health care products are subject to governmental influence or control. In addition, legislation or regulations that impose restrictions on the price that may be charged for health care products or medical devices may adversely affect the Company's financial condition, results of operations and cash flows. From time to time, legislation or regulatory proposals are proposed and discussed which could alter the review and approval process relating to pharmaceutical or medical device products. The Company is unable to predict the likelihood of adverse effects which might arise from future legislative or administrative action, either in the United States or abroad. REIMBURSEMENT The Company's ability to sell its products successfully may depend in part on the extent to which reimbursement for such products and related treatment will be available from government health administration authorities, private health insurers, managed care entities and other organizations. Such payors are increasingly challenging the price of medical products and services and establishing protocols and formulae which effectively limit physicians' ability to select products and procedures. Uncertainty exists as to the reimbursement status of health care products (especially innovative technologies), and there can be no assurance that adequate reimbursement coverage will be available to enable the Company to achieve market acceptance of its products or to maintain price levels sufficient for realization of an appropriate return on its products. MANUFACTURING CAPACITY To be successful, the Company's products must be manufactured in commercial quantities under current Good Manufacturing Practices ("GMP") prescribed by the FDA and at acceptable costs. The Company will need to expand its manufacturing capabilities. In the event the Company determines to expand its manufacturing capabilities, it will require the expenditure of substantial funds, the hiring and retention of significant additional personnel and compliance with extensive regulations applicable to such expansion. There can be no assurance that the Company will be able to expand such capabilities successfully. If the Company is not able to expand its manufacturing capabilities, it could materially and adversely affect the Company's financial condition, results of operations, cash flows and prospects. UNCERTAINTY REGARDING PATENTS AND PROPRIETARY TECHNOLOGY The Company's success will depend, in part, on its and its licensors' ability to obtain, assert and defend its patents, protect trade secrets and operate without infringing the proprietary rights of others. The Company has filed applications for or has been issued U.S. and foreign patents, and has exclusive or non-exclusive licenses under patent applications or patents of others. The patent position of medical device firms generally is highly uncertain and involves complex legal and factual questions. There can be no assurance that the patent applications owned by or licensed to the Company will result in issued patents, that any issued patents will provide the Company with proprietary protection or competitive advantages, will not be infringed upon or designed around by others, will not be challenged by others and held to be invalid or unenforceable or that the patents of others will not have a material adverse effect on the Company, its financial condition, results of operations, cash flows and prospects. The Company is aware that its competitors and other companies, institutions and individuals have been issued patents relating to its products. In addition, the Company's competitors and other companies, institutions and individuals may have filed patent applications or been issued patents relating to other potentially competitive products of which the Company is not aware. Further, the Company's competitors and other companies, institutions and individuals may, in the future, file applications for, or be granted or licensed or otherwise obtain proprietary rights to, patents relating to other potentially competitive products. There can be no assurance that these existing or future patents or patent applications will not conflict with the Company's or its licensors' patents or patent applications. Such conflicts could result in a rejection of the Company's or its licensors' patent applications or the invalidation of their patents, which could have a material adverse effect on the Company's competitive position, its financial condition, results of operations, cash flows and prospects. In the event of such conflicts, or in the event the Company believes that such competitive products may infringe the patents owned by or licensed to the Company, the Company may pursue patent infringement litigation or interference proceedings against, or may be required to defend against litigation involving, holders of such conflicting patents or competing products. Such proceedings may materially adversely affect the Company's competitive position, and there can be no assurance that the Company will be successful in any such proceeding. Litigation and other proceedings relating to patent matters, whether initiated by the Company or a third party, can be expensive and time consuming, regardless of whether the outcome is favorable to the Company, and can result in the diversion of substantial financial, managerial and other resources from the Company's other activities. An adverse outcome could subject the Company to significant liabilities to third parties or require the Company to cease production and sale of other products. In addition, if patents that contain dominating or conflicting claims have been or are subsequently issued to others and such claims are ultimately determined to be valid, the Company may be required to obtain licenses under patents or other proprietary rights of others. No assurance can be given that any licenses required under any such patents or proprietary rights would be made available on terms acceptable to the Company, if at all. If the Company does not obtain such licenses, it could encounter delays or could find that the development, manufacture or sale of products requiring such licenses is foreclosed. The Company also seeks to protect its proprietary technology and processes in part by confidentiality agreements with its collaborative partners, employees and consultants. There can be no assurance that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known or be independently discovered by competitors. ENVIRONMENTAL MATTERS The Company is subject to federal, state, county and local laws and regulations relating to the protection of the environment. In the course of its business, the Company is involved in the handling, storage and disposal of materials that are classified as hazardous. The Company's safety procedures for handling, storage and disposal of such materials are designed to comply with the standards prescribed by applicable laws and regulations. However, there can be no assurance that the Company will not be involved in an accidental contamination or injury from these materials. In the event of such an accident or injury, the Company could be held liable for any damages that result, and any such liability could materially adversely affect the Company, its financial condition, results of operations, cash flows and prospects. Further, there can be no assurance that the cost of complying with these laws and regulations will not increase materially in the future. CONTROL BY OFFICERS AND DIRECTORS As of July 31, 1997, the Company's officers and directors beneficially owned approximately 15.2% of the outstanding Common Stock. Depending upon the size of the Board of Directors, these shareholders may be able to elect one or more of the Company's directors and will have the ability to influence the Company and the direction of its business and affairs. Although it will be reduced by the conversion of Notes into shares of common stock and the increase of additional shares of common stock, such as upon the exercise of the Warrants, such concentration ownership may have the effect of delaying or preventing a change in control of the Company, which could adversely affect the market price for the Common Stock. POTENTIAL VOLATILITY OF STOCK PRICE; NO DIVIDENDS The market prices for securities of medical device companies have historically been highly volatile. Future announcements concerning the Company or its competitors or industry, including, but not limited to, the results of testing, technological innovations or new commercial products, the achievement of or failure to achieve certain milestones, governmental regulations, rules and orders, developments concerning patents or other proprietary rights, litigation or public concern about the safety of the Company's products, may have a material adverse effect on the market price of the Common Stock. In addition, the stock market has experienced extreme price and volume fluctuations. This volatility has significantly affected the market prices of securities of many pharmaceutical and medical device companies for reasons frequently unrelated or disproportionate to the performance of the specific companies. These broad market fluctuations may materially adversely affect the market price of the Common Stock. The Company has never paid dividends, cash or otherwise, on its capital stock and does not anticipate paying any such dividends in the foreseeable future. The Company's agreement with the holders of the Notes prohibits the payment of dividends on its Common Stock. DELISTING FROM NASDAQ SMALLCAP MARKET The Company's securities were deleted from The Nasdaq Market, Inc. ("Nasdaq") SmallCap Market effective June 11, 1997 because the Company failed to comply with the continuing listing requirements of Nasdaq. The delisting of the Company's securities could negatively affect their liquidity and price and severely limit the market for the Company's securities. There can be no assurance that the Company will be successful in meeting Nasdaq's listing requirements in the future. SHARES OF COMMON STOCK ELIGIBLE FOR SALE As of July 31, 1997, the Company had an aggregate of approximately 8,444,666 issued and outstanding shares of Common Stock. In addition, as of July 31, 1997, the Company had reserved for issuance an aggregate of approximately 7,056,925 shares of Common Stock issuable pursuant to: (i) outstanding vested and non-vested options, warrants and similar rights; and (ii) contingent obligations to issue additional shares. Pursuant to the Company's Certificate of Incorporation, the Company currently has 20,000,000 authorized shares of Common Stock. Subject to certain limitations, the persons holding such options and warrants may obtain the shares of Common Stock underlying such options and warrants at any time. The issuance of a large number of shares of Common Stock would dilute the percentage interest of other existing stockholders of the Company and the holders of Shares. Certain stockholders, including certain officers, directors, employees and affiliates of the Company also currently hold issued and outstanding shares of Common Stock and/or certain of the options or warrants to purchase additional shares of Common Stock. See "Principal and Selling Securityholders." Sales of substantial amounts of such shares could adversely affect the market value of the Common Stock.

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+ RISK FACTORS - -------------------------------------------------------------------------------- RISK OF LOSS ON EARLY TERMINATION Although a Program is voluntary and may be terminated at any time upon facsimile or written request by a Participant, it should not be concluded that it necessarily may be terminated without loss. Termination of the Program in its early stages is more likely to lead to a loss in a Participant's investment if sales charges are incurred in the acquisition of mutual fund shares. Furthermore, in the event of an early termination of a Program, the cash value, if any, of an insurance policy included under the Program would be minimal and might not be available if the Participant is not the owner of the policy. A Participant also would pay a termination fee and liquidation charges for early termination. On the other hand, a termination in the latter stages of the Program will result in increased interest expense and administrative fees which the Participant must pay. See "Summary of Charges." RISK OF TERMINATION FOR FAILURE TO MAINTAIN COLLATERAL AND MARGIN REQUIREMENTS Failure to maintain the appropriate collateral and margin requirements can result in an involuntary termination of a Program without prior notice to the Participant. Certain collateral and margin requirements have been imposed by the Company in order to comply with Federal regulations and to insure sufficient collateral for the Company's loans to Participants. These requirements are more fully described under "The Programs - Insurance Premium Loans to Participants". THE COMPANY HAS NO OBLIGATION TO PROVIDE NOTICE TO THE PARTICIPANT THAT THE APPLICABLE MARGIN REQUIREMENT HAS BEEN VIOLATED AND THAT HIS PROGRAM WILL BE TERMINATED. IN ADDITION, THE AMOUNT REALIZED BY THE COMPANY UPON REDEMPTION OF A PARTICIPANT'S SHARES MAY BE SIGNIFICANTLY LESS THAN THE APPLICABLE MARGIN REQUIREMENT. RISK THAT THE COMPANY WILL NOT BE ABLE TO OBTAIN FINANCING The continuance of the Programs is dependent upon the Company's ability to provide, or arrange for, the financing of insurance premiums for Participants. In prior years, Colonial and Chubb Life, provided the funds necessary to the Company's financing of the Programs. During 1996, the Company entered into a Revolving Credit Agreement with a non-affiliate, SunTrust Bank, of Atlanta, Georgia ("SunTrust Bank"). This revolving credit agreement replaced the Company's loan agreements, with its affiliates, Colonial and Chubb Life. A Participant should carefully consider the Company's ability to borrow money and the consequences of its inability to borrow. Moreover, although the Company's present financing arrangement with Suntrust Bank does not include the assignment of a Participant's mutual fund shares to the lender as security, the Agency Agreement does authorize the Company to assign a Participant's mutual fund shares to any lender as collateral security for the Company's indebtedness pursuant to any financing arrangements. If any such assignment takes place and the Company subsequently defaults on an obligation for which the Participant's mutual fund shares have been pledged as security, the mutual fund shares may be redeemed by the lender to whom the obligation is owed. The redemption could occur at a time when the value of the shares had declined. A Participant should carefully consider the extent to which the rights of a lender who might receive such an assignment would have priority over his interests in the pledged mutual fund shares. If the Company is unable to borrow funds in the future or continue to borrow funds under its Loan Agreement for the purpose of financing loans to Participants for the payment of insurance premiums, it may not be able to continue the sale of the Programs. A lender, affiliated or unaffiliated with the Company, may cease to provide financing if the Company is in default under its loan agreement. In this case, Programs will be terminated on their renewal dates. The Company is under no contractual obligation to continue to make loans on future Program renewal dates; however, it intends to continue making such loans as long as funds are available to it. RISK OF ADVERSE DETERMINATION UNDER STATE LAW Most States have passed "prohibited inducement" statutes. These statutes generally restrict certain kinds of prohibited inducements in the sale of life insurance and/or securities. The Programs are not constructed or in any way intended to be an inducement of the type prohibited by the state statutes. In particular, the terms and conditions of both the life insurance and the mutual fund sales are the same whether purchased in connection with the Programs or separately. The Company, however, cannot predict whether, or the extent to which, a state may later interpret its statute to restrict the Programs. Although the Company offers no opinion on state legal issues, it has no reason to believe that any adverse determination will be made under state law. In 1996, the Programs were eligible for sale to the public in all states except for South Dakota and Vermont. - -------------------------------------------------------------------------------- SUMMARY OF CHARGES - -------------------------------------------------------------------------------- The following table summarizes the charges imposed under the Programs. Certain of the charges will vary in total dollar amount depending on the amount of the loans taken out under the Programs. Other charges are collected only upon the occurence of a particular transaction, as described below. PROGRAM FEES PLACEMENT FEE: One time fee for each insurance policy placed in or added to the Program $25.00 PROGRAM FEE: One time fee for Programs pledging certain no-load funds with which Broker Dealer does not have a selling agreement $200.00 ADMINISTRATIVE FEE: Annual fee for administration and recordkeeping of Participant's Program (Reduced Rate: Currently $360 ten-year period if paid in advance) $50.00 SPECIAL SERVICES FEE: For certain special transactions, described below $25.00 TERMINATION FEE: Upon termination by Participant or the Company prior to ten- year scheduled termination $100.00 LIQUIDATION FEE: Upon liquidation of each fund, if any, prior to liquidation at end of ten-year term $25.00 LOAN CHARGES INTEREST RATE: Interest rates on a Participant's indebtedness are subject to change at any time during the Program at the discretion of the Company and are always subject to maximum permissible interest rates under state law. The Agency Agreement provides that the nominal interest rate on a Program will not be less than 6% per annum, nor exceed three percentage points above the prime, or base rate, as quoted in The Wall Street Journal. Such interest increases may occur without prior notice to the Participants and will become effective immediately. The current interest rate will be applicable to all outstanding indebtedness and apply to all Participants uniformly. The Company reserves the right to impose a rate less than the maximum permissible rate. Any such reduced interest rate will apply to all outstanding Participant loans. Other charges, commissions and fees may be imposed by other entities such as a broker-dealer, including Chubb Securities, a mutual fund or Insurance Company. For example, an unaffiliated broke-dealer may charge a fee for transfering mutual fund shares to the Program. The Placement Fee, Program Fee, Administrative Fee, and Special Charges. - ------------------------------------------------------------------------ The Company charges a one-time placement fee of $25 for each insurance policy issued in connection with the Programs. The placement fee is due at the time when the Company determines that a prospective Participant has qualified for investment in a Program (including the life insurance application). In addition, the Company will charge a fee of $25 for adding a policy to an existing Program. The Company also charges a one-time Program fee of $200 for Programs using certain no-load funds with which the Broker-Dealer does not have a selling agreement. This Program fee is due at the time of application for the Programs. An annual administrative fee is also charged by the Company for its services under the Agency Agreement to cover the reasonable cost of administering the Programs. The annual administrative fee is $50 and may be paid in a lump sum for the entire ten year period at a reduced rate, currently $360. Unless the Participant pays the annual administrative fee in cash, the Company, at its discretion, may pay the fee from proceeds realized from the redemption of mutual fund shares or by adding the fee to the Participant's indebtedness. Charges will also be made for certain special services. The current charges are $25 for each of the following services on a per fund and per policy basis: (i) return check charge (protested check); (ii) transfer of registration of shares; (iii) reduction of loan balance; (iv) conversion from one premium mode to another; (v) transfer of shares from one fund to another; (vi) policy conversion; (vii) policy change; (viii) redemption of shares; and (ix) other exceptional transactions requested by the Participant. These charges are payable by a Participant in cash or from proceeds realized from the redemption of mutual fund shares. The Company reserves the right to adjust these charges at any time and from time to time. The Termination and Liquidation Fees. - ------------------------------------- The Company will charge a termination fee of $100 when a Program is terminated by either the Participant or the Company, except for termination at the end of ten years. A Participant also will be charged a $25 liquidation charge per fund whenever a fund is liquidated, regardless of whether the Program is being terminated, except at termination at the end of ten years. These fees are based upon the Company's administrative costs for processing terminations and liquidations. - -------------------------------------------------------------------------------- REVENUE - -------------------------------------------------------------------------------- The Company's proceeds from the sale of the Programs is in the form of fees, charges and interest income. These proceeds are used to pay administrative and operational expenses, and to obtain financing. See "Summary of Charges" for more information on fees, charges and interest. - -------------------------------------------------------------------------------- THE PROGRAMS - -------------------------------------------------------------------------------- DISTRIBUTION OF THE PROGRAMS The securities offered by this Prospectus are personalized investment programs which coordinate the acquisition of mutual fund shares and insurance over a period of ten years, commencing with the due date of the initial premium advanced under the Program. The Programs are neither distributed through underwriters nor traded in securities markets. Unlike other securities, Participants may not sell or trade their Programs, rather the Programs must be held for the ten year period unless earlier terminated. As personalized investment programs, they are sold only through registered representatives (the "Representatives") of Chubb Securities or other independent securities dealers ("Independent Dealers") with whom the Company, Chubb Securities and one of the Insurance Companies have agreements. Under the terms of the agreements under which the Independant Dealers may distribute the Programs, the Independant Dealers agree to comply with applicable laws, and to solicit the distribution of the Programs, and remain responsible for the determination of whether a Program is suitable for a prospective Participant. The Representatives are jointly licensed to sell both mutual funds and insurance. As registered representatives of Chubb Securities, they are authorized to sell mutual fund shares pledged in the Programs, as well as the Programs themselves. As licensed agents of one or more of the Insurance Companies, they are authorized to sell various forms of life insurance. In every case, the Representative will have some form of agency relationship with Chubb Securities and/or one of the Insurance Companies. There are no additional benefits or compensation to the Representatives by selling mutual funds or life insurance products of affiliated companies in connection with the Programs. The Representatives sell the Programs on a best-efforts basis. No underwriting compensation is paid to Chubb Securities or any other party in connection with the sale of the Programs. Chubb Securities or the Independant Dealer typically receives a commission on the sale of mutual fund shares in connection with a Program. A portion of any commission received by Chubb Securities is paid to the Representative. In his capacity as a licensed insurance agent, the Representative also receives commissions from one of the Insurance Companies on insurance sold as part of any Program. HOW TO BECOME A PROGRAM PARTICIPANT To become a Program Participant, the prospective Participant must contact a Representative authorized to distribute the Programs. The Program may begin once the Participant enters into the Limited Power of Attorney and Agency Agreement with the Company and signs the Federal Reserve Form G-3 (concerning extensions of credit and the use of margin stock). Participants should obtain independent advice from their Representative in regard to insurance and mutual fund acquisitions. Prior to the sale of a Program, the Representative will make an independent assessment as to whether the entire transaction, including the loan arrangement, is suitable for the prospective Participant; this in no way relieves the prospective Participant from the responsibility of making his own considered determination as to whether a particular Program is suitable for him. MINIMUM REQUIRED INITIAL COLLATERAL If a Participant decides to begin a Program, an investment in the mutual fund selected by him is made in an amount at least equal to the minimum required initial collateral. Any mutual fund shares which are to be used as collateral for premium loans must be owned by a prospective Participant for at least 31 days. If a prospective Participant already owns sufficient qualified shares of a mutual fund which permits reinvestment of dividends and capital gains distributions, these shares may be utilized to initiate and maintain a Program. The initial collateral must be at least 250% of the insurance premium for most Programs, regardless of the mode of premium payment selected. Programs using no- load funds with which Chubb Securities does not have a selling agreement or that are not sold through an approved investment management program require initial collateral of at least 1800% of the initial insurance premium, which premium must be paid annually. Prospective Participants are cautioned, however, that the minimum investment required by certain mutual funds for the purchase of their shares may exceed the minimum collateral required by the Company to initiate a Program ($1,200 for most Programs). The only mutual funds available for sale by Chubb Securities in connection with the Programs are those which agree to use the Company's administrative and confirmation requirements. Moreover, Chubb Securities does not sell all mutual funds currently available. The services of another broker-dealer may be required if the Participant wants to purchase mutual fund shares that Chubb Securities does not sell. Previously purchased mutual fund shares may be used if the fund agrees to use the Company's administrative and confirmation requirements. Moreover, the Participant need not use the services offered by Chubb Securities in purchasing mutual funds to be pledged with the Company at the start of the Program. However, a Participant may be charged a fee by another broker-dealer for transfering mutual fund shares to the Program. Mutual funds available for sale by Chubb Securities in connection with the Programs must provide for the automatic reinvestment of dividends and capital gains distributions in mutual fund shares. Ordinary income dividends generally are reinvested either at net asset value or at the public offering price, which usually includes the sales charge. Capital gains distributions generally are reinvested at net asset value. If a service charge is applicable, it is made irrespective of the Program. Orders for mutual funds will be accepted only from those persons who desire to make their mutual fund investment irrespective of the Insurance Companies' insurability requirements. Accordingly, the purchase of the initial order of mutual funds shares will be required even though the person may not be a Participant in the Program because he is uninsurable. Individuals proposed for insurance who have had medical problems, who have been denied insurance in the past, or who are in higher risk groups, may bear a much greater risk for the affiliated Insurance Companies and may not be issued an insurance policy or may have to pay additional premiums. Prospective Participants should discuss these insurance questions with the insurance agent/ registered representive. ACQUISITION OF INSURANCE A Program allows a Participant to purchase insurance by financing the premiums through a loan secured by his mutual fund shares. Insurance available for purchase in connection with a Program may vary from state to state, depending on whether Chubb Life or Colonial is licensed to sell insurance in a particular jurisdiction, and whether a jurisdiction in which one of the Insurance Companies is licensed has approved a particular insurance product. Whole life, variable universal life, single premium whole life, level term, renewable or convertible term, and decreasing term insurance are available for purchase in connection with a Program on a nonparticipating basis. AGENCY AGREEMENT AND LIMITED POWER OF ATTORNEY An Agency Agreement and Limited Power of Attorney (the "Agency Agreement") is executed by a Participant contemporaneously with the signing of the application for insurance or the purchase or delivery of mutual fund shares to be used in the Program. It is also signed by the Company and is thereafter effective until terminated by the Participant or the Company. Upon giving notice in writing or via facsimile, a Participant may terminate the Agency Agreement at any time, which automatically results in termination of a Program, but the Company may do so only for reasons discussed under "The Programs-Termination." Under the Agency Agreement, the Company, as attorney-in-fact of the Participant, has the power to: (a) arrange loans to Participants to pay insurance premiums and administrative fees, if not paid in cash, as they become due or excess premiums as agreed to by the Company; (b) receive pledge as collateral of all mutual fund shares acquired in the Program, furnished by a Participant or available for pledge, having an aggregate redemption value of up to the applicable margin requirement of 250% or 1800% of a Participant's Account Indebtedness as security therefor; and (c) pledge the Participant's mutual fund shares securing his Account Indebtedness if necessary for the purpose of obtaining funds to finance the Programs. After execution of the Agency Agreement, no further notice is given to a Participant prior to the loans made by the Company to a Participant to pay insurance premiums. All mutual fund shares purchased in the Program will be registered in the name of the Company, as custodian for the Participant, to be held by the mutual fund companies, subject to instructions of the Company pursuant to the Agency Agreement. Certificates for mutual fund shares acquired by the Participants will be issued upon direction of the Company only in those instances where it is necessary to meet the legal collateral requirements of a state or governmental agency. INSURANCE PREMIUM LOANS TO PARTICIPANTS LOANS UNDER THE AGENCY AGREEMENT Upon issuance of a policy by an Insurance Company and contingent upon acceptance of the policy by the Participant, the Company makes a loan to the Participant under the Agency Agreement in an amount equal to the selected premium mode. Mutual fund shares are then pledged to secure that loan ("Pledged Shares"). As each premium becomes due, a new loan equal to the next premium and administrative fee, if not paid in cash, is made and added to the Participant's Account Indebtedness. It is intended that such loans will recur each premium due date until the expiration of ten years after the due date of the initial premium advanced under the Program, unless the Program is sooner terminated. Thus, interest, as well as principal, is borrowed, and all mutual funds purchased or otherwise accumulated in the Program having redemption value of up to 250% of the Participant's Account Indebtedness, or 1800% for the initial premium loan of Programs using certain no-load funds, are pledged as collateral for such loans. Shares representing any excess in redemption value over the applicable margin requirement of 250% or 1800% of the Participant's Account Indebtedness are not required to be pledged as collateral. Pursuant to the Agency Agreement, the Company may renew a Participant's Program at the due date for the insurance premium, in accordance with the same basic Program terms and conditions (including but not limited to the "Margin and Collateral Requirements" discussed below) for a period of time ending as of the due date of the next insurance premium. For example, if the insurance premium payment mode is annual, the renewal of the Program will be for a period of one year. Until the Programs are terminated, it is intended that such loans will recur over the life of the Program. Assuming that the minimum collateral requirements described hereinafter are met, the Company will recompute a Participant's Account Indebtedness in advance of the premium due date so that the loan can be renewed on the premium due date of the insurance policy during each year of a Program. The new Account Indebtedness is determined by adding the amount of the Participant's existing Account Indebtedness to the amount of the next premium due, new fees, plus interest. See "Summary of Charges." Since May 29, 1970, the date the Company first offered Programs for sale, the nominal interest rate charged by the Company pursuant to the Agency Agreement has ranged from a low of 6% to a high of 13%. An increase in the interest rate on the loans will serve to increase the cost of the Program and diminish its value to a Participant upon termination. MARGIN AND COLLATERAL REQUIREMENTS Any mutual fund shares used to secure premium loans must have been owned by the Participant for a minimum period of 31 days before credit secured by such mutual fund shares is extended to the Participant. The holding period applies to all purchases of mutual fund shares, whether for initial purchases, renewals, or meeting margin requirements. The maximum credit allowed by Regulation G (adopted by the Federal Reserve Board and applicable to loans made under the Programs) against pledged mutual fund shares is 50% of the value of the shares. The Company's present policy is to make an initial loan not to exceed 40% of the value of the mutual fund shares pledged as security. If the Federal Reserve Board should increase margin requirements beyond the Company's requirement, a Participant would be required to acquire and pledge more securities to finance the premiums due and to maintain the ratio required to prevent involuntary termination of the plan. It is possible that such increased margin requirements might require the Company to discontinue the sale of its Programs and terminate Programs then outstanding. It is also possible that periods may exist when the Federal Reserve Board margin regulations will preclude the financing of additional premiums. As a matter of policy, independent of Federal regulations, the Company presently requires Participants to provide qualified collateral with values exceeding the amount of their indebtedness by specific margins in three different situations: at initiation, at renewal, and between renewal dates. (i) Initiation Requirement - Each initial loan by the Company to pay insurance premiums for all Programs except those using certain no-load funds must be secured by qualified mutual fund shares which have a value of at least 250% of the premium to be financed. Accordingly, a Participant must pledge qualified shares having a value of at least $1,200 to initiate an annual Program which has a life insurance policy with the minimum annual premium of $480, (except for any new Program that is the result of a rollover from a previously existing program, in which case the existing annual insurance premium may be lower than the $480 annual minimum). Programs using no-load funds with which Chubb Securities does not have a selling agreement require an 1800% initiation requirement and qualified shares having a value of at least $90,000 for a minimum annual premium of $5,000. (ii) Maintenance Margin Requirement - The Company requires Participants to maintain qualified collateral with a value of at least 130% of Account Indebtedness at all times. Failure to maintain the 130% requirement will result in termination of a Program. The Company generally will notify a Participant of a decline in value in his mutual fund shares, although it is not required and undertakes no obligation to do so. If the value of Pledged Shares with the Company declines below 130% of a Participant's Account Indebtedness, the account indebtedness will automatically become due and payable, and the Company will terminate the program and sell or redeem the pledged shares to satisfy the debt, all without notice to the Participant. The Company will act promptly but accepts no responsibility for any loss incurred by a Participant due to a reduction in the value of mutual fund shares arising from delays in redemption which are beyond the control of the Company. Any Pledged Shares not required to be redeemed to satisfy the Account Indebtedness will be released from pledge and re-registered to the Participant. The Company intends to enforce its rights whenever the 130% requirement is breached. If the Company is holding shares available for pledge, it will pledge such shares with itself in order to maintain a Participant's 130% margin requirement. No mutual fund shares pledged by the Company to secure payment of one Participant's Account Indebtedness may be redeemed in order to satisfy the payment of another Participant's Account Indebtedness. (iii) Account Indebtedness at Renewal - At the time of renewal, a Participant must have qualified shares pledged to the Company equal to at least 150% of the Participant's Account Indebtedness. The 150% renewal requirement may be met in one of four ways: (a) a Participant's qualified Pledged Shares in the Program may have a value in excess of 150% of the Account Indebtedness; (b) if the Company is holding additional qualified shares available for pledge as custodian for the Participant under the Agency Agreement, then the Company may automatically pledge sufficient additional shares to cover the 150% requirement; (c) if the Company is not holding enough qualified Pledged Shares, then the Participant may make the necessary shares available for pledge by purchasing additional shares at least 31 days prior to the renewal date; or (d) a Participant may make a cash payment to reduce the Account Indebtedness to no more than 66.66% of the value of the shares pledged in the Program. If the 150% margin requirement is not met in one of these four ways, prior to the renewal of a loan, the Company will terminate the Program. The Company may notify a Participant 31 days prior to a renewal date if it appears that the 150% requirement may not be met, but the Company is under no obligation to provide such notice. (iv) Renewal Loan Margin Requirement - The Company requires at renewal that a new premium loan be secured by qualified shares which must have a value of at least 250% of the new premium loan. Any previously pledged and qualified mutual fund shares held by the Company as custodian for the Participant may only be used towards renewal loans if those shares are in excess of 250% of the Participant's total Account Indebtedness. If qualified shares are not available to be pledged by the Company as custodian for the Participant, then the Participant must provide additional qualified shares with a value of at least 250% of the new premium loan before the life insurance policy can be renewed within the Program. A PARTICIPANT'S PERSONAL DEFICIENCY RESULTING FROM THE LOANS The Loans which the Company makes to Participants to finance insurance premiums are made without recourse. Consequently, a Participant will not be responsible for payment of a deficiency in the event the value of the pledged shares is not sufficient to pay his entire Account Indebtedness. A Participant should not infer from this that a Program will not result in a loss to him. The appreciation of value of mutual fund shares and the costs and expenses of the Program (including interest and fees) all will have a bearing on whether the Participant incurs a loss in a Program. RELEASE OF COLLATERAL If at any time the redemption value of all the shares held in the Participant's account exceeds 250% of the Participant's total Account Indebtedness for all Programs except those using certain no-load funds, the Participant may, upon written request to the Company, have such excess released to him either in shares or in cash. Shares are valued at their net asset value for redemption purposes. ADDITIONAL MUTUAL FUND SHARE PURCHASES A Participant is under no obligation to make additional purchases of mutual fund shares once a Program is initiated, except to the extent necessary to meet the margin and collateral requirements described above. Failure to make additional purchases generally may result in termination of a Participant's Program since the amount of collateral required to secure a Participant's Account Indebtedness will increase correspondingly with the amount of each borrowing. Similarly, failure to purchase additional mutual fund shares in order to prevent a decline in the aggregate redemption value of the pledged shares below 130% of a Participant's Account Indebtedness will result in a sale of existing collateral and termination of the Participant's Program. Accordingly, many Participants must make investments, some as often as monthly, in shares which are transferred into the name of the Company as custodian for the Participant and held until they become qualified shares. These qualified shares then will be pledged by the Company to itself if the value of the shares previously pledged with the Company declines below the margin and collateral requirements. PROGRAM MODIFICATION Subject to the minimum premium requirement of $480 annually for all Programs except those using certain no-load funds for which the minimum premium requirement is $5,000 and an annual premium, the amount of insurance and the premium(s) to be financed may be reduced. If increased insurance protection is desired, a Participant may add either a new or existing policy, but only within six weeks of the annual anniversary date of his Program. The cost of acquisition (including the placement fee) must be paid by a Participant upon the issuance of a new policy. Provided the appropriate authorization form is on file with the Company, a Participant or, if authorized, the Participant's registered representative, may direct the redemption or exchange of mutual fund shares by telephone to the Company. The Company will employ procedures that it believes are reasonable in order to confirm that instructions communicated to it by telephone are genuine. These procedures include (i) any Participant or registered representative providing instructions by telephone to redeem or exchange shares must be on a recorded telephone line, (ii) all such Participants or registered representatives must supply the Company with personal identification information at the time of redemption or exchange for verification purposes, and (iii) all transactions relying on telephone instructions will be verified by a written confirmation statement sent by the mutual fund to the Participant. If these "reasonable procedures" or other procedures that may be developed are not employed in order to confirm that instructions communicated by telephone to the Company are genuine, the Company may be liable for any losses due to unauthorized or fraudulent instructions. The Company will not be liable to the Participant or any third party if the Participant is unable to reach the Company by telephone. The Participant may be unable to implement a telephone transaction during periods of drastic economic or market change. This telephone transaction privilege may be terminated or modified upon 60 days written notice to the Participants. A Participant may likewise re-direct his periodic investment from one mutual fund to another fund available in the Programs. The Company assesses an additional charge to redeem shares of one mutual fund so that a Participant may purchase another mutual fund's shares. See "Summary of Charges." Presently there is no limit on the number of times a Participant may modify his Program; however, the Company reserves the right at any time to limit the number of times a Participant may modify his Program. TERMINATION Programs are entirely voluntary and may be terminated at any time by a Participant, upon written notice mailed or transmitted via facsimile to the Company. A Program will be terminated by the Company upon the occurrence of any of the following: (i) the death of the Participant; (ii) the death of all insureds covered by a policy issued as part of a Program; (iii) failure to meet minimum collateral requirements due to a decline in the value of the mutual fund shares securing premium loans; (iv) failure to meet minimum investment requirements due to a decrease in insurance premiums advanced under a Program unless waived by the Company to the extent permitted by law; (v) failure to provide sufficient collateral to secure loans for premiums due under the Program; (vi) inability of the Company to provide or arrange for financing of premiums; (vii) failure of the Participant's bank to honor checks made payable to the Company from the Participant's account. A Participant should clearly understand that in the event of any of the above circumstances a Program may be terminated by the Company without prior notice to the Participant. Programs must be terminated not later than ten years from the due date of the initial premium financed (unless extended at the option of the Company). If a Participant terminates his Program, he must pay his Account Indebtedness in full, plus interest to the date of payment. The Company also charges a $100 termination fee and liquidation charges unless the termination is at the end of the tenth year of the Program. If the Company terminates a Program with prior notice to a Participant, the Participant must pay his Account Indebtedness within seven business days after a notice of termination. In either case, if a Participant's Account Indebtedness is not paid, the Company has the right to redeem as many of the Participant's qualified shares as necessary to pay his debt. To pay his Account Indebtedness, a Participant may: (i) redeem his mutual fund shares and surrender his life insurance policy for its cash value; (ii) redeem such shares and, if he has the right, borrow on the cash surrender value of the life insurance policy, keeping the policy in force; (iii) redeem his mutual fund shares only and independently continue the insurance; (iv) retain his mutual fund shares and, if he has the right, surrender the insurance policy for its cash value, if any; or, (v) retire the debt from funds unrelated to the mutual fund shares or the insurance policy. The cash value of the insurance policy alone will not provide adequate funds to liquidate all of the accumulated indebtedness. The continuance of the Program is dependent upon the Company's ability to provide, or to arrange for, the financing of insurance premiums for Participants. A Participant's Program may be involuntarily terminated if such financing cannot be obtained by the Company. See "The Programs - Financing of the Programs by the Company." A Participant must maintain certain margin and collateral requirements in order to avoid termination of his Program. See "The Programs - Insurance Premium Loans to Participants."

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+ RISK FACTORS In addition to other information in this Prospectus, the following factors should be considered carefully by prospective investors in evaluating the Company before purchasing the Common Stock offered hereby. INTEGRATION OF RECENT ACQUISITIONS; LIMITED COMBINED OPERATING HISTORY The Company has a limited operating history with regard to a significant portion of its operations, including the AlaTenn Systems, which are significantly larger than the Company's previous acquisitions and represents a substantial increase in the scope of the Company's business. Since 1994, the Company also acquired 29 other pipeline systems which collectively comprised $7.9 million or 27% of the Company's revenues for the year ended 1996 and $11.4 million or 62% of the Company's property, plant and equipment at December 31, 1996. See "Business and Properties -- Principal Systems." The integration and consolidation of the AlaTenn Acquisition and the Company's other recent acquisitions will require substantial management time and financial and other resources. While management believes that it has sufficient financial and management resources to accomplish the integration of the AlaTenn Systems and the Company's other recent acquisitions, there can be no assurances in this regard or that the Company will not experience difficulties with customers, personnel or operations. Any failure or any inability to successfully integrate the AlaTenn Systems or any other significant acquisition may have a material adverse effect on the Company's results of operations and financial condition. RAPID GROWTH; DEPENDENCE ON ACQUISITIONS The Company has grown rapidly in recent years primarily due to its acquisition and construction of a number of pipelines. A key part of the Company's business strategy is continuous growth through strategic acquisitions. The Company will consider and evaluate acquisitions on a continuous basis, and a period of rapid growth could place a significant strain on the Company's management, operations and other resources. There can be no assurance that the Company will continue to be able to identify attractive or willing acquisition candidates, or that the Company will be able to acquire such candidates on economically acceptable terms. The Company will compete with other intrastate and interstate pipeline companies for suitable acquisition candidates in the future. The Company's growth strategy is also capital intensive in nature and depends in large measure on its ability to successfully acquire or construct additional pipeline systems. The Company's ability to grow through acquisitions and manage such growth will require the Company to continue to invest in its operational, financial and management information systems and to attract, retain, motivate and effectively manage its employees. The inability of the Company's management to manage growth effectively would have a material adverse effect on the financial condition, results of operations and business of the Company. As the Company pursues its acquisition strategy in the future, its financial position and results of operations may fluctuate significantly from period to period. Additionally, in connection with any acquisition made by the Company, including the AlaTenn Acquisition, there may be liabilities that the Company fails or is unable to discover, including liabilities arising from non-compliance with governmental regulation and environmental laws by prior owners, and for which the Company, as a successor owner, may be responsible. See "Business and Properties -- Business Strategy." RELIANCE ON OFFICERS, DIRECTORS AND KEY EMPLOYEES The Company is dependent on the services of certain key management personnel, the loss of whose services could have a material adverse effect on the Company. In particular, the Company depends on the services of Dan C. Tutcher, Chairman of the Board, President and Chief Executive Officer, I. J. Berthelot, II, Vice President of Operations, Chief Engineer and director, and Richard A. Robert, Chief Financial Officer and Treasurer. Each of these individuals is party to an employment agreement with the Company. There can be no assurance that any of these persons will remain employed by the Company, or that these persons will not participate in businesses that compete with the Company in the future. In seeking qualified personnel, the Company will be required to compete with companies having greater financial and other resources than the Company. Since the Company's future success will depend on its ability to attract and retain qualified personnel, the inability to do so could have a materially adverse affect on its business. See "Management." ABILITY TO SECURE ADDITIONAL FINANCING The Company's growth strategy is capital intensive in nature and depends in large measure on its ability to successfully acquire or construct additional pipeline systems. The ability of the Company to generate cash flow and obtain financing from third parties will depend on the Company's future performance and liquidity. The Company's strategy of acquiring or constructing pipelines is dependent upon its ability to obtain financing for such acquisitions and construction projects. The Company expects to utilize its existing credit facilities (the "Credit Agreement") provided by Bank One, Texas N.A. ("Bank One") to borrow a portion of the funds required for any given transaction or project. Pursuant to the Credit Agreement, the Company's current aggregate borrowing availability is limited to $46.5 million and is subject to semi-annual borrowing base redeterminations based on the performance of the Company's existing assets and certain events such as the Company's acquisition or disposition of assets through new construction or acquisition activity. If funds under the Credit Agreement are not available to fund acquisition and construction projects, the Company would seek to obtain such financing from the sale of equity securities or other debt financing. There can be no assurance that any such other financing would be available on terms acceptable to the Company. Should sufficient capital not be available, the Company may not be able to continue to implement its acquisition strategy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources and Liquidity" and "Business and Properties." RISKS OF COMPETITION FROM LARGER COMPETITORS The Company has numerous competitors in its geographic areas of operations, many of which are larger pipeline companies with more extensive pipeline networks. Many of these competitors, particularly those affiliated with major integrated oil and interstate and intrastate pipeline companies, have financial resources substantially greater than those of the Company and have access to supplies of natural gas substantially greater than those available to the Company. In particular, Southern Natural Gas, Inc. ("Southern"), a subsidiary of Sonat, Inc. ("Sonat") has filed an application with the Federal Energy Regulatory Commission ("FERC") to build a 110-mile pipeline from Tuscaloosa, Alabama to northern Alabama to provide gas to two municipal customers in that geographic area. Those two customers, accounting for approximately 26% or $3 million of the AlaTenn Subsidiaries' gross margin in 1996, have entered into a 20-year contract with Southern to provide natural gas transportation services if the proposed pipeline is constructed. Since these contracts with Southern cover substantially all of the current natural gas requirements of these two customers, if the pipeline is constructed, the Company will lose the firm transportation gas volumes of these customers at some point in the future unless the Company is able to renew the contracts or obtain new customers. If the Sonat pipeline is constructed, it may have a material adverse effect on the financial condition, results of operations and business of the Company. See "Business and Properties -- Competition." FACTORS AFFECTING INTERSTATE PIPELINE OPERATIONS The MIT System is subject to regulation as an interstate pipeline by FERC, which entails numerous legislative and regulatory restrictions that are subject to change and could affect the MIT System to various degrees. Significant interstate regulatory factors that have affected or may affect the MIT System from time to time include the following (i) potential inability to obtain authorization for additional allowable firm throughput and rate increases from regulatory authorities in adequate amounts on a timely basis, (ii) uncertainties relating to interstate pipeline restructuring pursuant to FERC Order No. 636 ("Order 636") and new requirements for gas supply resulting from such restructuring, (iii) attempts by large volume customers or gas suppliers to construct gas facilities to connect to an interstate pipeline or other source of gas supply in order to bypass the Company's systems, (iv) uncertainties related to customers' projected energy requirements and (v) uncertainties related to regulation of interstate pipelines which supply distribution companies. See "Business and Properties -- Natural Gas Supply" and "Business and Properties -- Rate and Regulatory Matters." FLUCTUATIONS IN DEMAND DUE TO WEATHER The Company has had quarter-to-quarter fluctuations in its financial results in the past due to changes in demand for natural gas primarily because of weather. Although, historically, quarter-to-quarter fluctuations resulting from weather variations have not been significant, the acquisitions of Magnolia and the MIT System are expected to increase the impact that weather conditions have on the Company's financial results. In particular, demand on both the Magnolia System and the MIT System is expected to fluctuate due to weather variations because of the large municipal or other seasonal customers which are served by these systems. There can be no assurances that the Company's efforts to minimize such effects will have any impact on future quarter to quarter fluctuations due to changes in demand resulting from weather conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- General." RISK OF ADVERSE PRICE CHANGES OR GAS MARKETING OPERATIONS As part of its natural gas marketing activities, the Company buys natural gas on the spot market for customers served by pipeline systems owned by the Company and for sales to those customers. Generally, natural gas is purchased under contracts that contain terms allowing prices to be determined by prevailing market conditions. Concurrently, the Company resells the gas at higher prices under sales contracts which are compatible as to term, price escalation, renegotiation and other material matters. The Company earns the difference between the gas purchase price it pays and the sales price it receives. Gas marketing is characterized by a high degree of competition and narrow margins. The profitability of the natural gas marketing operations of the Company depends in large part on the ability of the Company's management to assess and respond to changing market conditions in negotiating these natural gas purchase and sale agreements. As a consequence of the increase in competition in the industry and volatility of natural gas prices there has been a reluctance of end-users to enter into long-term purchase contracts. Moreover, consumers have shown an increased willingness to switch fuels between gas and alternate fuels in response to relative price fluctuations in the market. The inability of management to respond appropriately to changing market conditions could have a negative effect on the Company's profitability. The Company's gas marketing activities which utilize third-party transporters also exposes the Company to economic risk resulting from imbalances or nominated volume discrepancies which can result either in penalties having a negative impact on earnings or a transaction gain, depending on how and when imbalances are corrected. See "Business and Properties -- Major Customers." RISKS OF INADEQUATE GAS SUPPLIES The Company has historically purchased substantially all of its gas from unaffiliated third parties and on the spot market. These purchase contracts may be affected by factors beyond both the Company's and the gas suppliers' control such as capacity constraints, temporary regional supply shortages, and, with regard to its gathering systems, other parties having control over the drilling of new wells, inability of wells to deliver gas at required pipeline quality and pressure, and depletion of reserves. The future performance of the Company will depend to a great extent on the throughput levels achieved by the Company with respect to its existing pipelines and the pipelines acquired or constructed by it in the future. In order to maintain the throughput on its gathering systems at current levels, the Company must access new natural gas supplies to offset the natural decline in reserves as such supplies are produced. See "Business and Properties -- Natural Gas Supply." CHANGES IN GOVERNMENT REGULATION AND CONTINUING INDUSTRY TRANSITION Changes in the regulatory environment for the natural gas transportation industry, most notably Order 636, have profoundly affected the economics and structure of the natural gas transmission industry, and may continue to do so in the future. There can be no assurance that such evolution will ultimately result in greater opportunities for smaller gas pipeline companies. Furthermore, there can be no assurance that such regulations will be effective in meeting their goals of creating a level playing field for all natural gas buyers and sellers. FERC could issue new regulations which may subject some portion of the Company's unregulated business activity to FERC regulation, subject the MIT System to additional regulation or adversely affect the conduct of the Company's business. The construction, operation, maintenance and safety of the Company's intrastate pipelines are typically regulated by the state regulatory commissions with jurisdictional authority. As in the case of potential federal regulatory changes, there can be no assurances that state regulatory measures will not adversely affect the Company's intrastate business and financial condition. In such events, state regulatory authorities could temporarily suspend or hinder operations in a particular state, depending on the authority's view of its jurisdiction. Regulators at the state level have generally followed FERC's lead by allowing increased competition behind local distribution companies ("LDCs"); however, there can be no assurance that every state will follow this practice. See "Business and Properties -- Rate and Regulatory Matters." LIABILITIES AND COSTS UNDER ENVIRONMENTAL LAWS The Company is subject to federal, state and local laws, regulations and ordinances relating to the environment, health and safety, waste management, and transportation of hydrocarbons and chemical products. Various governmental authorities have the power to enforce compliance with these regulations and the permits issued pursuant to them, and violators are subject to civil and criminal penalties, including civil fines, injunctions, or both. Liability may be incurred without regard to fault for the cost of remediation of contaminated areas. Private parties, including the owners of property through which the Company's pipelines pass, may also have the right to pursue legal actions to enforce compliance and seek damages for noncompliance with environmental laws and regulations. The Company will make expenditures in connection with environmental matters as part of its normal operations and capital expenditures and the possibility exists that stricter laws, regulations or enforcement policies could significantly increase the Company's compliance costs and the cost of any remediation which may become necessary. There is inherent risk of the incurrence of environmental costs and liabilities in the Company's business due to its handling of oil, gas and petroleum products, historical industry waste disposal practices and prior use of gas flow meters containing mercury. There can be no assurance that material environmental costs and liabilities will not be incurred by the Company. Furthermore, there can be no assurance that the Company's environmental impairment insurance will provide sufficient coverage in the event an environmental claim is made against the Company. An uninsured or underinsured claim of sufficient magnitude could have a material adverse effect on the Company's financial condition. Additionally, in connection with any acquisition made by the Company, including the AlaTenn Acquisition, there may be liabilities that the Company fails or is unable to discover, including liabilities arising from non-compliance with governmental regulation and environmental laws by prior owners, and for which the Company, as a successor owner, may be responsible. See "Business and Properties -- Rate and Regulatory Matters" and "Business and Properties -- Insurance." HAZARDS AND OPERATING RISKS OF PIPELINE OPERATIONS The Company's operations are subject to the many hazards inherent in the natural gas transmission industry. These include damage to pipelines, related equipment and surrounding properties caused by hurricanes, floods, fires and other acts of God, inadvertent damage from construction and farm equipment, leakage of natural gas and other hydrocarbons, fires and explosions, and other hazards that could also result in personal injury and loss of life, pollution and suspension of operations. The Company maintains such insurance protection as it believes to be adequate against normal risks in its operations. There is no assurance that any such insurance protection will be sufficient or effective under all circumstances or against all hazards to which the Company may be subject. The occurrence of a significant event not fully insured against could materially adversely affect the Company's operations and financial condition. No assurance can be given that the Company will be able to maintain adequate insurance in the future at rates it considers reasonable. See "Business and Properties -- Insurance." Should catastrophic conditions occur which interrupt delivery of gas for any reason, such occurrence could have a material impact on the profitability of the Company's operations. NO ASSURANCE OF FUTURE DIVIDENDS The holders of the Common Stock are entitled to receive dividends if, when and as declared by the board of directors of the Company (the "Board") out of funds legally available therefor. The Company's current policy is to declare quarterly cash dividends at a rate of $.08 per share of Common Stock. The amount of future cash dividends, if any, will depend upon future earnings, capital requirements, covenants contained in various financing agreements of the Company and its subsidiaries, the financial condition of the Company and certain other factors. Accordingly, there can be no assurance that dividends will be paid by the Company in the future. See "Price Range of Common Stock and Dividend Policy." LIMITED TRADING MARKET FOR COMMON STOCK The Company's Common Stock is traded on the AMEX. Average daily trading volume for the Common Stock as reported by the AMEX for the first quarter 1997 was approximately 4,900 shares. Despite the increase in the number of shares of Common Stock to be publicly held as a result of the Offering, there can be no assurance that a more active trading market in the Common Stock will develop. Because there is a small public float in the Common Stock and it is thinly traded, sales of small amounts of Common Stock in the public market could materially adversely affect the market price for the Common Stock. Sales of Common Stock, or the perception that such sales could occur, could materially adversely affect prevailing market prices for the Common Stock and may make it more difficult for the Company to sell shares of Common Stock in the future at times and for prices that it deems appropriate. Upon completion of the Offering, the Company will have 4,500,000 shares of Common Stock outstanding (4,815,000 shares if the Underwriters' over-allotment option is exercised in full). The 2,100,000 shares of Common Stock sold in the Offering (2,415,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely transferable without restriction or registration under the Securities Act, unless purchased by persons deemed to be affiliates of the Company (as that term is defined under the Securities Act). Substantially all of the remaining 2,500,000 shares of Common Stock outstanding immediately following the Offering will be transferable without restriction or registration under the Securities Act, except for approximately 1,200,000 shares purchased by persons deemed to be affiliates of the Company (as that term is defined under the Securities Act) which will be subject to the volume restrictions under Rule 144. See "Shares Eligible for Future Sale."

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+ RISK FACTORS 1. Competition. The Company faces keen and increasing competition. A number of insurance sales groups solicit within the military market. To some extent, the Company relies on replacing competitors' policies with more cost effective ones for a portion of its sales. Competition is equally keen for USPA, due to the numerous investment opportunities available to military personnel. (See "Business of the Company.") 2. War. Business could be reduced if armed conflict (or even the prospect of armed conflict) involving United States military forces occurs. Such reductions have occurred in the past. In such event, insurance companies can be expected to limit or cease writing policies on military personnel which provide war coverage. Members of the sales force may be called to active duty. The Company could then be unable to cover its current high level of fixed operating expenses. 3. Reduction in Force. The U.S. military has experienced base closures and a reduction in force over the past few years resulting in a smaller market of active duty members of the military for the Company's services. Further such reductions can occur at any time. However, with approximately 1,500,000 active duty members currently, the Company will still be selling, and providing service, to less than twenty-five percent of its potential market (Rank of E-6 and above including all warrant and commissioned officer ranks). (See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business of the Company.") 4. No Civilian Sales Market. The Company's sales force has never sold competitively in the civilian market, and the Company has no plans to attempt to sell to such market. (See "Business of the Company.") 5. High Level of Compensation for Company's Agents. The Company must maintain a high level of compensation for its agents, inasmuch as the Company encourages its agents to maintain a high degree of professionalism, and the Company's business is highly competitive. (See "Business of the Company.") 6. Offering Price. The offering price of $27.04 per share was determined by the Company, in its sole and absolute discretion. There is no established public trading market for the shares, therefore, market forces do not and cannot determine share price. The offering prices results in a price/earnings ratio of approximately 3:1. (See "Prospectus Summary," "Determination of Offering Price" and "Description of Securities.") 7. No Control for New Investors; Voting Shareholders Control the Company. The Class A voting shareholders will continue to control the Company after the offering, regardless of whether or not the offering is complete, since all of the offered shares will be Class B Nonvoting Stock. The Company has made prior offerings of Class B Nonvoting Common Stock as follows: A Regulation A offering in 1981 to Company agents, an S-18 offering to this group in 1982, a Regulation A offering to this group in 1984, a Regulation A offering to this group in 1985, a Regulation A offering to this group in 1987, an S-18 offering to this group in 1990, an S-18 offering to this group in 1993, an S-1 offering to this group in 1995, and an S-1 offering to this group in 1996. Presently, the Company has approximately four hundred eighty (480) shareholders. The Class A voting shareholders will continue to control the Company after the offering is completed. (See "Principal Shareholders" and "Description of Securities.") 8. Restrictive Legend; Restrictions on Share Ownership and Transfer. All shares sold pursuant to the offering will bear the following legend which describes additional restrictions on ownership and transfer, more fully described in paragraph "9" below: "The transferability of these shares is limited by the provisions of Article 2.22 of the Texas Business Corporation Act and Articles 21.07-1 of the Texas Insurance Code, as well as the provisions of the Stock Agreement identified on the reverse side hereof." 9. Restrictions on Ownership and Transfer of Shares. As required by Texas law, only persons licensed as insurance agents by the state of Texas are permitted to own shares in an insurance agency incorporated in the state of Texas. Each first time shareholder must also execute a Stock Agreement which provides that in the event the shareholder fails to continue as a licensed insurance agent, ceases to be a duly authorized agent of the Company, dies, or desires to sell his shares, the Company will repurchase such shares within a period of ninety (90) days, and that the shares may not be pledged, assigned or encumbered. (See "Description of Securities" and "Appendix A - Stock Agreement.") 10. Stock Offered Hereunder. All of the Stock offered hereunder is Class B Nonvoting Common Stock. It is unlikely that any Class A Voting Common Stock will be offered in the foreseeable future, and the Class A Voting Common Stock is, and will likely continue to be, owned and voted by present shareholders. (See "Description of Securities.") 11. Payne Family Stock Agreement. Surviving members of the family of Carroll H. Payne, the Company's founder, Freda J. Payne, Debra Sue Payne, Carroll H. Payne II, and Naomi K. Payne, own 12 of the 25 outstanding shares of the Company's Class A Voting Common Stock and are parties to a certain Stock Agreement dated March 22, 1983, between such family members and the Company which provides, among other things, that in the event that any of such persons desire to sell or otherwise dispose of all or any portion of their Class A Voting Common Stock or in the event of the death of any such person, the other Payne family members shall have the option to purchase such shares, on a proportionate basis, for a period of sixty (60) days. These provisions of such Stock Agreement can be expected to have the effect of concentrating ownership of a significant number of the shares of Class A Voting Common Stock in the hands of first three, then two, and eventually one of these Payne family members. 12. No Market. There is not now and never has been a market for the Company's Class B Stock other than the Company itself. Because of the statutory and contractual restrictions on disposal of this Stock, it is extremely unlikely that a public market for the Stock will ever develop or that purchasers will be able to sell their shares other than in accordance with the "Stock Agreement." Investors may not be able to readily liquidate their shares of Stock of the Company. (See "Prospectus Summary," "Description of Securities," and "Appendix A-Stock Agreement.") 13. Management Will Have Broad Discretion Over the Allocation of Proceeds. All (100%) of the net cash proceeds to the Company from this offering (estimated to be $925,000 if the minimum number of shares is sold and $3,981,000 if the maximum number of shares is sold) shall become a part of its working capital, and shall be used for the continuing operation of the Company's business, for further development and expansion, and for limited contingency planning. Management of the Company will have broad discretion in determining the specific application of all of such net cash proceeds. (See "Purpose of Offering/Use of Proceeds.") 14. Agency Agreements Terminable at Will or Upon Short Notice. All of the agency agreements which the Company or its insurance agency subsidiaries have with the ten insurance carriers the Company represents as general agent are terminable at will or upon short notice. The Company has been doing business with these insurance carriers for from nine to twenty-six years or more (with the exception of the newest of the carriers represented by the Company, which the Company has done business with for less than one year) and is not aware of any intent on the part of any of these carriers to terminate any agency agreement. (See "Business of the Company.") 15. Make-Up of Company's Assets. Marketable securities, consisting of mutual fund shares, make up approximately sixty three percent (63%) of the Company's assets. Such securities are subject to fluctuations in value as a result of market forces. Furthermore, under applicable accounting policies, such securities are reported by the Company at such fair market value. (See "Index to Consolidated Financial Statements - Note 2, Summary of Significant Accounting Policies - Marketable Securities.") 16. Excess of Current Liabilities Over Current Assets. As of March 31, 1997 the Company's current liabilities of $27.4 million exceed its current assets of $19.6 million by $7.8 million. This is principally due to the amount of outstanding loans to the Company from insurance carriers calculated on first year commissions to be earned by the Company on certain insurance policies sold by its agents. See paragraph "17" below. If, for any reason, the Company is unable to meet its current liabilities as they become due, this could have an adverse impact on the Company's operations. 17. Loans From Insurance Carriers. The Company has loan agreements with five of the insurance carriers it represents as general agent whereby the carriers loan an amount to the Company equal to the difference between the total amount of first year commissions to be earned by the Company on certain insurance policies sold by its agents and the amount of commissions actually earned by the Company as of any particular date. As of March 31, 1997, outstanding loans from insurance carriers to the Company totalled approximately $11.6 million. Each of the loan agreements provides that the outstanding balance of any loan be repaid immediately by the Company if the policy upon which the loan was calculated is canceled during its first year. However, historically, less than five percent (5%) of the policies sold by the Company are canceled during the first year of the policy. (See "Business of the Company - Insurance Agency Operations.") 18. Government Regulation of the Company's Insurance, Securities and Banking Businesses. The insurance, securities and banking industries are heavily regulated as to trade practices. The Company and its agents, USPA and its registered representatives, and its bank employees must be continuously aware of such regulations and comply fully at all times. Regulatory fines, sanctions and suspensions do occur in the insurance, securities and banking industries, and can have a negative effect on financial results. (See "Business of the Company - Regulation and Competition.") 19. Possible Dilution of Ownership as a Result of Future Stock Offerings. Over the past fifteen years the Company has made a total of ten stock offerings to its agents, including this offering, and the Company may make additional stock offerings to its agents in future years. Any such future stock offerings may have the effect of diluting the percentage ownership of a stockholder in the Company's Class B Common Stock and the accompanying benefits with respect thereto, including dividends declared and paid on such stock, if any. (See "Prospectus Summary - The Offering" and "Purpose of Offering/Use of Proceeds".)

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+ RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should consider carefully the following risk factors, in addition to the other information contained in this Prospectus, in connection with an investment in the Common Stock offered hereby. This Prospectus contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the 1934 Act. The words "expect," "estimate," "anticipate," "predict," "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this Prospectus and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's financing plans; (iii) the Company's business strategies; and (iv) the declaration and payment of dividends. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The accompanying information contained in this Prospectus, including without limitation the information set forth below, as well as under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as information contained in the Company's 1934 Act filings with the Commission, identify important factors that could cause such differences. DEPENDENCE UPON PRINCIPAL SUPPLIERS. Compaq, Hewlett-Packard and IBM supplied approximately 19%, 17% and 3%, respectively, of the Company's Southeastern region purchases for the nine months ended December 31, 1996. No other supplier accounted for more than 3% of the Company's Southeastern region purchases during this period. The Company's authorized dealership agreements with Compaq, Hewlett-Packard and IBM are renewable annually and are subject to termination by Compaq, Hewlett-Packard, IBM or the Company with or without cause upon three months prior written notice, or immediately, under certain circumstances. The non-renewal or termination by Compaq, Hewlett-Packard or IBM of the Company's authorized dealer status would have a material adverse effect on the Company's business. Additionally, any significant reduction in promotional sales concessions by such suppliers could have a material adverse effect on the Company's business and its ability to compete. See "Business--Products and Principal Suppliers." COMPETITION. The sale of microcomputer equipment, related products and computer services is highly competitive. The Company competes with local, regional, national and international resellers and distributors and mail order providers of microcomputer equipment, related products and computer services, including network integrators and retail stores. Many of the Company's competitors are substantially larger, have more personnel, have substantially greater financial and marketing resources, and operate within a larger geographic area than the Company. The microcomputer distribution and support industry continues to experience a significant amount of consolidation. In the future, the Company may experience further competition from new market entrants and possible alliances between existing competitors. Additionally, the Company's recent reduction in size and geographic reach may make it a less desirable supplier for some of its customers. As a result of competition among microcomputer resellers, higher discounts given to large corporate customers and other factors, the Company's gross margins have continued to decline over the past several years, and there can be no assurance that such decreases will not continue. The Company is also increasingly competing with microcomputer manufacturers which market through direct sales forces and distributors. More aggressive competition by manufacturers of microcomputer products, such as offering a full range of services in addition to products, could have a material adverse effect on the Company's business. There can be no assurance that the Company will be able to compete successfully with its competitors in the future. See "Business--Competition." COMPETITIVE MARKET FOR TECHNICAL PERSONNEL. The Company's future success also depends largely on its ability to attract, hire, train and retain highly qualified technical personnel to provide the Company's services. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining the technical personnel it requires to conduct and expand its operations successfully and to differentiate itself from its competition. The Company's results of operations and growth prospects could be materially adversely affected if the Company were unable to attract, hire, train and retain such qualified technical personnel. See "Business--Employees." MANAGEMENT OF GROWTH AND REDEPLOYMENT OF THE COMPANY'S RESOURCES. The Company's future performance will depend in part on its availability to redeploy its resources to its remaining core business and to finance and manage any expansion of these operations. Additionally, the Company must adapt its management information system to changes in its business, including those related to the changing scope of its operations and the redirection of its efforts to its core business. The failure of the Company to effectively redeploy its resources, to manage growth effectively, or to successfully adapt its management information systems, could have a material adverse effect upon its business, financial condition and results of operations. LIQUIDITY AND CAPITAL RESOURCES. The Company has historically relied upon credit lines and trade credit from its vendors to satisfy its capital needs. The inability to obtain and retain such sources of capital could have an adverse affect on the Company's business, financial condition and results of operations. INVENTORY MANAGEMENT. The microcomputer distribution and support industry is characterized by rapid product improvement and technological change resulting in relatively short product life cycles and rapid product obsolescence. While most of the inventory stocked by the Company is for specific customer orders, inventory devaluation or obsolescence could have a material adverse effect on the Company's operations and financial results. Current industry practice among manufacturers is to provide price protection intended to reduce the risk of inventory devaluation, although such policies are subject to change at any time and there can by no assurance that such price protection will be available to the Company in the future. Also, the Company currently has the option of returning inventory to certain manufacturers and distributors, subject to certain limitations. The amount of inventory that can be returned to manufacturers without a restocking fee varies under the Company's agreements and such return policies may provide only limited protection against excess inventory. There can be no assurance that new product developments will not have a material adverse effect on the value of the Company's inventory or that the Company will successfully manage its existing and future inventory. In addition, the Company stocks parts inventory for its service business. Parts inventory is more likely to experience a decrease in valuation as a result of technological change and obsolescence, and there are no price protection practices offered by manufacturers with respect to parts. See "Business--Products and Principal Suppliers." PRODUCT SUPPLY. The computer distribution industry is dependent upon the supply of products available from its vendors. The industry is characterized by periods of severe product shortages due to vendors' difficulty in projecting demand for certain products distributed by the Company. When such product shortages occur, the Company typically receives an allocation of product from the vendor. There can be no assurance that vendors will be able to maintain an adequate supply of products to fulfill all of the Company's customer orders on a timely basis. Failure to obtain adequate product supplies, if available to competitors, could have an adverse affect on the Company's business, financial condition, and results of operations. VENDOR REBATES AND VOLUME DISCOUNTS. The Company's profitability has been favorably affected by its ability to obtain rebates and volume discounts from manufacturers and through aggregators and distributors. Because of the divesture of the Company's Eastern, Midwestern and Western regions, the Company has experienced a reduction in its volume discounts. Any additional reduction or elimination of rebates, volume discount schedules or other marketing programs offered by manufacturers and currently received by the Company could have a material adverse effect on the Company's operations and financial results. In particular, a reduction or elimination of rebates relating to government customers could adversely effect the Company's ability to serve government agencies in a highly competitive marketplace. See "Business--Products and Principal Suppliers". MANUFACTURER MARKET DEVELOPMENT FUNDS. Several manufacturers offer market development funds, cooperative advertising and other promotional programs to computer resellers. These funds are accounted for as reductions in selling, general and administrative expenses, thereby increasing net income. While such programs have been available to the Company in the past, there is no assurance that these programs will be continued. Any discontinuation or material reduction of these programs could have an adverse effect on the Company's operations and financial results. See "Business--Products and Principal Suppliers." RISKS ASSOCIATED WITH RAPID TECHNOLOGICAL CHANGE. The market for the Company's products and services is characterized by rapidly changing technology and frequent new product and service introductions. The development and commercialization of new technologies and the introduction of new products can render existing products and services obsolete or unmarketable. The Company's business depends on its ability to attract and retain highly capable technical personnel, to enhance existing services and to package newly developed and introduced service offerings of its own with products and services from vendors, on a timely and cost-effective basis, that keep pace with technological developments and address increasingly sophisticated client requirements. There can be no assurance that the Company will be successful in identifying and marketing service enhancements or supporting new products and services introduced by vendors that respond to technological change. In addition, the Company may experience contractual or technical difficulties that could delay or prevent it from successfully deploying new product and service offerings. See "Business--Industry." DEPENDENCE ON INDUSTRY ALLIANCES AND RELATIONSHIPS. The Company depends in part upon its alliances and relationships with leading hardware and software vendors, telecommunications carriers and Internet access service providers, particularly Compaq, Hewlett-Packard and IBM. Any adverse change in these relationships could have a materially adverse effect on the Company's results of operations and financial condition while it seeks to establish alternative relationships. Also, the Company will likely need to establish additional alliances and relationships in order to keep pace with evolutions in technology and enhance its service offerings, and there can be no assurance that such additional alliances will be established. See "Business--Products and Principal Suppliers." DEPENDENCE ON TELESALES CENTER. The Company's product sales network is dependent upon the Company's ability to protect its computer and telecommunications equipment and the information stored in its Clearwater, Florida, Telesales Center against damage from fire, hurricanes, power loss, telecommunications failures, unauthorized intrusion, computer viruses and disabling devices and similar events. There can be no assurance that an unforeseen event will not result in a prolonged disruption of the Company's product sales or that the Company can recover the full amount of its lost revenues from its insurance policies for business interruption. See "Business--Services." SUBSTANTIAL RELIANCE ON KEY CLIENTS. The Company estimates that its current top 25 clients accounted for approximately 29% of revenues in the nine months ended December 31, 1996. No one customer accounted for more than 5% of the Company's business during this period. The loss of any of its top 25 clients or any other large client or a significant reduction in purchases by any of the top 25 clients could have a materially adverse effect on the Company's results of operations. The Company's contracts to provide professional services to its clients generally do not obligate the client to purchase any minimum level of services and are terminable upon relatively short notice, often 30 days. There can be no assurance that the Company's largest clients will continue to enter into new contracts with the Company at current levels of business, if at all, or that existing contracts will not be terminated. VOLATILITY OF STOCK PRICE. The market price of the Common Stock could be subject to significant fluctuations in response to the Company's operating results and other factors, and there can be no assurance that the market price of the Common Stock will not decline below the current market price. Developments in the high technology industries or changes in general economic conditions could adversely affect the market price of the Common Stock. In addition, the stock market has from time to time experienced extreme price and volume volatility. These fluctuations may be unrelated to the operating performance of particular companies whose shares are traded and may adversely affect the market price of the Common Stock. See "Price Range of Common Stock." DEPENDENCE ON SENIOR MANAGEMENT. The Company is largely dependent upon its senior management team. The loss of the services of any member of its senior management for any reason could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management."

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+ RISK FACTORS AN INVESTMENT IN THE COMMON STOCK IS HIGHLY SPECULATIVE, INVOLVES A HIGH DEGREE OF RISK, AND SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT DECISION, SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER MATTERS REFERRED TO IN THIS PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS AND NOTES THERETO, THE FOLLOWING RISK FACTORS. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IMPLIED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. THE ORDER IN WHICH THESE CONSIDERATIONS ARE PRESENTED SHOULD NOT BE INTERPRETED AS BEING INDICATIVE OF THEIR RELATIVE IMPORTANCE. THIS SECTION CONTAINS FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." LOSSES FROM RECENT OPERATIONS; WORKING CAPITAL DEFICIENCY The Company incurred operating losses of $1,814,370, $2,368,226 and $328,647, respectively, during the six months ended December 31, 1996, the year ended June 30, 1996 and the six and one-half months ended June 30, 1995. The Company's operating loss for the six month period ended December 31, 1996 exceeded 75% of the operating loss for the preceding twelve month period, primarily as a result of increased cost of sales as a percentage of net sales and an asset impairment charge, both of which were associated with the accelerated pace of the Company's updating of its product lines. As of December 31, 1996, the Company had a working capital deficiency of $5,851,527. The Company has been largely dependent upon loans from ETS, ST and its affiliates to satisfy its working capital requirements. See "Debt Financing" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Accordingly, the likelihood of the future success of the Company must be considered in light of its recent bankruptcy and the possibility of future operating losses, as well as the problems, expenses, difficulties, risks and complications frequently encountered in connection with similarly situated companies. In addition, the Company's future plans are subject to known and unknown risks and uncertainties that may cause the Company's actual results in future periods to be materially different from any future performance implied herein. See "Recent Bankruptcy" below and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEBT FINANCING The Company has been largely dependent on a succession of short-term loans and guarantees from its controlling shareholder and affiliates thereof since it emerged from Chapter 11 protection approximately two years ago. At present Radyne has short-term indebtedness of $4,100,000 to ST, payable on April 30, 1997, and has $10,500,000 in bank lines of credit on which it owes approximately $6,900,000. Although the Company's indebtedness to the banks is not supported by a guarantee or any other form of binding agreement, the banks have been provided with letters of awareness by ST's grandparent corporation, Singapore Technologies Pte Ltd. Certain loans pursuant to these bank lines are demand loans. There can be no assurance that the banks will not demand repayment at an inopportune time for the Company or that ST and its affiliates will continue to assist the Company in maintaining such financing. If the Company were to fail to realize substantially the anticipated net proceeds of the Rights Offering, its ability to repay its indebtedness (including its indebtedness to ST) and its financial condition could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ADDITIONAL FINANCING REQUIREMENTS Based on the Company's operating plan, the Company believes that the net proceeds of the Rights Offering, together with cash flows from operations and funding available under its bank credit lines, will be sufficient to satisfy its capital requirements and finance its plans for expansion for at least the next 12 months. Such belief is based on certain assumptions, including without limitation the respective rates of growth of the Company's orders and sales, and there can be no assurance that such assumptions are correct. Accordingly, there can be no assurance that such resources will be sufficient to satisfy the Company's capital requirements for such period. After such 12-month period, the Company anticipates that it may require additional financing in order to meet its current plans for expansion. Such financing may take the form of the issuance of common or preferred equity securities or debt securities, or may involve additional bank financing. There can be no assurance that the Company will be able to obtain such additional capital on a timely basis, on favorable terms, or at all. See "Purpose of the Rights Offering and Use of Proceeds," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RECENT BANKRUPTCY In April 1994, Radyne sought protection from creditors under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). By order dated December 16, 1994, a Plan of Reorganization was confirmed by the United States Bankruptcy Court for the Eastern District of New York and the Company emerged from protection under Chapter 11 of the Bankruptcy Code. Despite the belief of the Company that the confluence of circumstances which caused the Company to seek bankruptcy protection no longer persists, the business and reputation of the Company have undoubtedly been damaged. See "Business-- Bankruptcy Reorganization." DEPENDENCE ON FACILITY The Company maintains only one facility. Accordingly, any disruption or suspension in the operations of the Facility would require the Company to seek alternative facilities. While the Company believes that it would be able to arrange for a suitable alternative facility without any significant interruption in its business operations, there can be no assurance thereof. If for any reason a suitable alternative facility could not be found, the Company's operations could be materially and adversely affected. See "Business-- Facilities." DEPENDENCE ON INTERNATIONAL MARKETS The Company's success will be materially dependent upon its ability to continue to successfully market video and data communication products in both international and domestic markets. The Company's export sales, as a percentage of net sales, increased from approximately 46% in the six and one-half month period ended June 30, 1995 to approximately 66% in the six month period ended December 31, 1996. This figure may increase further in the future. The figure for the recent period includes sales to a single customer in Brazil and combined sales to several customers in China accounting for 18.3% and 19.4%, respectively, of the Company's net sales. The Company has entered into distribution or representation agreements with companies in Europe, the Middle East, Canada, Latin America and the Pacific Rim. There can be no assurance that these arrangements will be successful or continuing. Foreign sales may be subject to political and economic risks, including political instability and changes in import/export regulations, tariffs, freight rates and currency exchange rates. Changes in current tariff structures or other trade policies could adversely affect the Company's sales to foreign customers. Failure to realize growth in its international sales could have a material adverse impact on the Company's business and financial condition. See "Business--Sales and Marketing." DEPENDENCE ON DISTRIBUTORS AND PRINCIPAL CUSTOMERS Sales to distributors and large orders from individual customers have constituted and are anticipated to constitute a significant portion of the Company's business. One customer has accounted for over 11% of the Company's net sales for the ten and one-half month period ended December 16, 1994, the six and one-half month period ended June 30, 1995, the year ended June 30, 1996 and the six month period ended December 31, 1996. For the latest of those periods one order from another customer accounted for over 18% of the Company's net sales. For the period ended June 30, 1995, another single order accounted for 22% of net sales. The loss of any of these distributors or the failure to generate such large orders could have a material adverse effect on the operating results and financial condition of the Company. The Company's distributors are not obligated to purchase any minimum quantity of the Company's products. There can be no assurance that such distributors will continue to purchase the Company's products or that the Company will be able to enter into favorable agreements with other distributors for the sale of its products. See "Business--Sales and Marketing." DEPENDENCE ON KEY PERSONNEL AND RECRUITMENT The Company's future performance is significantly dependent on the continued active participation of Robert C. Fitting, its President, and Steve Eymann, Executive Vice President, and Peter Weisskopf, Microwave Products Division President. Should any of these key employees leave or otherwise become unavailable to the Company, the Company's business and results of operations could be materially adversely affected. See "Management." The ability of the Company to attract and retain highly skilled personnel is critical to the operations and expansion of the Company. To date, the Company has been able to attract and retain the personnel necessary for its limited operations. However, there can be no assurance that the Company will be able to do so in the future. If the Company is unable to attract and retain personnel with necessary skills when needed, its business and expansion plans could be materially adversely affected. MANUFACTURING The Company's products are to a certain extent assembled and tested at its Phoenix, Arizona facilities using subsystems and circuit boards supplied by subcontractors. Although the Company believes that it maintains adequate stock to reduce the procurement lead time for certain components, the Company's products use a number of specialized chips and customized components or subassemblies produced by a limited number of suppliers. In the event that such suppliers were to be unable to fulfill the Company's requirements, the Company could experience an interruption in production until an alternative source of supply was developed. Moreover, given its previous financial difficulties, the Company has experienced inflexibility on the part of some suppliers as to the delivery of components in desired quantities on acceptable credit terms. The Company believes that there are a number of companies capable of providing replacements for the types of unique chips and customized components and subassemblies used in its products. See "Business--Manufacturing". RAPID TECHNOLOGICAL CHANGE The market for modems, converters and related equipment is characterized by rapid and significant technological change. There can be no assurance that the Company's competitors will not succeed in developing or marketing products or technologies that are more effective and/or less costly and which render the Company's products obsolete or non-competitive. In addition, new technologies could be developed that replace or reduce the value of the Company's products. For example, as more fiber cables are laid under the oceans or otherwise brought into service, the use of satellites for international telephony is slowing. The Company's success will depend in part on its ability to respond quickly to technological changes through the development and improvement of its products. Accordingly, the Company believes that a substantial amount of capital will be required to be allocated to research and development activities in the future. There can be no assurance that the Company's product development efforts will be successful. The failure by the Company to improve its existing products and develop new products could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Industry Overview", "Business--Research and Development" and "Business-- Competition." RESEARCH AND DEVELOPMENT The Company's research and development efforts to date have been devoted to the design and development of new products for the satellite communications and telecommunications industries. The Company's future growth depends on increasing the market shares of its new products and adaptation of its existing satellite communications products to new applications, and the introduction of new communications products that will find market acceptance and benefit from the Company's established international distribution channels. Accordingly, the Company is actively applying its communications expertise to design and develop new hardware and software products and enhance existing products. However, there is no assurance that the Company will continue to have access to sufficient capital to fund the necessary research and development or that such efforts, even if adequately funded, will prove successful. In its fiscal years ended June 30, 1995 and June 30, 1996 and the six months ended December 31, 1996, the Company spent $0, $1,795,000 and $808,000, respectively, on research and development activities. During this period, the Company introduced the RCS-10 Redundant Modem System, the DMD-15 Universal Modem, the DVB-3000 Digital Video Modulator, the SFC-6400 Up Converter, the SFC-4200 Down Converter, and the RCS-20 Modem Switch as well as the DMD-2400 Modem. See "Business--Research and Development". COMPETITION The Company has a number of major competitors in the satellite communications field. These include large companies, such as Hughes Network Systems, NEC, California Microwave, and Spar Aerospace, which have significantly larger and more diversified operations and greater financial, marketing, human and other resources than Radyne. The Company believes that it has been able to compete by concentrating its sales efforts in the international market, utilizing the resources of local distributors, and by emphasizing product features. However, most of the Company's competitors offer products which have one or more features or functions similar to those offered by the Company. The Company believes that the quality, performance and capabilities of its products, its ability to customize certain network functions and the relatively lower overall cost of its products, as compared to the costs generally offered by the Company's major competitors, have contributed to Radyne's ability to compete successfully. However, the Company's major competitors have the resources available to develop products with features and functions competitive with or superior to those offered by the Company. There can be no assurance that such competitors will not successfully develop such products or that the Company will be able to maintain a lower cost advantage for its products. Moreover, there can be no assurance that the Company will not experience increased competition in the future from these or other competitors currently unknown. See "Business-- Competition." PATENTS AND INTELLECTUAL PROPERTY The Company believes that improvement of existing products, reliance upon trade secrets, copyrights and unpatented proprietary know-how and the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. Because patents often provide only narrow protection which may not provide a competitive advantage in areas of rapid technological change and because patent applications require public disclosure of information which may otherwise be subject to trade secret protection, Radyne has not obtained, and has no present intention to obtain, patents on existing products. However, there can be no assurance that the Company's technology will not be found to infringe upon the intellectual property of others. If the Company's technology should be found to impermissibly utilize the intellectual property of others, the Company's ability to utilize the technology could be materially restricted or prohibited. In such event, the Company might be required to obtain licenses from third parties to utilize the patents or proprietary rights of others. No assurance can be given that any licenses required could be obtained on terms acceptable to the Company or at all. In addition, in such event, the Company could incur substantial costs in defending itself against infringement claims made by third parties or in enforcing its own intellectual property rights. It should also be noted that some foreign countries in which the Company's products are sold provide less protection to intellectual property than do the laws of the United States. Although the Company believes that its significant intellectual property (generally firmware included in the Company's products) is unlikely to be successfully misappropriated by foreign competitors, there can be no assurance that no such misappropriation will ever occur or that the Company's business would not be adversely affected by such a misappropriation. See "Business-- Technology." CONTROL BY PRINCIPAL STOCKHOLDER Upon the closing of the Rights Offering, ST, which currently owns approximately 91% of the Company's outstanding Common Stock, will continue to own a substantially similar level of control together with its affiliate, SPL. ST and SPL will, therefore, continue to have the ability to elect all of the directors of the Company and to control the outcome of all issues submitted to a vote of the stockholders of the Company. As a result of ST and SPL's substantial ownership interest in the Common Stock, it may be more difficult for a third party to acquire the Company. A potential buyer would likely be deterred from any effort to acquire the Company absent the consent of ST and SPL or their participation in the transaction. See "Principal and Management Stockholders." The Company is subject to Section 912 of the New York Business Corporation Law, which restricts certain business combinations that are not approved by a corporation's board of directors. NO DIVIDENDS The Company has not paid any cash dividends on the Common Stock since inception and does not intend to pay any dividends to its stockholders in the foreseeable future. The Company currently intends to reinvest earnings, if any, in the development and expansion of its business. See "Dividend Policy" and "Description of Common Stock." SUBSTANTIAL PORTION OF NET PROCEEDS ALLOCATED FOR GENERAL CORPORATE AND WORKING CAPITAL PURPOSES Approximately $1,238,000 of the net proceeds from the Rights Offering are expected to be allocated for the reduction of short-term bank debt or for general corporate and working capital purposes (including research and development costs). However, such proceeds may be utilized in the discretion of the Board of Directors. As a result, investors will not know in advance how such net proceeds will be utilized by the Company. See "Purpose of the Rights Offering and Use of Proceeds." IMMEDIATE AND SUBSTANTIAL DILUTION; NET TANGIBLE BOOK VALUE DEFICIENCY BEFORE OFFERING Upon the closing of the Rights Offering, investors in the offering will incur immediate and substantial dilution in the per share net tangible book value of their Common Stock. At December 31, 1996, giving effect to the Reverse Split and receipt by the Company of the maximum net proceeds of the Rights Offering, the Company had a pro forma net tangible book value of approximately $.04 per share. Net tangible book value is the amount of the Company's total assets minus intangible assets and liabilities. See "Dilution." To the extent that Rights are exercised by other Holders and Rights Options are exercised by employees, shareholders who do not exercise their Rights in full will realize a dilution in their percentage voting interest and ownership interest in future net earnings, if any, of the Company. The Company is not able to predict the effect, if any, the Rights Offering will have on the market price of the Common Stock. See "Market Considerations; Volatility of Stock Price" below. In addition to the 280,000 presently exercisable Rights Options, the Company currently has outstanding under the 1996 Incentive Stock Option Plan options which (if certain performance targets are met) may become exercisable to purchase an aggregate of 668,395 shares of Common Stock at an exercise price of $2.50 per share. Options on an additional 20,000 shares will become exercisable at $2.50 per share over the next four years, assuming that the grantees' employment does not terminate prematurely. An additional 313,647 shares are available for options yet to be granted under the Plan. Exercise of the options granted under the 1996 Incentive Stock Option Plan would further reduce a shareholder's percentage voting and ownership interest. See "Management--Stock Option Plan." ELIMINATION OF PREEMPTIVE RIGHTS The Company's shareholders recently voted to amend the Company's Certificate of Incorporation to eliminate the preemptive rights accorded shareholders under Section 622 of the New York Business Corporation Law with respect to the purchase of securities of the Company. Therefore, the Company may in the future offer securities for sale without giving existing shareholders an opportunity to purchase any particular amount of such securities. SHARES ELIGIBLE FOR FUTURE SALE The sale, or availability for sale, of a substantial number of shares of Common Stock in the public market subsequent to this offering pursuant to Rule 144 under the Securities Act ("Rule 144") or otherwise could materially adversely affect the market price of the Common Stock and could impair the Company's ability to raise additional capital through the sale of its equity securities or debt financing. Upon completion of the Rights Offering, if all Rights and Rights Options are fully exercised, there would be approximately 6,015,554 shares of Common Stock issued and outstanding. Of these shares, the Company believes that approximately 905,554 would be freely transferable immediately due to the present or prior registration or the present availability of a Rule 144 exemption from the requirement of registration. The remaining approximately 5,110,000 shares would be "restricted securities" for purposes of the Securities Act and would be eligible for resale at various times in the future, in each case subject to the volume and manner of sale limitations of Rule 144 under the Securities Act. Of these restricted shares, 3,400,000 shares are owned by ST and it is estimated that 1,680,000 shares would be owned by SPL. In addition to the Rights Options (which have been taken into account in the above figures), there are currently 1,002,042 shares of Common Stock reserved for issuance pursuant to options granted or to be granted under the 1996 Incentive Stock Option Plan. See "Shares Eligible for Future Sale." In addition, the Registration Statement, of which this Prospectus forms a part, includes a separate prospectus relating to the offering and resale by one shareholder of 30,000 shares of Common Stock. See "Concurrent Sale by Selling Stockholder." DISCLOSURES RELATING TO LOW PRICED STOCKS The Company's securities are subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended, which imposes additional sales practice requirements for broker-dealers which sell penny stocks to persons other than established customers and accredited investors as defined in Regulation D under the Securities Act of 1933. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, such rule may adversely affect the ability of broker-dealers to sell the Company's securities and may adversely affect the ability of purchasers in the Rights Offering to sell any of the securities acquired hereby in the secondary market. Securities and Exchange Commission regulations define a "penny stock" to be any equity security not registered on a national securities exchange or for which quotation information is disseminated on NASDAQ that has a market price (as therein defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Unless exempt, the rules require delivery, prior to a

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+ RISK FACTORS This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended. Actual events or results could differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the risk factors set forth below and elsewhere in this Prospectus. The following risk factors should be considered carefully before purchasing the Common Stock or Warrants offered hereby. RECENT CHANGE IN BUSINESS OPERATIONS/CHANGES IN MANAGEMENT As discussed under "BUSINESS-Recent Acquisitions, Dispositions and Transactions," since acquiring all of the assets and liabilities of Energy and its wholly owned subsidiary, CTL, in July of 1995, the Company has changed the focus of its business operations several times. In addition, the Company has experienced significant management changes during this period. These changes have resulted in certain inefficiencies resulting from the interruption and loss of momentum in the activities of the companies acquired and of those which were disposed. Although, the Company believes this activity is not unusual for a company attempting to bring new products to market, continued changes of the nature experienced in the past two years could likely have a material adverse effect on the Company's operations. LIMITED OPERATING HISTORY; HISTORY OF LOSSES Due to the Company's change of business purpose, the Company has a limited operating history that is relevant to its proposed future operations. The Company does not anticipate producing significant new operating revenues until such time, if ever, that it begins assembling and selling Dual Inline Memory Modules ("DIMMs") and commences production of chip on board ("COB") memory modules using the Patch Technology. There can be no assurance that the DIMMs and COB memory modules, if developed and manufactured, will be able to compete successfully in the marketplace and/or generate significant revenue. The Company anticipates incurring significant costs in connection with the development of its technologies and proposed products and there is no assurance that the Company will achieve significant revenues to offset anticipated operating costs. Included in such operating costs are research and development expenses, marketing costs, manufacture and assembly, and general and administrative expenses. The Company's financial statements reflect the increased operating expenses that the Company has incurred. Specifically, the Company's operating losses increased from $433,000 in 1995 to $5,196,000 in 1996 and from $3,544,000 in the third quarter of fiscal 1996 to $6,025,000 in the third quarter of fiscal 1997. Similarly, the net cash (used in) operating activities increased from ($201,000) in 1995 to ($1,697,000) in 1996 and from $(1,764,000) in the third quarter of fiscal 1996 to $(5,549,000) in the third quarter of fiscal 1997. Inasmuch as the Company will continue to have high levels of operating expenses and will be required to make significant expenditures in connection with its continued research and development activities, the Company qualification of the manufacturing process specific to a proposed product that will use the Company's patented particle interconnect technology (the "PI Technology") and a proprietary trade secret electroplating process (the "Proprietary Electroplating Process"). The Company does not intend to develop full production capacity to actively produce products using the PI Technology, rather it intends to enter into licensing or joint venture relationships with product manufacturers who will manufacture the products. The Company currently conducts its operations by and through its wholly owned subsidiaries, CTL and Particle Interconnect Corporation ("PI Corp."), and through its majority-owned subsidiary, Sigma 7. The PI Technology requires significant additional effort to complete validation and documentation and to establish acceptance of the PI Technology by the market and therefore, the Company does not anticipate operating revenues from its PI Technology until such time, if ever, that it enters into licensing or joint venture relationships with existing manufacturers who desire to use the PI Technology and the PI Technology is accepted in the market place. RECENT TRANSACTIONS DISPOSITION OF ANTENNA TECHNOLOGY Until recently, the Company had anticipated pursuing a new line of business involving the development and manufacture of shielded cellular phone antennas. The Company had obtained the rights to certain patent applications relating to certain technology (the "Antenna Technology") designed to reduce actual or perceived potential health hazards that may be associated with exposure to electromagnetic signals by using a "shielded" antenna that the Company jointly developed with the Telecommunications Research Center at Arizona State University ("ASU"). Based on subsequent evaluations of the Antenna Technology by the Company and the review of the Antenna Technology by an independent investment banking company, the Company determined that it was in the Company's best interest to divest itself of the proposed design, development and production of the Antenna Systems conducted by its wholly owned subsidiary Intercell Wireless Corp. ("Intercell Wireless"), as well as the manufacture of miniature and non- miniature coils, transformers and other electronic assemblies conducted by its wholly owned subsidiary Cellular Magnetics, Inc. ("Cellular Magnetics"). On July 18, 1997, the Company sold all of its right, title and interest in the Antenna Technology and its wholly owned subsidiaries (the "Antenna Transaction") to Intercell Technologies Corporation ("ITC"), a Colorado corporation, of which Terry W. Neild and Lou L. Ross own a controlling interest. At the time the transaction was proposed, Mr. Neild was a director and Executive Vice President of the Company and Mr. Ross was a consultant to the Company. As consideration for the sale, the Company received shares and warrants for shares of ITC common stock, shares of the Company's common stock held by shareholders of ITC and certain promissory notes. The total consideration received was valued at approximately $2,300,000. No gain or loss was recorded on this disposition. See "BUSINESS-Recent Acquisitions, Dispositions and Transactions." anticipates that such losses will continue until such time, if ever, as the Company is able to generate sufficient revenues to exceed its total costs of operation. As of June 30, 1997, the Company had an accumulated deficit of $13,418,000. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "PROSPECTUS SUMMARY-Summary Historical Consolidated Financial Data of the Company." NEW LINES OF BUSINESS The Company intends to enter into licensing agreements with various connector manufacturers to develop and market its products using the PI Technology. In addition the Company intends to develop a new product line of DIMMs and COB memory modules using the Patch Technology. The Company's long-term profitability and growth depend in part upon the successful completion of the development, manufacture and distribution of DIMMs and COB memory modules and entering into licensing or joint venture relationships with leading connector manufacturers. The Company can provide no assurances that, with respect to the PI Technology, that such agreements and relationships will be entered into, or that the DIMMs and COB memory modules will be developed, manufactured, marketed or distributed. In connection with the development of commercially saleable prototypes, the Company must successfully complete a testing program for the products before they can be marketed. Unforeseen technical problems arising out of such testing could materially and adversely affect the Company's ability to manufacture a commercially acceptable version. Other than the operations of CTL and Sigma 7, the Company has no experience or business history in marketing any of the products it intends to manufacture and sell. In addition, the manufacture and sale of COB memory modules using the Patch Technology has not been tested under full production. There can be no assurance that the Company will gain the necessary experience, either through the hiring of experienced personnel or by acquiring such experience through trial and error, to ever successfully and profitably bring products that use its PI Technology to market. NO IMMINENT JOINT VENTURES OR PARTNERSHIPS As discussed in more detail herein, the Company intends to license the PI Technology and Proprietary Electroplating Process with existing interconnect manufacturers. Although the Company has had discussions with potential licensees, no agreements, written or otherwise, of any material nature have been formally or informally entered into with respect thereto and there can be no assurances given that any such relationships will be entered into in the future. FUTURE CAPITAL REQUIREMENTS The Company's capital requirements have been and will continue to be significant. The Company's need to obtain financing from outside sources, will primarily depend on the success of Sigma 7 and the Company's ability to successfully bring its PI Technology to market. If such ACQUISITION OF SIGMA 7 On June 6, 1997, the Company acquired approximately 90% of the outstanding shares of common stock of Sigma 7, a Delaware corporation, which conducts its business operations at its facilities located in San Diego, California, through Sigma 7's wholly owned subsidiary, BMI Acquisition Group, Inc. ("BMI"). The Company acquired control of Sigma 7 in exchange for the payment of $550,000 and by providing approximately $1,985,000 in additional financing, consisting primarily of secured loans and standby letters of credit. In addition, the Company agreed to issue 1,000 shares of a new class of its Series D Preferred Stock to holders of certain preferred shares of BMI to eliminate such preferred shares. For the purposes of this exchange the Series D Preferred Stock was valued at $2,500 per share. See "BUSINESS-Recent Acquisitions, Dispositions and Transactions." MEMORY MODULES The Company, through Sigma 7, designs, tests, markets and sells standard memory modules. Through its development of proprietary testing technologies, the Company purchases memory integrated circuits (also referred to as "die" or "chips") at the wafer level, before they are tested and sorted and uses these wafers to produce SIMMs (Single Inline Memory Modules), as well as other products. The Company does not manufacture memory chips or, at this time, package such memory chips, rather, the Company has entered into various wafer program agreements with certain major semiconductor manufacturers, wherein such manufacturers have agreed to sell to the Company, at a discount, packaged, untested memory chips at the wafer level. The Company believes that this process provides it with a cost advantage over competitors in the same marketplace. With respect to future products, the Company is in the engineering phase for production of DIMMs (Dual Inline Memory Modules), and is preparing to enter the final engineering phase for production of chip on board ("COB") memory modules. The Company has submitted a patent application for new technology that enables it to use faulty memory products, typically the cause of yield and margin problems for conventional manufacturers, in producing fully functional memory modules (the "Patch Technology"). If successful in production, this Patch Technology will provide significant competitive advantages to the Company by driving down material costs and, when used to "patch," COB will, it is believed, represent a significant segment of business for the Company, since it allows COB to be readily salvaged without damaging the printed circuit board. The Company believes that this new technology, coupled with the wafer program, could potentially lower the Company's cost of goods sold compared to traditional memory module manufacturers, resulting in larger gross profit margins upon the sale of its products. See "BUSINESS-The Company's Memory Module Business" for a discussion of the Patch Technology. products prove unsuccessful, the Company will need to obtain additional debt or equity financing and there can be no assurance the Company can successfully consummate any such future financing on terms favorable to the Company, or at all. Certain factors, among others, could affect the Company's access to the capital markets or the cost of such capital, including the perception in the capital markets of the Company's present businesses, results of operations, leverage, financial condition and business prospects or concerns in the capital markets regarding the potential for growth in the particular industries in which the Company's subsidiaries conduct their businesses. If additional funds are raised by issuing equity securities, further dilution to the existing stockholders will result. If adequate financing is not available, the Company may be required to delay, scale back or eliminate its research and development or manufacturing programs or obtain financing through arrangements with partners or others that may require the Company to relinquish rights to certain of its technologies, patents, potential products or other assets. In this regard, with respect to the development of the PI Technology, the Company has determined that its future capital requirements will be met in part by entering into licensing or other similar arrangement with existing connector manufacturers. The failure to enter into such relationships could result in the Company requiring substantial additional capital and resources to bring the PI Technology to market. The Company does not believe that, in the absence of such relationships, it will have the necessary resources to compete in the Z-axis interconnect market. The Company can provide no assurances that it will be successful in entering into such relationships in the future. The inability to obtain such financing could have a material adverse effect on the Company's business, financial condition and results of operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." RIGHTS TO PI TECHNOLOGY Pursuant to oral and written representations and warranties of Particle Interconnect, Inc., a California corporation ("Particle California"), made to the Company at the time of its merger with and into PI Corp. on September 3, 1996, the Company believed that it was purchasing all right, title and interest in and to the PI Technology, with the exception of certain licenses granted to others to practice the inventions. Subsequent to such transaction, the Company became aware of a purported assignment on February 14, 1991 of a one-half interest, title and right in and to the then patent application, which is now U.S. Patent No. 5,083,697 (a basic patent underlying the PI Technology), all inventions disclosed in the patent description and all patents that might be granted on those inventions, made by Louis DiFrancesco, the inventor of the PI Technology, to Mr. Kenneth S. Bahl. To the extent the assignment is valid, which the company does not concede, Mr. Bahl would have a one-half interest in certain patents underlying and in and to the PI Technology. As the joint owner of these patents, Mr. Bahl may sell his interest therein for his own profit, or license others to import, make, use, sell or offer to sell without regard to the rights of the Company. Mr. Bahl may have licensed the technology to another company at or about the time of the assignment of the half interest to him. Mr. Bahl may sell the interest or any part of it, or grant licenses to others without regard to the ELECTRON TUBES The Company manufactures and rebuilds a wide variety of electron power tubes in numerous forms and models which service the frequency range of 200 KHz to 18,000 MHz. Currently, the Company provides rebuilt and new electron tubes to a wide variety of customers who use microwave technology in various types of applications, including AM and VHF radio, television, linear accelerators, radar, electron guns and industrial microwave and heating use. This line of business will continue to be conducted by and through the Company's wholly owned subsidiary, CTL. Electron power tubes or electron tubes are enclosed tubes, in which electrons act as the principal conductors of current between at least two electrodes. Electron tubes fall into two categories, oscillators and amplifiers. Oscillators are typically magnetrons and power grid tubes (triodes and tetrodes), and amplifiers are klystrons and traveling wave tubes. Electron power tubes are commonly identified by reference to the frequency band of the electromagnetic spectrum (generally the L-band through KU-band) within which they operate. Electron and vacuum tubes are generally recognized as the dominant technology for the generation of high power radio frequency ("RF") and microwaves. Consequently, these tubes are used by many companies for widely varying applications. The manufacturing and rebuilding of these units is a significant industry. The Company estimates that the annual worldwide rebuilt market is approximately $5.7 million for magnetron tubes and $20 million for power grid tubes. The Company believes that it is one of the more significant domestic companies engaged in rebuilding electron power tubes in the United States. The Company manufactures and rebuilds electron tubes in numerous iterations and models that service the frequency range of 200 KHz to 18,000 MHz with power levels of up to three million watts. The Company's product lines operate within the following frequency bands: HF and UHF bands - 200 KHz to 1,000 MHz, L-band 500 MHz to 2,000 MHz; S-band 2,000 MHz to 4,000 MHz; C-band 4,000 MHz to 8,000 MHz; X-band 7,000 MHz to 12,000 MHz and Ku-band 12,000 MHz to 18,000 MHz. The Company primarily manufactures and rebuilds electron power tubes categorized as follows: CW (continuous waive) magnetrons, pulsed magnetrons, klystrons, power grid tubes (triodes and tetrodes), linear accelerators guides and electron guns. In the markets in which the Company competes, the Company believes it is the major supplier of L-band, C.W. magnetrons in the world and one of the major rebuilders of high power and high frequency triodes. The Company is engaged in a very narrow segment of the microwave technology industry, the rebuilding of electron and microwave tubes, and has attempted to avoid direct competition with the major manufacturers of microwave products. The manufacturing of new microwave products is dominated by several very large companies in the United States and internationally. To date, these companies have not chosen to dedicate their resources to the rebuilding of such products or the manufacture of the electron tubes the Company manufactures. Company's wishes. Any other sale or assignment that may have occurred and any future assignments, sale or license of Mr. Bahl's one-half interest in the patents to other persons or entities could materially adversely affect the Company's business, financial condition and results of operations with respect to the PI Technology. The Company currently is negotiating with Mr. Bahl to acquire his purported interest in the patents referred to above. See "BUSINESS- Intellectual Property." GOING CONCERN QUALIFICATION The independent auditor's report of Sigma 7, for the fiscal year ended December 31, 1996 was issued under the assumption that Sigma 7 would continue as a going concern. As discussed in Note 2 to the Sigma 7 financial statements for the 1996 fiscal year, Sigma 7 has experienced operating losses over the past two years, resulting in a deficit equity position. Sigma 7's auditors believed, based on the financial results of Sigma 7 as of December 31, 1996, that such results raised substantial doubts about the ability of Sigma 7 to continue as a going concern. Since such date, Sigma 7 has undergone significant changes- including the acquisition of Sigma 7 by the Company-resulting in an investment in Sigma 7 by the Company of approximately $3,664,365 and the implementation of significant changes to the Company's business operations, including the installation of a new management team. See "BUSINESS-History of the Company" and "INDEX TO FINANCIAL STATEMENTS." DEPENDENCE ON LIMITED SOURCES OF SUPPLY The Company currently depends on two major semiconductor manufacturers for the supply of substantially all memory chips used by the Company in assembling its memory modules. The Company can provide no assurances that this source of supply will continue in the future or, if this source of supply ceases, that it can obtain an adequate supply of flawed, when used, and non-flawed memory chips from one or more additional suppliers. Due to the possibility of creating an adverse market image, certain semiconductor manufacturers may be hesitant to provide Sigma 7 with a supply of flawed memory chips at such times when Sigma 7 may desire to purchase such memory chips. At the present time, the interruption of Sigma 7's main sources of supply would have a material adverse effect on the Company's business and results of operations. VOLATILITY OF THE SEMICONDUCTOR INDUSTRY; RECENT MARKET CONDITIONS Due to the major decline in the market value of Dynamic Random Access Memory ("DRAM") chips in the 1996 and 1995 fiscal years, BMI was required to substantially write down the value of its inventory, consisting primarily of DRAM chips, by $3,075,723 in 1996 and $5,022,218 in 1995. The charge to BMI's inventory was primarily the result of the decision of the management of BMI to accumulate approximately $7,000,000 in DRAM chips, making BMI vulnerable to a decrease in the price of memory chips. BMI has subsequently changed its The Company has recently moved its manufacturing operation to a new facility customized for the Company's operations. The Company believes that the new facility will enable it to meet its current and future manufacturing needs. See "BUSINESS-The Company's Electron Tube Products" for a description of the Company's electron tube business. PARTICLE INTERCONNECT TECHNOLOGY The Company is pursuing a new line of business involving the development and licensing of high performance, low-cost interconnect products. The Company's PI Technology utilizes patents procured and owned by the Company for the production of electronic interconnect products. The Company intends to license the PI Technology and Proprietary Electroplating Process to strategic partners, which will use the technology to mount, package or attach electronic devices and other products. This proposed line of business will be conducted through the Company's wholly owned subsidiary, PI Corp. The PI Technology utilizes patents owned by the Company for bonding and joining metal surfaces to enhance electrical connectivity. The Company's core product is similar to "conductive sandpaper" in appearance, and is formed by attaching conductive diamond particles to a panel. The "conductive sandpaper" creates a socket or connector contact surface for electronic devices, and replaces the use of soldering to create such connections. The Company believes that market trends in IC packaging will lead to increased demand for emerging high density substrates. As ICs are becoming increasingly powerful, they produce more heat and require a significantly greater number of input/output ("I/O") electrical connections to attach the silicon die, thus placing substantially greater demands on the IC packaging materials. For instance, a typical IC five years ago required approximately 80 I/O connections to the silicon die, whereas today typical ICs require approximately 250 or more I/O connections. The Company believes, based on published industry information, that the number of high density IC packages requiring more than the typical 250 I/O connections to the silicon die increased from an estimated 240 million in 1990 to an estimated 777 million in 1995. Market demands are currently forcing certain ICs toward 1,000 I/O connections. The Company believes that its PI Technology could potentially provide a cost effective solution to solving the increasing demands made on IC Packaging materials. Based on the experiences of current licensees to the PI Technology and the Company's research and development performed to date, the Company believes that the PI Technology can establish reliable, rematable connections at 10 grams of force. This means that 10 kg versus 40 to 80 kg of force is required to interconnect a 1,000 I/O IC socket with the underlying substrate. The Company believes this reduction in force may enable manufacturers to connect complex ICs to products through the next several generations of electronics. purchasing operations so that it attempts to acquire only that number of memory chips that it believes it can use and sell within approximately one week from the date of purchase. Nevertheless, the semiconductor memory industry is still characterized by rapid technological change, frequent product introductions and enhancements, difficult product transitions, relatively short product life cycles, and volatile market conditions. These characteristics historically have made the semiconductor industry highly cyclical, particularly in the market for DRAM chips, which are the primary memory chips used in the Company's memory modules. The semiconductor industry has a history of declining average unit sale prices as products mature. Average decreases in unit sale prices for semiconductor memory products have approximated 30% on an annualized basis over the last six years. Growth in worldwide supply of memory chips has outpaced growth in worldwide demand in recent periods, resulting in a significant decrease in average unit selling prices for memory modules like those produced by the Company. The memory products sector of the semiconductor industry is characterized by volatility in pricing and, to a lesser extent, seasonality. The selling prices for the Company's memory modules fluctuate significantly with real and perceived changes in the balance of supply and demand for these commodity products. The Company is unable to ascertain whether the stabilization of DRAM prices in early calendar 1997 was indicative of a change in industry supply and demand, capacity or inventory levels. In the event that average unit selling prices decline faster than the rate at which the Company can turn over its inventory, the Company could be materially adversely affected in its business, results of operations and financial condition. Additionally, although some of the semiconductor manufacturers have announced adjustments to the rate at which they will implement capacity expansion programs, many of the semiconductor manufacturers have already added significant capacity for the production of semiconductor memory products. The amount of capacity to be placed into production and future yield improvements by the semiconductor manufacturers could dramatically increase worldwide supply of semiconductor memory and increase downward pressure on pricing. DRAMs are the most widely used semiconductor memory component in most personal computer ("PC") systems. The Company believes that the growth rate, on average, for worldwide sales of PC systems has declined and may remain below prior periods' growth rates for the foreseeable future. In addition, the growth rate in the amount of semiconductor memory per PC system may decrease in the future. Should the growth rate of sales of PC systems or the rate of growth of memory per PC system decrease, the growth rate for sales of semiconductor memory could also decrease, placing further downward pressure on selling prices for the Company's semiconductor memory products. CUSTOMER CONCENTRATION Approximately 90% of the net sales of Sigma 7 for fiscal 1996 and the first six months of fiscal 1997 were to Sigma 7's top three customers. As a result of this concentration of Sigma 7's customer base, the loss or cancellation of business from any of these customers, The Proprietary Electroplating Process can apply the diamond particles to many different substrates, both flexible, rigid, metallic and non-metallic. This ability, coupled with the very low contact force, gives the PI Technology the capability to make reliable connectors out of materials that could collapse if exposed to the normally required contact forces. Initially, the Company planned to develop full production capacity to produce particle interconnect coatings using the PI Technology. Because of the large capital investment required to develop full production capacity, however, the Company has decided to license the PI Technology and Proprietary Electroplating Technology to interconnect manufacturers and assist such manufacturers in the development, testing and qualification of the PI Technology for that specific product line. The Company plans to provide this service to numerous connector manufacturers, in competing and non-competing applications. The Company may also enter into joint venture agreements or exclusive or non-exclusive license agreements with leading connector manufacturers. The Company believes this approach will provide it with the ability to penetrate the market utilizing existing customer bases and reputations of established leaders in the connector industry. In many cases the Company will attempt to establish long term strategic alliances with these industry leaders to continue development and manufacture of new products that will incorporate PI Technology. See "BUSINESS-The Company's Particle Interconnect Technology" for a description of the PI Technology. THE COMPANY The Company was organized under the laws of the State of Colorado on October 4, 1983. Unless the context otherwise requires, the "Company" refers to Intercell Corporation, its predecessors and its subsidiaries. The Company's principal executive offices are located at 370 Seventeenth Street, Suite 3290, Denver, Colorado 80202. Its telephone number is (303) 592-1010. RISK FACTORS The Common Stock and Warrants offered hereby involve a high degree of risk. See "RISK FACTORS." significant changes in scheduled deliveries to any of these customers or decreases in the prices of products sold to any of these customers could have a material adverse effect on Sigma 7's business, financial conditions and results of operations. However, the Company believes that it can sell all of its product into the general memory market, should these customers no longer be available to the Company. NO ASSURANCE OF PRODUCT QUALITY, PERFORMANCE AND RELIABILITY With respect to the PI Technology, the Company has no experience in producing and manufacturing new technologies from the conceptual phase to a commercially acceptable product. The Company expects that its customers will establish demanding specifications for quality, performance and reliability. Specifically, the PI Technology and memory modules will generally be manufactured for incorporation into, or used in, high technology products manufactured by original equipment manufacturers ("OEMs") or products manufactured by the Company's joint venture partners, co-manufacturing partners or licensees, if any, and, accordingly, will need to meet exacting specifications. The Company believes that if its DIMMs and COB memory modules prove successful, a substantial portion of the OEMs or the Company's joint venture partners, co-manufacturing partners or licensees, if any, will require the Company to qualify as an approved supplier. In order to so qualify, the Company may be required to satisfy stringent quality control standards and undergo extensive in-plant inspections of the Company's personnel, manufacturing processes, equipment and quality control systems. Although the Company's efforts will be devoted to ensure that its capabilities and quality control standards are adequate to meet specific OEM customer requirements or the requirements of the Company's joint venture partners, co-manufacturing partners or licensees, if any, there can be no assurance that the Company will be able to comply with quality control standards established by such parties or that the Company will be able, for financial or other reasons, to qualify as an approved supplier for its existing and prospective customers. UNCERTAINTY OF MARKET ACCEPTANCE FOR PI TECHNOLOGY The Company's prospective customers, connector manufacturers and electronic equipment OEMs, are currently manufacturing and selling equipment without the Company's PI Technology. To be successful in convincing these potential customers that its PI Technology should be used in lieu of existing technologies, the Company must, among many actions, convince its potential customers that the PI Technology makes rematable contacts with reduced force and can be manufactured efficiently and cost effectively. Achieving market acceptance for new products requires substantial marketing and sales efforts and expenditure of significant funds to create awareness of and demand for the Company's products. There can be no assurance that future additions to the Company's product line will achieve market acceptance or result in significantly increased levels of revenues. See "BUSINESS-The Company's Particle Interconnect Technology-Company PI Technology Strategy." THE OFFERING <TABLE> <S> <C> Series B Warrants to Purchase Common Stock offered by the Selling Shareholders............................ 1,092,064 Warrants Common Stock issuable upon exercise of Series B Warrants............... 1,092,064 Common Shares Series C Warrants to Purchase Common Stock offered by the Selling Shareholders........................ 745,386 Warrants Common Stock issuable upon exercise of Series C Warrants............... 745,386 Common Shares Common Stock offered by the Selling Shareholders upon conversion of Series B Preferred Stock...... 200,000 Common Shares Outstanding Common Stock offered by Series C Preferred Stock Selling Shareholders................................ 7,412,156 Common Shares Common Stock offered by the Selling Shareholders upon conversion of Series C Preferred Stock...... 5,545,000 Common Shares Common Stock outstanding after the Offering and assuming exercise of Warrants and Conversion of Preferred Stock................ 37,953,525 Common Shares/(1)/ Use of proceeds................................. Net proceeds (approximately $6,558,808), if any, which might be received by the Company from the exercise of all of the Warrants will be used for general corporate purposes. The Company will not receive any proceeds from the sale of the Common Stock underlying the Preferred Stock, or the Common Stock underlying the Warrants offered hereby. See "USE OF PROCEEDS." Common Stock NASDAQ symbol (OTC)................ "INCE" </TABLE> ______________ /(1)/ Does not include 8,877,000 shares of common stock currently issuable upon the exercise of outstanding stock options. Any delay in the adoption of the Company's PI Technology may result in prospective customers utilizing alternative technologies in their next generation of IC packages or other electronic interconnections, which may have a material adverse effect on the Company's business, financial condition and results of operations. Specifically, the Company believes that it is necessary to establish a market presence in the 1997 calendar year or the early part of the 1998 calendar year. To achieve such a presence, the Company plans to enter into licensing or other similar arrangement with one or more connector manufacturers. There can be no assurances given that the Company will be able to enter into such relationships in the future, that prospective customers will use products manufactured using the PI Technology, or that the PI Technology will be viewed to any significant extent as an improvement over existing technologies and achieve commercial acceptance in the electronic interconnect industry. Failure to achieve or sustain commercial acceptance of the PI Technology may materially adversely affect the Company's business, financial condition and results of operations. See "BUSINESS-The Company's Particle Interconnect Technology-Company PI Technology Strategy." NO ASSURANCE OF SUCCESSFUL EXPANSION OF OPERATIONS The Company's significant increase in the scope and the scale of its operations with the acquisition of Sigma 7, including the hiring of additional personnel, has resulted in significantly higher operating expenses. As a result, the Company anticipates that its operating expenses will continue to increase. Expansion of the Company's operations may also cause a significant demand on the Company's management, its finances and other resources. The Company's ability to manage the anticipated future growth, should it occur, will depend upon a significant expansion of its accounting and other internal management systems and the implementation and subsequent improvement of a variety of systems, procedures and controls. There can be no assurance that significant problems in these areas will not occur. Any failure to expand these areas and implement and improve such systems, procedures and controls in an efficient manner at a pace consistent with the Company's business could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company's attempts to expand its marketing, sales, manufacturing and customer support efforts will be successful or will result in additional sales or profitability in any future period. As a result of the expansion of its operations and the anticipated increase in its operating expenses, as well as the difficulty in forecasting revenue levels, the Company expects to continue to experience significant fluctuations in its results of operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "BUSINESS." SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA OF THE COMPANY On December 4, 1995, the Company changed its fiscal year end from December 31, 1995 to September 30, 1995 due to the acquisition of the assets and liabilities of Energy on July 7, 1995 for 5,412,191 shares of Common Stock, which represented 52% of the Common Stock outstanding at that time. As a result, for accounting purposes, Energy was considered the acquiring corporation and the comparative information presented herein represents that of Energy prior to July 7, 1995 and Energy and the Company subsequent to such date. See "BUSINESS-Recent Acquisitions, Dispositions and Transactions," and "INDEX TO FINANCIAL STATEMENTS." The following selected consolidated financial data should be read in conjunction with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. The Consolidated Statements of Operations data presented below for the nine months ended June 30, 1997 and 1996 and for the fiscal year ended September 30, 1996, the eleven months ended September 30, 1995 and the fiscal year ended October 31, 1994 and the Consolidated Balance Sheet data as of June 30, 1997 and September 30, 1996 and 1995 have been derived from the Company's Consolidated Financial Statements included in this Prospectus. The Consolidated Financial Statements as of and for the fiscal year ended September 30, 1996 and the eleven months ended September 30, 1995 were audited by KPMG Peat Marwick LLP, independent certified public accountants. The Consolidated Financial Statements, as of and for the fiscal year ended October 31, 1994 were audited by Mark Shelley, CPA, independent public accountant. The Statements of Operations data set forth below for the years ended October 31, 1993 and 1992 and the Balance Sheet data set forth below at October 31, 1994, 1993 and 1992 are derived from audited financial statements not included in this Prospectus. The selected historical financial information as of June 30, 1997 and for the nine months ended June 30, 1997 and 1996 are derived from unaudited financial statements of the Company. The Company's management believes such unaudited financial statements have been accounted for on the same basis as the audited financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of such financial statements. DEPENDENCE ON KEY PERSONNEL AND NECESSITY TO HIRE ADDITIONAL QUALIFIED PERSONNEL The Company's future operating results depend in significant part upon the continued contributions of its key technical and senior management personnel, many of whom would be difficult to replace. See "MANAGEMENT." The Company's future operating results also depend in significant part upon its ability to attract and retain qualified personnel with experience in manufacturing and marketing that can be applied to the Company's new and existing products. The Company must hire additional qualified personnel in order to become successful. Other than the manufacturing and rebuilding of electron tubes, no members of management have significant experience in operating a manufacturing company. There can be no assurance that the Company will be successful in attracting or retaining such personnel. In addition, the success of the Company is dependent upon its ability to hire and retain additional qualified technical and financial personnel. There can be no assurance that the Company will be able to hire or retain such necessary personnel. The loss of any key employee, the failure of any key employee to perform in his or her current position or the Company's inability to attract and retain skilled employees as needed, could materially and adversely affect the Company's business, financial condition and results of operations. See "BUSINESS-Employees" and "MANAGEMENT." DEPENDENCE ON COMPANY-OWNED MANUFACTURING FACILITIES; RISKS OF BUSINESS INTERRUPTIONS The Company intends to manufacture its products at company-owned or leased manufacturing facilities. See "BUSINESS-Properties." The Company has no present intention of establishing additional manufacturing locations and, therefore, the Company is dependent on existing facilities to manufacture its products. If these facilities are not available, even temporarily, for operations at or near full capacity for any extended period, the business, operating results and financial condition of the Company could be materially and adversely affected. The capacity of the Company's manufacturing facilities have been estimated by management to be sufficient for future needs. However, if additional capacity is required as a result of unplanned increased in demand for the Company's products, the Company may suffer delays and increased costs in establishing other facilities which could adversely affect customer relationships, cause a loss of market opportunities and have a material adverse effect on the Company's business, operating results and financial condition. In order to remain competitive, the Company will be required to introduce new products and processes into its assembly environment, such as the completion of engineering and initiation of production of DIMMs and the proposed design and assembly of COB memory modules. These changes can disrupt the assembly process which could adversely effect customer relationships, cause a loss of market opportunities and have a material adverse effect on the Company's business, results of operations and financial condition. No assurance can be given that the Company will be successful in introducing new products and processes or, if introduced, that they will be successful in the market place. See "BUSINESS." <TABLE> <CAPTION> Nine Months Ended 6/30 ----------------------------- Year Eleven Year Year Year Ended Months Ended Ended Ended Ended 1997 1996 9/30/96 9/30/95/(1)/ 10/31/94 10/31/93 10/31/92 ---- ---- ------- ------------ -------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> Total net sales $ 5,426,000 $ 2,499,000 $ 3,405,000 $ 3,768,000 $2,066,000 $ 60,000 $ -- Costs & expenses 11,265,000 6,164,000 8,688,000 5,089,000 2,428,000 142,000 43,000 Net loss (5,839,000) (3,665,000) (5,283,000) (1,321,000) (362,000) (82,000) (43,000) Deemed preferred stock dividend relating to in-the-money conversion 1,023,000 -- 1,625,000 -- -- -- -- Accretion on Preferred Stock 413,000 -- -- -- -- -- Net loss applicable to common Stockholders (7,275,000) -- (6,908,000) -- -- -- -- Net loss per common share $(0.42) $(0.28) $(0.54) $(0.18) $(0.08) $(0.04) N/A Weighted average Number of common shares outstanding 17,169,353 13,095,417 13,072,683 7,391,275 4,828,007 2,066,979 1,781,880 At period end: Current assets $ 7,742,000 2,408,000 $10,625,000 $ 1,796,000 $1,499,000 $ 4,000 $ 0 Current liabilities 2,124,000 2,001,000 2,060,000 1,799,000 1,621,000 82,000 149,000 Working capital (deficit) 5,618,000 407,000 8,565,000 (3,000) (122,000) (78,000) (149,000) Total assets 16,115,000 5,137,000 13,826,000 3,069,000 3,141,000 51,000 0 Long-term debt -- -- 86,000 48,000 48,000 175,000 0 Stockholders' equity (deficit) $11,491,000 $ 3,136,000 $11,680,000 $ 1,222,000 $1,472,000 $ (206,000) $ (149,000) Cash dividends per common share -- -- -- -- -- -- -- </TABLE> _______________ See also "BUSINESS-Recent Acquisitions, Dispositions and Transactions." /(1)/ On December 4, 1995, the Company changed its fiscal year end from December 31 to September 30. The comparative information presented herein represents that of Energy which was deemed to be the acquiring company in the July 7, 1995 transaction. Energy's fiscal year end was previously October 31. REQUIREMENT FOR RESPONSE TO RAPID TECHNOLOGICAL CHANGE AND REQUIREMENT FOR FREQUENT NEW PRODUCT INTRODUCTIONS The interconnect and semi-conductor memory markets are subject to rapid technological change, frequent new product introductions and enhancements, product obsolescence and changes in end-user requirements. This market may be eroded or replaced with other forms of technology. The Company's ability to be competitive in this market will depend in significant part upon its ability to successfully manufacture, market and sell its products on a timely and cost- effective basis that responds to changing customer requirements. Any success of the Company in developing new or enhanced products will depend upon a variety of factors, including new product selection, integration of the various elements of its complex technology, timely and efficient completion of design, timely and efficient implementation of manufacturing and assembly processes, and development of competitive products by competitors. The Company may experience delays from time to time in the development and introduction of its DIMM and COB memory module product lines. Moreover, there can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or that errors will not be found in the Company's new products after commencement of commercial shipments, if any, which could result in the loss of or delay in market acceptance. The inability of the Company to introduce in a timely manner products that satisfy market demands could have a material adverse effect on the Company's business, financial condition and results of operations. See "BUSINESS." COMPETITION; TECHNOLOGICAL AND PRODUCT OBSOLESCENCE The market for the Company's current and prospective products is highly competitive. In the semiconductor memory module market, the Company currently indirectly competes with numerous well-established foreign and domestic companies, including Fujitsu, Ltd., Hitachi Ltd., Hyundai Electronics, Co., Ltd., Micron Electronics, Inc., Micron Technologies, Inc., Motorola, Inc., NEC Corp., Samsung Semiconductor, Inc., LG Semicon, and Texas Instruments Incorporated. In the interconnect market the Company, through its proposed licensees, would potentially compete with multinational connector manufacturers such as Berg Electronic, AMP, 3M, Molex and Yamaichie and major OEM electronic technology leaders, such as Intel, Dupont, Siemens and IBM. All of these well- established foreign and domestic companies possess substantially greater financial, marketing, personnel and other resources than the Company and have established reputations for success in the development, sale and service of products. The Company may be at a disadvantage in competing against larger manufacturers with significantly greater capital resources or manufacturing capacities, larger engineer and employee bases, larger portfolios of intellectual property, and more diverse product lines that provide cash flows counter cyclical to fluctuations in semiconductor memory operations. The Company's larger competitors also have long-term advantages over the Company in research and new product development and in their ability to withstand periodic downturns in the semiconductor memory market. Also, the Company expects that companies have developed or are developing new technologies or products directly competitive with the Company's products. The ability of the Company to compete successfully will depend in large measure on its ability to maintain development capabilities in connection with upgrading its products and quality control procedures and to adapt to technological changes and advances in the electronics industry, including ensuring continuing compatibility with evolving generations of electronic components and OEM manufacturing equipment. No assurance can be given that the Company will be successful in such endeavors. UNCERTAINTY REGARDING PROTECTION OF PROPRIETARY RIGHTS The Company attempts to protect its intellectual property rights through patents, trademarks, trade secrets and a variety of other measures. However, there can be no assurance that such measures will provide adequate protection for the Company's trade secrets or other proprietary information, that disputes with respect to the ownership of its intellectual property rights will not arise (such as the current matter with Mr. Kenneth S. Bahl discussed above under "- Rights to PI Technology), that the Company's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors or that the Company can otherwise meaningfully protect its intellectual property rights. There can be no assurance that any patent owned by the Company will not be invalidated, circumvented or challenged, that the rights granted thereunder will provide competitive advantages to the Company or that any of the Company's pending or future patent applications will be approved or what the scope of the patent coverage will be as sought by the Company. Furthermore, there can be no assurance that others will not develop similar products, duplicate the Company's products or design around the patents owned by the Company or that third parties will not assert intellectual property infringement claims against the Company. In addition, there can be no assurance that foreign intellectual property laws will adequately protect the Company's intellectual property rights abroad. The failure of the Company to protect its proprietary rights could have a materially adverse effect on its business, financial condition and results of operations. Litigation may be necessary to protect the Company's intellectual property rights and trade secrets, to determine the validity of and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that infringement, invalidity, right to use or ownership claims by third parties or claims for indemnification resulting from infringement claims will not be asserted in the future. If any claims or actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that a license will be available under reasonable terms or at all. In addition, should the Company decide to litigate such claims, such litigation could be extremely expensive and time-consuming and could materially adversely effect the Company's business, financial condition and results of operations, regardless of the outcome of the litigation. See "BUSINESS-Intellectual Property." LICENSE RIGHTS TO PI TECHNOLOGY Prior to the Company's acquisition of Particle Interconnect, Inc. (see "BUSINESS-Recent Acquisitions, Dispositions and Transactions"), Mr. Louis DiFrancesco, the inventor of the PI Technology, or companies he controlled, granted exclusive and non-exclusive licenses to use the patents and patent applications on the PI Technology to five companies. The exclusive licenses pertain to the use of the PI Technology in the field of sockets for use in the automated handling and testing of integrated circuits and in the field of MCM-D thin film substrates. While such exclusive licenses are in force, the Company cannot compete in the fields in which the exclusive license has been granted. The non-exclusive licenses include a non-exclusive license to use the PI Technology in the field of electrically conductive components. While the licenses are generally limited to certain fields of use, the terms of the licenses do not prohibit the licensees from directly competing with the Company or any of the Company's future licensees. Should the present licensees do so, such competition could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, Mr. DiFrancesco and not the Company will receive any royalty payments or other compensation received under the terms of these licenses. See "BUSINESS-Intellectual Property." ACQUISITION RISKS An important part of the Company's recent growth strategy has been, and is expected to continue to be, the acquisition of companies that complement or supplement the Company's existing business operations. Any acquisition involves inherent uncertainties, such as the effect on the acquired business of its integration into the Company and the availability of managerial resources to oversee the operation of the acquired business. Integrating acquired products and operations requires a significant amount of time and skill of the Company's management and may place significant demands on the Company's operations and its financial resources. Although an acquired business may have enjoyed profitability and growth prior to its acquisition, there can be no assurance that such profitability or growth will continue thereafter. POTENTIAL LIABILITY AND INSURANCE REGARDING ENVIRONMENTAL REGULATIONS; GOVERNMENT REGULATION The Company's operations involve the use and handling of environmentally hazardous substances. The use of hazardous substances is subject to extensive and frequently changing federal, state and local laws and substantial regulation under these laws by governmental agencies, including the United States Environmental Protection Agency, various state agencies and county and local authorities acting in conjunction with federal and state authorities. Among other things, these regulatory bodies impose restrictions to control air, soil and water pollution. The Company believes that it is in substantial compliance with all material federal and state laws and regulations governing its operations. Furthermore, amendments to statutes and regulations and the Company's expansion into new areas could require the Company to continually modify or alter methods of operations at costs which could be substantial. There can be no assurance that the Company will be able, for financial or other reasons, to comply with applicable laws and regulations. Failure by the Company to comply with applicable laws and regulations could subject the Company to civil remedies, including fines and injunctions, as well as potential criminal sanctions, which could have a material adverse effect on the Company. See "BUSINESS-Government Regulation." REGULATORY COMPLIANCE The various business operations of the Company are subject to numerous federal, state and local laws and regulations, including those relating to the use and disposal of hazardous substances discussed above. Any difficulties or failure to obtain required licenses, permits or authorizations, could adversely impact the Company's operations. The failure to obtain or retain any licenses or permits would have a material adverse effect on the Company's business. See "BUSINESS-Government Regulation." While the Company believes it is aware of all of the permits it is required to obtain and all of the governmental regulations with which it is required to comply, and believes that it has obtained such permits, there can be no assurance that this will be the case, that such compliance might not increase the expenses the Company will incur or that such regulations will not be modified, making it increasingly difficult for the Company to operate its businesses as anticipated. Additionally, there can be no assurance that the Company can comply with all such applicable regulations in the future and maintain any license which is granted. NO MARKET FOR WARRANTS There is no public market for the Warrants and the Company does not intend to apply for listing of the Warrants on any national securities exchange or of quotation of the Warrants through the NASDAQ automated quotation system. No assurance can be given as to the liquidity of any markets that may develop for the Warrants, the ability of holders of the Warrants to sell their Warrants, or the price at which holders would be able to sell their Warrants. Future trading prices of the Warrants, if any, will depend on many factors, including among other things, the Company's operating results and the market for similar securities. NECESSITY OF FUTURE REGISTRATION OF WARRANTS AND STATE BLUE SKY REGISTRATION; EXERCISE OF WARRANTS The Warrants may trade separately upon the closing of the Offering. Although the Warrants will not knowingly be sold to purchasers in jurisdictions in which the Warrants are not registered or otherwise qualified for sale or exempt, purchasers may buy the Warrants in the after-market or may move to jurisdictions in which the Warrants and the Common Stock underlying the Warrants are not so registered or qualified or exempt. In this event, the Company would be unable lawfully to issue Common Stock to those persons desiring to exercise their Warrants (and the Warrants will not be exercisable by those persons) unless and until the Warrants and the underlying Common Stock are registered or qualified for sale in jurisdictions in which such purchasers then reside or an exemption from such registration or qualification requirement exists in such jurisdictions. There can be no assurance that the Company will be able to effect any required registration or qualification. The Warrants offered hereby will not be exercisable unless the Company maintains a current registration statement on file with the Commission either by filing post-effective amendments to the Registration Statement, of which this Prospectus is a part, or by filing a new registration statement with respect to the exercise of such Warrants. The Company has agreed to use its best efforts to file and maintain, so long as the Warrants offered hereby are exercisable, a current registration statement with the Securities and Exchange Commission (the "SEC") relating to such Warrants and the shares of Common Stock underlying such Warrants. However, there can be no assurance that it will do so or that such Warrants or such underlying Common Stock will be or continue to be so registered. The value of the Warrants could be adversely affected if a then current prospectus covering the Common Stock issuable upon exercise of the Warrants is not available pursuant to an effective registration statement or if such Common Stock is not registered or qualified for sale or exempt from registration or qualification in the jurisdictions in which the holders of Warrants reside. See "DESCRIPTION OF SECURITIES-Warrants."

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+ RISK FACTORS Prospective investors should consider, among other things, the following factors in connection with a decision to purchase the Trust Preferred Securities. RANKING OF GREATER BAY'S OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE All obligations of Greater Bay under the Guarantee, the Junior Subordinated Debentures and other documents described herein are unsecured and rank subordinate and junior in right of payment to all current and future Senior and Subordinated Debt, the amount of which is unlimited. At December 31, 1996, the aggregate outstanding Senior and Subordinated Debt of Greater Bay was approximately $3.0 million. In addition, because Greater Bay is a holding company, all obligations of Greater Bay relating to the securities described herein will be effectively subordinated to all existing and future liabilities of Greater Bay's subsidiaries, including the Banks. As a holding company, the right of Greater Bay to participate in any distribution of assets of any subsidiary upon such subsidiary's liquidation or reorganization or otherwise (and thus the ability of holders of the Trust Preferred Securities to benefit indirectly from such distribution) is subject to the prior claims of creditors of that subsidiary, except to the extent that Greater Bay may itself be recognized as a creditor of that subsidiary. Accordingly, the Junior Subordinated Debentures and all obligations of Greater Bay relating to the Trust Preferred Securities will be effectively subordinated to all existing and future liabilities of the Banks, and holders of the Trust Preferred Securities should look only to the assets of Greater Bay, and not of its subsidiaries, for principal and interest payments on the Junior Subordinated Debentures. None of the Indenture, the Guarantee, the Guarantee Agreement or the Trust Agreement places any limitation on the amount of secured or unsecured debt, including Senior and Subordinated Debt, that may be incurred by Greater Bay or its subsidiaries. Further, there is no limitation on Greater Bay's ability to issue additional Junior Subordinated Debentures in connection with any further offerings of Trust Preferred Securities, and such additional debentures would rank pari passu with the Junior Subordinated Debentures. See "Description of Junior Subordinated Debentures--Subordination" and "Description of Guarantee--Status of the Guarantee." DEPENDENCE ON DIVIDENDS AND INTEREST PAYMENTS FROM THE BANKS The ability of GBB Capital to pay amounts due on the Trust Preferred Securities is solely dependent upon Greater Bay making payments on the Junior Subordinated Debentures as and when required. As a holding company without significant assets other than its equity interest in the Banks, Greater Bay's ability to pay interest on the Junior Subordinated Debentures to GBB Capital (and consequently GBB Capital's ability to pay Distributions on the Trust Preferred Securities and Greater Bay's ability to pay its obligations under the Guarantee) depends primarily upon the cash dividends Greater Bay receives from the Banks. Dividend payments from the Banks are subject to regulatory limitations, generally based on current and retained earnings, imposed by the various regulatory agencies with authority over the respective Banks. Payment of dividends is also subject to regulatory restrictions if such dividends would impair the capital of the Banks. Payment of dividends by the Banks is also subject to the respective Bank's profitability, financial condition and capital expenditures and other cash flow requirements. No assurance can be given that the Banks will be able to pay dividends at past levels, or at all, in the future. See "Supervision and Regulation." OPTION TO DEFER INTEREST PAYMENT PERIOD; TAX CONSEQUENCES OF A DEFERRAL OF INTEREST PAYMENTS So long as no Debenture Event of Default (as defined herein) has occurred and is continuing, Greater Bay has the right under the Indenture to defer payment of interest on the Junior Subordinated Debentures at any time or from time to time for a period not exceeding 20 consecutive quarters with respect to each Extension Period, provided that no Extension Period may extend beyond the Stated Maturity of the Junior Subordinated Debentures. As a consequence of any such deferral, quarterly Distributions on the Trust Preferred Securities by GBB Capital will be deferred (and the amount of Distributions to which holders of the Trust Preferred Securities are entitled will accumulate additional amounts thereon at the rate of % per annum, compounded quarterly, from the relevant payment date for such Distributions, to the extent permitted by applicable law) during any such Extension Period. During any such Extension Period, Greater Bay will be prohibited from making certain payments or distributions with respect to Greater Bay's capital stock (including dividends on or redemptions of common or preferred stock) and from making certain payments with respect to any debt securities of Greater Bay that rank pari passu with or junior in interest to the Junior Subordinated Debentures; however, Greater Bay will not be restricted from (a) paying dividends or distributions in common stock of Greater Bay, (b) redeeming rights or taking certain other actions under a shareholders' rights plan, (c) making payments under the Guarantee or (d) making purchases of common stock related to the issuance of common stock or rights under any of Greater Bay's benefit plans for its directors, officers or employees. Further, during an Extension Period, Greater Bay would have the ability to continue to make payments on Senior and Subordinated Debt. Prior to the termination of any Extension Period, Greater Bay may further extend such Extension Period provided that such extension does not cause such Extension Period to exceed 20 consecutive quarters or to extend beyond the Stated Maturity. Upon the termination of any Extension Period and the payment of all interest then accrued and unpaid (together with interest thereon at the annual rate of %, compounded quarterly, to the extent permitted by applicable law), Greater Bay may elect to begin a new Extension Period subject to the above requirements. There is no limitation on the number of times that Greater Bay may elect to begin an Extension Period. See "Description of the Trust Preferred Securities--Distributions" and "Description of Junior Subordinated Debentures--Option to Defer Interest Payment Period." Because Greater Bay believes the likelihood of it exercising its option to defer payments of interest is remote, the Junior Subordinated Debentures will be treated as issued without "original issue discount" for United States federal income tax purposes. As a result, holders of Trust Preferred Securities will include interest in taxable income under their own methods of accounting (i.e., cash or accrual). If Greater Bay exercises its right to defer payments of interest, the holders of Trust Preferred Securities will be required to include their pro rata share of original issue discount in gross income as it accrues for United States federal income tax (and possibly other) purposes in advance of the receipt of cash. See "Certain Federal Income Tax Consequences-- Interest Income and Original Issue Discount." Greater Bay has no current intention of exercising its right to defer payments of interest by extending the interest payment period on the Junior Subordinated Debentures. However, should Greater Bay elect to exercise its right to defer payments of interest in the future, the market price of the Trust Preferred Securities is likely to be adversely affected. A holder that disposes of such holder's Trust Preferred Securities during an Extension Period, therefore, might not receive the same return on such holder's investment as a holder that continues to hold the Trust Preferred Securities. TAX EVENT REDEMPTION, INVESTMENT COMPANY EVENT REDEMPTION OR CAPITAL TREATMENT EVENT REDEMPTION Upon the occurrence and during the continuation of a Tax Event, an Investment Company Event or a Capital Treatment Event (whether occurring before or after , 2002), Greater Bay has the right, if certain conditions are met, to redeem the Junior Subordinated Debentures in whole (but not in part) at 100% of the principal amount together with accrued but unpaid interest to the date fixed for redemption within 90 days following the occurrence of such Tax Event, Investment Company Event or Capital Treatment Event and therefore cause a mandatory redemption of the Trust Securities. The exercise of such right is subject to Greater Bay having received prior approval of the Federal Reserve to do so if then required under applicable guidelines or policies of the Federal Reserve. See "Description of the Trust Preferred Securities--Redemption." A "Tax Event" means the receipt by Greater Bay and GBB Capital of an opinion of counsel experienced in such matters to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such prospective change, pronouncement or decision is announced on or after the original issuance of the Trust Preferred Securities, there is more than an insubstantial risk that (i) GBB Capital is, or will be within 90 days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Junior Subordinated Debentures, (ii) interest payable by Greater Bay on the Junior Subordinated Debentures is not, or within 90 days of such opinion, will not be, deductible by Greater Bay, in whole or in part, for United States federal income tax purposes, or (iii) GBB Capital is, or will be within 90 days of the date of the opinion, subject to more than a de minimus amount of other taxes, duties or other governmental charges. See "--Possible Tax Law Changes Affecting the Trust Preferred Securities" below for a discussion of certain legislative proposals that, if adopted, could give rise to a Tax Event, which may permit Greater Bay to cause a redemption of the Junior Subordinated Debentures (and therefore the Trust Preferred Securities) prior to , 2002. An "Investment Company Event" means the receipt by Greater Bay and GBB Capital of an opinion of counsel experienced in such matters to the effect that, as a result of any change in law or regulation or a change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, GBB Capital is or will be considered an "investment company" that is required to be registered under the Investment Company Act of 1940, as amended (the "Investment Company Act"), which change becomes effective on or after the original issuance of the Trust Preferred Securities. A "Capital Treatment Event" means the reasonable determination by Greater Bay that, as a result of any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision thereof or therein, or as a result of any official or administrative pronouncement or action or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such prospective change, pronouncement or decision is announced on or after the date of issuance of the Trust Preferred Securities under the Trust Agreement, there is more than an insubstantial risk of impairment of Greater Bay's ability to treat the Trust Preferred Securities (or any substantial portion thereof) as "Tier 1 Capital" (or the then equivalent thereof) for purposes of the capital adequacy guidelines of the Federal Reserve, as then in effect and applicable to Greater Bay. POSSIBLE TAX LAW CHANGES AFFECTING THE TRUST PREFERRED SECURITIES Recently the Clinton Administration announced its budget proposals for the fiscal year 1998. That announcement included a proposal that could affect the tax characteristics of the Junior Subordinated Debentures. Under the Administration's proposal, no deduction would be allowed for interest or original issue discount on an instrument issued by a corporation that has a maximum term of more than 40 years, or is payable in stock of the issuer or a related party. The budget announcement also states that no such deduction would be allowed for certain indebtedness that is reflected as equity on the issuer's balance sheet. The budget announcement states that the effective date of the first proposal is for instruments issued "after the date of first committee action," which is not a legally precise term. The budget announcement is less clear about the proposed effective date of the second proposal mentioned above. Similar proposals were made by the Administration last year. The Revenue Reconciliation Bill of 1996 (the "1996 Bill") would, among other things, have denied interest deductions for interest on an instrument, issued by a corporation, that had a maximum term of more than 20 years and that was not shown as indebtedness on the separate balance sheet of the issuer or, where the instrument was issued to a related party (other than a corporation), where the holder or some other related party issued a related instrument that is not shown as indebtedness on the issuer's consolidated balance sheet. The 1996 Bill was never enacted, but it is likely that the second proposal in the budget announcement mentioned above will be similar in some respects to the proposal in the 1996 Bill. Enactment of this proposal could affect deduction of interest expenses and original issue discount with respect to the Junior Subordinated Debentures. This, in turn, could create a Tax Event affecting the Trust Preferred Securities. In connection with the 1996 Bill, the Chairmen of the Senate Finance and House Ways and Means Committees issued a joint statement that it was their intention that the effective date of the Administration's legislative proposals, if adopted, would be no earlier than the date of appropriate Congressional action. Senate Finance Committee Chairman William Roth has been quoted in the news media recently as stating that the 1997 tax changes generally should be effective on a prospective basis. It is intended that the Trust Preferred Securities and the Junior Subordinated Debentures will be issued prior to any type of Congressional committee action with respect to the aforementioned budget proposal. However, due to business considerations, the unpredictability of when Congress will begin action with respect to the Administration's proposals, and the imprecision in the public statements concerning the anticipated effective date of the legislative proposals, there can be no guarantee that these instruments will not be affected by the aforementioned legislative proposals, if they are enacted. There also can be no assurance that other future legislative proposals or final legislation will not affect the ability of the Company to deduct interest on the Junior Subordinated Debentures. Such a change could give rise to a Tax Event, which may permit Greater Bay, upon approval of the Federal Reserve, if then required under applicable capital guidelines or policies of the Federal Reserve, to cause a redemption of the Trust Preferred Securities. See "Description of the Trust Preferred Securities--Redemption--Tax Event Redemption" and "Description of Junior Subordinated Debentures--Redemption." See also "Certain Federal Income Tax Consequences--Possible Tax Law Changes Affecting the Trust Preferred Securities." POSSIBLE DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TRUST PREFERRED SECURITIES Greater Bay will have the right at any time to terminate GBB Capital and, after satisfaction of liabilities to creditors of GBB Capital as required by applicable law, cause the Junior Subordinated Debentures to be distributed to the holders of the Trust Preferred Securities in liquidation of GBB Capital. The exercise of such right is subject to Greater Bay having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. Because holders of the Trust Preferred Securities may receive Junior Subordinated Debentures in liquidation of GBB Capital and because Distributions are otherwise limited to payments on the Junior Subordinated Debentures, prospective purchasers of the Trust Preferred Securities are also making an investment decision with regard to the Junior Subordinated Debentures and should carefully review all the information regarding the Junior Subordinated Debentures contained herein. See "Description of the Trust Preferred Securities--Liquidation Distribution Upon Termination" and "Description of Junior Subordinated Debentures." Under current United States federal income tax law and interpretations and assuming, as expected, GBB Capital is classified as a grantor trust for such purposes, a distribution of the Junior Subordinated Debentures upon a liquidation of GBB Capital should not be a taxable event to holders of the Trust Preferred Securities. However, if a Tax Event were to occur which would cause GBB Capital to be subject to United States federal income tax with respect to income received or accrued on the Junior Subordinated Debentures, a distribution of the Junior Subordinated Debentures by GBB Capital could be a taxable event to GBB Capital and the holders of the Trust Preferred Securities. See "Certain Federal Income Tax Consequences--Distribution of Junior Subordinated Debentures to Holders of Trust Preferred Securities." SHORTENING OF STATED MATURITY OF JUNIOR SUBORDINATED DEBENTURES Greater Bay will have the right at any time to shorten the maturity of the Junior Subordinated Debentures to a date not earlier than five years from the date of issuance and thereby cause the Trust Preferred Securities to be redeemed on such earlier date. The exercise of such right is subject to Greater Bay having received prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve. See "Description of Junior Subordinated Debentures--Redemption." LIMITATIONS ON DIRECT ACTIONS AGAINST GREATER BAY AND ON RIGHTS UNDER THE GUARANTEE The Guarantee guarantees to the holders of the Trust Preferred Securities the following payments, to the extent not paid by GBB Capital: (i) any accumulated and unpaid Distributions required to be paid on the Trust Preferred Securities, to the extent that GBB Capital has funds on hand available therefor at such time, (ii) the redemption price with respect to any Trust Preferred Securities called for redemption, to the extent that GBB Capital has funds on hand available therefor at such time, and (iii) upon a voluntary or involuntary dissolution, winding-up or liquidation of GBB Capital (unless the Junior Subordinated Debentures are distributed to holders of the Trust Preferred Securities), the lesser of (a) the aggregate of the Liquidation Amount and all accumulated and unpaid Distributions to the date of payment to the extent that GBB Capital has funds on hand available therefor at such time (the "Liquidation Distribution") and (b) the amount of assets of GBB Capital remaining available for distribution to holders of the Trust Preferred Securities after satisfaction of liabilities to creditors of GBB Capital as required by applicable law. The holders of not less than a majority in aggregate liquidation amount of the Trust Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of the Guarantee or to direct the exercise of any trust power conferred upon the Guarantee Trustee under the Guarantee Agreement. Any holder of the Trust Preferred Securities may institute a legal proceeding directly against Greater Bay to enforce its rights under the Guarantee without first instituting a legal proceeding against GBB Capital, the Guarantee Trustee or any other person or entity. If Greater Bay were to default on its obligation to pay amounts payable under the Junior Subordinated Debentures, GBB Capital would lack funds for the payment of Distributions or amounts payable on redemption of the Trust Preferred Securities or otherwise, and, in such event, holders of the Trust Preferred Securities would not be able to rely upon the Guarantee for payment of such amounts. Instead, in the event a Debenture Event of Default shall have occurred and be continuing and such event is attributable to the failure of Greater Bay to pay interest on or principal of the Junior Subordinated Debentures on the payment date on which such payment is due and payable, then a holder of Trust Preferred Securities may institute a legal proceeding directly against Greater Bay for enforcement of payment to such holder of the principal of or interest on such Junior Subordinated Debentures having a principal amount equal to the aggregate Liquidation Amount of the Trust Preferred Securities of such holder (a "Direct Action"). In connection with such Direct Action, Greater Bay will have a right of set-off under the Indenture to the extent of any payment made by Greater Bay to such holder of Trust Preferred Securities in the Direct Action. Except as described herein, holders of Trust Preferred Securities will not be able to exercise directly any other remedy available to the holders of the Junior Subordinated Debentures or assert directly any other rights in respect of the Junior Subordinated Debentures. See "Description of Junior Subordinated Debentures-- Enforcement of Certain Rights by Holders of Trust Preferred Securities" and "Description of Guarantee." The Trust Agreement provides that each holder of Trust Preferred Securities by acceptance thereof agrees to the provisions of the Guarantee Agreement and the Indenture. UNCERTAINTY OF DEDUCTIBILITY OF INTEREST ON THE JUNIOR SUBORDINATED DEBENTURES The Company's ability to deduct the interest paid on the Junior Subordinated Debentures depends upon whether the Junior Subordinated Debentures are characterized as debt instruments for federal income tax purposes, taking all the relevant facts and circumstances into account. The Company believes that the Junior Subordinated Debentures are debt instruments for federal income tax purposes and that interest on the Junior Subordinated Debentures will, therefore, be deductible by the Company. There is no clear authority on the appropriate characterization for federal income tax purposes of instruments such as the Junior Subordinated Debentures when they are issued in connection with an offering of securities such as the Trust Preferred Securities. If the interest on the Junior Subordinated Debentures is not deductible by the Company, the Company would have significant additional income tax liabilities. Any such tax liability could adversely affect the ability of Greater Bay to pay interest on the Junior Subordinated Debentures to GBB Capital (and consequently GBB Capital's ability to pay Distributions on the Trust Preferred Securities and Greater Bay's ability to pay its obligations under the Guarantee). LIMITED COVENANTS The covenants in the Indenture are limited, and there are no covenants relating to Greater Bay in the Trust Agreement. As a result, neither the Indenture nor the Trust Agreement protects holders of Junior Subordinated Debentures, or Trust Preferred Securities, respectively, in the event of a material adverse change in Greater Bay's or the Company's financial condition or results of operations or limits the ability of Greater Bay or any subsidiary to incur additional indebtedness. Therefore, the provisions of these governing instruments should not be considered a significant factor in evaluating whether Greater Bay will be able to comply with its obligations under the Junior Subordinated Debentures or the Guarantee. LIMITED VOTING RIGHTS Holders of Trust Preferred Securities will generally have limited voting rights relating only to the modification of the Trust Preferred Securities, the dissolution, winding-up or liquidation of GBB Capital, and the exercise of GBB Capital's rights as holder of Junior Subordinated Debentures. Holders of Trust Preferred Securities will not be entitled to vote to appoint, remove or replace the Property Trustee or the Delaware Trustee, and such voting rights are vested exclusively in the holder of the Common Securities except upon the occurrence of certain events described herein. In no event will the holders of the Trust Preferred Securities have the right to vote to appoint, remove or replace the Administrative Trustees; such voting rights are vested exclusively in the holder of the Common Securities. The Property Trustee, the Administrative Trustees and Greater Bay may amend the Trust Agreement without the consent of holders of Trust Preferred Securities to ensure that GBB Capital will be classified for United States federal income tax purposes as a grantor trust or to ensure that GBB Capital will not be required to register as an "investment company," even if such action adversely affects the interests of such holders. See "Description of Trust Preferred Securities-- Voting Rights; Amendment of the Trust Agreement" and "--Removal of Trustees." ABSENCE OF EXISTING PUBLIC MARKET; MARKET PRICES There is no existing market for the Trust Preferred Securities. Application has been made to list the Trust Preferred Securities on the Nasdaq National Market. There can be no assurance that an active and liquid trading market for the Trust Preferred Securities will develop or that a continued listing of the Trust Preferred Securities will be available on Nasdaq. Although the Underwriter has informed GBB Capital and the Company that the Underwriter intends to make a market in the Trust Preferred Securities offered hereby, the Underwriter is not obligated to do so and any such market making activity may be terminated at any time without notice to the holders of the Trust Preferred Securities. Future trading prices of the Trust Preferred Securities will depend on many factors including, among other things, prevailing interest rates, the operating results and financial condition of the Company, and the market for similar securities. As a result of the existence of Greater Bay's right to defer interest payments on or, subject to prior approval of the Federal Reserve if then required under applicable capital guidelines or policies of the Federal Reserve, shorten the Stated Maturity of the Junior Subordinated Debentures, the market price of the Trust Preferred Securities may be more volatile than the market prices of debt securities that are not subject to such optional deferrals or reduction in maturity. There can be no assurance as to the market prices for the Trust Preferred Securities or the Junior Subordinated Debentures that may be distributed in exchange for the Trust Preferred Securities if Greater Bay exercises its right to terminate GBB Capital. Accordingly, the Trust Preferred Securities that an investor may purchase, or the Junior Subordinated Debentures that a holder of the Trust Preferred Securities may receive in liquidation of GBB Capital, may trade at a discount from the price that the investor paid to purchase the Trust Preferred Securities offered hereby. ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY The financial performance of the Company will depend in part on the Company's ability to successfully integrate the operations and management of Mid-Peninsula and Cupertino and to implement its Super Community Banking Philosophy. The Merger was effected in late November 1996, and integration of such operations and management are in the early stages. There can be no assurance that the Company will be able to effectively and profitably integrate the operations and management of Mid-Peninsula and Cupertino, or that it will be able to profitably implement its Super Community Banking Philosophy. See "Business--Super Community Banking Philosophy." INTEREST RATE RISK Banking companies' earnings depend largely on the relationship between the cost of funds, primarily deposits, and the yield on earning assets. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. Fluctuations in interest rates affect the demand of customers for the Company's products and services. The Company is subject to interest rate risk to the degree that its interest- bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than its interest-earning assets. Given the Company's current volume and mix of interest-bearing liabilities and interest-earning assets, the Company's interest rate spread could be expected to increase during times of rising interest rates and, conversely, to decline during times of falling interest rates. Although the Company believes its current level of interest rate sensitivity is reasonable, significant fluctuations in interest rates may have an adverse effect on the Company's results of operations. ECONOMIC CONDITIONS AND GEOGRAPHIC CONCENTRATION The Company's operations are located in Northern California and concentrated primarily in Santa Clara and San Mateo Counties, which include the area known as the "Silicon Valley." As a result of the geographic concentration, the Company's results depend largely upon economic conditions in these areas. A deterioration in economic conditions in the Company's market areas, particularly in the technology and real estate industries on which these areas depend, could have a material adverse impact on the quality of the Company's loan portfolio and the demand for its products and services, and accordingly, its results of operations. See "Business--Market Area." GOVERNMENT REGULATION AND MONETARY POLICY The banking industry is subject to extensive federal and state supervision and regulation. Such regulation limits the manner in which Greater Bay and the Banks conduct their respective businesses, undertake new investments and activities and obtain financing. This regulation is designed primarily for the protection of the deposit insurance funds and consumers, and not to benefit holders of the Company's securities. Financial institution regulation has been the subject of significant legislation in recent years, and may be the subject of further significant legislation in the future, none of which is in the control of the Company. Significant new laws or changes in, or repeals of, existing laws may cause the Company's results to differ materially. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company, primarily through open market operations in United States government securities, the discount rate for bank borrowings and bank reserve requirements, and a material change in these conditions would be likely to have a material impact on the Company's results of operations. See "Supervision and Regulation." COMPETITION The banking and financial services business in California generally, and in the Banks' market areas specifically, is highly competitive. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. The Banks compete for loans, deposits and customers for financial services with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than the Banks. There can be no assurance that the Banks will be able to compete effectively in their markets, and the results of operations of the Company could be adversely affected if circumstances affecting the nature or level of competition change. See "Business--Competition." DEPENDENCE ON KEY PERSONNEL The Company's success depends substantially on certain members of its senior management, in particular David L. Kalkbrenner, President and Chief Executive Officer of Greater Bay and MPB, C. Donald Allen, President and Chief Executive Officer of CNB, Steven C. Smith, Executive Vice President, Chief Operating Officer and Chief Financial Officer of Greater Bay and Executive Vice President and Chief Operating Officer of CNB, David R. Hood, Executive Vice President and Chief Lending Officer of Greater Bay, Murray B. Dey, Executive Vice President and Chief Credit Officer of MPB, and Hall Palmer, Executive Vice President and Senior Trust Officer of Greater Bay. The Company's business and financial condition could be materially adversely affected by the loss of the services of any such individuals. The Company does not maintain key man life insurance. See "Management--Board of Directors and Executive Officers."

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+ RISK FACTORS An investment in the Common Stock offered hereby involves certain risks. The following factors, in addition to those discussed elsewhere in this Prospectus, should be considered carefully before purchasing shares of Common Stock. EXPOSURE TO LOCAL ECONOMIC CONDITIONS The Company's success is dependent to a significant extent upon general economic conditions in the Washington, D.C. metropolitan area which are, in turn, dependent to a large extent on the Federal government, particularly its local employment and spending levels. In addition, the banking industry in the Washington, D.C. metropolitan area, similar to other geographic markets, is affected by general economic conditions such as inflation, recession, unemployment and other factors beyond the Company's control. Economic recession over a prolonged period or other economic dislocation in the Washington, D.C. metropolitan area, or a substantial reduction in the level of employment or local spending by the Federal government, could cause increases in nonperforming assets, thereby causing operating losses, impairing liquidity and eroding capital. There can be no assurance that future adverse changes in the economy in the Washington, D.C. metropolitan area would not have a material adverse effect on the Company's financial condition, results of operations or cash flows. See "Business." INTEREST RATE RISK AND NET INTEREST MARGIN The Company's earnings depend to a great extent on "rate differentials," which are the differences between interest income that the Company earns on loans and investments and the interest expense paid on deposits and other borrowings. These rates are highly sensitive to many factors which are beyond the Company's control, including general economic conditions and the policies of various government and regulatory authorities. From time to time, maturities of assets and liabilities are not balanced, and a rapid increase or decrease in interest rates could have an adverse effect on the net interest margin and results of operations of the Company. The nature, timing and effect of any future changes in federal monetary and fiscal policies on the Company and its results of operations are not predictable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations -- Interest Rate Sensitivity Management." The Company anticipates that its net interest margin will decline immediately after the Eastern American Bank deposit transaction, since the proportion of non-interest bearing deposits is lower, and the average rate paid on interest-bearing deposits is higher, at the McLean Branch than in the Company's present deposit structure. See "The Eastern American Transaction" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." REGULATION AND SUPERVISION Bank holding companies and banks operate in a highly regulated environment and are subject to extensive supervision and examination by several federal and state regulatory agencies. The Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). The Bank, as a national banking association, is subject to regulation and supervision by the Office of the Comptroller of the Currency (the "OCC") and, as a result of the insurance of its deposits, by the Federal Deposit Insurance Corporation (the "FDIC"). These agencies' regulations are intended primarily for the protection of depositors, rather than for the benefit of investors. These agencies' regulations, among other things, impose percentage limitations on the acquisition of shares of Common Stock without prior agency approval, require the satisfaction by the Bank (and, upon completion of the transaction with Eastern American, the Company) of certain minimum capital standards and limit the activities which may be conducted by the Company and the Bank. In addition, other agencies regulate certain aspects of the Bank's lending activities. All of these agencies can be expected to continue to propose new regulatory and legislative actions which would affect the operations of the Company and which may alter the competitive nature of the banking business. The effects of any potential changes cannot be predicted but could adversely affect the business and operations of the Company and the Bank in the future. See "Supervision and Regulation." BROAD DISCRETION OF MANAGEMENT IN USE OF PROCEEDS With the exception of the contribution to the capital of the Bank described under "Use of Proceeds," the net proceeds raised in this Offering are allocated only to general categories of expenditure. Accordingly, purchasers of the Common Stock must rely on the judgement of management for the specific expenditure of the proceeds of this Offering. RESTRICTIONS ON PAYMENT OF DIVIDENDS The Company has not paid any cash dividends on the Common Stock to date, and it intends during the near term to retain any earnings available for dividends for the development and growth of its business. Although the Company's long-term plan calls for the payment of cash dividends when circumstances permit, no assurance may be given if or when the Company will adopt a policy of paying cash dividends. See "Dividend Policy." Federal Reserve Board policy limits the payment of cash dividends by bank holding companies and requires that the holding company serve as a source of strength to its banking subsidiaries. See "Supervision and Regulation -- Regulation of the Company." The Company's principal source of funds to pay dividends on the shares of Common Stock will be cash dividends that the Company receives from the Bank. The payment of dividends by the Bank to the Company is subject to certain restrictions imposed by federal banking laws, regulations and authorities. As of June 30, 1997, an aggregate of approximately $1.4 million was available for payment of dividends by the Bank to the Company under applicable restrictions, without regulatory approval. As of the date of this Prospectus, the Bank had not paid any dividends to the Company during 1997. See "Supervision and Regulation -- Regulation of the Bank." ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAW PROVISIONS The Company's Certificate of Incorporation, as amended, and Bylaws contain certain provisions which may delay, discourage or prevent an attempted acquisition or change of control of the Company. These provisions, among other things, impose certain procedural requirements on stockholders of the Company who wish to make nominations for elections of directors or propose other actions at stockholder meetings, authorize the Board of Directors to fix the rights and preferences of the shares of series of preferred stock without stockholder approval, prohibit stockholder action by written consent and limit the ability of stockholders to call special meetings of stockholders. In addition, certain provisions of the Delaware General Corporation Law prohibit a Delaware corporation from engaging in a broad range of business combinations with an "interested stockholder" for a period of three years following the date that such stockholder became an interested stockholder, subject to certain exceptions. See "Description of Capital Stock -- Anti-Takeover Protections." MANAGEMENT'S OWNERSHIP INTEREST After the consummation of the Offering, the executive officers and directors of the Company will own 494,376 shares of the outstanding Common Stock, representing approximately 23.9% of such class outstanding or approximately 22.5% of such class if the Underwriter's over-allotment option is fully exercised. In addition, warrants and stock options to purchase an aggregate of 193,035 shares of Common Stock are held by the Company's directors and executive officers. If all such warrants and stock options were exercised, the directors and executive officers would own approximately 30.4% of the Common Stock to be outstanding after the Offering (approximately 28.8% if the Underwriter's over-allotment option is exercised in full). Accordingly, these executive officers and directors will be able to influence, to a significant extent, the outcome of all matters required to be submitted to the Company's stockholders for approval, including decisions relating to the election of directors of the Company and other significant corporate transactions. See "Security Ownership of Certain Beneficial Owners and Management." LIMITED PRIOR TRADING MARKET Prior to this Offering, there has been no established public trading market for the Common Stock, although it was quoted on the NNOTC Bulletin Board and was traded on a limited basis. The Common Stock has been authorized for quotation on the Nasdaq SmallCap Market under the symbol "CTRY." Continued inclusion of the Common Stock for quotation on the Nasdaq SmallCap Market requires that the Company satisfy a minimum tangible net worth or net income standard, and that the Common Stock satisfy minimum standards as to public float, bid price and market makers. There can be no assurance, however, that an active public market will develop or be sustained after this Offering or that if such a market develops, investors in the Common Stock will be able to resell their shares at or above the public offering price. The public offering price of the shares of Common Stock will be determined by negotiations between the Company and the Underwriter. Among the factors to be considered in making such a determination will be any recent trading prices of the Common Stock, an assessment of the Company's results of operations, an evaluation of the Company's management, the future prospects of the Company and its industry in general, relative price to earnings and book value ratios of securities of companies engaged in activities similar to those of the Company and the prevailing conditions in the securities market. See "Underwriting." COMPETITION The Bank is subject to vigorous competition in all aspects and areas of its business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. The Bank competes in its market area with a number of much larger financial institutions with greater resources, lending limits, larger branch systems and a wider array of commercial banking services. The Company believes the Bank has been able to compete effectively with other financial institutions by emphasizing customer service, establishing long-term customer relationships, building customer loyalty and providing products and services designed to address the specific needs of its customers. No assurance may be given, however, that the Bank will continue to be able to compete effectively with other financial institutions in the future. See "Business -- Competition." DEPENDENCE ON KEY EMPLOYEES To a large extent, the Company is dependent upon the experience and abilities of certain key employees, including the services of Mr. Joseph S. Bracewell, its President. Should the services of these employees become unavailable for any reason, the business of the Company could be adversely affected. The Company and Mr. Bracewell are parties to an Employment Agreement providing for his continued employment by the Company through August 1998. See "Management -- Employment Agreement."

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+ RISK FACTORS Potential investors should consider carefully the following factors, as well as the more detailed information contained elsewhere in this Prospectus, before making a decision to invest in the Common Stock offered hereby. SUBSTANTIAL DEBT AND OPERATING LEASE PAYMENTS At June 30, 1997, the Company had long-term debt (including current portion) of $167.3 million, of which $144.3 million was payable to one lender, and was obligated to pay annual rental obligations of approximately $3.0 million under long-term operating leases. In addition, the Company has signed a definitive agreement to acquire a long-term leasehold interest in a community located in Richmond, Virginia that will require annual rental payments of approximately $4.3 million. The Company has entered into non-binding letters of intent to establish operating lease facilities with Nationwide Health Properties, Inc. ("NHP") and National Health Investors, Inc. ("NHI"), both health care real estate investment trusts, pursuant to which NHP and NHI, at the Company's request and upon satisfaction of certain conditions, would develop, construct, or acquire up to $110.0 million and $100.0 million, respectively, of senior living communities and lease the communities to the Company (collectively, the "REIT Facilities"). Currently, the Company has been allocated $41.6 million and $4.7 million, respectively, in commitments under the REIT Facilities. The Company currently intends to finance its growth through a combination of bank indebtedness, construction and mortgage financing, transactions with NHP and NHI or other real estate investment trusts, the remaining proceeds from the IPO, the proceeds from the sale of the Debentures offered hereby, and joint venture arrangements. As a result, a substantial portion of the Company's cash flow will be devoted to debt service and lease payments. As of June 30, 1997, the Company's existing debt and lease agreements required aggregate annual payments for the years ending December 31, 1997, 1998, 1999, 2000, and 2001, assuming no change in the Company's average interest cost (8.4% at June 30, 1997), ranging from approximately $20.7 million to $22.9 million. In addition, the Company intends to incur significant additional indebtedness and lease obligations and therefore expects its annual debt service and lease obligations over the next five fiscal years will be significantly greater than the amounts set forth in the preceding sentence. For the fiscal year ended December 31, 1996, the Company's net cash provided by operating activities, before giving effect to the payment of interest expense on the Company's outstanding indebtedness, was approximately $23.6 million. There can be no assurance that the Company will generate sufficient cash flows from operations to cover required interest, principal, and operating lease payments. Any payment or other default could cause the lender to foreclose upon the communities securing such indebtedness, or, in the case of an operating lease, could terminate the lease, with a consequent loss of income and asset value to the Company. Furthermore, because most of the Company's mortgages and sale-leaseback agreements contain cross-default provisions, a default by the Company on one of its payment obligations could adversely affect a significant number of the Company's other properties and, consequently the Company's business, results of operations, and financial condition. NEED FOR ADDITIONAL FINANCING; EXPOSURE TO RISING INTEREST RATES The Company's ability to sustain any operating losses and to otherwise meet its growth objectives will depend, in part, on its ability to obtain additional financing on acceptable terms from available financing sources. The Company maintains a $2.5 million line of credit that restricts the Company's ability to incur additional indebtedness. There can be no assurance that future debt instruments will not also include covenants restricting the Company's ability to incur additional debt. Moreover, raising additional funds through the issuance of equity securities could cause existing shareholders to experience dilution and could adversely affect the market price of the Common Stock. There can be no assurance that the Company will be successful in securing additional financing or that adequate financing will be available and, if available, will be on terms that are acceptable to the Company. The Company's inability to obtain additional financing on acceptable terms could delay or eliminate some or all of the Company's growth plans. At June 30, 1997, $48.3 million in principal amount, or approximately 28.9%, of the Company's indebtedness, bore interest at floating rates, with a weighted average annual rate of 7.9%. In addition, it is anticipated that the REIT Facilities will require operating lease payments that will be based on prevailing interest rates. Future indebtedness, from commercial banks or otherwise, and lease obligations are also expected to be based on interest rates prevailing at the time such debt and lease arrangements are obtained. Therefore, increases in prevailing interest rates could increase the Company's interest or lease payment obligations and could have a material adverse effect on the Company's business, financial condition, and results of operations. SUBORDINATION The Debentures will be expressly subordinated in right of payment to all existing and future Senior Indebtedness of the Company. At June 30, 1997, the Company's Senior Indebtedness aggregated approximately $90.9 million. In addition, the Debentures will be effectively subordinated to the liabilities (including trade payables but excluding intercompany liabilities) of the Company's subsidiaries, which were approximately $85.9 million at June 30, 1997. Neither the Indenture nor the Debentures will limit the ability of the Company or any of its subsidiaries to incur additional Senior Indebtedness or other liabilities. The Indenture and the Debentures will not contain any financial covenants or similar restrictions with respect to the Company and, therefore, the holders of the Debentures will have no protection (other than rights upon Events of Default as described under "Description of Debentures") from adverse changes in the Company's financial condition. By reason of the subordination of the Debentures, in the event of insolvency, bankruptcy, liquidation, reorganization, dissolution, or winding up of the business of the Company or upon a default in payment with respect to any indebtedness of the Company or an event of default with respect to such indebtedness resulting in the acceleration thereof, the assets of the Company will be available to pay the amounts due on the Debentures only after all Senior Indebtedness and all liabilities of the Company's subsidiaries have been paid in full. DISCRETIONARY USE OF PROCEEDS The Company intends to use the net proceeds of the offering for general corporate purposes, including the development and construction of free-standing assisted living residences, possible acquisitions of businesses engaged in activities similar or complementary to the Company's business, and the possible prepayment of indebtedness. Accordingly, the Company will have broad discretion as to the application of such proceeds. See "Use of Proceeds." DEPENDENCE ON PRIVATE PAY RESIDENTS Approximately 92.4% of the Company's total revenues for the year ended December 31, 1996 and approximately 89.2% of the Company's total revenues for the six months ended June 30, 1997 were attributable to private pay sources. For the same periods, 7.6% and 10.8%, respectively, of the Company's revenues were attributable to reimbursement from third-party payors, including Medicare. The Company expects to continue to rely primarily on the ability of residents to pay for the Company's services from their own or familial financial resources. Inflation or other circumstances that adversely affect the ability of the elderly to pay for the Company's services could have a material adverse effect on the Company's business, financial condition, and results of operations. NO ASSURANCE AS TO ABILITY TO MANAGE GROWTH The Company intends to expand its operations through the development, construction, and acquisition of free-standing assisted living residences and through the acquisition of other types of senior living communities, as well as through the expansion of the Company's home health care services. See "Business -- Growth Strategy." The success of the Company's growth strategy will depend, in large part, on its ability to effectively operate any newly acquired or developed residences, communities, or home health care agencies, as to which there can be no assurance. The Company has limited experience developing and operating assisted living residences on a free-standing basis. The Company's growth plans will also place significant demands on the Company's management and operating personnel. The Company's ability to manage its future growth effectively will require it to improve its operational, financial, and management information systems and to continue to attract, retain, train, motivate, and manage key employees. If the Company is unable to manage its growth effectively, its business, results of operations, and financial condition will be adversely affected. See "Business -- Growth Strategy" and "Management -- Directors and Executive Officers." LOSSES FROM NEWLY DEVELOPED RESIDENCES AND ACQUISITIONS Although the Company was profitable in 1994, 1995, and 1996, in view of its growth plan for development and acquisitions, there can be no assurance that the Company will continue to be profitable in any future period. Newly developed assisted living residences are expected to incur operating losses during a substantial portion of their first twelve months of operations, on average, until the residences achieve targeted occupancy levels. Newly acquired residences and communities may also incur losses pending their integration into the Company's operations. The Company may also incur operating losses as a result of the expansion of its existing home health care agencies and the establishment of additional home health care agencies in new markets. See "Business -- Growth Strategy" and "Business -- Development Activities." NO ASSURANCE AS TO ABILITY TO DEVELOP ADDITIONAL ASSISTED LIVING RESIDENCES An integral component of the Company's growth strategy is to develop and operate free-standing assisted living residences. As part of its growth strategy, the Company is currently developing 27 free-standing assisted living residences, with an estimated aggregate capacity for approximately 2,400 residents, and is expanding nine of its existing senior living communities to add capacity to accommodate approximately 800 additional residents. The Company's ability to develop successfully assisted living residences will depend on a number of factors, including, but not limited to, the Company's ability to acquire suitable development sites at reasonable prices; the Company's success in obtaining necessary zoning, licensing, and other required governmental permits and authorizations; and the Company's ability to control construction costs and project completion schedules. In addition, the Company's development plans are subject to numerous factors over which it has little or no control, including competition for developable properties; shortages of labor or materials; changes in applicable laws or regulations or their enforcement; the failure of general contractors or subcontractors to perform under their contracts; strikes; and adverse weather conditions. As a result of these factors, there can be no assurance that the Company will not experience construction delays, that it will be successful in developing and constructing currently planned or additional assisted living residences, or that any developed assisted living residences will be economically successful. If the Company's development schedule is delayed, the Company's growth plans could be adversely affected. Additionally, the Company anticipates that the development and construction of additional assisted living residences will involve a substantial commitment of capital with little or no revenue associated with residences under development, the consequence of which could be an adverse impact on the Company's liquidity. See "Business -- Development Activities." RISKS IN ACQUISITIONS OF COMMUNITIES AND COMPLEMENTARY BUSINESSES; DIFFICULTIES OF INTEGRATION The Company plans to make strategic acquisitions of senior living communities (which may include a variety of independent living, assisted living, and skilled nursing facilities), free-standing assisted living residences, home health care agencies, and other properties or businesses that are complementary to the Company's operations and growth strategy. The acquisition of existing communities or other businesses involves a number of risks. Existing communities available for acquisition frequently serve or target different markets than those presently served by the Company. The Company may also determine that renovations of acquired communities and changes in staff and operating management personnel are necessary to successfully integrate such communities or businesses into the Company's existing operations. The costs incurred to reposition or renovate newly acquired communities may not be recovered by the Company. In undertaking acquisitions, the Company also may be adversely impacted by unforeseen liabilities attributable to the prior operators of such communities or businesses, against whom the Company may have little or no recourse. The success of the Company's acquisition strategy will be determined by numerous factors, including the Company's ability to identify suitable acquisition candidates, the competition for such acquisitions, the purchase price, the requirement to make operational or structural changes and improvements, the financial performance of the communities or businesses after acquisition, the Company's ability to finance the acquisitions, and the Company's ability to integrate effectively any acquired communities or businesses into the Company's management, information, and operating systems. There can be no assurance that the Company's acquisition of senior living communities and complementary properties and businesses will be completed at the rate currently expected, if at all, or, if completed, that any acquired communities or businesses will be successfully integrated into the Company's operations. RISKS OF DEVELOPMENT IN CONCENTRATED GEOGRAPHIC AREAS The Company's growth strategy involves the development of assisted living residences and the acquisition of senior living communities in concentrated geographic service areas. See "Business -- Growth Strategy." Accordingly, the Company's occupancy rates in existing, developed, or acquired communities may be adversely affected by a number of factors, including regional and local economic conditions, general real estate market conditions including the supply and proximity of senior living communities, competitive conditions, and applicable local laws and regulations. See "Business -- Operating Residences," "Business -- Development Activities," and "Business -- Government Regulation." INCREASING COMPETITION The senior living and health care services industry is highly competitive, and the Company expects that all segments of the industry will become increasingly competitive in the future. The Company competes with other companies providing independent living, assisted living, skilled nursing, home health care, and other similar service and care alternatives. Although the Company believes there is a need for assisted living residences in the markets where the Company is operating and developing residences, the Company expects that competition will increase from existing competitors and new market entrants, some of whom may have substantially greater financial resources than the Company. In addition, some of the Company's competitors operate on a not-for-profit basis or as charitable organizations and have the ability to finance capital expenditures on a tax-exempt basis or through the receipt of charitable contributions, neither of which are readily available to the Company. Furthermore, if the development of new senior living communities (particularly given the rapid pace of development of new assisted living residences) outpaces the demand for such communities in the markets in which the Company has or is developing senior living communities, such markets may become saturated. An oversupply of such communities in the Company's markets could cause the Company to experience decreased occupancy, reduced operating margins, and lower profitability. Consequently, there can be no assurance that the Company will not encounter increased competition that adversely affects its occupancy rates, pricing for services, and growth prospects. See "Business -- Competition." DEPENDENCE ON KEY PERSONNEL The Company is dependent on the services of its executive officers, particularly the Company's Chairman and Chief Executive Officer, W.E. Sheriff, and the Company's President and Chief Operating Officer, Christopher J. Coates, for the management of the Company. Neither Mr. Sheriff, Mr. Coates, nor any of the Company's other executive officers has an employment agreement with the Company. The Company has a key employee life insurance policy in the amount of $2.0 million covering Mr. Sheriff. The loss by the Company of certain of its executive officers and the inability to attract and retain qualified management personnel could adversely affect the Company's business, financial condition, and results of operations. See "Management -- Directors and Executive Officers." RESIDENCE MANAGEMENT, STAFFING, AND LABOR COSTS The Company competes with other providers of senior living and health care services with respect to attracting and retaining qualified management personnel responsible for the day-to-day operations of each of the Company's communities and skilled technical personnel responsible for providing resident care. A shortage of nurses or trained personnel may require the Company to enhance its wage and benefits package in order to compete in the hiring and retention of such personnel or to hire more expensive temporary personnel. The Company will also be dependent on the available labor pool of semi-skilled and unskilled employees in each of the markets in which it operates. No assurance can be given that the Company's labor costs will not increase, or that, if they do increase, they can be matched by corresponding increases in rates charged to residents. Any significant failure by the Company to attract and retain qualified management and staff personnel, to control its labor costs, or to pass on any increased labor costs to residents through rate increases could have a material adverse effect on the Company's business, financial condition, and results of operations. CONTROL BY MANAGEMENT AND CERTAIN SHAREHOLDERS The Company's officers and directors and entities controlled by them, collectively, beneficially own approximately 40.0% of the outstanding shares of Common Stock. Accordingly, such persons have the ability, by voting their shares in concert, to influence the election of the Company's Board of Directors and the outcome of all other matters submitted to the Company's shareholders. Furthermore, such influence could preclude any unsolicited acquisition of the Company and, consequently, adversely affect the market price of the Debentures and the Common Stock. See "Principal Shareholders." GOVERNMENT REGULATION AND THE BURDENS OF COMPLIANCE Federal and state governments regulate various aspects of the Company's business. The development and operation of health care facilities and the provision of health care services are subject to federal, state, and local licensure, certification, and inspection laws that regulate, among other matters, the number of licensed beds, the provision of services, the distribution of pharmaceuticals, billing practices and policies, equipment, staffing (including professional licensing), operating policies and procedures, fire prevention measures, environmental matters, and compliance with building and safety codes. Failure to comply with these laws and regulations could result in the denial of reimbursement, the imposition of fines, temporary suspension of admission of new patients, suspension or decertification from the Medicare programs, restrictions on the ability to acquire new facilities or expand existing facilities, and, in extreme cases, the revocation of a community's license or closure of a community. There can be no assurance that federal, state, or local governments will not impose additional restrictions on the Company's activities that could materially adversely affect the Company. Many states, including several of the states in which the Company currently operates, control the supply of licensed skilled nursing beds and home health care agencies through certificate of need ("CON") programs. Presently, state approval is required for the construction of new health care communities, the addition of licensed beds, and certain capital expenditures at such communities, as well as the opening of a home health care agency. To the extent that a CON or other similar approval is required for the acquisition or construction of new facilities, the expansion of the number of licensed beds, services, or existing communities, or the opening of a home health care agency, the Company could be adversely affected by the failure or inability to obtain such approval, changes in the standards applicable for such approval, and possible delays and expenses associated with obtaining such approval. In addition, in most states the reduction of the number of licensed beds or the closure of a community requires the approval of the appropriate state regulatory agency and, if the Company were to seek to reduce the number of licensed beds at, or to close, a community, the Company could be adversely affected by a failure to obtain or a delay in obtaining such approval. Federal and state anti-remuneration laws, such as "anti-kickback" laws, govern certain financial arrangements among health care providers and others who may be in a position to refer or recommend patients to such providers. These laws prohibit, among other things, certain direct and indirect payments that are intended to induce the referral of patients to, the arranging for services by, or the recommending of, a particular provider of health care items or services. Federal anti-kickback laws have been broadly interpreted to apply to certain contractual relationships between health care providers and sources of patient referral. Similar state laws vary, are sometimes vague, and seldom have been interpreted by courts or regulatory agencies. Violation of these laws can result in loss of licensure, civil and criminal penalties, and exclusion of health care providers or suppliers from participation in the Medicare and Medicaid programs. There can be no assurance that such laws will be interpreted in a manner consistent with the practices of the Company. Under the Americans with Disabilities Act of 1990, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. A number of additional federal, state, and local laws exist that also may require modifications to existing and planned communities to create access to the properties by disabled persons. Although the Company believes that its communities are substantially in compliance with present requirements or are exempt therefrom, if required changes involve a greater expenditure than anticipated or must be made on a more accelerated basis than anticipated, additional costs would be incurred by the Company. Further legislation may impose additional burdens or restrictions with respect to access by disabled persons, the costs of compliance with which could be substantial. See "Business -- Government Regulation." POTENTIAL FOR ENVIRONMENTAL LIABILITY Under various federal, state, and local environmental laws, ordinances, and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or petroleum product releases at such property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and clean up costs incurred by such parties in connection with the contamination. Such laws typically impose clean-up responsibility and liability without regard to whether the owner knew of or caused the presence of the contaminants, and liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs of investigation, remediation, or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such property, may adversely affect the owner's ability to sell or lease such property or to borrow using such property as collateral. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by such person. Finally, the owner of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. LIABILITY AND INSURANCE The provision of personal and health care services entails an inherent risk of liability. In recent years, participants in the health care services industry have become subject to an increasing number of lawsuits alleging negligence or related legal theories, many of which involve large claims and result in the incurrence of significant defense costs. Moreover, assisted living residences offer residents a greater degree of independence in their daily living. This increased level of independence may subject the resident and the Company to certain risks that would be reduced in more institutionalized settings. The Company currently maintains liability insurance in amounts it believes are sufficient to cover such claims based on the nature of the risks, its historical experience, and industry standards. There can be no assurance, however, that claims in excess of the Company's insurance or claims not covered by the Company's insurance, such as claims for punitive damages, will not arise. A claim against the Company not covered by, or in excess of, the Company's insurance could have a material adverse effect upon the Company. In addition, the Company's insurance policies must be renewed annually. There can be no assurance that the Company will be able to obtain liability insurance in the future or that, if such insurance is available, it will be available on acceptable economic terms. See "Business -- Insurance and Legal Proceedings." EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS The Company's Board of Directors has the authority, without action by the shareholders, to issue up to 5,000,000 shares of preferred stock and to fix the rights and preferences of such shares. This authority, together with certain provisions of the Company's Charter (including provisions that implement staggered terms for directors, limit shareholder ability to call a shareholders' meeting or to remove directors, and require a supermajority vote to amend certain provisions of the Charter), may delay, deter, or prevent a change in control of the Company. In addition, as a Tennessee corporation, the Company is subject to the provisions of the Tennessee Business Combination Act and the Tennessee Greenmail Act, each of which may be deemed to have anti-takeover effects and may delay, deter, or prevent a takeover attempt that might be considered by the shareholders to be in their best interests. In the event of any Change in Control of the Company, each holder of the Debentures will have the right, at such holder's option and subject to certain conditions and restrictions, to require the Company to repurchase all or any part of such holder's Debentures. The right to require the Company to repurchase Debentures may delay, deter, or prevent a change in control of the Company. See "Description of Debentures" and "Description of Capital Stock -- Certain Provisions of the Charter, Bylaws, and Tennessee Law." ABSENCE OF PUBLIC MARKET FOR THE DEBENTURES The Debentures are a new class of securities for which there is currently no public market. Although the Debentures have been approved for listing on the NYSE, there can be no assurance as to the liquidity of the market for the Debentures that may develop, the ability of the holders to sell their Debentures, or the prices at which holders of the Debentures would be able to sell their Debentures. If a market for the Debentures does develop, the Debentures may trade at a discount from their initial public offering price, depending on prevailing interest rates, the market for similar securities, performance of the Company, performance of the senior living industry, and other factors. See "Underwriting."

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+ RISK FACTORS An investment in the Common Stock offered hereby is speculative in nature and involves a high degree of risk. In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating the Company and its business before purchasing the Common Stock offered hereby. This Prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act. Discussions containing such forward-looking statements may be found in the material set forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Strategy," "Business -- Sales and Marketing," and "Business -- Engineering, Research and Product Development," as well as the Prospectus generally. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, the risk factors set forth below and the matters set forth in the Prospectus generally. Fluctuations in Quarterly Operating Results. The Company's quarterly operating results may fluctuate due to a variety of factors, including the timing of new product announcements and introductions by the Company, its major customers or its competitors, delays in new product introductions by the Company, market acceptance of new or enhanced versions of the Company's products, changes in the product or customer mix of sales, delay, cancellation or acceleration of customer orders, changes in the level of operating expenses, competitive pricing pressures, the gain or loss of significant customers, increased research and development and sales and marketing expenses associated with new product introductions, the mix of distribution channels through which the Company's products are sold, purchasing patterns of OEMs, VARs, system integrators and distributors and the hiring and training of additional staff as well as general economic conditions. In addition, the Company has often recognized a substantial portion of its revenues in the last month of a quarter. As a result, product revenues in any quarter are substantially dependent on orders booked and shipped in that quarter, and revenues for any future quarter are not predictable with any degree of certainty. Any significant deferral of purchases of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations in any particular quarter and, to the extent significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. In addition, most of the Company's sales are in the form of large orders with short delivery times and the Company's ability to determine the timing of individual customer orders is limited. All of the above factors are difficult for the Company to forecast and these and other factors can materially adversely affect the Company's business, financial condition and results of operations for one quarter or a series of quarters. The Company's expense levels are based in part on its expectations regarding future sales and are fixed in the short term to a large extent. Therefore, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected shortfall in sales. Any significant decline in demand relative to the Company's expectations or any material delay of customer orders could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company is typically able to deliver a standard interactive communications system within 14 days of receipt of the order and, therefore, does not customarily have a significant long-term backlog. To achieve its sales objective, the Company is dependent upon obtaining orders in a quarter for shipment in that quarter. Furthermore, the Company's agreements with its OEMs, VARs, system integrators and distributors typically provide that they may change delivery schedules and cancel orders within specified timeframes, typically up to 30 days prior to the scheduled shipment date, without significant penalty. The Company's OEMs, VARs, system integrators and distributors have in the past built, and may in the future build, significant inventory for a number of reasons. Decisions by such OEMs, VARs, system integrators and distributors to reduce their inventory levels could lead to reductions in purchases from the Company. These reductions, in turn, could cause fluctuations in the Company's operating results and could have a material adverse effect on the Company's business, financial condition and results of operations in the periods in which the inventory is reduced. There can be no assurance that the Company will be able to grow its level of revenues or sustain its level of profitability, or even maintain profitability, in the future. Increases in operating expenses are expected to continue and, together with pricing pressures, may result in a decrease in operating income. In addition, it is possible that, in some future quarter, the Company's operating results will be below the expectations of public market analysts and investors. In such event the price of the Company's Common Stock would likely be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Reliance on Indirect Distribution. The Company markets and sells products domestically and internationally primarily through resellers, such as OEMs, VARs, systems integrators and distributors. The number of qualified resellers in certain countries is limited. Resellers typically are not effective at selling the Company's products until they have been trained and have successfully completed several sales. The Company's performance depends in part on attracting, retaining and motivating such resellers. Certain of the Company's resellers may also act as resellers for competitors of the Company and could devote greater effort and resources to marketing competitive products. The Company's resellers are generally provided discounts and occasionally are entitled to special pricing or distribution arrangements, the effect of which is to decrease the Company's gross margins. Although the Company has contractual relationships with many of its resellers, these agreements do not require the resellers to purchase the Company's products and can generally be terminated on short notice by the reseller. There can be no assurance that resellers will continue to market the Company's products or devote the resources necessary to provide effective sales and marketing support to the Company. In addition, the Company is dependent on the continued viability and financial stability of its resellers, many of which are small organizations with limited capital. The loss of any key reseller could adversely affect the Company's business. The Company's sales through OEMs, VARs, systems integrators and distributors for the year ended December 31, 1996 accounted for approximately 50% of the Company's net sales. In addition, for the year ended December 31, 1996, sales to five customers accounted for approximately 58.9% of the Company's net sales. Because of the Company's sales and marketing approach, these percentages may not decrease in the near future. The Company, therefore, depends on receiving large orders from large customers and there can be no assurance that such sales will continue. Accordingly, there can be no assurance that these factors will not materially adversely affect the Company's business, financial condition and results of operations. See "Business -- Sales and Marketing." Management of Growth. The Company has recently experienced and may continue to experience growth in the number of its employees and scope of its operations. In particular, the Company intends to increase its sales, marketing, engineering and support staff. These increases will result in increased responsibilities for management. To manage potential future growth effectively, the Company must improve its operational, financial and management information systems and must hire, train, motivate and manage a growing number of employees. There can be no assurance that the Company will be able to effectively achieve or manage any such growth, and failure to do so could delay product development cycles or otherwise have a material adverse effect on the Company's business, financial condition and results of operations. Reliance on Key Personnel. The Company's success during the foreseeable future will depend largely upon the continued services of its executive officers, each of whom has entered into an employment agreement with the Company. None of the employment agreements contains non-competition covenants. The Company does not have key-man life insurance on its executive officers. Although the Company's executive officers and key personnel have extensive experience in the industry, the length of employment of certain employees at the Company is relatively short. The Company's success will also depend in part on its ability to attract and retain qualified managerial, technical and sales and marketing personnel, for whom competition is intense. In particular, the current availability of qualified sales and engineering personnel is limited. The Company has recently hired a significant number of sales and marketing personnel and the Company's success will depend in part on the Company's ability to train and integrate new hires into the Company's business. The Company's business, financial condition and results of operations could be materially adversely affected if the Company were unable to attract, hire, assimilate and train these personnel in a timely manner. See "Management." Highly Competitive Market Environment. The market for interactive communications systems is highly competitive. Certain of the Company's competitors have substantially greater financial, technical, marketing and sales resources than the Company. There can be no assurance that the Company's present or future competitors will not exert increased competitive pressures on the Company. In particular, the Company may in the future experience pricing pressures as the markets in which it competes mature, as new technologies are introduced or for other reasons, and such price competition could materially and adversely affect the Company's market share, business, financial condition and results of operations. In addition, many suppliers of voice mail systems and telecommunications suppliers have added interactive communications capabilities to some of their product offerings and offer interactive communications systems as a component or add-on of an overall sale of a voice mail system or a telecommunications switch. The Company expects that the average sales prices of its products will decline in the future primarily due to increased competition and the introduction of new technologies. Accordingly, the Company's ability to maintain or increase net sales and gross margins will depend in part upon its ability to reduce its cost of sales, to increase unit sales volumes of existing products and to introduce and sell new products. Although the Company believes it has certain marketing, technical and other advantages over many of its competitors, maintaining such advantages will require continued investment by the Company in product innovation and development as well as in sales, marketing and customer support. There can be no assurance that the Company will be successful in such efforts. If the Company is unable to maintain such advantages, it may have a material adverse effect on the Company's business, financial condition and results of operations. See "Business - -- Competition." Technological Change, Changing Markets and New Products. The market in which the Company operates is characterized by rapid continual technological change and improvements in hardware and software technology. The Company believes that its future success will depend, in part, upon its ability to expand and enhance the features of its existing products and to develop and introduce new products designed to meet changing customer needs on a cost-effective and timely basis. Failure by the Company to respond on a timely basis to technological developments, changes in industry standards or customer requirement or the introduction or development of superior or alternative technologies could render the Company's existing products, as well as products currently under development, obsolete and unmarketable. There can be no assurance that the Company will respond effectively to technological changes or new product announcements by others or that the Company will be able to successfully develop and market new products or product enhancements and that any new product or product enhancement will gain market acceptance. The Company's software products, as with software programs generally, may contain undetected errors or "bugs" when introduced or as new versions are released. Although the Company's current products have not experienced post-release software errors that have had a significant financial or operational impact on the Company, there can be no assurance that such problems will not occur in the future, particularly as the Company's software systems continue to become more complex and sophisticated. Such defective software may result in loss of or delay in market acceptance of the Company's products, warranty liability or product recalls. The Company budgets research and development expenditures based on planned product introductions and enhancements; however, actual expenditures may significantly differ from budgeted expenditures. Inherent in the product development process are a number or risks. The development of new, technologically advanced products and product enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. There can be no assurance that the Company will successfully identify, develop or introduce new products or product enhancements. In addition, modifications by the Company of its products to comply with unique customer specifications may detract from its ongoing product development efforts. Future delays in the introduction of new or enhanced products, the inability of such products to gain market acceptance or problems associated with new product transitions could adversely affect the Company's operating results, particularly on a quarterly basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Lengthy Sales Cycle. The sales cycle for the Company's products (particularly to Telcos) is lengthy and can range from approximately one month to over one year, averaging six to nine months, and is subject to a number of significant risks, including customers' budgetary constraints and internal acceptance reviews, over which the Company has little or no control. Consequently, if sales forecasted from a specific customer for a particular quarter are not realized in that quarter, the Company may not be able to generate revenue from alternate sources in time to compensate for the shortfall. As a result, a lost or delayed sale could have a material adverse effect on the Company's quarterly operating results. Moreover, to the extent that significant sales occur earlier than expected, operating results for subsequent quarters may be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." International Sales. Sales to customers outside the United States accounted for approximately 11% of the Company's total sales for the year ended December 31, 1996. The Company intends to expand its operations outside of the United States and to enter additional international markets, which will require significant management attention and financial resources. The Company expects to commit additional time and development resources to customizing its products for selected international markets and to developing international sales and support channels. There can be no assurance that such efforts will be successful. International operations are subject to a number or risks, including costs of customizing products for foreign countries, dependence on independent resellers, multiple and conflicting regulations regarding telecommunications, longer payment cycles, unexpected changes in regulatory requirements, import and export restrictions and tariffs, difficulties in staffing and managing foreign operations, greater difficulty or delay in accounts receivable collection, potentially adverse tax consequences, the burdens of complying with a variety of foreign laws, the impact of possible recessionary environments in economies outside the United States and political and economic instability. The Company's export sales are currently denominated predominantly in United States dollars. An increase in the value of the United States dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in foreign markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Reliance on Component Availability and Key Suppliers. In certain instances, despite the availability of multiple supply sources, the Company elects to procure certain components or parts from a single source to maintain quality control or to develop a strategic relationship with a supplier. In particular, Dialogic Corporation ("Dialogic") is the primary supplier of voice boards for the Company's products. Although the Company has entered into supply contracts with Dialogic and certain of its other vendors, the Company has no assurance that components and parts will be available as required, or that prices of such components and parts will not increase. If the Company were to experience significant delays, interruptions or reductions in the supply of certain components and parts purchased from such vendors, the Company's business, financial condition and results of operations could be materially adversely affected. See "Business -- Manufacturing." Purchase orders from the Company's customers frequently require delivery quickly after placement of the order. Because the Company does not maintain significant component inventories, when purchase orders include hardware deliverables, delay in shipment by a supplier could lead to lost sales. The Company uses internal forecasts to determine its general materials and components requirements. Lead times for materials and components may vary significantly and depend on factors such as specific supplier performance, contract terms and general market demand for components. If orders vary from forecasts, the Company may experience excess or inadequate inventory of certain materials and components. From time to time, the Company has experienced shortages and allocations of certain components, resulting in delays in fulfillment of customer orders. Such shortages and allocations could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Third-Party Claims of Infringement; Limited Protection of Proprietary Rights. The industry in which the Company competes is characterized by a significant level of use of proprietary technology and frequent litigation based on allegations of infringement of such proprietary technologies. From time to time, third parties may assert exclusive copyright, trademark and other intellectual property rights to technologies that are important to the Company. The Company is aware that certain segments of the voice processing industry, particularly voice mail/voice messaging systems, are affected by active and costly litigation, and there can be no assurance that as the Company's interactive communications systems evolve (possibly to include certain voice mail/voice messaging features), the Company will not be required to enter into license agreements or become involved in, or otherwise be affected by, litigation which may or may not be meritorious. In its distribution agreements, the Company typically agrees to indemnify its customers for any expenses or liabilities, generally without limitation, resulting from claimed infringements of patents, trademarks or copyrights of third parties. In the event of litigation to determine the validity of any third-party claims, such litigation, whether or not determined in favor of the Company, could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel from productive tasks. In the event of an adverse ruling in such litigation, the Company might be required to discontinue the use and sale of infringing products, expend significant resources to develop non-infringing technology or obtain licenses from third parties. There can be no assurance that licenses from third parties would be available on acceptable terms, if at all. In the event of a successful claim against the Company and the failure of the Company to develop or license a substitute technology, the Company's business, financial condition and results of operations would be materially adversely affected. The Company relies on a combination of patent, copyright, trademark and trade secret laws, employee confidentiality and third-party nondisclosure agreements and license agreements to protect its proprietary software technology. Nonetheless, there can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of such rights or that third parties will not independently develop functionally equivalent or superior software technology. The laws of certain foreign countries in which the Company's products are or may be developed, manufactured or sold may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of misappropriation of the Company's technology and products more likely. See "Business -- Patents and Other Proprietary Rights." Substantial Control By Insiders. After the sale of the shares of Common Stock offered hereby, the Company's officers, directors and principal stockholders will retain voting control of approximately 60.2% of the Company's Common Stock (55.3% if the Underwriters' over-allotment option is exercised in full) and, therefore, will be able to exercise substantial control over the Company's affairs. Accordingly, if such persons act together, they will be able to elect all directors and exercise control over the business policies and affairs of the Company. See "Management -- Executive Officers and Directors" and "Principal and Selling Stockholders." Absence of Prior Trading Market; Potential Volatility of Stock Price. Prior to this offering, there has been no public market for the Company's Common Stock and there can be no assurance that following this offering an active trading market will develop or be maintained. The initial public offering price of the Common Stock will be determined by negotiations between the Company and the Representatives of the Underwriters and may not be indicative of the market price of the Common Stock in the future. For a description of the factors to be considered in determining the initial public offering price, see "Underwriting." The market price of the shares of the Company's Common Stock may be highly volatile. Factors such as fluctuations in the Company's quarterly operating results, announcements of technological innovations or new commercial products by the Company or its competitors, and conditions in the markets in which the Company and its customers compete, may have a significant effect on the market price and marketability of the Common Stock. Furthermore, the stock market historically has experienced volatility, which has particularly affected the market prices of securities of many high technology companies and which sometimes has been unrelated to the operating performances of such companies. See "Underwriting." Shares Eligible for Future Sale. Sales of the Company's Common Stock in the public market following this offering could adversely affect the prevailing market price of the Common Stock. Immediately after completion of the offering, the Company will have 7,028,885 shares of Common Stock outstanding, of which the 2,500,000 shares offered hereby will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company as that term is defined under Rule 144. The Company, its executive officers, directors and certain current stockholders, who in the aggregate own beneficially 4,468,571 of the remaining outstanding shares of Common Stock and stock options exercisable for an additional 431,998 shares of Common Stock have agreed pursuant to lock-up agreements that they will not sell or otherwise dispose of any shares of Common Stock beneficially owned by them for a period of 180 days from the date of this Prospectus. Such agreements provide that Oppenheimer & Co., Inc. may, in its sole discretion and at any time without notice, release all or a portion of the shares subject to these lock-up agreements. Upon the expiration of these lock-up agreements, 4,900,569 of such shares, including shares issuable pursuant to the exercise of stock options, will become immediately eligible for sale in the public market, subject in some cases to the volume and other restrictions of Rule 144 or Rule 701 under the Securities Act. As soon as practicable after the date of this Prospectus, the Company intends to register on one or more registration statements on Form S-8 all shares of Common Stock subject to outstanding stock options and Common Stock issuable pursuant to the Company's stock and employee stock purchase plans that do not qualify for an exemption under Rule 701 from the registration requirements of the Securities Act. Shares covered by such registration statement will be eligible for sale in the public market after the effective date of such registration. In addition, the holders of 4,193,791 shares of Common Stock are entitled to certain registration rights with respect to such shares. If such holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, such sales may have an adverse effect on the market price for the Common Stock. In addition, if the Company is required to include in a Company-initiated registration shares held by such holders pursuant to the exercise of their "incidental" registration rights, such sales may have an adverse effect on the Company's ability to raise needed capital. See "Management," "Principal Stockholders," "Shares Eligible for Future Sale" and "Underwriting." Immediate and Substantial Dilution. The initial public offering price is substantially higher than the net tangible book value per share of Common Stock. Investors purchasing shares of Common Stock in this offering will, therefore, incur immediate substantial dilution in net tangible book value per share. See "Dilution." No Expectation of Dividends. The Company currently intends to retain any future earnings in its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. See "Dividend Policy." Anti-Takeover Provisions; Possible Issuance of Preferred Stock. The Company's Restated Articles of Organization ("Articles of Organization") and Amended and Restated By-laws ("By-laws") contain provisions that might diminish the likelihood that a potential acquiror would make an offer for the Common Stock, impede a transaction favorable to the interest of the stockholders or increase the difficulty of removing members of the Board of Directors or management. After the consummation of this offering, the Board of Directors will have the authority, without further stockholder approval, to issue up to 1,000,000 shares of Preferred Stock in one or more series and to determine the price, rights, preferences and privileges of those shares. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of shares of Preferred Stock, while potentially providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plans to issue shares of Preferred Stock. Furthermore, certain provisions of the Articles of Organization, including provisions that provide for the Board of Directors to be divided into three classes to serve for staggered three-year terms, may have the effect of delaying or preventing a change in control of the Company, which could adversely affect the market price of the Common Stock. In addition, the Company is subject to Chapters 110D and 110F of the Massachusetts General Laws, which prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of such provisions also could have the effect of delaying or preventing a change of control in the Company. See "Description of Capital Stock -- Certain Articles of Organization, By-law and Statutory Provisions Affecting Stockholders." Discretion as to Use of Proceeds. The principal purposes of this offering are to increase the Company's equity capital, to create a public market for the Company's Common Stock, to increase the visibility of the company in the marketplace and to facilitate future access to public equity markets. As of the date of this Prospectus, the Company has no specific plans to use the net proceeds from this offering other than for working capital and general corporate purposes, including repayment of bank indebtedness. Accordingly, the Company's management will retain broad discretion as to the allocation of the net proceeds from this offering. Pending any such uses, the Company plans to invest the net proceeds in the investment grade, interest-bearing securities. See "Use of Proceeds."

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+ RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed below and in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Variability of Quarterly Operating Results; Seasonality. The Company's quarterly operating results have fluctuated significantly in the past, and will likely continue to fluctuate in the future, as a result of a number of factors, many of which are outside the Company's control. These factors include the demand for the Company's software products and services; the size and timing of specific sales; the level of product and price competition that the Company encounters; the length of sales cycles; the timing of new product introductions and product enhancements by the Company or its competitors; market acceptance of new products; changes in pricing policies by the Company or its competitors; the Company's ability to hire sales and consulting personnel to meet the demand, if any, for implementations of the OneWorld version of its application suites; the Company's ability to establish and maintain relationships with third-party implementation providers; the Company's ability to establish and maintain relationships with hardware and software suppliers; the announcement of new hardware platforms that cause delay of customer purchases; variations in the length of the implementation process for the Company's software products; the Company's ability to complete fixed-price consulting contracts on budget; the mix of products and services sold; the mix of distribution channels through which products are sold; the mix of international and domestic revenue; changes in the Company's sales incentives; changes in the renewal rate of support agreements; product life cycles; software defects and other product quality problems; seasonality of technology purchases; personnel changes; changes in the Company's strategy; the activities of competitors; the extent of industry consolidation; expansion of the Company's international operations; general domestic and international economic and political conditions; and budgeting cycles of the Company's customers. The timing of large individual sales has been difficult for the Company to predict, and large individual sales have, in some cases, occurred in quarters subsequent to those anticipated by the Company. There can be no assurance that the loss or deferral of one or more significant sales would not have a material adverse effect on the Company's quarterly operating results. The Company's software products are typically shipped when orders are received, and consequently, license backlog at the beginning of any quarter has in the past represented only a small portion of that quarter's expected revenue. As a result, license fee revenue in any quarter is difficult to forecast because it is substantially dependent on orders booked and shipped in that quarter. Moreover, the Company typically recognizes a substantial amount of its revenue in the last month of the quarter, frequently in the last week or even days of the quarter. Since the Company's operating expenses are based on anticipated revenue levels and because a high percentage of the Company's expenses are relatively fixed in the near term, any shortfall from anticipated revenue or any delay in the recognition of revenue could result in significant variations in operating results from quarter to quarter. Quarterly license fee revenue is also difficult to forecast because the Company's sales cycles, from initial evaluation to delivery of software, vary substantially from customer to customer. If revenue falls below the Company's expectations in a particular quarter, the Company's operating results could be materially adversely affected. See "-- Lengthy Sales Cycle." The Company has experienced, and is expected to continue to experience, a high degree of seasonality, with a disproportionately greater amount of the Company's revenue for any fiscal year being recognized in its fourth fiscal quarter and an even greater proportion of net income being recognized in such quarter. For example, in fiscal 1996, 32% of total revenue, 39% of license fee revenue, 28% of service revenue and 67% of net income were recognized in the fourth fiscal quarter. In addition, because the Company's operating expenses are relatively fixed in the near term, the Company's operating margins have historically been significantly higher in its fourth fiscal quarter than in its other quarters. The Company believes that such seasonality is primarily the result of the efforts of the Company's direct sales force to meet or exceed fiscal year-end sales quotas and the tendency of certain customers to finalize sales contracts at or near the Company's fiscal year end. Because revenue, operating margins and net income are greater in the fourth quarter, any shortfall from anticipated revenue, particularly license fee revenue, in the fourth quarter would have a disproportionately large adverse effect on the Company's operating results for the fiscal year. In addition, the Company's total revenue, license fee revenue, service revenue and net income in its first fiscal quarter have historically been lower than those in the immediately preceding fourth quarter. For example, total revenue, license fee revenue, service revenue and net income in the first quarter of fiscal 1997 decreased 20%, 41%, 3% and 87%, respectively, from the fourth quarter of fiscal 1996. The Company's first quarter revenue has historically slowed during the holiday season in November and December. Based on all of the foregoing, the Company believes that future revenue, expenses and operating results are likely to vary significantly from quarter to quarter. As a result, quarter-to-quarter comparisons of operating results are not necessarily meaningful or indicative of future performance. Furthermore, the Company believes it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts or investors. In such event, or in the event that adverse conditions prevail, or are perceived to prevail, with respect to the Company's business or generally, the market price of the Company's Common Stock would likely be materially adversely affected. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Limited Deployment of OneWorld Version; Entering New Markets. The Company first shipped the OneWorld version of its application suites in late calendar 1996. The Company's future revenue growth is substantially dependent upon the market acceptance of these OneWorld application suites and the ability of the Company to license OneWorld application suites to new customers who are not currently users of the Company's WorldSoftware. The Company does not expect to generate substantial OneWorld license fee revenue from its existing installed base of WorldSoftware users. The Company expects that it will take a longer time to implement the OneWorld version of its application suites than it takes to implement the WorldSoftware version, which typically takes six to 18 months. To date, only a limited number of the Company's customers have licensed the OneWorld version of its application suites, and, due to the lengthy implementation process, only a few have completed implementation of some or all of the licensed OneWorld applications suites. Potential and existing customers may find it difficult, or be unable, to successfully implement OneWorld application suites, or may not purchase OneWorld application suites for a number of reasons, including a lack of implementation experience by the Company or its third-party implementation providers in complex multi-platform environments; a customer's lack of the necessary hardware, software or networking infrastructure; an absence of required functionality in OneWorld application suites; excessive time and cost of implementation; the failure of the OneWorld version to be competitive with other products on the market; defects or "bugs" in OneWorld application suites; and a failure to meet customer expectations. In addition, because the Company is using OneWorld application suites to target potential customers in new markets, the Company must overcome certain significant obstacles, including new competitors who have significantly more experience and name recognition with open systems customers, implementations and platforms; the Company's limited relationships with third-party implementation providers; the limited experience of the Company's sales and consulting personnel in the open systems environment; and the Company's limited existing reference accounts in the open systems market. If, for any reason, the Company is unable to successfully sell or implement OneWorld in the UNIX or Windows NT ("NT") markets, the Company's reputation would be damaged, and such failure would have a material adverse effect on the Company's business, operating results and financial condition. Moreover, if the Company fails to meet the expectations of market analysts or investors with regard to sales or implementations of OneWorld application suites, the market price of the Company's Common Stock would likely be materially adversely affected. Dependence on IBM AS/400 Platform. Although the Company has recently released the OneWorld version of its application suites to run on leading UNIX and NT servers, the Company is and, for an extended period, expects to remain substantially dependent upon the market for software products for the IBM AS/400 platform. All of the Company's revenue in fiscal 1994, 1995 and 1996 and substantially all of the Company's revenue for the first nine months of fiscal 1997 was derived from its software products and related services for the AS/400 market. The market for the AS/400 platform is expected to grow at a minimal rate; however, there can be no assurance that the AS/400 market will grow at all in the future. Similarly, there can be no assurance that AS/400 customers or prospective customers will respond favorably to the Company's future or enhanced software products or that the Company will continue to be successful in selling its software products or services in the AS/400 market. The Company's future growth will depend in part on its ability to gain market share in the AS/400 market; however, there can be no assurance that the Company will be able to achieve any such market share gains or maintain its current market share. Moreover, the Company's goal of gaining market share in the AS/400 market will be more difficult to achieve since the Company is also focusing on the UNIX and NT markets. See "-- Management of Growth; Need for Additional Qualified Personnel." If the Company's AS/400 installed customer base erodes, resulting in a decline in recurring support and other service revenue, the Company's business, operating results and financial condition will be materially adversely affected. Competition. The market for Enterprise Resource Planning ("ERP") software solutions is intensely competitive, subject to rapid technological change and significantly affected by new product introductions and other market activities of industry participants. The Company's products are designed and marketed for the AS/400 market and, more recently, for leading UNIX and NT servers. The Company's primary competition comes from a large number of independent software vendors including: (i) companies offering products that run on the AS/400 platform and other mid-range computers, including System Software Associates, Inc., Marcam Corporation, Infinium Software, Inc. (formerly Software 2000) and JBA Holdings plc; (ii) companies offering products that run on UNIX or NT servers in a client/server environment, such as SAP Aktiengesellschaft ("SAP"), Baan Company N.V. ("Baan"), PeopleSoft, Inc. ("PeopleSoft") and Oracle Corporation ("Oracle"); and (iii) companies offering either standard or fully customized products that run on mainframe computer systems, such as SAP. Additionally, the Company faces indirect competition from suppliers of custom-developed business application software that focus mainly on proprietary mainframe and mid-range computer-based systems, such as systems consulting groups of major accounting firms, and from IT departments of potential customers that develop systems internally. The Company's competitors currently offer products that run on the AS/400 platform and/or UNIX and NT servers or have announced their intent to introduce such products in the near future. As a result, the Company will experience increased competition. There can be no assurance that the Company will be able to successfully compete with new or existing competitors or that such competition will not have a material adverse effect on the Company's business, operating results or financial condition. See "Business -- Competition." Many of the Company's competitors, and SAP and Oracle in particular, have significantly greater financial, technical, marketing and other resources than the Company, as well as wider name recognition and larger installed customer bases. Moreover, the Company has traditionally competed only in the AS/400 market, which primarily consists of mid-sized organizations, and has only recently entered the UNIX and NT markets. In contrast, each of SAP, Baan, PeopleSoft and Oracle has significantly more experience with UNIX and NT implementations and platforms, name recognition with potential UNIX and NT customers, and reference accounts with UNIX and NT customers. Accordingly, such competitors have significantly more customers in the UNIX and NT markets to use as references when competing against the Company. Additionally, several of the Company's competitors have well-established relationships with current and potential customers of the Company. These relationships may prevent the Company from competing effectively in divisions or subsidiaries of such customers. Many of the Company's competitors, such as SAP, Baan, PeopleSoft and Oracle, also offer, or have announced their intention to offer, vertical applications targeted to mid-sized organizations, which market comprises a substantial portion of the Company's revenue. Further, several of the Company's competitors regularly and significantly discount prices on their products. If these competitors continue to discount or increase the amount or frequency of such discounts in response to increased competition or other factors, the Company may be required to similarly discount its products, which could have an adverse effect on the Company's margins. There can be no assurance that the Company will be able to compete successfully against any of these competitors. The Company relies, and expects to increase its reliance, on a number of third-party implementation providers and other customer support services, as well as for recommendations of its products during the evaluation stage of the purchase process. A number of the Company's competitors, including SAP, Baan, PeopleSoft, and Oracle, have significantly more well-established relationships with such providers and, as a result, such firms may be more likely to recommend competitors' products rather than the Company's products. Furthermore, there can be no assurance that these third parties, many of which have significantly greater financial, technical, marketing and other resources than the Company, will not market software products in competition with the Company in the future. If the Company is unable to maintain or increase the number and quality of its relationships with providers who recommend, implement or support ERP software, the Company's business, operating results and financial condition will be materially adversely affected. Lengthy Sales Cycle. The Company's software is generally used for division- or enterprise-wide, business-critical purposes and involves significant capital commitments by customers. Potential customers generally commit significant resources to an evaluation of available enterprise software and require the Company to expend substantial time, effort and money educating them about the value of the Company's solutions. Sales of the Company's software products require an extensive sales effort throughout a customer's organization because decisions to license such software generally involve the evaluation of the software by a significant number of customer personnel in various functional and geographic areas, each often having specific and conflicting requirements. A variety of factors, including factors over which the Company has little or no control, may cause potential customers to favor a particular supplier or to delay or forego a purchase. As a result of these or other factors, the sales cycle for the Company's products is long, typically ranging between six and 15 months. Moreover, the Company expects that the sales cycle for the recently released OneWorld version of its application suites may be longer than that of the WorldSoftware version, at least until the Company's sales force becomes familiar with the needs of customers operating on UNIX and NT servers. As a result of the length of the sales cycle for its software products, the Company's ability to forecast the timing and amount of specific sales is limited, and the delay or failure to complete one or more large license transactions could have a material adverse effect on the Company's business, operating results or financial condition and cause the Company's operating results to vary significantly from quarter to quarter. See "-- Variability of Quarterly Operating Results; Seasonality." Lengthy Implementation Process. The Company's software products are complex and perform or directly affect business-critical functions across many different functional and geographic areas of the enterprise. Consequently, implementation of the Company's software is a complex, lengthy process that involves a significant commitment of resources by the Company's customers and that is subject to a number of significant risks over which the Company has little or no control. The Company expects that implementation of the OneWorld version of its application suites on UNIX and NT servers is likely to be more complex and require more time than implementation on the AS/400 platform. In addition, the Company's lack of experience in implementing the OneWorld version of its application suites may contribute to the length of the implementation process. Delays in the completion of implementations of any of its application suites whether by the Company or its business partners, may result in customer dissatisfaction or damage to the Company's reputation and could have a material adverse effect on the Company's business, operating results or financial condition. Reliance on Third Parties and Development of Certain Relationships. The Company intends to rely primarily on third-party implementation providers for the implementation of the OneWorld version of its application suites. Although the Company has historically subcontracted a portion of its implementation services to third parties, the Company has adopted a strategy in which an increasing number of OneWorld implementations will be performed by third parties that will contract directly with the Company's customers to provide such services. Executing this strategy will require that third-party implementation providers with which the Company has existing relationships allocate additional resources to OneWorld implementations and that the Company enter into new relationships with additional third-party implementation providers to provide such services. Due to the limited resources and capacities of many third-party implementation providers and the reluctance of such providers to switch partners or enter into new relationships with additional suppliers, there can be no assurance that the Company will be able to establish or maintain relationships with third parties having sufficient resources to provide the necessary implementation services to support demand, if any, for the OneWorld version. If such resources are unavailable, the Company will be required to perform such services internally, and there can be no assurance that the Company will have sufficient resources available for such purposes. In addition, there can be no assurance that any third-party implementation provider with which the Company has, or intends to establish, such a relationship will provide the level and quality of service required to meet the needs and expectations of the Company's customers. If the Company is unable to establish and maintain effective, long-term relationships with such providers, or if such providers do not meet customer needs, the Company's business, operating results or financial condition will be materially adversely affected. The Company has established a number of relationships with third parties, including consulting and systems integration firms, hardware suppliers, and database, operating system and other independent software vendors, in order to enhance its sales, marketing and customer service efforts. Many of these third parties have better established relationships with one or more of the Company's competitors and may, in specific instances, select or recommend ERP software offerings of the Company's competitors rather than the Company's software. In addition, certain of these third parties, including Oracle, compete with the Company in developing and marketing ERP software applications. Competition between the Company and these third parties may cause a deterioration in or termination of such relationships, which could have a material adverse effect on the Company's business, operating results or financial condition. See "-- Competition." Dependence on Service Revenue. The Company licenses software under non-cancelable license agreements and provides related services, which consist of support, training, consulting and implementation. Total revenue from license fees and services has increased from year to year. As a percentage of total revenue, service revenue has increased from 55.3% of total revenue in fiscal 1994 to 62.3% of total revenue in fiscal 1996 primarily as a result of the Company's continued emphasis on providing consulting and training services that complement its software products and increased support revenue resulting from the Company's growing installed base of customers. Furthermore, the Company has historically subcontracted a portion of its consulting and training services to third parties, and, in fiscal 1996, such subcontracted services accounted for approximately 40.0% of services revenue. However, the Company is currently pursuing a strategy of relying on third-party implementation providers to contract directly with its customers for OneWorld implementation and related services. See "Business -- Strategy" and "Business -- Implementation Services and Training." To the extent the Company is successful in implementing this strategy and the OneWorld version of the Company's application suites achieves market acceptance in future periods, revenue from subcontracted services and total service revenue as a percentage of revenue will likely decrease. If such revenue decreases more than anticipated, the Company's operating results will be materially adversely affected. There can be no assurance that the Company will be successful in implementing its strategy or that such products will achieve market acceptance, the failure of which could have a material adverse effect on its business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Management of Growth; Need for Additional Qualified Personnel. Although the Company has experienced significant revenue growth in past years, such growth is not necessarily indicative of future revenue growth. This growth has resulted in new and increased responsibilities for management personnel and has placed, and continues to place, a significant strain upon the Company's management, operating and financial resources. There can be no assurance that such strain will not have a material adverse effect on the Company's business, operating results or financial condition. The rapid growth of the Company's business has required the Company to make significant recent additions in personnel, particularly in product development and sales and marketing. The Company believes that its future operating results depend in significant part on its ability to attract and retain highly skilled technical, managerial, sales, marketing, service and support personnel. Although the Company has increased the number of its sales, services and support personnel in recent years, the Company has experienced, and expects to continue to experience, difficulty in recruiting such personnel. The Company anticipates that it will need to continue to increase the size of its direct sales, services and support personnel in future periods. If the Company is unable to hire qualified personnel on a timely basis, the Company's business, operating results and financial condition will be materially adversely affected. To manage its operations, the Company must continuously evaluate the adequacy of its management structure and its existing procedures, including, among others, its financial and internal controls. There can be no assurance that management will adequately anticipate all of the changing demands that growth may impose on the Company's procedures and structure. Any failure to adequately anticipate and respond to such changing demands may have a material adverse effect on the Company's business, operating results or financial condition. As a result of the Company's development and release of the OneWorld version of its application suites, a significant amount of the Company's resources has been focused on the UNIX and NT markets. To maintain a focus on the AS/400 market, as well as on the UNIX and NT markets, the Company is in the process of implementing certain internal organizational changes. If the Company's efforts to maintain a focus on both markets are unsuccessful, the Company's business, operating results and financial condition may be materially adversely affected. Fixed-Price Service Contracts. The Company offers a combination of ERP software, implementation and support services to its customers. Typically, the Company enters into service agreements with its customers that provide for consulting and implementation services on a "time and materials" basis. Certain customers have asked for, and the Company has from time to time entered into, fixed-price service contracts. These contracts specify certain milestones to be met by the Company regardless of actual costs incurred by the Company in fulfilling those obligations. The Company believes that fixed-price service contracts may increasingly be offered by its competitors to differentiate their product and service offerings. As a result, the Company may enter into more fixed-price contracts in the future. There can be no assurance that the Company can successfully complete these contracts on budget, and the Company's inability to do so could have a material adverse effect on its business, operating results and financial condition. Year 2000 Compliance. Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in less than three years, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Although the Company currently offers software products that are designed to be Year 2000 compliant, there can be no assurance that the Company's software products contain all necessary date code changes. The Company believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. In addition, it is possible that certain of the Company's customers are purchasing support contracts only to ensure that they become Year 2000 compliant and that, once such customers believe they are Year 2000 compliant, they will not renew support contracts. If a significant number of the Company's customers do not renew support contracts for this or other reasons, the Company's business, operating results and financial condition would be adversely affected. Many potential customers may also choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industry. Conversely, Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for software products. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers, to reevaluate their current ERP system needs, and as a result consider switching to other systems or suppliers. Moreover, the Company believes that some customers may be purchasing the Company's products as an interim solution to their Year 2000 needs until their current suppliers reach compliance. There can be no assurance that such customers will purchase support services from the Company or that they will upgrade beyond their current version of the Company's software once their current software suppliers reach compliance. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. International Operations and Currency Fluctuations. International revenue as a percentage of total revenue ranged between 35% and 37% from fiscal 1994 through the first nine months of fiscal 1997, and the Company expects that revenue from international customers will continue to account for a significant portion of the Company's total revenue. The Company currently has 27 international sales offices located throughout Canada, Europe, Asia, Latin America and Africa. To service the needs of its customers with international operations, the Company and its support partners must provide worldwide product support services. One of the Company's strategies is to continue to expand its existing international operations and enter additional international markets, which will require significant management attention and financial resources. Traditionally, international operations are characterized by higher operating expenses and lower operating margins. As a result, if international revenue increases as a percentage of total revenue, operating margins may be adversely affected. Costs associated with international expansion include the establishment of additional foreign offices, the hiring of additional personnel, the localization and marketing of its products for particular foreign markets, and the development of relationships with additional international service providers. If international revenue is not adequate to offset the expense of expanding foreign operations, the Company's business, operating results or financial condition could be materially adversely affected. A significant portion of the Company's revenue is received in currencies other than U.S. dollars and, in the past, the Company has engaged in minimal hedging activities. As a result, the Company is subject to risks associated with foreign exchange rate fluctuations. In the first nine months of fiscal 1997 and fiscal 1996, the Company incurred foreign exchange losses of approximately $1.6 million and $1.1 million, respectively. Accordingly, due to the substantial volatility of foreign exchange rates, there can be no assurance that foreign exchange rate fluctuations will not have a material adverse effect on the Company's business, operating results or financial condition. The Company's international operations are subject to other risks inherent in international business activities, such as the imposition of governmental controls, export license requirements, restrictions on the export of certain technology, cultural and language difficulties associated with servicing customers, the impact of a recessionary environment in economies outside the United States, reduced protection for intellectual property rights in some countries, the potential exchange and repatriation of foreign earnings, political instability, trade restrictions, tariff changes, localization and translation of products for foreign countries, difficulties in staffing and managing international operations, difficulties in collecting accounts receivable and longer collection periods, and the impact of local economic conditions and practices. The Company's success in expanding its international business will be dependent, in part, on its ability to anticipate and effectively manage these and other risks. There can be no assurance that these and other factors will not have a material adverse effect on the Company's business, operating results or financial condition. Risks Associated with New Versions and New Products; Rapid Technological Change; Risks of Software Defects. The market for the Company's products is characterized by rapid technological change, evolving industry standards in computer hardware and software technology, changes in customer requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. The life cycles of the Company's software products are difficult to estimate. As a result, the Company's future success will depend, in part, upon its ability to continue to enhance existing products and develop and introduce in a timely manner new products that keep pace with technological developments, satisfy customer requirements and achieve market acceptance. There can be no assurance that the Company will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner, or that products, capabilities or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive or shorten the life cycles of the Company's products. See "-- Competition." Although the Company has addressed the need to develop new products and enhancements primarily through its internal development efforts, the Company has also addressed this need through the licensing of third-party technology. Licensing third-party technology involves numerous risks. See "-- Limited Protection of Proprietary Technology; Risks of Infringement." If the Company is unable to develop on a timely and cost-effective basis new software products or enhancements to existing products, or if such new products or enhancements do not achieve market acceptance, the Company's business, operating results and financial condition may be materially adversely affected. Historically, the Company has issued significant new releases of its family of software products periodically, with interim releases issued even more frequently. As a result of the complexities inherent in software development, and in particular for multi-platform environments, and the broad functionality and performance demanded by customers for ERP products, major new product enhancements and new products can require long development and testing periods before they are commercially released. The Company has on occasion experienced significant delays in the scheduled introduction of new and enhanced products, and there can be no assurance that such delays will not be experienced in the future. The Company recently released OneWorld, the network-centric version of its application suites. Because the development of enhancements in network-centric environments is more complex than in host-centric systems, there can be no assurance that the introduction of future enhancements will not be delayed. See "Business -- Products." Complex software products such as those offered by the Company frequently contain undetected errors or "bugs" when first introduced or as new versions are released that, despite testing by the Company, are discovered only after a product has been installed and used by customers. The Company has in the past discovered software errors in new versions of its ERP software after their release. To date, the Company's business, operating results or financial condition have not been materially adversely affected by the release of products containing errors. There can be no assurance, however, that errors will not be found in the Company's products or that such errors will not result in delay or loss of revenue, diversion of development resources, damage to the Company's reputation, increased service and warranty costs, or impaired market acceptance of these products, any of which could result in a material adverse effect on the Company's business, operating results or financial condition. See "Business -- Products." Dependence on Key Personnel. The Company's success depends to a significant extent upon a limited number of members of senior management and other key employees. The loss of one or more key employees could have a material adverse effect on the Company. Although the Company currently maintains key man life insurance on C. Edward McVaney, Chairman, President and Chief Executive Officer, such insurance is minimal and is not maintained on other key personnel. The Company does not have employment agreements with its executive officers. In addition, the Company believes that its future success will depend in part on its ability to attract and retain highly skilled technical, managerial, sales and marketing personnel. Competition for such personnel in the computer software industry is intense. There can be no assurance that the Company will be successful in attracting and retaining such personnel, and the failure to do so could have a material adverse effect on the Company's business, operating results or financial condition. Limited Protection of Proprietary Technology; Risks of Infringement. The Company's ability to compete is dependent in part upon its internally developed, proprietary intellectual property. Although the Company currently has no patents, it has five patent applications pending on various aspects of its application suites. In addition, the Company has applied to register the trademarks "WorldSoftware" and "OneWorld." The Company also relies on general trademark and copyright protection for its technology, although it generally does not register such intellectual property. Furthermore, the Company relies on trade secret law, confidentiality procedures and licensing arrangements to establish and protect its rights in its technology. Nevertheless, the Company believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition, customer training and reliable product support, are more essential to protect its market position. There can be no assurance that others will not develop technologies that are similar or superior to the Company's technology. The Company typically enters into confidentiality or license agreements with its employees, consultants and suppliers, and typically controls access to and distribution of its software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization, or to develop similar technology independently through reverse engineering or other means. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technology. Preventing or detecting unauthorized use of the Company's products is difficult. There can be no assurance that the steps taken by the Company will prevent misappropriation of its technology or that its license agreements will be enforceable. In addition, litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results or financial condition. The Company typically licenses its products to end users under the Company's standard license agreements, although each license is individually negotiated and may contain variations. The Company's products are licensed not only to end users, but also to independent, third-party distributors with a right to sublicense. Although the Company seeks to establish the conditions under which the Company's products are licensed by such distributors to end users, the Company cannot ensure that its distributors do not deviate from such conditions. Moreover, in order to facilitate the customization required by most of the Company's customers, the Company generally licenses its software products to end users in both object code (machine- readable) and source code (human-readable) format. Although this practice facilitates customization, making software available in source code also makes it easier for third parties to copy or modify the Company's software for non-permitted purposes. In the future, the Company may receive notice of claims of infringement of other parties' proprietary rights. Although the Company does not believe that its products infringe the proprietary rights of third parties, there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against the Company or that any such assertions or prosecutions will not materially adversely affect the Company's business, operating results or financial condition. Regardless of the validity or the successful assertion of such claims, defending against such claims could result in significant costs and diversion of resources with respect to the defense thereof, which could have a material adverse effect on the Company's business, operating results or financial condition. In addition, the assertion of such infringement claims could result in injunctions preventing the Company from distributing certain products, which would have a material adverse effect on the Company's business, operating results and financial condition. If any claims or actions are asserted against the Company, the Company may seek to obtain a license to such intellectual property rights. There can be no assurance, however, that such a license would be available on reasonable terms or at all. The Company also relies on certain other technology which it licenses from third parties, including software that is integrated with internally developed software and used in the Company's products to perform key functions. Most notably, the Company licenses the graphical user interface to the WorldSoftware version of its application suites (which the Company markets as WorldVision). There can be no assurance that these third-party technology licenses will continue to be available to the Company on commercially reasonable terms. The loss of, or inability to maintain, any of these technology licenses, particularly that for WorldVision's graphical user interface, would result in delays or reductions in product shipments until equivalent technology could be identified, licensed or developed, and integrated. Any such delays or reductions in product shipments could materially adversely affect the Company's business, operating results or financial condition. Moreover, although the Company is generally indemnified by third parties against claims that such third parties' technology infringes the proprietary rights of others, such indemnification is not always available for all types of intellectual property rights (for example, patents may be excluded) and in some cases the geographic scope of indemnification is limited. The result is that the indemnity that the Company receives against such claims is often less broad than the indemnity that the Company provides to its customers. Even in cases in which the indemnity that the Company receives from a third-party licensor is as broad as the indemnity that the Company provides to its customers, the third-party licensors from whom the Company would be receiving indemnity are often not well-capitalized and may not be able to indemnify the Company in the event that such third-party technology infringes the proprietary rights of others. Accordingly, the Company could have substantial exposure in the event that technology licensed from a third party infringes another party's proprietary rights. The Company currently does not have any liability insurance to protect against the risk that licensed third-party technology infringes the proprietary rights of others. There can be no assurance that infringement or invalidity claims arising from the incorporation of third-party technology, and claims for indemnification from the Company's customers resulting from such infringement claims, will not be asserted or prosecuted against the Company or that any such assertions or prosecutions will not materially adversely affect the Company's business, operating results or financial condition. Regardless of the validity or successful assertion of such claims, the Company could incur significant costs and diversion of resources with respect to the defense thereof, in addition to potential product redevelopment costs and delays, all of which could have a material adverse effect on the Company's business, operating results or financial condition. Security; Product Liability. The Company has included security features in certain of its Internet browser-enabled products that are intended to protect the privacy and integrity of customer data. Despite the existence of these security features, the Company's software products may be vulnerable to break-ins and similar disruptive problems caused by Internet users. Such computer break-ins and other disruptions may jeopardize the security of information stored in and transmitted through the computer systems of the Company's customers. Break-ins often involve hackers bypassing firewalls and misappropriating confidential information. Addressing problems caused by such third parties may require significant expenditures of capital and resources by the Company, which may have a material adverse effect on the Company's business, operating results or financial condition. Although the Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential liability for damages arising out of use of or defects in the Company's products, it is possible that such limitation of liability provisions may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Although the Company has not experienced any such product liability claims to date, there can be no assurance that the Company will not be subject to such claims in the future. Because the Company's software products may be used in business-critical applications, a successful product liability claim brought against the Company could have a material adverse effect on the Company's business, operating results or financial condition. Moreover, defending such a suit, regardless of its merits, could entail substantial expense and require the time and attention of key management personnel, either of which could have a material adverse effect on the Company's business, operating results or financial condition. General Economic and Market Conditions. Segments of the software industry have experienced significant economic downturns characterized by decreased product demand, price erosion, work slowdowns and layoffs. The Company's operations may in the future experience substantial fluctuations from period to period as a consequence of general economic conditions affecting the timing of orders from major customers and other factors affecting capital spending. Although the Company has a diverse client base, it has targeted certain vertical markets. Therefore, any economic downturns in general or in the targeted vertical segments in particular would have a material adverse effect on the Company's business, operating results and financial condition. Control by Existing Stockholders. Immediately after the closing of this offering (based on shares outstanding at July 31, 1997), 63.9% of the outstanding Common Stock (61.4% if the Underwriter's over-allotment option is exercised in full) will be held by the directors and executive officers of the Company, together with certain entities affiliated with them, assuming no exercise of outstanding stock options. As a result, these stockholders, if acting together, would be able to control substantially all matters requiring approval by the stockholders of the Company, including the election of all directors and approval of significant corporate transactions. See "Management -- Executive Officers and Directors" and "Principal and Selling Stockholders." In addition, C. Edward McVaney, Robert C. Newman and Jack L. Thompson (the "Founders") have entered into an Amended and Restated Stockholders Agreement with the Company, which provides that Messrs. Newman and Thompson must cast their votes in the same proportion as the votes cast by Mr. McVaney with respect to certain significant corporate issues, such as any revision of the Company's Certificate of Incorporation; any merger, consolidation, share exchange or similar event; any sale or other disposition of all or substantially all of the Company's assets; any dissolution or liquidation of the Company; or bankruptcy filing for the Company. As a result, Mr. McVaney has substantial control over the approval of such matters. In addition, each Founder must vote for the election of each of the other Founders to the Company's Board of Directors or a designee appointed by such other Founder. See "Certain Transactions." Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware Law. Certain provisions of the Company's Amended and Restated Certificate of Incorporation and Bylaws and certain provisions of Delaware law could delay or make difficult a merger, tender offer or proxy contest involving the Company. The authorized but unissued capital stock of the Company includes 5,000,000 shares of preferred stock. The Board of Directors is authorized to provide for the issuance of such preferred stock in one or more series and to fix the designations, preferences, powers and relative, participating, optional or other rights and restrictions thereof. Accordingly, the Company may in the future issue a series of preferred stock, without further stockholder approval, that will have preference over the Common Stock with respect to the payment of dividends and upon liquidation, dissolution or winding-up of the Company. See "Description of Capital Stock -- Preferred Stock." In addition, the Company's Amended and Restated Certificate of Incorporation includes provisions that create a classified board of directors. See "Management -- Board of Directors." Further, Section 203 of the General Corporation Law of the State of Delaware (as amended from time to time, the "DGCL"), which is applicable to the Company, prohibits certain business combinations with certain stockholders for a period of three years after they acquire 15% or more of the outstanding voting stock of a corporation. See "Description of Capital Stock -- Antitakeover Effects of Delaware Law and Certain Provisions of the Company's Certificate of Incorporation and Bylaws." Any of the foregoing could adversely affect holders of the Common Stock or discourage or make difficult any attempt to obtain control of the Company. Shares Eligible for Future Sale. Sales of a substantial number of shares of Common Stock (including shares issued upon the exercise of outstanding options) in the public market after this offering could materially adversely affect the market price of the Common Stock. Such sales also might make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the Company deems appropriate. Upon completion of this offering (based on shares outstanding at July 31, 1997), the Company will have outstanding an aggregate of 91,684,910 shares of Common Stock, assuming no exercise of the Underwriters' over-allotment option and no exercise of outstanding options. Of these shares, all of the shares sold in this offering will be freely tradeable without restriction or further registration under the Securities Act, unless such shares are purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining 75,884,910 shares of Common Stock held by existing shareholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 promulgated under the Securities Act. As a result of the contractual restrictions described below and the provisions of Rules 144 and 701, the Restricted Shares will be available for sale in the public market as follows: (i) 515,830 shares in addition to the shares offered hereby will be eligible for immediate sale on the date of this Prospectus; (ii) 135,240 shares will be eligible for sale beginning 90 days after the date of this Prospectus; (iii) 75,224,600 shares will be eligible for sale upon expiration of the lock-up agreements 180 days after the date of this Prospectus; and (iv) 9,240 shares will be eligible for sale thereafter upon expiration of their respective one-year holding periods. Notwithstanding the above, the Company's ESOP, in which 8,706,040 shares are held as of the date of this Prospectus, obligates the trustees thereof to distribute at scheduled distribution dates shares held therein to a beneficiary following the cessation of his or her employment with the Company. The next scheduled distribution date will not occur until March 30, 1998. Following such distribution, the shares so distributed will be immediately available for sale in the public market to the extent they are not held by Affiliates. All officers and directors and certain stockholders and certain option holders of the Company have agreed not to offer, pledge, sell, contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly (or enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of), any shares of Common Stock or any securities convertible into or exercisable or exchangeable for shares of Common Stock, for a period of 180 days after the date of this Prospectus, without the prior written consent of Morgan Stanley & Co. Incorporated. The Company intends to file a registration statement on Form S-8 which would allow shares issuable upon exercise of options previously granted to be freely tradeable, subject to compliance with Rule 144 in the case of Affiliates of the Company and except to the extent that such shares are subject to vesting restrictions with the Company or any contractual restrictions described above. See "Management -- Employee Benefit Plans," "Shares Eligible for Future Sale" and "Underwriters." No Prior Public Market; Possible Stock Price Volatility. Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after this offering. The initial public offering price will be determined by negotiations among the Company, the Selling Stockholders, and the representatives of the Underwriters based on several factors and may not be indicative of the future market price of the Common Stock after this offering. The market price of the Company's Common Stock is likely to be highly volatile and may be subject to significant fluctuations in response to actual or anticipated variations in quarterly operating results and other factors, such as announcements of technological innovations, new products or new contracts by the Company or its competitors, conditions and trends in the software and other technology industries, adoption of new accounting standards affecting the software industry, changes in earning estimates or recommendations by securities analysts, general market conditions or other events. In addition, equity markets have also experienced extreme volatility that has particularly affected the market prices of equity securities of many high technology companies and that has often been unrelated or disproportionate to the operating performance of such companies. Broad market fluctuations, as well as economic conditions generally and in the software industry specifically, may result in material adverse effects on the market price of the Company's Common Stock. There can be no assurance that the market price for the Company's Common Stock will not decline below the initial public offering price. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect upon the Company's business, operating results or financial condition. See "Underwriters." Dilution; Dividend Policy. Investors participating in this offering will incur immediate and substantial dilution of pro forma net tangible book value per share of $18.26 from the initial public offering price. To the extent outstanding options to purchase the Company's Common Stock are exercised, there will be further dilution. There can be no assurance that the Company will not require additional funds to support its working capital requirements or for other purposes, in which case the Company may seek to raise such additional funds through public or private equity financing or from other sources. There can be no assurance that such additional financing will be available or that, if available, such financing will be obtained on terms favorable to the Company and would not result in additional dilution to the Company's stockholders. See "Dilution." The Company has never paid or declared any cash dividends on the Common Stock or other securities and does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy."

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+ RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. The following factors, in addition to the other information in this Prospectus, should be carefully considered in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results in the future could differ significantly from the results discussed in such forward-looking statements. Factors that could cause or contribute to such a difference include, but are not limited to, those discussed in 'Risk Factors' below, 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and 'Business,' as well as those discussed elsewhere in this Prospectus. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY OF BUSINESS The Company experiences quarterly seasonal variations in revenues as a result of many factors, including its clients' business cycles and timing of product introductions. As a result, the Company's revenues are typically lower during the first and third quarters of the Company's fiscal year. The Company expects this seasonality to continue in the future. In addition, other factors that may cause the Company's quarterly results to fluctuate include timing of the completion, material reduction or cancellation of projects or timing of the receipt of new business, timing of the hiring or loss of sales personnel, the relative profit mix of projects, strategic pricing decisions of the Company and costs relating to the expansion of operations and other factors. Events which dominate news broadcasts may cause the Company's clients to delay their use of, or not use, the Company's services for a particular project as such clients may determine that their messages may not receive adequate attention in light of the coverage of other news events. Such circumstances could have a material adverse effect on the Company's business, operating results and financial condition. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' DEPENDENCE ON KEY PERSONNEL The Company's success depends to a significant degree upon the continuing contributions of, and on its ability to attract and retain, qualified management and sales, operations, marketing and technical personnel. In particular, the loss of the services of its founders, Laurence Moskowitz, the Company's Chairman of the Board, President and Chief Executive Officer, or J. Graeme McWhirter, its Executive Vice President and Chief Financial Officer, could have a material adverse effect upon the Company. There can be no assurance that an adequate replacement could be found if the Company were to lose the services of Mr. Moskowitz or Mr. McWhirter. There can be no assurance that the Company will be able to continue to attract and retain qualified management and sales, operations, marketing and technical personnel in the future. The Company's failure to attract and retain key personnel would have a material adverse effect on its business, operating results and financial condition. The Company is the beneficiary of a $1.25 million key man life insurance policy on the life of Laurence Moskowitz. The Company has entered into employment agreements with its executive officers which will become effective upon the consummation of this offering, except for the employment agreement with Mr. David Davis which is currently effective. See 'Management.' DEPENDENCE ON CERTAIN SUPPLIERS The Company has an exclusive agreement with the AP for the operation of the AP Express/Medialink Newswire serving approximately 720 television stations across the U.S. The Company believes that its agreement with the AP gives it a competitive advantage because of this ability to notify television stations of upcoming video transmissions, and the termination of such agreement could have a material adverse effect on the Company's business, operating results and financial condition. The Company's agreement with the AP expires in November 1999. The Company uses Nielsen Media Research and Competitive Media Reporting for electronic monitoring of video television broadcasts. In addition, the Company has agreements with the AP and ABC Radio for satellite transmissions of audio services to radio stations in the U.S. The termination of any of these services could have a material adverse effect on the Company's business, operating results and financial condition. The Company benefits from favorable volume pricing agreements with certain suppliers for satellite transmission services. The inability in the future to obtain sufficient supply or service from these and other vendors, or to develop alternative sources, could result in price increases, delays or reductions in services which could have a material adverse effect on the Company's business, operating results and financial condition. The Company's ability to distribute material to media outlets in accordance with its clients' requirements depends on a number of factors. Some of these factors are outside of the Company's control, including equipment failure and interruption in services by its telecommunications service providers. The Company's failure to make timely distributions could have a material adverse effect on the Company's business, operating results and financial condition. The Company has experienced increases in satellite transmission costs during the past two years. The inability or unwillingness of the Company to pass such cost increases to its clients could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON VIDEO NEWS RELEASES A substantial portion of the Company's revenues to date has been derived from the production, distribution and monitoring of VNRs in the U.S. and overseas. A decline in demand for, or reduction in average prices charged by the Company for, VNR services, whether as a result of competition, technological change or otherwise, would have a material adverse effect on the Company's business, operating results and financial condition. Additionally, the Company is dependent upon the willingness of the media outlets to which it supplies VNRs to actually use them on their news broadcasts. Should these media outlets reduce the use of VNRs, there would be a material adverse effect on the Company's business, operating results and financial condition. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and 'Business.' DEPENDENCE ON NEW SERVICES FOR GROWTH The Company believes that its growth will depend, in part, on its ability to effectively market recently introduced services and to develop new services in a timely and cost-effective manner. There can be no assurance that the Company will be successful in marketing and developing these recently introduced services or other new services or that if such development is completed, the Company's planned introduction of these services will realize market acceptance or will meet the technical or other requirements of its clients. If the Company is unable to effectively market new services, there could be a material adverse effect on the Company's business, operating results and financial condition. See 'Business.' RISKS ASSOCIATED WITH ACQUISITIONS The Company's growth strategy includes pursuing acquisitions in the communications services industry. The success of this strategy depends not only upon the Company's ability to identify and acquire suitable businesses on a cost-effective basis, but also upon its ability to integrate acquired personnel, operations, products, services and technology into its organization effectively, to retain and motivate key personnel and to retain the clients of acquired firms. There can be no assurance that the Company will be able to achieve any of the foregoing. The Company competes for acquisition opportunities with other companies that have significantly greater financial and other resources than those of the Company. The Company may use Common Stock and/or Preferred Stock (which could result in dilution to the purchasers of the Common Stock offered hereby) or may incur long-term indebtedness or a combination thereof for all or a portion of the consideration to be paid in future acquisitions. The Company has no current plans, agreements or commitments and is not currently engaged in any negotiations with respect to any acquisitions. GLOBAL EXPANSION The Company plans to continue its international expansion through direct operations and foreign affiliations. There can be no assurance, however, that the Company's services will achieve market acceptance in other countries. The Company's ability to successfully enter these new markets will depend, in part, on its ability to attract personnel with experience in these locations and to attract partners with the necessary local business relationships. Changes in government policies and regulations in foreign countries could require the Company's services to be redesigned or could restrict the Company's ability to deliver its material. Telecommunications standards in foreign countries differ from those in the U.S. and may require the Company to incur substantial costs and expend significant managerial resources to comply with such standards. Furthermore, international business is subject to country-specific risks and circumstances, including different tax laws, difficulties in expatriating profits, currency exchange rate fluctuations, increases in duties, price controls and the complexities of administering business abroad. These and other related risks and circumstances could have a material adverse effect on the Company's business, operating results and financial condition. ABILITY TO INTEGRATE NEW TECHNOLOGY The communications industry is characterized by rapidly changing technology. The Company's ability to remain competitive will depend in significant part upon its ability to continue to integrate new technology into its services. New technologies, as well as the introduction of services embodying new technologies, could render the Company's existing services obsolete or unmarketable. There can be no assurance that the Company will be successful in identifying and developing new services that respond to technological change, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these services or that its new or enhanced services will adequately meet the requirements of the marketplace and achieve market acceptance. See 'Business.' COMPETITION The markets for the Company's services are highly competitive. The principal competitive factors affecting the Company are effectiveness, reliability, price, technological sophistication and timeliness. Numerous specialty companies compete with the Company in each of its business lines although no single company competes across all service lines. Many of the Company's competitors or potential competitors have longer operating histories, longer client relationships and significantly greater financial, management, technological, sales, marketing and other resources than the Company. In addition, clients could perform internally all or certain of the services provided by the Company rather than outsourcing such services. The Company expects that competition will increase substantially as a result of industry consolidations and alliances, as well as through the emergence of new competitors. The Company believes that the market for communications services may become increasingly concentrated in the future as a result of the acquisition and integration of smaller service providers, which are likely to permit many of the Company's competitors to devote significantly greater resources to the development and marketing of new competitive services. There can be no assurance that existing or future competitors will not develop or offer communications services that provide significant performance, price, creative or other advantages over those offered by the Company. The Company could face competition from companies in related communications markets which could offer services that are similar or superior to those offered by the Company. In addition, national and regional telecommunications providers could enter the market with materially lower electronic delivery costs, and radio and television networks could also begin transmitting business communications separate from their news programming. The Company's ability to maintain and attract clients depends to a significant degree on the quality of services provided and its reputation among its clients and potential clients as compared to that of competitors. There can be no assurance that the Company will not face increased competition in the future or that such competition will not have a material adverse effect on the Company's business, operating results and financial condition. MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH EXPANSION The Company's business has grown rapidly in recent years. The Company's expansion has resulted, and is expected in the future to result, in substantial growth in the number of its employees and in increased responsibility for both existing and new management personnel. The Company's success depends to a significant extent on the ability of its executive officers and other members of senior management, only one of whom has any executive management experience with a public company, to manage that growth and operate effectively, both independently and as a group. See 'Management.' In addition, the Company plans to expand its services and open new offices. There can be no assurance that the Company will be able to manage its recent or any future expansion effectively and profitably, and any inability to do so would have a material adverse effect on the Company's business, operating results and financial condition. There also can be no assurance that the Company will be able to sustain the rates of growth that it has experienced in the past. ABSENCE OF LONG-TERM CONTRACTS The Company's clients generally retain the Company on a project-by-project basis rather than under long-term contracts. As a result, there can be no assurance that a client will engage the Company for further services once a project is completed. Assignments from existing clients represented a significant portion of the Company's revenues for 1995 and the nine months ended September 30, 1996, accounting for 63% and 70%, respectively. To the extent that a large number of the Company's current clients do not continue to use the Company's services, and the Company is unable to attract new clients or leverage existing client relationships by cross-marketing its services, there would be a material adverse effect on the Company's business, operating results and financial condition. SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS The Company's revenues are affected by its clients' marketing communications spending and advertising budgets. The Company's revenues and results of operations may be subject to fluctuations based upon general economic conditions in the geographic locations where it distributes its material. If there were to be a general economic downturn or a recession in these geographic locations, then the Company expects that business enterprises, including its clients and potential clients, could substantially and immediately reduce their marketing and communications budgets. In the event of such an economic downturn, there would be a material adverse effect on the Company's business, operating results and financial condition. CONCENTRATION OF STOCK OWNERSHIP; POTENTIAL ISSUANCE OF PREFERRED STOCK; PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECTS Upon completion of this offering, the executive officers and directors of the Company and their affiliates and other holders of 5% or more of the Common Stock will beneficially own approximately 44.3% of the Common Stock (approximately 40.0% if the Underwriters' over-allotment option is exercised in full). As a result, these stockholders will be able to significantly influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. See 'Principal Stockholders.' In addition, the Company's Board of Directors has the authority to issue up to 1,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions thereof, including voting rights, without any further vote or action by the Company's stockholders. Although the Company has no current plans to issue any shares of Preferred Stock, the rights of the holders of Common Stock would be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. Issuance of Preferred Stock could have the effect of delaying, deferring or preventing a change in control of the Company. Furthermore, certain provisions of the Company's Amended and Restated Certificate of Incorporation and Amended and Restated By-laws and of Delaware law could have the effect of delaying, deferring or preventing a change in control of the Company. See 'Management,' 'Certain Transactions,' 'Principal and Selling Stockholders' and 'Description of Capital Stock.' The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law which prevent certain Delaware corporations, including those whose securities are listed on the Nasdaq National Market, from engaging, under certain circumstances, in a 'business combination' with any 'interested stockholder' for three years following the date that such stockholder became an 'interested stockholder.' A Delaware corporation may 'opt out' of this law with an express provision in its original certificate of incorporation or an amendment either to its certificate of incorporation or to its by-laws approved by a majority of the outstanding voting shares. The Company has not opted out of the law which may inhibit a third party 'interested stockholder' from commencing a 'business combination.' DISCRETION IN USE OF PROCEEDS The Company intends to use the net proceeds from the sale of the Common Stock offered hereby for general corporate purposes and possible acquisitions. The Company, however, has not designated any specific use for these proceeds. Accordingly, the Company will have complete discretion with respect to the use of these proceeds and there can be no assurance that they can or will be invested to yield a significant return. See 'Use of Proceeds.' NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering there has been no public market for the Company's Common Stock and, although the Company has applied to have the Common Stock approved for quotation and trading on the Nasdaq National Market, there can be no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price of the Common Stock offered hereby will be determined through negotiations among the Company and the Representatives of the Underwriters and may not be indicative of future market prices. There can be no assurance that the market price of the Common Stock will not decline below the initial public offering price. The trading prices of the Common Stock may be highly volatile and subject to wide fluctuations in response to a number of factors, including variations in operating results, limited trading volume, failure to meet expectations of, or a change in recommendation by, securities analysts, announcements of extraordinary events such as litigation or acquisitions, announcements of technological innovations or new services by the Company or its competitors, as well as trends in the Company's industry and general market conditions. In addition, stock markets have experienced extreme price and volume fluctuations in recent years. This volatility has had a substantial effect on the market prices of securities of many companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. See 'Underwriting.' IMMEDIATE AND SUBSTANTIAL DILUTION Assuming an initial public offering price of $10.00 per share, investors participating in this offering will incur immediate, substantial dilution of approximately $6.13 in the net tangible book value per share. To the extent outstanding options to purchase the Company's Common Stock are exercised, there will be further dilution to such investors. See 'Dilution.' BENEFITS OF THIS OFFERING TO CURRENT STOCKHOLDERS Upon the consummation of this offering, the current stockholders of the Company will realize certain benefits, including the creation of a public trading market for their shares of Common Stock and the corresponding facilitation of sales by such stockholders of their shares of Common Stock in the secondary market. Such stockholders purchased their Common Stock at an average price of $1.27 per share, substantially below the initial public offering price. SHARES ELIGIBLE FOR FUTURE SALES Sales of a substantial number of shares of Common Stock in the public market following this offering or the prospect of such sales could adversely affect the market price of the Common Stock prevailing from time to time. Upon completion of this offering, the Company will have 5,047,933 shares of Common Stock outstanding. Of these shares, 2,000,000 shares of Common Stock offered hereby will be freely transferable without restriction unless purchased by 'affiliates' of the Company as that term is defined under Rule 144 ('Rule 144') promulgated under the Securities Act of 1933, as amended (the 'Securities Act'). The remaining shares will be 'restricted securities' as that term is defined in Rule 144 under the Securities Act and may not be sold other than pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from such registration requirement. Subject to the contractual restrictions discussed below, 3,021,412 shares of Common Stock will be eligible for sale under Rule 144 from the date of this Prospectus. 2,111,669 of such shares are entitled to certain registration rights. See 'Description of Capital Stock.' Holders of 99% of the outstanding Common Stock are subject to lock-up agreements under which they have agreed not to sell or otherwise dispose of any shares of Common Stock without the prior written consent of Dean Witter Reynolds Inc. for a period of 180 days after the date of this Prospectus whether now owned or hereafter acquired by such stockholders or with respect to which such stockholders have or hereafter acquire the power of disposition or enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock or any Common Stock deemed to be beneficially owned by such stockholders, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Such stockholders also have agreed not to exercise their registration rights for 180 days after the date of this Prospectus and have granted Dean Witter Reynolds Inc. the right of first refusal to be engaged as the lead manager of the underwritten public offering of their shares if registration rights are exercised following the expiration of the lock-up period until the date that is 12 months from the date of this Prospectus. The Company has consented to any such engagement of Dean Witter Reynolds Inc. The Company has agreed not to issue or sell any shares of Common Stock, without the prior written consent of Dean Witter Reynolds Inc. for a period of 180 days after the date of this Prospectus other than the issuance of shares upon the exercise of stock options. Upon the expiration of the 180-day lock-up period, certain of the shares of Common Stock subject to the lock-up agreements will become eligible for sale in the public market subject to the conditions of Rule 144. See 'Underwriting' and 'Shares Eligible For Future Sales.'

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+ RISK FACTORS AND OTHER IMPORTANT CONSIDERATIONS Each Public Unitholder should carefully read this entire Prospectus, including the Exhibits and the documents incorporated herein by reference, and should give particular attention to the considerations discussed below. When used in this Prospectus, the words "may," "will," "expect," "anticipate," "continue," "estimate," "intend" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), regarding events, conditions and financial trends that may affect the Partnership's future plans of operations, business strategy, results of operations and financial position. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those described below under "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Partnership" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of PIMCO Advisors" and elsewhere in this Prospectus. RISKS RELATING TO OWNERSHIP OF PIMCO ADVISORS THROUGH THE PARTNERSHIP The Partnership's operating income is derived from its investment in PIMCO Advisors GP Units. Therefore, an investment in the Partnership Units will effectively involve the same risks as the Public Unitholders' current investment in PIMCO Advisors LP Units. These risks include the following: RELIANCE ON KEY PERSONNEL AND PROFIT-SHARING PAYMENTS The ability of PIMCO Advisors and the Investment Management Firms to attract and retain clients is dependent to a large extent on their ability to attract and retain key employees, including skilled portfolio managers. Certain of PIMCO Advisors employees are responsible for significant client relationships. In particular, PIMCO Advisors depends, to a significant extent, on the services of William H. Gross of Pacific Investment Management and key portfolio managers of each of the other Investment Management Firms. Mr. Gross is one of the best-known fixed income portfolio managers in the United States, and the loss of his services could have a material adverse effect on PIMCO Advisors. In order to help retain these and other key personnel, each of the Investment Management Firms has a substantial profit-sharing plan for its senior management. Oppenheimer Capital maintains a benefit plan for its senior management which offers a significant profits interest in the performance of the Investment Management Firm. The other Investment Management Firms reserve a substantial percentage of their adjusted net book income for profit-sharing payments (45% in the case of Pacific Investment Management and CCI, and in the case of the other Investment Management Firms, 15% of the first $3.0 million of such income, 25% of the next $2.0 million of such income, 40% of the next $5.0 million of such income and 45% of such income in excess of $10 million). These profit-sharing payments significantly reduce the amount of the Investment Management Firms' profits that is distributed to PIMCO Advisors and becomes available for distribution to unitholders of PIMCO Advisors and indirectly to unitholders of the Partnership. There can be no assurance that key personnel will be retained. COMPETITION The investment management business is highly competitive. PIMCO Advisors and its Investment Management Firms compete with a large number of other domestic and foreign investment management firms, commercial banks, insurance companies, broker-dealers and other financial services providers. Some of the financial services companies with which the firms compete have greater resources, assets under management and administration than PIMCO Advisors and the Investment Management Firms and offer a broader array of investment products and services. PIMCO Advisors believes that the most important factors affecting its success are the abilities, performance records and reputations of its investment managers, and the development of new investment and marketing strategies. The relative importance of these factors varies depending on the type of investment management service involved. Client service is also an important competitive factor. PIMCO Advisors ability to increase and retain client assets could be adversely affected if client accounts underperform the market over time or if key investment managers leave the firms. The ability of PIMCO Advisors and the Investment Management Firms to compete with other investment management firms is also dependent, in part, on the relative attractiveness of their investment philosophies and methods under prevailing market conditions. There are relatively few barriers to entry by new investment management firms in the institutional managed accounts business, which increases competitive pressure. A large number of mutual funds are sold to the public by investment management firms, broker-dealers, insurance companies and banks in competition with mutual funds sponsored by PIMCO Advisors. Many competitors apply substantial resources to advertising and marketing their mutual funds which may adversely affect the ability of PIMCO Advisors-sponsored funds to attract new retail clients and to retain retail assets under management. FACTORS AFFECTING FEE REVENUES General Considerations Investment management agreements between Investment Management Firms and their clients typically provide for fees based on a percentage of the assets under management, determined at least quarterly and valued at current market levels. The percentage of the fee applicable to a particular classification of assets under management is a function of several factors. For example, investments or strategies which have a higher degree of risk and uncertainty command a higher percentage fee. Therefore, significant fluctuations in securities prices or in the investment patterns of clients that result in shifts in assets under management can have a material effect on PIMCO Advisors consolidated revenues and profitability. Such fluctuations in asset valuations and client investment patterns may be affected by overall economic conditions and other factors influencing the capital markets and the net sales of mutual fund shares generally, including interest rate fluctuations. Virtually all of PIMCO Advisors revenues are derived from investment management agreements with clients that are terminable at any time or upon 30 to 60 days' notice, as is the case generally in the investment management industry. Any termination of agreements representing a significant portion of assets under management could have an adverse impact on PIMCO Advisors results of operations. The investment management business is highly competitive and fees vary among investment managers. Some of the Investment Management Firms' fees are higher than those of many investment managers relative to the average size of accounts under management. Each Investment Management Firm's ability to maintain its fee structure in the competitive environment is dependent to a large extent on the ability of its investment managers to provide clients with service and investment returns that will cause clients to be willing to pay those fees. There can be no assurance that the Investment Management Firms will be able to retain their clients or sustain their fee structures in the future. Reliance on Performance-Based Fees Approximately 5.3%, 4.5% and 4.1% of PIMCO Advisors revenues (as adjusted to combine with the revenues of Oppenheimer Capital) for the nine months ended September 30, 1997 and the years ended December 31, 1996 and December 31, 1995, respectively, were derived from performance-based fees. Most of these revenues are attributable to Pacific Investment Management's operations. To earn a performance-based fee with respect to an account, the relevant Investment Management Firm must generally outperform a specific benchmark over a particular period. Performance-based fee arrangements make revenues more volatile, but also provide an opportunity to earn higher fees than could be obtained under fee arrangements based solely on a percentage of assets under management. Pacific Investment Management's StocksPLUS(R) product, which accounted for $11.3 billion of assets under management at September 30, 1997, is subject to a performance-based arrangement in which under-performance relative to the S&P 500 over a particular time period results in no fees being paid by clients, while superior performance results in incentive fees that are not subject to a cap. In addition to the StocksPLUS accounts, several large fixed income accounts aggregating approximately $10.9 billion at September 30, 1997, also have performance-based fee arrangements. Pacific Investment Management's performance-based fee arrangements, including the StocksPLUS fee arrangement, can materially affect Pacific Investment Management's revenues, and thus those of PIMCO Advisors, from period to period. USE OF DERIVATIVES The use of derivatives by investors has received national attention in recent years because of losses suffered on investments in derivatives. The Investment Management Firms, from which PIMCO Advisors obtains its operating income, have used derivatives and plan to continue using derivatives in the future. In particular, Pacific Investment Management has used derivatives since 1980 in various ways, principally to manage portfolio risk and exploit market inefficiencies. LIABILITY AS GENERAL PARTNER After the Restructuring, the Public Unitholders will be limited partners in the Partnership. The Partnership's sole business is holding PIMCO Advisors GP Units. As a general partner of PIMCO Advisors, the Partnership is liable for the obligations of PIMCO Advisors although the PIMCO Advisors assets would be used first to satisfy such obligations. As limited partners, the Public Unitholders will not be liable for obligations of the Partnership. However, their investment in the Partnership may be adversely affected to the extent the Partnership is required to satisfy PIMCO Advisors obligations. OTHER RISKS LACK OF PARTICIPATION IN MANAGEMENT; VOTING As the sole general partner of the Partnership and the general partner with a controlling interest in PIMCO Advisors, PGP has ultimate control over the operations of the Partnership and PIMCO Advisors. Limited partners of the Partnership have only limited voting rights on matters affecting the Partnership's business and have no right to participate in the management of the Partnership or PIMCO Advisors. Holders of Partnership Units have no voting rights regarding the selection of the management board of the Partnership. If PGP resigned or was removed as general partner and the limited partners of the Partnership elected to continue the operations of the Partnership, its successor would be elected by holders of a majority of Partnership Units outstanding. A vote of holders of 80% or more of the Partnership Units is required to remove PGP as general partner of the Partnership, and PGP and its affiliates may vote their Partnership Units, if any, with respect to removal (while PGP owns no Partnership Units, 154,356 Partnership Units are owned by PIMCO Advisors, which is controlled by PGP). However, even if PGP were removed as general partner of the Partnership, such removal would not affect its status as the controlling general partner of PIMCO Advisors. CASH DISTRIBUTIONS Distributions to limited partners of the Partnership will be dependent upon distributions by PIMCO Advisors, which, in turn, are dependent upon the Distributable Cash of PIMCO Advisors. Distributable Cash is defined in the PIMCO Advisors Partnership Agreement as the Operating Profit Available for Distribution (as defined below in "Recent Unit Prices and Distributions -- Distribution Policy") less the amount, if any, required for expenses, for capital expenditures, for future payments on indebtedness, as reserves or otherwise in the business of PIMCO Advisors, determined in the discretion of the general partners. While PIMCO Advisors pays all of the Partnership's expenses (other than taxes), after December 31, 1997, distributions on the Partnership Units will be less than those on PIMCO Advisors units due to tax on the Partnership's gross income from active businesses.

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+ RISK FACTORS THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION. AN INVESTMENT IN THESE SECURITIES SHOULD BE MADE ONLY BY INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. IN ADDITION TO THE FACTORS SET FORTH ELSEWHERE IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD GIVE CAREFUL CONSIDERATION TO THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. THIS PROSPECTUS MAY BE DEEMED TO CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE REFORM ACT. FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS OR HEREAFTER INCLUDED IN OTHER PUBLICLY AVAILABLE DOCUMENTS FILED WITH THE COMMISSION, REPORTS TO THE COMPANY'S STOCKHOLDERS AND OTHER PUBLICLY AVAILABLE STATEMENTS ISSUED OR RELEASED BY THE COMPANY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FUTURE RESULTS ARE BASED UPON MANAGEMENT'S BEST ESTIMATES BASED UPON CURRENT CONDITIONS AND THE MOST RECENT RESULTS OF OPERATIONS. THESE RISKS INCLUDE, BUT ARE NOT LIMITED TO, RISKS SET FORTH HEREIN, EACH OF WHICH COULD ADVERSELY AFFECT THE COMPANY'S BUSINESS AND THE ACCURACY OF THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN. LACK OF REVENUES AND HISTORY OF LOSSES. The Company has generated minimal revenues from operations since inception and no revenues from sales of products since approximately 1990, and has been engaged primarily in research and development of its products. The Company has only generated revenues in 1995 and 1996 from certain milestone payments related to the research and development of the Company's microprocessors, and in November, 1997 from an advance payment pursuant to an agreement to provide certain design services and the use of the Company's proprietary technologies and methodologies to customers of a large supplier of software tools and professioinal services related to silicon designs and electronics equipment. The Company has incurred net losses in each year since inception, and, as of September 30, 1997, the Company had an accumulated deficit of $20,847,459. As of the date of this Prospectus, the financial condition of the Company raises substantial doubts about the ability of the Company to continue as a going concern. The Company expects to continue to incur significant operating losses over at least the following two years as it continues to devote significant financial resources to product development activities and as the Company expands its operations. In order to achieve profitability, the Company will have to develop, manufacture and market products which are accepted on a widespread commercial basis. There can be no assurances that the Company will develop, manufacture or market any products successfully, operate profitably in the future or generate revenues from operations, or that capital in excess of the net proceeds of this Offering will not be required in order to accomplish the Company's current business plan. See "Use of Proceeds," "Management's Discussion and Analysis of Results of Operations and Financial Condition," "Business" and "Financial Statements." QUALIFIED FINANCIAL STATEMENTS; NEED FOR ADDITIONAL FINANCING. The Company's auditors have included an explanatory paragraph in their Report of Independent Certified Public Accountants to the effect that recoverability of a major portion of the Company's recorded asset amounts shown in the Company's financial statements is dependent upon continued operations of the Company, which in turn, is dependent upon the Company's ability to continue to meet its financing requirements and to succeed in its future operations. The Company has historically financed its operations principally through the private placement of equity and debt securities. From January 1, 1995 through September 30, 1997, the Company had raised gross proceeds of $13,455,000 through such private placements, including $2,000,000 in loan financing from affiliates. Subsequent to September 30, 1997, the Company has obtained an additional $450,000 in loan financing, including $200,000 from an affiliate. The Company continues to require such financing in order to remain in business. The Company believes that the proceeds of this Offering will be sufficient to finance the Company's operations and continued development of the Company's products for a period of approximately eighteen (18) months following the date of this Prospectus, based on the Company's current business plan. However, there can be no assurance that the Company will be able to generate revenues prior to such date or at all, or that the Company will not require additional financing at or prior to such date in order to continue operations and product development. There can be no assurances that any additional sources of financing will be available on terms favorable to the Company, or at all, or that the business of the Company will ever achieve revenues or profitable operations. Further, any additional financing may be senior to the Company's Common Stock or result in significant dilution to the holders of the Common Stock. In the event the Company does not receive any such financing or generate profitable operations, management may have to suspend or discontinue its business activity or certain components thereof in its present form or cease operations altogether. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and "Financial Statements." NEED TO DEVELOP AND POTENTIAL OBSOLESCENCE OF NEW PRODUCTS. The Company is engaged in the business of developing new products and technologies for the microprocessor and computer industries, but has not completed development on any such product or technology to the point where it may be commercially introduced into the market, and no assurance can be given that the Company will ever be able to do so. The markets for the Company's products are characterized by rapidly changing technology, frequent new product introductions and price erosion. Accordingly, the Company believes its future prospects depend on its ability not only to enhance and successfully market its products in development, but also to develop and introduce new products in a timely fashion that achieve market acceptance. There can be no assurance that the Company will be able to identify, design, develop, market or support such products successfully or that the Company will be able to respond effectively to technological changes or product announcements by competitors. Delays in new product introductions or product enhancements, or the introduction of unsuccessful products, could have a material adverse effect on the Company. Even if the Company receives all of the proceeds from this Offering and completes the development of any of its products, no assurance can be given that any such product will perform according to the design specifications of the Company. Even if such product performs to such specifications, no assurance can be given that technologies developed by others will not render any product developed by the Company obsolete, or otherwise significantly diminish the value of the Company's products, or that there will still be a market for such product by the time such product is ready for production. If the Company does not develop one or more finished products at a time when a market window for such a product is still open, there would be a material adverse effect on the Company's financial position, and the Company may be compelled to curtail or cease its operations altogether. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." RISK OF MARKET ACCEPTANCE OF THE COMPANY'S PRODUCTS. The Company's growth will depend on the Company's ability to identify, develop and successfully market new products. The microprocessor and computer industries are populated by many companies of various sizes and types and are characterized by constant and rapid technological and other change, innovation and new discoveries, which make conducting such a business more difficult. The identification of specific market needs is seldom made by any one company alone, and no assurance can be given that there are not many other microprocessor companies actively engaged in developing products designed to solve the needs identified by the Company or that one or more such companies could not develop a product which has the effect of capturing the market which has been targeted by management of the Company for its products or making obsolete a product or technology developed by the Company. There can be no assurance that any products which may be developed by the Company, if at all, will meet any specific needs then existing in the market or that such products will obtain commercial acceptance in the market. See "Business," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Financial Statements." DIFFICULTY OF MARKETING THE COMPANY'S PRODUCTS. The Company faces a number of obstacles to the successful marketing of certain of its products which are under development and certain of its products which are ready for marketing, but which have not been successfully marketed as of the date of this Prospectus. No assurance can be given that the markets currently projected by the Company for such products will exist, or if it does, that the products using the Company's technologies will achieve acceptance in the market. Even in the event that the Company's products find a level of market acceptance, there can be no assurance that the sale of such products will generate significant revenue for or result in profitability to the Company. The Company may face a formidable task in marketing such products in the face of efforts by other companies to market their own products, even if such companies' products do not, in the opinion of management of the Company, perform as effectively or efficiently as the Company's products. Further, no assurance can be given that any market share which may be achieved by the Company will not be overtaken by products manufactured by other companies possessing far greater technical and financial resources. See "Business - Products; - License and Production Agreement; - Design Agreement; - Competition." DEPENDENCE ON MANUFACTURER AND RISKS OF ACCESS TO ALTERNATIVE MANUFACTURING SOURCES AND MANUFACTURING DELAYS. The Company will rely on outside parties for the manufacture of its products. Accordingly, the Company will be dependent on the capabilities of these outside parties for the successful manufacture of its products. There can be no assurance that these manufacturers will be willing or able to meet the Company's product needs in a satisfactory and timely manner. The Company's reliance on third-party manufacturers involves a number of additional risks, including the absence of guaranteed capacity, and reduced control over delivery schedules, quality assurance, production yields and costs. Although the Company believes that these manufacturers would have an economic incentive to perform such manufacturing for the Company, the amount and timing of resources to be devoted to these activities are not within the control of the Company, and there can be no assurance that manufacturing problems will not occur in the future. As of the date of this Prospectus, the Company has entered into an agreement (the "Production Agreement") with one manufacturer (the "Manufacturer") for the production of the Meta 6000. The Company and the Manufacturer currently have agreed that the Manufacturer will be under no further obligation to make payments, provide personnel of the Manufacturer or to acquire or make available capital equipment to the Company, and will only be obligated to provide to the Company certain access to specific technologies, equipment and manufacturing processes of the Manufacturer, with respect to the continued development of the Meta 6000, and that the Meta 6000 will be designed exclusively by the Company. Based on the reduction of the commitment of the Manufacturer's capital and technological resources in connection with the development of the Meta 6000, the Company will be required to utilize primarily its own resources to continue development of the Meta 6000. There can be no assurances that the proceeds of this Offering will be sufficient to complete development of the Meta 6000 or that the Company will be able to obtain additional financing or technological assistance from other parties to be able to complete the development of the Meta 6000. The Production Agreement provides limited assurances of deliveries of such products for a limited period of time. To generate revenues from sales of the Company's Meta 6000 chips and related technologies, the Company will need to obtain volumes of wafers of the of Meta 6000 chips. The Company expects to ask for needed supply commitments over time, but there can be no assurance that the Company will be successful in obtaining those requested supply commitments. The Manufacturer's specific manufacturing technology ("fabrication process") which the Company and the Manufacturer expect to use to fabricate the Meta 6000 is not a qualified manufacturing process for volume production as of the date of the Production Agreement. Aggressive technological cooperation between the Company and the Manufacturer is required by the competitive nature of the microprocessor business. There can be no assurance that significant levels of technological cooperation will be made available by the Manufacturer or others, or that this fabrication process will be fully qualified by the Manufacturer and available for manufacture of the Meta 6000 as soon as desired, or at all. If one or more products developed by the Company under the Production Agreement should achieve some measure of acceptance in the market, the Company's ability to earn revenue from the commercial exploitation of such products will depend on the manufacture of such products by the Manufacturer. Under the Production Agreement, the Manufacturer is under no obligation to manufacture and sell any chips developed pursuant to the Production Agreement. In addition, to the extent that the Company wishes to sell chips directly, the Company's success will depend in significant part on the timely and adequate production of chips by the Manufacturer for an inventory of such chips, on terms to be negotiated between the Company and the Manufacturer, and no assurance can be given that the Manufacturer will be able or willing to provide such production, or if it does, that it will do so on terms and conditions satisfactory to the Company. In such circumstance, the Company may not be able to continue in business. Production of the Company's Meta 6000 requires the use of process technologies, which are available from only a few sources. There can be no assurance that the Company will continue to have access to such technology or to other process technologies that the Company may require for future products. In the event the Manufacturer is unwilling to meet the Company's needs, the Company believes alternative suppliers could be found. However, a change in suppliers or any significant delay in the Company's ability to have access to such resources, whether resulting from the need to access alternative process technologies, to resolve manufacturing problems at existing suppliers or for other reasons, would have a material adverse effect on the Company's delivery schedules, business, operating results and financial condition. There can be no assurance that the Company will be able to enter into agreements with additional manufacturers or that, if it is able to enter into such agreements, that those agreements will be on terms favorable to the Company. Converting the physical design for the Company's processor and system logic products to the design rules of a different fabrication facility is a difficult task. Each new manufacturer has a different set of design rules for manufacturing products, which may require the Company to generate a new design for each manufacturer. Additional silicon and design iterations in excess of the Company's current plan, if required, may cause additional delays and may cause the Company to incur substantial additional costs. Product positioning and market acceptance may be adversely affected by such delays, particularly if competitors introduce improved or superior products during such period. There can be no assurance that such additional iterations will not be required. See "Business - License and Production Agreement." DEPENDENCE ON THE PRODUCTION AGREEMENT AND DESIGN AGREEMENT. As of the date of this Prospectus, the Company has entered into two (2) contracts which have the potential for generating revenue from the sale or license of the Company's products. These agreements include the Production Agreement and an agreement (the "Design Agreement") to provide design services and the use of the Company's proprietary technologies and methodologies to customers of a large supplier of software tools and professional services related to silicon designs and electronics equipment. Fulfillment of the Company's obligations under the Production Agreement and the Design Agreement will require the Company to concentrate its resources thereon, reducing the possibility that the Company will be able to identify and obtain other potential arrangements for the development and exploitation of its products and technologies. Thus, the success of the Company's microprocessor business is dependent in large part on the success of the development and exploitation of products and services pursuant to the terms of the Production Agreement and the Design Agreement. If the Company is unable to meet its obligations under either of the Production Agreement or the Design Agreement, or if either of the Production Agreement or the Design Agreement is terminated for any reason, there would be a material adverse effect on the Company's financial condition, and the Company may be compelled to curtail or cease business operations altogether. See "Business - License and Production Agreement; - Design Agreement." DEPENDENCE ON EFFECTIVE PRODUCT DEVELOPMENT. In order to compete successfully in the future, the Company will continuously need to develop higher performance and cost-reduced versions of the Meta 6000, and will also need to develop future generations of products. The Company has experienced significant delays in product development in the past. The Company's future products will require significant additional research and development prior to their commercialization. Further design and silicon iteration may be necessary to attain competitive performance for any future generation products. The nature of the Company's research and development activities is inherently complex, precluding definitive statements as to the time required and costs involved in reaching certain objectives. Consequently, actual research and development costs could exceed amounts budgeted from the proceeds of this Offering and estimated time frames may require extension. Any delays or additional research costs could require the raising of funds in addition to the proceeds of this Offering, and therefore could have a material adverse effect on the Company's business and results of operations. There can be no assurance that any potential products will be capable of being produced in commercial quantities on a timely basis at acceptable costs or be successfully marketed, or that the Company will be able to obtain such additional financing on terms favorable to the Company, or at all. See "Business." PRODUCT DEFECTS. In the event that the Company produces and distributes products, it is possible that one or more of the Company's products may be found to be defective after the Company has already shipped in volume, requiring a product replacement or a software fix which might cure such defect, but impede performance. Product returns and the potential need to remedy defects or provide replacement products or parts could impose substantial costs to the Company and have a material adverse effect on the Company. See "Business." NO INDEPENDENT CERTIFICATION OF PRODUCTS. The Company is currently developing products and technologies which have not been commercially distributed to the public. None of the Company's proposed products have been subjected to independent examination with respect to their efficacy or marketability. Further, in order to market any microprocessors which may be produced by the Company and to demonstrate compatibility with software or hardware of manufacturers which constitute a significant portion of the established market, prior to volume production and product shipment, the Company must receive independent certifications from other manufacturers, such as Windows certification from Microsoft, and Platinum certification from XXCAL, a nationally recognized testing organization. Although the Company intends to submit its products to rigorous internal (ITT and proprietary test suites) and external (XXCAL and Microsoft certification) testing, there can be no assurance that the Company's products will receive such certifications or be compatible with all standard PC software or hardware. Further, the Company's library of design elements must also be certified by tool vendors, or may require certification by industry standard bodies in the future. Any inability of the Company's products to achieve such compatibility with other software or hardware or to obtain required certifications would have a material adverse effect on the Company's business and operating results. See "Business." LARGER AND MORE ESTABLISHED COMPETITION. The market for the Company's products is extremely competitive. The Company directly and indirectly competes with other businesses, including businesses in the computer and microprocessor industries. In most cases, these competitors are substantially larger and more firmly established, have greater marketing and development budgets and substantially greater capital resources than the Company. Accordingly, there can be no assurance that the Company will be able to achieve and maintain a competitive position in the Company's industry. Further, in order to compete effectively in the market for high performance x86 microprocessors, the Company must develop and introduce on a timely basis competitive products that embody new technology, meet evolving industry standards, and achieve increased levels of performance at prices acceptable to the market. In particular, the market for microprocessor products has been and continues to be characterized by intense and increasing price competition, even for advanced microprocessor products. Intel has increasingly made more frequent and more significant price reductions to stimulate market demand for its Pentium-TM- and advanced generation microprocessors and encourage the migration of original equipment manufacturers ("OEMs") and end users to its latest generation of microprocessors. The Company's competitors in the market for x86 microprocessors include Intel, Advanced Micro Devices, Inc. ("AMD"), and National Semiconductor (which recently acquired Cyrix) and others with substantially greater resources in technology, finance, manufacturing, sales, marketing, distribution, customer service and support, as well as greater experience and name recognition, than the Company. Intel, in particular, has long had a dominant position in the market for microprocessors used in PCs. Intel's dominant market position, to date, has allowed it to set standards and thus dictate the type of product the market requires of Intel's competitors. The Company believes that the Meta 6000 will need to be competitive primarily with Intel Pentium-TM-. It is expected that Intel will introduce faster versions of the Pentium-TM- and advanced generation microprocessors and that other companies will continue to develop competitive technologies. Intel has announced the architecture and technology of its next generation microprocessor. AMD has announced that it has begun the shipment of its sixth generation product and Cyrix has announced it intends to begin shipping its new microprocessor product. The Company expects substantial direct competition, both from existing competitors and from new market entrants. Further, larger and more established competitors may seek to impede the Company's ability to establish a market share for any products which may be developed by the Company through competitive pricing activities. Intel recently announced that it will market inventories of prior generation Pentium-TM-microprocessors at discounted prices. Also, prospective customers for the Company's products may be reluctant to disrupt relationships with well-established distributors of products which may be comparable in quality or pricing to any of the Company's products. The Company's competitors spend substantial sums on research and development, manufacturing facilities, and intensive advertising campaigns designed to engender brand loyalty among PC end-users in order to maintain their respective market positions. The Company does not have comparable resources with which to invest in research and development and advertising and is at a competitive disadvantage with respect to its ability to develop products. The Company may also encounter difficulties in customer acceptance because it is likely to be perceived as a new processor supplier whose identity is not yet well known and whose reputation and commercial longevity are not yet established. Substantial marketing and promotional costs, possibly in excess of what the Company can afford, may be required to overcome barriers to customer acceptance. There can be no assurance that the Company will be able to overcome such barriers. The failure to gain customer acceptance of the Meta 6000 and related technology would have a material adverse effect on the Company. So long as Intel remains in this dominant position, its product introduction schedule and product pricing will materially, and at times adversely, affect the Company's business and financial condition. See "Business - Competition." DEPENDENCE ON MARKET DEVELOPMENT. In contrast to the standard x86 microprocessor market, the market for custom x86-compatible Pentium-TM- cores is not fully developed. Although no directly equivalent combination of core products and services intended to be offered by the Company is currently being marketed, it is possible that such competitive products may appear in the future. Sales of the Company's custom core products and services could also be adversely affected by customer substitution of variants of microprocessors currently produced or which may be produced by Intel and others. There can be no assurance that the Company's custom core products and services will be preferred over existing lower-performance 386 and 486-class cores, or future Pentium-TM- class alternatives. The Company also intends to develop, market and sell design elements derived from its research and development efforts. Such design elements, which include so-called "custom super-macro cells," like adders and multipliers, synthesis libraries and other intellectual property, also may address an emerging market. Sales of these products and the Company's financial performance could be adversely affected by competition from others and future improvements in silicon design technology (e.g., more effective synthesis tools), the appearance of superior competitive products, or the industry infrastructure associated with advanced silicon design. No assurance can be given that this market will develop as anticipated by the Company, or that the Company will be able to develop the alliances necessary to penetrate this market effectively. See "Business - Sales, Marketing and Distribution." NO MARKETING STUDIES. No independent studies with regard to feasibility of the Company's proposed business plan have been conducted at the expense of the Company or by any independent third parties with respect to the Company's present and future business prospects and capital requirements. In addition, there can be no assurances that the Company's products and services will find sufficient commercial acceptance in the marketplace to enable the Company to fulfill its long and short term goals, even if adequate financing is available and products are ready for market, of which there can be no assurance. See "Business." HIGHLY LEVERAGED BUSINESS OPERATIONS. As of the date of this Prospectus, the Company had short-term borrowings in the aggregate amount of $2,880,000, of which $2,200,000 was payable to an affiliate of Martin S. Albert, a director and principal beneficial stockholder of the Company and secured by the Company's intellectual property rights related to the Meta 6000. In addition, during the period in which $2,000,000 of such obligation remains unpaid, such affiliate of Mr. Albert has the right to appoint an additional member to the Company's Board of Directors, which right has not been exercised as of the date of this Prospectus. The Company intends to pay $680,000 of these short-term obligations to certain non-affiliates from the proceeds of this Offering. The Company may require additional financings in order to pay off these obligations, and the failure to raise additional funds and the default on any of these obligations could have a material adverse effect upon the business operations of the Company. See "Management's Discussion and Analysis of Results of Operations and Financial Condition," "Certain Relationships and Related Transactions" and "Underwriting." DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon the skills of its management and technical team. There is strong competition for qualified personnel in the computer microprocessor industry, and the loss of key personnel or an inability to continue to attract, retain and motivate key personnel could adversely affect the Company's business. There can be no assurances that the Company will be able to retain its existing key personnel or to attract additional qualified personnel. The Company does not have key-person life insurance on any of its employees, other than George Smith, its Chief Executive Officer. See "Management." RELIANCE ON PATENT PROTECTION AND PROPRIETARY TECHNOLOGY. The Company's business is dependent upon its ability to protect its intellectual property, including patented and other proprietary technology, certain of which is licensed by the Company and certain of which is owned by the Company. To the extent the Company or the owners of the patented technology are unsuccessful in protecting proprietary rights to such technology or such technology may infringe on proprietary rights of third parties, that portion of the Company's business could suffer. The Company's more significant proprietary technology is based on unpatented trade secrets and know-how. To the extent that the Company relies upon unpatented trade secrets and know-how and the development of new products and improvements thereon in establishing and maintaining a competitive advantage in the market for the Company's products, there can be no assurances that such proprietary technology will remain a trade secret or that others will not develop substantially equivalent or superior technologies to compete with the Company's products. In addition, there can be no assurances that others will not independently develop similar or superior technologies which will enable them to provide superior products or services. Further, there can be no assurances that patentable improvements on such technology will be developed or that existing or improved technology will have competitive advantages or not be challenged by third parties. The Company also has certain proprietary rights in certain registered trademarks related to the Company's products. No assurance can be given that the trademarks will afford the Company any competitive advantages. Further, the microprocessor industry has been marked by costly and time-consuming litigation with respect to intellectual property rights between competitors. There can be no assurances that third parties will not claim that some or all of the Company's technology infringes on proprietary rights of others. Such litigation may be used to seek damages or to enjoin alleged infringement of proprietary rights of others. Further, the defense of any such litigation, whether or not meritious, may divert financial and other resources of the Company, including the proceeds of this Offering, which may otherwise be devoted to development of the Company's business plan, and therefore, may have a material adverse effect on the financial condition of the Company. An adverse decision to the Company in any such litigation may result in a significant damages award payable by the Company or enjoin the Company from marketing its then existing products, and therefore, would have an adverse effect on the Company's ability to continue in business. In the event of an adverse result in such litigation, the Company would be required to expend significant resources to develop non-infringing technology or to obtain licenses to the disputed technology from third parties. There can be no assurances that the Company will have the resources to develop or license such technology, or if so, that the Company would be successful in such development or that any such licenses would be available on commercially reasonably terms. Further, the Company may be required to commence litigation against third parties to protect any proprietary rights of the Company. There can be no assurances that the Company will be able to afford to prosecute such litigation, or if so, that such litigation will be successful. See "Business - Patents." RISK OF LOSING NASDAQ/NMS LISTING. The Company's Common Stock is currently quoted in the over-the-counter market (the "Over-the-Counter Market") in the so-called "pink sheets" or the "Electronic Bulletin Board" of the National Association of Securities Dealers, Inc. ("NASD"). The Company has applied for the Common Stock to be listed in the NASDAQ/NMS and anticipates that it will meet the initial inclusion requirements for the NASDAQ/NMS at the time of the closing of this Offering. Although the Company believes that it meets the current NASDAQ/NMS initial listing requirements and expects to be included on the NASDAQ/NMS, there can be no assurances that the Company will meet the criteria for continued listing on the NASDAQ/NMS. Continued inclusion on the NASDAQ/NMS generally requires that a company would need to have, among other things: (i) net tangible assets of $4,000,000, a minimum public float of 750,000 shares with an aggregate market value of $5,000,000, and a minimum bid price of $1.00 per share, or (ii) either a market capitalization of $50,000,000, total assets and total revenues of $50,000,000 each for the most recently completed fiscal year or two (2) of the three (3) most recently completed fiscal years, and, in addition, a minimum public float of 1,100,000 shares with an aggregate market value of $15,000,000, and a minimum bid price of $5.00 per share. Additionally, for continued listing on the NASDAQ/NMS, a company will be required to continue to have at least two independent directors, and an Audit Committee, a majority of the members of which would need to be independent directors. If the Company is unable to satisfy the NASDAQ/NMS maintenance requirements, its Common Stock may be delisted from the NASDAQ/NMS. In addition, the NASDAQ/NMS has the right to review and reverse a decision to list a security on the NASDAQ/NMS before or after the completion of an offering. In the event of any such delisting, trading, if any, in the Common Stock, would thereafter be conducted in the Over-the-Counter Market, and it could be more difficult to obtain quotations of the market price of the Company's Common Stock. Consequently, the liquidity of the Company's Common Stock could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of transactions, reduction in participation of broker/dealers, and security analysts' and media's coverage of the Company and, further, result in difficulty in obtaining future financing for the Company. See "Underwriting." EFFECT OF REVERSE STOCK SPLIT ON MARKET FOR COMMON STOCK. The Company intends to effect a reverse split of the issued and outstanding shares of Common Stock, excluding the shares to be issued in connection with this Offering, on a 1-for-___________ basis on the Effective Date. Although the number of shares of Common Stock issued and outstanding will be reduced by a factor of _____________, and the offering price on the Effective Date will be $________ per share, after giving effect to the reverse stock split, there can be no assurance that the market price will increase proportionately to the ratio of the reverse split in the future based on historical market prices. See "Price Range of Common Stock" and "Underwriting." DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock is currently listed for trading in the Over-the-Counter Market. The Company has applied for the Common Stock to be listed in the NASDAQ/NMS upon effectiveness of this Offering. If, at any time, the Company's securities are not listed for trading in the NASDAQ/NMS, the Company's securities could become subject to the "penny stock rules" adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The penny stock rules apply to non-NASDAQ companies whose common stock trades at less than $5.00 per share or which have tangible net worth of less than $5,000,000 ($2,000,000 if the company has been operating for three or more years). Such rules require, among other things, that brokers who trade "penny stock" to persons other than "established customers" complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade "penny stock" because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. In the event that the Company's securities become subject to the "penny stock rules," there may develop an adverse impact on the market for the Company's securities. See "Underwriting." CERTAIN REGISTRATION RIGHTS. The Company has entered into various agreements pursuant to which certain holders of the Company's outstanding Common Stock and convertible securities have been granted the rights under various circumstances, to have Common Stock that is currently outstanding or underlying such convertible securities registered for sale in accordance with the registration requirements of the Securities Act upon demand or which may be "piggybacked" to a registration statement which may be filed by the Company. Any such registration statement may have a material adverse effect on the market price for the Company's Common Stock resulting from the increased number of free trading shares of Common Stock in the market. There can be no assurances that such registration rights will not be enforced or that the enforcement of such registration rights will not have a material adverse effect on the market price for the Common Stock. See "Certain Relationships and Related Transactions," "Description of Securities" and "Dilution." LACK OF DIVIDENDS ON COMMON STOCK. The Company has paid no dividends on its Common Stock to date and there are no plans for paying dividends in the foreseeable future. The Company intends to retain earnings, if any, to provide funds for the expansion of the Company's business. See "Dividend Policy" and "Description of Securities." POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Company is subject to certain provisions of the Delaware General Corporation Law which, in general, restrict the ability of a publicly held Delaware corporation from engaging in certain "business combinations," with certain exceptions, with "interested stockholders" for a period of three (3) years after the date of transaction in which the person became an "interested stockholder." Further, the Company's Certificate of Incorporation includes certain provisions which are intended to protect the Company's stockholders by rendering it more difficult for a person or persons to obtain control of the Company without cooperation of the Company's management. These provisions include the implementation of a classified Board of Directors and certain super majority requirements for the amendment of the Company's Certificate of Incorporation and Bylaws. Such provisions are often referred to as "anti-takeover" provisions. The inclusion of such "anti-takeover" provisions in the Certificate of Incorporation may delay, deter or prevent a takeover of the Company which the stockholders may consider to be in their best interests, thereby possibly depriving holders of the Company's securities of certain opportunities to sell or otherwise dispose of their securities at above-market prices, or limit the ability of stockholders to remove incumbent directors as readily as the stockholders may consider to be in their best interests. See "Description of Securities - Certain Business Combinations and Other Provisions of Certificate of Incorporation." DILUTION. The public offering price of the Shares of Common Stock is substantially higher than the book value per share of the Common Stock. This Offering will result in immediate and substantial dilution of $________ per share of Common Stock (or _______% of the assumed offering price per share), based on the Company's capitalization as of September 30, 1997, which amount represents the difference between the net tangible book value per share of Common Stock before and after the Offering. As of the date of this Prospectus, the Company had 38,925,941 shares of Common Stock issued and outstanding. See "Dilution" and "Description of Securities." SHARES ELIGIBLE FOR FUTURE SALE; ISSUANCE OF ADDITIONAL SHARES. Future sales of shares of Common Stock by the Company and its stockholders could adversely affect the prevailing market price of the Common Stock. There are currently _________ restricted shares and __________ shares of Common Stock which are freely tradeable or eligible to have the restrictive legend removed pursuant to Rule 144(k) promulgated under the Securities Act. Of the _________ restricted shares, __________ shares have been held for at least one year from the date of this Prospectus, and in the absence of an agreement with the Representatives, are currently eligible for resale under Rule 144. Of the restricted shares, __________ shares held by certain of the Company's officers and directors will be subject to certain lock-up agreements with the Representatives during the __________ (_____) month period following the date of this Prospectus. Further, the Company has granted options to purchase up to an additional 5,684,273 shares of Common Stock, 2,965,117 of which are currently exercisable, and warrants to purchase up to 864,298 shares of Common Stock, 614,298 of which warrants have certain registration rights. The Company has filed a registration statement which registers up to 9,000,000 shares of Common Stock underlying certain options which have been or may be granted pursuant to certain stock option plans (911,500 of which have been exercised, an additional 3,256,323 of which have been granted and 1,057,167 of which are currently exercisable), and holders of options to purchase an additional 1,772,950 shares have certain registration rights in connection with such options. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales may occur, could have a material adverse effect on the market price of the Common Stock. Pursuant to its Certificate of Incorporation, the Company has the authority to issue additional shares of Common Stock and Preferred Stock. The issuance of such shares could result in the dilution of the voting power of Common Stock purchased in the Offering. See "Compensation of Executive Officers and Directors - Stock Option Plans," "Principal Stockholders," "Description of Securities," "Shares Eligible for Future Sale" and "Underwriting." FUTURE ISSUANCES OF PREFERRED STOCK. The Company's Certificate of Incorporation, as amended, authorizes the issuance of preferred stock with such designation, rights and preferences as may be determined from time to time by the Board of Directors, without shareholder approval. In the event of the issuance of additional series of preferred stock, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company has no present intention to issue any shares of its preferred stock, there can be no assurances that the Company will not do so in the future. See "Description of Securities." UNDERWRITERS' WARRANTS AND OPTIONS; RISK OF FURTHER DILUTION. The Company has agreed to sell to the Underwriters, for nominal consideration, warrants to purchase up to _________ shares of Common Stock at an exercise price of _______% of the price at which the Shares are offered to the public (the "Underwriters' Warrants"). The Underwriters' Warrants and any profits realized by the Underwriters on the sale of the shares of Common Stock underlying the Underwriters' Warrants could be considered additional underwriting compensation. For the life of the Underwriters' Warrants, the holders thereof are given, at nominal cost, the opportunity to profit from the difference, if any, between the exercise price of the Underwriters' Warrants and the value of or market price (if any) for the Shares, with a resulting dilution in the interest of existing stockholders. The terms on which the Company could obtain additional capital during the exercise period of the Underwriters' Warrants may be adversely affected as the holders of the Underwriters' Warrants may be expected to exercise them when in all likelihood, the Company would be able to obtain any needed capital by a new placement of securities on terms more favorable than those provided for by the Underwriters' Warrants. See "Underwriting." LIMITATIONS ON DIRECTOR LIABILITY. The Company's Certificate of Incorporation provides, as permitted by governing Delaware law, that a director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, with certain exceptions. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on behalf of the Company against a director. In addition, the Company's Certificate of Incorporation and Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Delaware law. See "Management."

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+ RISK FACTORS Prospective purchasers of the Shares should consider carefully the risk factors set forth below, in addition to the other information contained in this Prospectus, before making a decision to purchase the Shares. This Prospectus contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements as a result of certain factors, including those set forth in the following "Risk Factors" and elsewhere in this Prospectus. In each instance in which a risk factor identifies an event that would or could adversely affect the Company, such risk should be viewed as potentially adversely affecting the Company's business, results of operations, and financial position. DEPENDENCE ON MAJOR CUSTOMERS The Company's revenues historically have been, and for a substantial period of time in the future likely will be, largely derived from the sale of its design and manufacturing services to a small number of major customers. During the 1993, 1994, and 1995 fiscal years, the Company had two major customers, Allergan and Alaris Medical Systems, Inc. (formerly IVAC Corporation), who together accounted for more than 50% of the Company's sales. In 1996, these two customers plus a third customer, Paradigm Medical Inc., accounted for approximately 66% of sales. These three customers each accounted for more than ten percent of the Company's total sales in 1996. During the first nine months of the 1997 fiscal year, 14% of sales were from Allergan, 21% of sales were from Paradigm, 20% of sales were from Alaris, and 12% of sales were from Mentor Corporation. No assurances can be given that such customers will continue to do business with the Company or that the volume of their orders for the Company's devices will increase or remain constant. The loss of any of such major customers, or a significant reduction in the volume of their orders for the Company's devices, will have a material adverse impact on the Company's operations. In addition, if one or more of these customers were to seek and obtain price discounts from the Company for the Company's devices, the resulting lower gross margins on those devices would have a material adverse effect on the Company's overall results of operations. If any customer with which the Company does a substantial amount of business were to encounter financial distress, the customer's lateness, unwillingness, or inability to pay its obligations to the Company could result in a material adverse effect on the Company's results of operations and financial condition. See "BUSINESS -- Significant Customers for Which ZEVEX Provides Design and Manufacturing Services." RISK FACTORS RELATING TO THE COMPANY'S CUSTOMERS At the present time, and for a substantial period of time in the future, the Company's success will depend largely on the success of the customers for its manufacturing services and on the medical devices designed and manufactured by the Company for those customers. Any unfavorable developments or adverse effects on the sales of those devices or such customers' businesses, results of operations, or financial position could have a corresponding adverse effect on the Company. In addition, the Company sells certain types of medical devices to multiple customers and to the extent there is an unfavorable development affecting the sales of any such type of device generally, the adverse effect of such development on the Company would be more substantial than that presented by the decline in sales to a single customer for such type of device. The Company believes that its design and manufacturing customers and their devices (and the Company indirectly) are generally subject to the following risks: Competitive Environment. The medical products industry is highly competitive and subject to significant technological change. Participation in the industry requires ongoing investment to keep pace with technological developments and quality and regulatory requirements. The medical products industry consists of numerous companies, ranging from start-up to well-established companies. Many of the Company's customers have a limited number of products, and some market only a single product. As a result, any adverse development with respect to these customers' products may have a material adverse effect on the business and financial condition of such customer, which may adversely affect that customer's ability to purchase and pay for its products manufactured by the Company. The competitors and potential competitors of the Company's customers may succeed in developing or marketing technologies and products that will be preferred in the marketplace over the devices manufactured by the Company for its customers or that would render its customers' technology and products obsolete or noncompetitive. In addition, other competitors may develop alternative treatments or cures so that the need for the products manufactured by the Company could be reduced or eliminated. See "BUSINESS -- Overview of Medical Technology Industry." Emerging Technology Companies. A significant number of the Company's customers are emerging medical technology companies that have competitors and potential competitors with substantially greater capital resources, research and development staffs, and facilities, and substantially greater experience in developing new products, obtaining regulatory approvals, and manufacturing and marketing medical products. Approximately five customers, representing 15% of the Company's revenues in fiscal year 1996, were, in management's opinion, emerging medical technology companies. These customers may not be successful in launching and marketing their products, or may not respond to pricing, marketing, or other competitive pressures or the rapid technological innovation demanded by the marketplace and, as a result, may experience a significant drop in product revenues which would have a material adverse effect on the Company's business, results of operations, and financial condition. See "BUSINESS -- Overview of Medical Technology Industry." Customer Regulatory Compliance. The Food and Drug Administration (the "FDA") regulates many of the devices manufactured by the Company under the Federal Food, Drug and Cosmetic Act, as amended (the "FDC Act"), which requires certain clearances from the FDA before new medical products can be marketed. As a prerequisite to any introduction of a new device into the medical marketplace, the Company's customers must obtain necessary product clearances from the FDA or other regulatory agencies with applicable jurisdiction. There can be no assurance that the Company's customers will obtain such clearances on a timely basis, if at all. Certain medical devices manufactured by the Company may be subject to the need to obtain FDA clearance of an application for premarket approval ("PMA"), which requires substantial preclinical and clinical testing and may cause delays and prevent introduction of such devices. Currently, at least two of the Company's customers are seeking or plan to seek such PMA clearances for devices to be manufactured by the Company. Other devices can be marketed without a PMA, but only by establishing in a 510(k) premarket notification "substantial equivalence" to a predicate device. FDA clearance to market regulations depend heavily on administrative interpretations, which may change retroactively and may create additional barriers that prevent or delay the introduction of a product. The process of obtaining a PMA or a 510(k) clearance could delay the introduction of a product. A PMA for a product could be denied altogether if clinical testing does not establish that the product is safe and effective. A 510(k) premarket notification may also need to contain clinical data. Clinical testing must be performed in accordance with the FDA's regulations. A customer's failure to comply with the FDA's requirements can result in the delay or denial of its PMA. Delays in obtaining a PMA are frequent and could result in delaying or canceling customer orders to the Company. Many products never receive a PMA. Similarly, 510(k) clearance may be delayed, and in some instances, 510(k) clearance is never obtained. Once a product is in commercial distribution, discovery of product problems or failure to comply with regulatory standards may result in restrictions on the product's future use or withdrawal of the product from the market despite prior governmental clearance. Additionally, once FDA clearance is obtained, a new clearance in the form of a PMA supplement may be needed to modify the device, its intended use, or its manufacturing. There can be no assurance that product recalls, product defects, or modification or loss of necessary regulatory clearance will not occur in the future. The delays and potential product cancellations inherent in the development, regulatory clearance, commercialization, and ongoing regulatory compliance of products manufactured by the Company for its customers may have a material adverse effect on the Company's business, reputation, results of operations, and financial condition. Sales of the Company's medical products outside the United States are subject to regulatory requirements that vary widely from country to country. The time required to obtain clearance for sale in foreign countries may be longer or shorter than that required for FDA clearance, and the requirements may differ. The FDA also regulates the sale of exported medical devices, although to a lesser extent than devices sold in the United States. For medical products exported to countries in Europe, the Company anticipates that its customers will want their products to qualify for distribution under the "CE Mark." The CE Mark is a designation given to products which comply with certain European Economic Area policy directives and therefore may be freely traded in almost every European country. Commencing in 1998, medical product manufacturers will be required to obtain certifications necessary to enable the CE Mark to be affixed to medical products they manufacture for sale throughout the European Community. In addition, the Company's customers must comply with other laws generally applicable to foreign trade, including technology export restrictions, tariffs, and other regulatory barriers. There can be no assurance that the Company's customers will obtain all required clearances or approvals for exported products on a timely basis, if at all. Failure or delay by the Company's customers in obtaining the requisite regulatory approvals for exported instruments manufactured by the Company may have a material adverse effect on the Company's business, results of operations, and financial condition. Medical devices manufactured by the Company and marketed by its customers pursuant to FDA or foreign clearances or approvals are subject to pervasive and continuing regulation by the FDA and certain state and foreign regulatory agencies. Regulatory requirements may include significant limitations on the indicated uses for which the product may be marketed. FDA enforcement policy prohibits the marketing of approved medical products for unapproved uses. The Company's customers control the marketing of their products, including representing to the market the approved uses of their products. If a customer engages in prohibited marketing practices, the FDA or another regulatory agency with applicable jurisdiction could intervene, possibly resulting in marketing restrictions, including prohibitions on further product sales, or civil or criminal penalties, which could have a material adverse effect on the Company's business, the results of operations, and financial condition. Changes in existing laws and regulations or policies could affect adversely the ability of the Company's customers to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on the customer's business, results of operations, and financial condition, which, in turn, could affect adversely the Company's business, results of operations, and financial condition. There can be no assurance that a customer of the Company, or the Company, will not be required to incur significant costs to comply with laws and regulations in the future, or that such customer or the Company will be able to comply with such laws and regulations, or that compliance with such laws and regulations will not have a material adverse effect on the Company's business, results of operations, and financial condition. See "BUSINESS--Governmental Regulation Within the United States" and "-- Governmental Regulations Outside the United States." Uncertain Market Acceptance of Products. There can be no assurance that the products created for the Company's customers will gain any significant market acceptance and market share among physicians and other health care providers, patients, or health care payors, even if required regulatory approvals are obtained. Market acceptance may depend on a variety of factors, including educating health care providers regarding the use of a new product or procedure, overcoming objections to certain effects of the product or its related treatment regimen, and convincing health care payors that the benefits of the product and its related treatment regimen outweigh its costs. Market acceptance and market share are also affected by the timing of market introduction of competitive products. Accordingly, the relative speed with which the Company's customers can develop products, gain regulatory approval and reimbursement acceptance, and supply commercial quantities of the product to the market are expected to be important factors in market acceptance and market share. Some of the Company's customers, especially emerging medical technology companies, have limited or no experience in marketing their products and have not made marketing or distribution arrangements for their products. The Company's customers may be unable to establish effective sales, marketing, and distribution channels to successfully commercialize their products. The failure by the Company's customers to gain market acceptance of their products could have a material adverse effect on the Company's business, results of operations, and financial conditions. Product Obsolescence. The marketplace for medical products is characterized by rapid change and technological innovation. As a result, the Company and its customers are subject to the risk of product obsolescence, whether from prolonged development or government approval cycles or the development of improved products or processes by competitors. In addition, the marketplace could conclude that the task for which a customer's product was designed is no longer an element of a generally accepted diagnostic or treatment regimen. Any development adversely affecting the market for a product manufactured by the Company would result in the Company's having to reduce production volumes or to discontinue manufacturing the product, which could have a material adverse effect on the Company's business, results of operations, and financial condition. See "BUSINESS -- Overview of Medical Technology Industry." Customers' Future Capital Requirements. Certain of the Company's customers, especially the emerging medical technology companies, are not profitable and may have little or no revenues, but they have significant working capital requirements. Such customers may be required to raise additional funds through public or private financings, including equity financings. Adequate funds for their operations may not be available when needed, if at all. Insufficient funds may require a customer to delay development of a product, clinical trials (if required), or the commercial introduction of the product or prevent such commercial introduction altogether. Depending on the significance of a customer's product to the Company's revenues or profitability, any adverse effect on a customer resulting from insufficient funding could result in a material adverse effect on the Company's business, results of operations, and financial condition. Uncertainty of Third-Party Reimbursement. Sales of many of the devices manufactured by the Company will be dependent in part on availability of adequate reimbursement for those instruments from third-party health care payors, such as government and private insurance plans, health maintenance organizations, and preferred provider organizations. Third-party payors are increasingly challenging the pricing of medical products and services. There can be no assurance that adequate levels of reimbursement will be available to enable the Company's customers to achieve market acceptance of their products. Without adequate support from third-party payors, the market for the products of the Company's customers may be limited. Nonmedical Customers. While the Company presently does not have any significant nonmedical customers, the Company may in the future perform significant design and manufacturing work for such parties. Nonmedical customers are subject to general business risks, such as competition, market acceptance of their products, capital requirements, and credit risks. The Company's future nonmedical customers may operate in highly competitive industries in which their products compete on price, quality, and product enhancements and are subject to risks of technological obsolescence. As a result, sales to nonmedical customers may be volatile and subject to risks of cancellation. Any unfavorable development experienced by such future nonmedical customers, whether of a general nature or a specific risk not anticipated by the Company, could have a material adverse effect on the Company's business, results of operations, and financial condition. UNCERTAINTY OF MARKET ACCEPTANCE OF OUT-SOURCING MANUFACTURING OF MEDICAL INSTRUMENTS The Company believes that the market for out-sourcing the design and manufacture of advanced medical products for medical technology companies is in its early stages. Many of the Company's potential customers have internal design and manufacturing facilities. The Company's engineering and manufacturing activities require that customers provide the Company with access to their proprietary technology and relinquish the control associated with internal engineering and manufacturing. As a result, potential customers may decide that the risks of out-sourcing engineering or manufacturing are too great or exceed the anticipated benefits of out-sourcing. In addition, medical technology companies that have previously made substantial investments to establish design and manufacturing capabilities may be reluctant to out-source those functions. If the medical technology industry generally, or any significant existing or potential customer, concludes that the disadvantages of out-sourcing manufacturing outweigh the advantages, the Company could suffer a substantial reduction in the size of one or more of its current target markets, which could have a material adverse effect on its business, results of operations, and financial condition. COMPETITION IN OUT-SOURCING MANUFACTURING OF MEDICAL INSTRUMENTS The Company faces competition from design firms and other manufacturers that operate in the medical technology industry. Many competitors have substantially greater financial, research, and development resources than the Company. Also, manufacturers focusing in other industries may decide to enter into the medical technology industry. Competition from any of the foregoing sources could place pressure on the Company to accept lower margins on its contracts or lose existing or potential business, which could result in a material adverse effect on the Company's business, results of operations, and financial condition. To remain competitive, the Company must continue to provide and develop technologically advanced manufacturing services, maintain quality levels, offer flexible delivery schedules, deliver finished products on a reliable basis, and compete favorably on the basis of price. There can be no assurance that the Company will be able to compete favorably with respect to these factors. See "BUSINESS -- Competition for ZEVEX's Design and Manufacturing Services." EARLY TERMINATION OF AGREEMENTS The Company's agreements with major customers generally permit the termination of the agreements before expiration thereof if certain events occur that are materially adverse to the design, development, manufacture or sale of the product. Examples of such events include the failure to obtain or the withdrawal of regulatory clearance, or an alteration of regulatory clearance that is materially adverse to the customer or which prohibits or interferes with the manufacture or sale of the products. The performance of agreements with major customers may be suspended or excused if certain conditions, generally beyond the control of the customer or the Company (so-called force majeure events), cause the failure or delay of performance. Such early termination could have a material adverse affect on the Company's business, results of operations, and financial condition, including in certain instances the transfer of manufacturing know-how to the customer. RISK FACTORS IN MARKETING THE COMPANY'S PROPRIETARY PRODUCTS In producing and marketing its own proprietary devices, the Company faces many of the same risks that its design/manufacturing customers face. As discussed above with respect to its customers, such risks include: - The medical products industry is highly competitive. A significant number of the Company's competitors have substantially greater capital resources, research and development staffs, and facilities, and substantially greater experience in developing new products, obtaining regulatory approvals, and manufacturing and marketing medical products. Competitors may succeed in marketing products preferable to the Company's products or rendering the Company's products obsolete. - The medical products industry is subject to significant technological change and requires ongoing investment to keep pace with technological development, quality, and regulatory requirements. In order to compete in this marketplace, the Company will be required to make ongoing investment in research and development with respect to its existing and future products. - The Company is subject to substantial risks involved in developing and marketing products regulated by the FDA and comparable foreign agencies. There can be no assurance that the Company will obtain the necessary FDA or foreign clearances on a timely basis, if at all. As discussed above, commercialized medical products are subject to further regulatory restrictions which may adversely affect the Company. Changes in existing laws and regulations or policies could affect adversely the ability of the Company to comply with regulatory requirements. The delays and potential product cancellations inherent in obtaining regulatory approval and maintaining regulatory compliance of products manufactured by the Company may have a material adverse effect on the Company's business, reputation, results of operations, and financial condition. - There can be no assurance that the Company's products will gain any significant market acceptance among physicians and other health care providers, patients, or health care payors, even if required regulatory approvals are obtained. - Revenues for many of the devices manufactured by the Company may be dependent in part on availability of adequate reimbursement for those devices from third-party health care payors, such as government and private insurance plans. There is no assurance that the levels of reimbursements offered by third-party payors will be sufficient to achieve market acceptance of the Company's products. The Company may not be successful in launching and marketing its own proprietary devices, or may not respond to pricing, marketing, or other competitive pressures or the rapid technological innovation demanded by the marketplace and, as a result, may experience a significant drop in its product revenues, which could have a material adverse effect on the Company's business, results of operations, and financial condition. See "BUSINESS -- Overview of Medical Technology Industry." REGULATORY COMPLIANCE FOR MANUFACTURING FACILITIES Applicable law requires that the Company comply with the FDA's detailed good manufacturing practices ("GMP") regulations for the manufacture of medical devices. The FDA monitors compliance with its GMP regulations by subjecting medical product manufacturers to periodic FDA inspections of their manufacturing facilities. To ensure compliance with GMP requirements, the Company expends significant time, resources, and effort in the areas of training, production, and quality assurance. In addition, the FDA typically inspects a manufacturer of a PMA device before approving a PMA. The failure to pass such an inspection could result in delay in approving a PMA. The Company is also subject to other regulatory requirements and may need to submit reports to the FDA relating to certain types of adverse events. Failure to comply with GMP regulations or other applicable legal requirements can lead to warning letters, seizure of violative products, injunctive actions brought by the U.S. government, and potential civil or criminal liability on the part of the Company and of the officers and employees who are responsible for the activities that lead to any violation. In addition, the continued sale of any instruments manufactured by the Company may be halted or otherwise restricted. Any such actions could have a material adverse effect on the willingness of customers and prospective customers to do business with the Company. In order for the Company's instruments to be exported and for the Company and its customers to be qualified to use the CE Mark for sales into the European Economic Area, the Company maintains International Organization for Standardization ("ISO") 9001/EN 46001 certification, which subjects the Company's operations to periodic surveillance audits. The ultimate regulatory risks present in manufacturing products for markets governed by these standards are currently substantially similar to those posed by GMP regulations. There can be no assurance that the Company's manufacturing operations will be found to comply with GMP regulations, ISO standards, or other applicable legal requirements or that the Company will not be required to incur substantial costs to maintain its compliance with existing or future manufacturing regulations, standards, or other requirements. Any such noncompliance or increased cost of compliance could have a material adverse effect on the Company's business, results of operations, and financial condition. The Company is also subject to numerous federal, state, and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. While the Company has not been the subject of any material proceeding concerning such laws, and believes it is currently in compliance with such laws in all material respects, there can be no assurance that the Company will not be required to incur significant costs to comply with such laws and regulations now or in the future, or that such laws or regulations will not have a material adverse effect upon the Company's ability to do business. Changes in existing requirements or adoption of new requirements or policies could affect adversely the ability of the Company to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on the Company's business, results of operations, and financial condition. See "BUSINESS -- Governmental Regulation Within the United States" and "-- Governmental Regulations Outside the United States." PRODUCT DEVELOPMENT The success of the Company will depend to a significant extent upon its ability to enhance and expand on its current offering of proprietary products and to develop and introduce additional innovative products that gain market acceptance. While the Company maintains research and development programs and has established a Technical Advisory Board to assist it, there is no assurance that the Company will be successful in selecting, developing, manufacturing, and marketing new products or enhancing its existing products on a timely or cost-effective basis. Moreover, the Company may encounter technical problems in connection with its efforts to develop or introduce new products or product enhancements. Some of the devices currently under consideration by the Company (as well as devices of some of its customers) will require significant additional development, pre-clinical testing and clinical trials and related investment prior to their commercialization. There can be no assurance that such devices will be successfully developed, prove to be safe or efficacious in clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at reasonable costs, or be successfully marketed. The failure of the Company to develop or introduce new products or product enhancements that achieve market acceptance on a timely basis could have a material adverse effect on the Company's business, results of operations, and financial condition. DESIGN AND MANUFACTURING PROCESS RISKS While the Company has substantial experience in designing and manufacturing devices, the Company may still experience technical difficulties and delays with the design and manufacturing of its or its customer's products. Such difficulties could cause significant delays in the Company's production of products and have a material adverse effect on the Company's revenues. In some instances, payment by a manufacturing customer is dependent on the Company's ability to meet certain design and production milestones in a timely manner. Also, some major contracts can be cancelled if purchase orders thereunder are not completed when due. Potential difficulties in the design and manufacturing process that could be experienced by the Company include difficulty in meeting required specifications, difficulty in achieving necessary manufacturing efficiencies, and difficulties in obtaining materials on a timely basis. Such design and manufacturing difficulties could have a material adverse effect on the Company's business, results of operations, and financial condition. EXPANSION OF MARKETING ACTIVITIES; LIMITED DISTRIBUTION The Company currently has a limited domestic direct sales force consisting of eight individuals, complemented by a network of independent manufacturing representatives. The Company anticipates that it will need to increase its marketing and sales capability significantly to more fully cover its target markets, particularly as additional proprietary devices become commercially available. There can be no assurance that the Company will be able to compete effectively in attracting and retaining qualified sales personnel or independent manufacturing representatives as needed. There can be no assurance that the Company or its independent manufacturing representatives will be successful in marketing or selling the Company's services and products. The Company's ability to sell its devices in certain areas may depend on alliances with independent manufacturing representatives. There can be no assurance that the Company will be able to identify and obtain suitable independent manufacturing representatives in desirable markets. PRODUCT RECALLS If a device that is designed or manufactured by the Company is found to be defective, whether due to design or manufacturing defects, to improper use of the product, or to other reasons, the device may need to be recalled, possibly at the Company's expense. Furthermore, the adverse effect of a product recall on the Company might not be limited to the cost of a recall. For example, a product recall could cause a general investigation of the Company by applicable regulatory authorities as well as cause other customers to review and potentially terminate their relationships with the Company. Recalls, especially if accompanied by unfavorable publicity or termination of customer contracts, could result in substantial costs, loss of revenues, and a diminution of the Company's reputation, each of which would have a material adverse effect on the Company's business, results of operations, and financial condition. RISK OF PRODUCT LIABILITY The manufacture and sale of products, and especially medical products, entails an inherent risk of product liability. The Company does maintain product liability insurance with limits of $1 million per occurrence and $2 million in the aggregate. There can be no assurance that such insurance is adequate to cover potential claims or that the Company will be able to obtain product liability insurance on acceptable terms in the future, or that any product liability insurance subsequently obtained will provide adequate coverage against all potential claims. Such claims may be large in the medical products area where product failure may result in loss of life or injury to persons. A successful claim brought against the Company in excess of its insurance coverage, or any material claim for which insurance coverage was denied or limited, could have material adverse effect on the Company's business, results of operations, and financial condition. Additionally, the Company generally provides a design defect warranty and in some instances indemnifies its customers for failure to conform to design specifications and against defects in materials and workmanship. Any substantial claim against the Company under such warranties or indemnification could have a material adverse effect on the Company's business, results of operations, and financial condition. POTENTIAL INABILITY TO SUSTAIN AND MANAGE GROWTH The Company's need to manage its growth effectively will require it to continue to implement and improve its operational, financial, and management information systems, to develop its managers' and project engineers' management skills, and to train, motivate, and manage its employees. The Company must also be able to attract and retain a sufficient number of suitable employees to sustain its growth. If the Company cannot keep pace with the growth of its customers, it may lose customers and its growth may be limited. DEPENDENCE UPON MANAGEMENT The Company is substantially dependent upon its key managerial, technical, and engineering personnel, particularly its three executive officers, Dean G. Constantine, Chief Executive Officer and President, David J. McNally, Vice President and Marketing Director, and Phillip L. McStotts, Chief Financial Officer and Secretary/Treasurer. The Company must also attract and retain highly qualified engineering, technical, and managerial personnel. Competition for such personnel is intense, the available pool of qualified candidates is limited, and there can be no assurance that the Company can attract and retain such personnel. The loss of its key personnel could have a material adverse effect on the Company's business, results of operations, and financial condition. None of the Company's key personnel have an employment agreement with the Company. See "MANAGEMENT." The Company carries key-man life insurance on the lives of its Chief Executive Officer, Chief Financial Officer, and Vice President in the amount of $500,000 each. No assurances can be given that such insurance would provide adequate compensation to the Company in the event of the death of such key employee. PATENT PROTECTION As of September 30, 1997, the Company held three U.S. patents and had applied for seven additional U.S. patents on devices developed by the Company. The Company has received Notices of Allowance from the U.S. Patent and Trademark office with respect to four of these seven applications. There is no assurance that the patent applications will issue. Such patents disclose certain aspects of the Company's technologies and there can be no assurance that others will not design around the patent and develop similar technology. The Company believes that its devices and other proprietary rights do not infringe any proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims in the future. CONTROL BY MANAGEMENT AND CERTAIN MAJOR SHAREHOLDERS Following this Offering, the current executive officers and directors of the Company, together with those persons who are the beneficial owners of more than 5% of the Company's Common Stock, will beneficially own or have voting control over approximately 35% of the outstanding Common Stock (approximately 32% if the Underwriters' over-allotment option is exercised in full). Accordingly, these individuals will have the ability to influence the election of the Company's directors and most corporate actions. This concentration of ownership, together with other provisions in the Company's charter and applicable corporate law, may also have the effect of delaying, deterring, or preventing a change in control of the Company. See "PRINCIPAL AND SELLING SHAREHOLDERS." SUPPLIERS AND SHORTAGES OF COMPONENT PARTS The Company relies on third-party suppliers for each of the component parts used in manufacturing its customers' devices. Although component parts are generally available from multiple suppliers, certain component parts may require long lead times, and the Company may have to delay the manufacture of customer devices from time to time due to the unavailability of certain component parts. In addition, even if component parts are available from an alternative supplier, the Company could experience additional delays in obtaining component parts if the supplier has not met the Company's vendor qualifications. Component shortages for a particular device may adversely affect the Company's ability to satisfy customer orders for that device. Such shortages and extensions of production schedules may delay the recognition of revenue by the Company and may in some cases constitute a breach of a customer contract, which may have a material adverse effect on the Company's business, results of operations, and financial condition. If shortages of component parts continue or if additional shortages should occur, the Company may be forced to pay higher prices for affected components or delay manufacturing and shipping particular devices, either of which could adversely affect subsequent customer demand for such devices and the Company's business, results of operations, and financial condition. CUSTOMER CONFLICTS The medical technology industry reflects vigorous competition among its participants. As a result, its customers sometimes require the Company to enter into noncompetition agreements that prevent the Company from manufacturing instruments for its customers' competitors. For example, the Company has agreed with one customer not to manufacture certain devices for laser cataract surgery for any other customer or potential customer. Such restrictions generally apply during the term of the customer's manufacturing contract and, in some instances, for a period following termination of the contract. If the Company enters into a noncompetition agreement, the Company may be adversely affected if its customer's product is not successful and the Company must forgo an opportunity to manufacture a successful instrument for such customer's competitor. Any conflicts among its customers could prevent or deter the Company from obtaining contracts to manufacture successful instruments, which could result in a material adverse effect on its business, results of operations and financial condition. FUTURE CAPITAL REQUIREMENTS The Company believes that the net proceeds of this offering, together with existing capital resources and amounts available under the Company's existing bank line of credit, will satisfy the Company's anticipated capital needs for the next three years (depending primarily on the Company's growth rate and its results of operations). The commercialization of proprietary products, which is an element of the Company's growth strategy, would require increased investment in working capital and could therefore shorten this period. Thereafter, the Company may be required to raise additional capital or increase its borrowing capacity, or both. There can be no assurance that alternative sources of equity or debt will be available in the future or, if available, will be on terms acceptance to the Company. Any additional equity financing would result in additional dilution to the Company's shareholders, including shareholders who purchase Common Stock in this Offering. If adequate funds are not available, the Company's business, results of operations, and financial condition could be materially adversely affected. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." RELIANCE ON EFFICIENCY OF DISTRIBUTION AND THIRD PARTIES The Company believes its financial performance is dependent in part on its ability to provide prompt, accurate, and complete services to its customers on a timely and competitive basis. Accordingly, delays in distribution in its day-to-day operations or material increases in its costs of procuring and delivering products could have an adverse effect on the Company's results of operations. Any failure of either its computer operating system or its telephone system could adversely affect its ability to receive and process customer's orders and ship products on a timely basis. Strikes or other service interruptions affecting Federal Express Corporation, United Parcel Service of America, Inc., or other common carriers used by the Company to receive necessary components or other materials or to ship its products also could impair the Company's ability to deliver products on a timely and cost-effective basis. VOLATILITY OF REVENUES AND PRODUCT MIX The Company's annual and quarterly operating results are affected by a number of factors, including the volume and timing of customer orders, which vary due to (i) variation in demand for the customer's products as a result of, among other things, product life cycles, competitive conditions, and general economic conditions, (ii) the customer's attempt to balance its inventory, (iii) the customer's need to adapt to changing regulatory conditions and requirements, and (iv) changes in the customer's manufacturing strategy. Such results may also be affected by technical difficulties and delays in the design and manufacturing processes. The foregoing factors may cause fluctuations in revenues and variations in product mix which could in turn cause fluctuations in the Company's gross margin. Under the terms of the Company's contracts with many of its customers, the customers have broad discretion to control the volume and timing of product deliveries. Further, the Company's contracts with its customers typically have no minimum purchase requirements. As a result, production may be reduced or discontinued at any time. Therefore, it is difficult for the Company to forecast the level of customer orders with certainty, making it difficult to schedule production and maximize manufacturing capacity. Other factors that may adversely affect the Company's annual and quarterly results of operations include inexperience in manufacturing a particular instrument, inventory shortages or obsolescence, labor costs or shortages, low gross margins on design projects, an increase in design revenues as a percentage of total revenues, price competition, and regulatory requirements. Because the Company's business organization and its related cost structure anticipate supporting a certain minimum level of revenues, the Company's limited ability to adjust its short term cost structure would compound the adverse effect of any significant revenue reduction. Any one of these factors or a combination thereof could result in a material adverse effect on the Company's business, results of operations, and financial condition. UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY To maintain the secrecy of its proprietary information, the Company relies on a combination of trade secret laws and internal security procedures. The Company typically requires its employees, consultants, and advisors to execute confidentiality and assignment of inventions agreements. There can be no assurance, however, that the common law, statutory, and contractual rights on which the Company relies to protect its intellectual property and confidential and proprietary information will provide it with adequate or meaningful protection. Third parties may independently develop products, techniques, or information which are substantially equivalent to the products, techniques, or information that the Company considers proprietary. In addition, proprietary information regarding the Company could be disclosed in a manner against which the Company has no meaningful remedy. Disputes regarding the Company's intellectual property could force the Company into expensive and protracted litigation or costly agreements with third parties. An adverse determination in a judicial or administrative proceeding or failure to reach an agreement with a third party regarding intellectual property rights could prevent the Company from manufacturing and selling certain of its products. Any of the foregoing circumstances could have a material adverse effect on the Company's business, results of operations, or financial condition. LIMITED MARKET FOR COMMON STOCK Historically, the market for the Common Stock has been limited due to the relatively low trading volume and the small number of brokerage firms acting as market makers. In May 1997, the Company's Common Stock was listed for trading on the American Stock Exchange, which may increase the market for the Common Stock. No assurance can be given, however, that the market for the Common Stock will continue or increase, or that the prices in such market will be maintained at their present levels. POSSIBLE VOLATILITY OF STOCK PRICE Announcements of technological innovations for new commercial devices by the Company or its competitors, developments concerning the Company's proprietary rights, or the public concern as to safety of its devices may have a material adverse impact on the Company's business and on the market price of the Common Stock, particularly as the Company expands its efforts to become a medical technology company that manufactures and markets its own proprietary devices. The market price of the Common Stock may be volatile and may fluctuate based on a number of factors, including significant announcements by the Company and its competitors, quarterly fluctuations in the Company's operating results, and general economic conditions and conditions in the medical technology industry. In addition, in recent years the stock market has experienced extreme price and volume fluctuations, which have had a substantial effect on the market prices for many medical-technology companies and are often unrelated to the operating performance of such companies. ISSUANCE OF ADDITIONAL SHARES FOR ACQUISITION OR EXPANSION Any future major acquisition or expansion of the Company may result in the issuance of additional common shares or other stocks or instruments which may be authorized without shareholder approval. The issuance of subsequent securities may also result in substantial dilution in the percentage of the Common Stock held by existing shareholders at the time of any such transaction. Moreover, the shares or warrants issued in connection with any such transaction may be valued by the Company's management based on factors other than the trading price on the exchange. DIVIDENDS While the Company has declared one stock dividend in its history, it has never paid a cash dividend and there can be no assurance that the Company will pay a dividend on Common Stock in the future. Any future cash dividends will depend on earnings, if any, the Company's financial requirements, and other factors. The Company's management does not currently intend to pay any cash dividends in the foreseeable future. Investors who anticipate the need of an immediate income from their investment in the Common Stock should refrain from the purchase of the Common Stock being offered hereby. Additionally, the Company is restricted from declaring any cash dividends under its current line of credit arrangement. POSSIBLE RULE 144 SALES The shares of Common Stock presently owned by management and certain other shareholders are deemed to be "restricted securities" as such term is defined in Rule 144 under the Securities Act of 1933, as amended. Rule 144 provides that a person who has held restricted securities for one year may, within a three-month period, sell in "brokers transactions" (as defined by the Rule) an amount equal to the greater of one percent of the issuer's outstanding securities of such class or the average weekly reported volume of trading in such securities during the four calendar weeks preceding the sale, if the conditions specified by the Rule are satisfied. If such person is not an "affiliate" of the issuer, as such term is defined by Rule 144, he may, after a holding period of two years, sell such restricted securities without a volume limitation. Future sales under Rule 144 may have a depressing effect on the market price of the shares of Common Stock. Of the 3,263,826 shares outstanding following this Offering (not including 500,000 shares issuable upon exercise of certain warrants), 1,363,990 shares will be considered "restricted" stock, of which 26,202 will be eligible for sale under Rule 144 immediately following the Offering. Beginning 180 days after the closing of this Offering, following the expiration of certain lockup agreements 1,139,198 additional currently outstanding shares of restricted Common Stock will be eligible for sale in the public market under Rule 144; provided that 350,000 shares may be sold by certain warrant holders, commencing February 1, 1998, pursuant to certain demand registration rights. The remaining 198,590 shares of restricted Common Stock will be eligible for sale from time to time thereafter pursuant to Rule 144. An additional 314,190 shares of Common Stock issuable upon exercise of outstanding stock options pursuant to the Company's Amended 1993 Stock Option Plan (the "Option Shares") may become eligible for resale in the public market at various times after the closing of the Offering. The Company intends to register the Option Shares for resale in the public market following expiration of the lockup period. See "SHARES ELIGIBLE FOR FUTURE SALE." BROAD DISCRETION WITH RESPECT TO ALLOCATION OF NET PROCEEDS The Company intends to use the net proceeds of the Offering for working capital and general corporate purposes, including the marketing of the Company's EnteraLite(R) Ambulatory Enteral Feeding Pump and funding the growth in the Company's manufacturing service business. Beyond those uses, if the opportunity arises, the Company intends to acquire other medical technologies or products that are similar to or complimentary to the Company's existing engineering expertise or that readily can be sold through the Company's existing sales channel. Furthermore, the Company may acquire other design and manufacturing service firms. Accordingly, management will have significant flexibility in applying the net proceeds of this Offering. Pending such uses, the Company intends to invest the net proceeds in short-term interest-bearing, investment-grade securities. See "USE OF PROCEEDS."

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+ RISK FACTORS THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. IN ADDITION TO OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY BY PROSPECTIVE INVESTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING SHARES OF COMMON STOCK OFFERED HEREBY. FLUCTUATIONS IN APPAREL RETAIL DEMAND In general, the retail industry has experienced significant changes and difficulties over the past several years, including consolidation of ownership, increased centralization of buying decisions, customer order cancellations, restructuring, bankruptcies and liquidations. As a result of weak apparel retailing demand during the second half of 1995, the Company experienced lower than anticipated demand for its products, which resulted in higher inventory levels. Although the Company believes that demand for the Company's apparel products has recovered, there can be no assurance that the apparel industry will not experience weakness in the future. IMPACT OF SEASONALITY Typically, demand for fleece products is higher during the third and fourth quarters than in the first two quarters of each year. As a result, the Company produces and stores fleece finished goods inventory in order to meet the heavy demand for delivery in the second half of the year. If, after producing and storing fleece inventory in anticipation of third and fourth quarter deliveries, demand is significantly less than expected, the Company may be required to hold inventory for an extended period of time at the Company's expense, or sell the excess inventory at reduced prices, thereby reducing profits. The holding of excess inventory could also necessitate the slowing of production, lower plant and equipment utilization and lower fixed operating cost absorption resulting in a negative impact on the Company's results of operations and financial condition. See "Business -- Seasonality." COMPETITION The fleece and jersey activewear industry is highly competitive. The Company believes that its primary competitors are vertically integrated manufacturers such as Fruit of the Loom, Inc. ("Fruit of the Loom"), Oneita Industries, Inc. ("Oneita"), Russell Corporation ("Russell"), Sara Lee Corporation ("Sara Lee"), Tultex Corporation ("Tultex") and VF Corporation ("VF") among others. Certain of these competitors have greater financial resources and manufacturing, distribution and marketing capabilities than the Company. The Company's future success will depend to a significant extent upon its ability to remain competitive in the areas of quality, price, marketing, product development, manufacturing, distribution and order processing. There can be no assurance that the Company will be able to compete effectively in all such areas in the future. See "Business -- Competition." In recent years, certain fleece and jersey apparel manufacturers have overproduced inventory as a result of excess plant and equipment capacity. This oversupply of inventory has on occasion led to inventory dumping, resulting in price reductions for fleece and jersey apparel. Such lower prices have had an adverse effect upon the Company's operating results. The Company believes that continuation of this practice would have an adverse impact on fleece and jersey apparel manufacturers, including the Company. Recently, import protection afforded to domestic manufacturers has been declining, resulting in increased foreign competition. Over a period of ten years beginning in 1995, the General Agreement on Tariffs and Trade ("GATT") eliminates restrictions on imports of apparel. In addition, on January 1, 1994, the North American Free Trade Agreement ("NAFTA"), which reduces or repeals trade barriers with Canada and Mexico, became effective. The implementation of both GATT and NAFTA, as well as other free trade agreements, could result in increased apparel imports from foreign manufacturers and have an adverse effect upon the Company. In general, wholesale distributors warehouse inventory longer than other distribution channels. Consequently, manufacturers, including the Company, have extended to wholesale customers longer payment terms. In addition, certain manufacturers recently began a practice of consigning products to wholesale distributors for competitive reasons. Should wholesale distributors of fleece and jersey apparel demand and receive longer payment terms than currently exist, or should consignment of inventory become common within the industry, the Company could be adversely impacted by increased inventory costs, delays in collecting receivables and return of inventory. DEPENDENCE ON MAJOR CUSTOMERS The Company's top ten customers accounted for approximately 75.5% of its net sales and 65.4% of its accounts receivable for the year ended December 31, 1996 and 75.6% of its net sales and 78.2% of its accounts receivable for the year ended December 31, 1995. Its top three customers for the year ended December 31, 1996, Sam's Club, adidas and Frank L. Robinson, accounted for 24.1%, 14.7% and 7.2%, respectively, of net sales. For the year ended December 31, 1995, the Company's top three customers, Sam's Club, Frank L. Robinson and Starter Galt (formerly Galt/Sand), accounted for 16.1%, 12.8% and 11.4%, respectively, of the Company's net sales. In the event that any of these customers or any of the Company's other significant customers were to substantially reduce their orders or cease buying from the Company, such an occurrence would have a material adverse effect on the Company's business should the Company be unable to replace that business with other customers. See "Business -- Customers." DEPENDENCE ON CUSTOMER FINANCIAL STABILITY While various retailers and wholesalers, including some of the Company's customers, experienced financial difficulties in the past few years, which increased the risk of extending credit to certain customers, the Company's bad debt experience was limited until 1995. In that year, the Company recognized a non-recurring charge to income of $3.3 million to increase its allowance for doubtful accounts receivable from $0.9 million to $4.1 million as of December 31, 1995, related to the anticipated bankruptcy of a major customer, 20/20 Sport, Inc. ("20/20 Sport"), that occurred on February 1, 1996. As a result, 1995 net income was decreased by $2.0 million, from $3.1 million to $1.1 million. In 1996, the Company wrote-off the entire accounts receivable balance of $3.6 million due from 20/20 Sport. Sales to 20/20 Sport were $2.5 million and $5.0 million for the years ended December 31, 1996 and 1995, respectively. The Company has not extended credit to 20/20 Sport since February 1, 1996. The allowance for doubtful accounts was $0.8 million as of December 31, 1996. The Company believes its allowance for doubtful accounts is sufficient. However, there can be no assurance that the Company will not have to increase such allowances in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." AVAILABILITY AND PRICE OF RAW MATERIALS The Company purchases raw materials such as yarn, dye stuffs and chemicals used in manufacturing its products. All of these purchases are made domestically. The Company is dependent upon the ability of its suppliers to furnish these materials in sufficient volumes at fair prices and to meet performance, quality and delivery criteria. Except for contracts periodically entered into by the Company that obligate yarn suppliers to deliver the cotton portion of yarn at a fixed price over a period of time, the Company does not have any contracts with its suppliers that obligate them to continue selling to the Company. The prices of cotton and polyester have been volatile since 1994. Should shortages of materials occur or should the prices of these materials rise, the Company's inability to increase its prices to recover such cost increases could have a material adverse effect upon the Company. See "Business -- Sources of Raw Materials." FINANCIAL LEVERAGE The Company is and will continue to be leveraged. As of December 31, 1996, the Company had outstanding indebtedness to First Union National Bank ("FUNB") in the aggregate amount of $43.6 million pursuant to the terms of a loan agreement evidencing the Company's revolving credit facility (the "Credit Facility"). Although the Company intends to utilize all of the net proceeds from this Offering to reduce the outstanding balance of the Credit Facility, an outstanding balance of approximately $14 million will remain thereon. Furthermore, the Company anticipates utilizing the Credit Facility in the future, when necessary, to fund operating and capital expenditures. Therefore, the Company has incurred and may continue to incur in the future significant interest expense. The degree to which the Company is leveraged could affect the Company's ability to obtain additional financing. Also, since the Company's borrowings are at variable interest rates, an increase in interest rates would result in higher interest expense. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." RESTRICTIONS IMPOSED BY CREDIT AGREEMENT The Credit Facility imposes certain operating and financial restrictions on the Company. At certain times in 1995, the Company was out of compliance with those financial covenants relating to limitations on (i) the incurrence of additional indebtedness (which was the result of the promissory note given in the Box Transaction), (ii) transactions with related parties (resulting from the Company's contract with Diversified Distributions, Inc. See "Certain Relationships and Related Transactions"), (iii) capital expenditures (resulting from the purchase of the Company's sewing plant in Vesta, Virginia. See "Business -- Properties"), as well as financial covenants related to the maintenance of certain debt to equity and EBITDA to interest expense ratios (resulting from the Box Transaction and the non-recurring charge for the doubtful accounts receivable attributable to 20/20 Sport). The Company sought waivers in connection with these matters, all of which were granted. As of December 31, 1996, the Company was in full compliance with the Credit Facility. However, there can be no assurance that the Company will not have to seek waivers in the future, and there can be no assurance that such waivers will be granted. The restrictions and financial requirements described above and the leveraged position of the Company could limit the Company's ability to respond to changing business or economic conditions, or other developments affecting the Company's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." ENVIRONMENTAL CONTROLS AND OTHER REGULATORY REQUIREMENTS The Company is subject to various federal, state and local environmental laws and regulations governing, among other things, the discharge, storage, handling and disposal of a variety of hazardous and nonhazardous substances and wastes used in or resulting from its present and past operations. While the Company does not expect that compliance with any of such laws and regulations will adversely affect the Company's operations, there can be no assurance that environmental regulatory requirements will not become more stringent in the future or that the Company will not incur significant costs relating to environmental matters in the future. The Company's operations also are governed by laws and regulations relating to employee safety and health, principally the Occupational Safety and Health Act ("OSHA") and regulations thereunder, that, among other things, establish exposure limitations for cotton dust, formaldehyde, asbestos and noise and regulate chemical and ergonomic hazards in the workplace. See "Business -- Environmental Matters." RELIANCE ON KEY PERSONNEL The success of the Company's business will be partially dependent upon the performance of certain members of senior management. The loss of key members of senior management could have an adverse effect on the Company's business. The Company's key executive officers are parties to employment contracts. The Company maintains key man life insurance on certain executives. See "Management." CONTROL BY PRINCIPAL SHAREHOLDERS Upon consummation of the Offering, the officers and directors of the Company as a group will control (directly or through beneficial ownership) 40.5% (38.3% if the Underwriters' over-allotment option is exercised in full) of the outstanding voting securities of the Company. Furthermore, certain family members of these officers and directors own additional Pluma shares that are not attributable to these officers and directors. These officers and directors will have the ability to control the business affairs of the Company (including the perpetuation of their positions with the Company if 9.6% of other holders of the Common Stock vote their shares consistently with such officers and directors and the Underwriters' over-allotment option is not exercised). See "Principal Shareholders." ANTITAKEOVER PROVISIONS The Company's Bylaws and Articles of Incorporation include provisions that may have the effect of discouraging a nonnegotiated takeover of the Company and preventing certain changes of control. These provisions, among other things (i) classify the Company's Board of Directors into three classes serving staggered three-year terms; (ii) permit the Company's Board of Directors, without further shareholder approval, to issue up to 1.0 million shares of preferred stock with rights and preferences determined by the Board of Directors at the time of issuance; and (iii) create a supermajority vote requirement (66 2/3%) of the Company's shareholders and directors prior to a sale of the Company's assets or other change in control of the Company. Such restrictions might, therefore, have the effect of inhibiting shareholders' ability to realize maximum value for their shares of Common Stock that might otherwise be realized as a result of a merger or other event affecting the control of the Company. See "Description of Capital Stock." NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this Offering, there has been no public market for the Company's Common Stock. There can be no assurance that an active trading market in the Common Stock will develop or be sustained after this Offering. The initial public offering price will be determined through negotiations among the Company, the Selling Shareholders and the representatives of the Underwriters based on the factors described under "Underwriting" and may not be indicative of the market price of the Common Stock after the Offering. The trading price of the Common Stock could be subject to significant fluctuations in response to variations in the Company's quarterly operating and financial results, changes in earnings estimates by research analysts and other events or factors. In addition, the stock market has in recent years experienced significant price fluctuations. These fluctuations often have been unrelated to the operating performance of specific companies. Broad market fluctuations, as well as economic conditions generally, and in the apparel manufacturing industry specifically, may adversely affect the market price and liquidity of the Company's Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock, or the availability of substantial amounts of Common Stock for future sale, could adversely affect the prevailing market price of the Common Stock. However, the Company, its directors, certain of its officers and all shareholders who own more than 36,800 shares of Common Stock have agreed with the Underwriters not to sell shares of Common Stock or securities convertible into Common Stock, subject to certain limited exceptions, for 180 days from the date of this Prospectus. See "Shares Eligible for Future Sale." DILUTION Purchasers of Common Stock in this Offering will experience immediate and substantial dilution in net tangible book value of the Common Stock offered hereby (based on an assumed initial public offering price of $13.00 per share) of approximately $5.13 per share ($4.89 per share if the Underwriters' over-allotment option is exercised in full). See "Dilution."

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+ RISK FACTORS In addition to other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" as well as those discussed elsewhere in this Prospectus. Fluctuations in Future Operating Results; Seasonality; Lengthy Sales Cycles. The Company's operating results have fluctuated significantly because of seasonal and other factors and the Company expects that future operating results will be subject to similar fluctuations. A significant portion of the Company's total revenue has been derived from relatively large orders and from service and maintenance arrangements. The timing of such orders has caused and will continue to cause material fluctuations in the Company's operating results, particularly on a quarterly basis. The Company's operating results may fluctuate significantly from quarter to quarter or on an annual basis as a result of a number of other factors, including but not limited to: the size and timing of customer orders; changes in the Company's customer and user bases; changes in license renewal rates; changes in pricing terms and billing methods, including changes associated with the Company's Web-based products and services under development; changes in revenue recognition; the mix of the Company's commercial, governmental and academic customers; the market success of the Company's services offerings; the timely development, introduction and marketing of new products and product enhancements; market acceptance of the Company's products, particularly Web-based products under development; deferrals of customer orders in anticipation of new products or product enhancements; the Company's ability to control cost, including the need for, and degree of use of, third-party contractors and the hiring of new employees; political instability in, or trade embargoes with respect to, foreign markets; changes in the Company's management team; acquisitions of technologies or other companies and fluctuating economic conditions. Consequently, there can be no assurance that the Company will be able to accurately predict the levels of future operating results. The Company believes that as a result of these and other factors, period-to-period comparisons of its historical results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Finally, it is likely that in some future periods the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. The Company's operating results have fluctuated significantly from quarter to quarter because of seasonal and other factors and the Company expects that future operating results will be subject to similar fluctuations. The Company has typically earned a significant portion of its quarterly revenue late in the quarter. The Company in the past has recognized its highest revenue in the fourth quarter followed by lower revenue in the first quarter. In addition, MSI's sales to Teijin Molecular Simulations Incorporated ("TMSI"), the Company's joint venture with Teijin Limited ("Teijin"), in the past have been higher in the Company's first quarter, in part because the fiscal year of most Japanese companies ends on March 31, and have declined sharply in the second quarter. Furthermore, the Company's operating expenses have generally increased beginning in its second quarter due to implementation of annual wage increases and increased hiring. The decline in Japanese sales combined with increased operating expenses has caused the Company's results of operations to be lowest in the second quarter. The Company also has experienced quarterly variability in service and other revenue. Finally, the Company has experienced decreased European sales in its third quarter. Consistent with these seasonal trends, the Company expects that its revenues and results of operations will be lower in the first quarter of 1997 as compared to the fourth quarter of 1996, and that its results of operations will decrease in the second quarter of 1997 as compared to the first quarter of 1997. The failure to achieve expected revenue during any individual quarter will have a material adverse effect on the Company's financial condition and results of operations, and the adverse effect may be magnified by the Company's inability to adjust spending in a timely manner to compensate for any revenue shortfall. See "--Risks Associated with International Operations." The sales cycles for the Company's products can be lengthy and are subject to a number of significant risks over which the Company has little or no control. The sales cycles for the Company's products typically last six months and can exceed 12 months. In addition, purchases of the Company's products generally involve significant commitments of capital, and delays frequently occur due to the authorization procedures for substantial capital expenditures within large organizations. Because the Company generally ships orders as received and as a result typically has little or no backlog, any significant delay in an anticipated order would likely cause material fluctuations to the Company's operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Sales and Marketing." History of Losses; No Assurance of Continued Profitability. The Company incurred a net loss in each of its three fiscal years prior to 1996. As of December 31, 1996, the Company's accumulated deficit was $31.5 million. The Company's net losses increased substantially in 1995 compared to 1994 primarily as a result of approximately $12.2 million in charges associated with the Company's acquisition of Biosym. Much of the Company's revenue growth has been the result of the acquisition of Biosym. In addition, the Company's revenue and profitability were adversely affected in 1996 by a strategic shift to annual software licenses from long-term (ten years or perpetual) licenses traditionally sold by the Company. Compared to long-term licenses, annual licenses generate lower revenue in the initial year of the license but will generate incremental revenue each time the license is renewed. For these and other reasons, there can be no assurance that the Company's revenue will grow or be sustained in future periods or that the Company will be profitable in any future period. See "--Need to Achieve Greater Market Penetration," "--Increasing Dependence on License Renewals" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Need to Achieve Greater Market Penetration. The ability of the Company to increase revenue from the license of its products is dependent upon increased market acceptance of the Company's software products and services. The Company's products are used primarily by simulation specialists. The Company's strategy is to expand usage of its products and services by marketing and distributing its software, in part through its Web-based products under development, to experimentalists. If the Company cannot expand its customer base to include experimentalists, or if the Company otherwise cannot successfully market and sell its Web-based products under development and related services, the Company may not be able to increase its revenue, or its revenue may decline. In general, increased market acceptance and greater market penetration of the Company's products depend upon several factors, including the overall product performance, ease of implementation and use, accuracy of simulation, breadth and integration of product offerings and the extent to which users achieve the intended research and development benefits from their use of the Company's products and services. There can be no assurance that the Company's products and services will achieve increased market acceptance or penetration in the Company's target industries or other industries. Failure to increase market acceptance or penetration would restrict substantially the future growth of the Company and would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Industry Background" and "--Strategy." Increasing Dependence on License Renewals. The Company derives a significant portion of its total revenue from the renewal of license, service, maintenance and consortia agreements with existing customers. The Company is pursuing a shift in the mix of new customer agreements away from long-term licenses toward annual, renewable licenses. As a result, the Company's total revenue in the future will be increasingly dependent on the renewal of annual licenses. The Company's ability to secure renewals may be adversely affected by ownership or management changes within customer organizations, including acquisitions of customers by other companies; the Company's inability to deliver consistent, high-quality and timely services or product enhancements; customer budget constraints; the introduction of competing products by third parties; political or economic instability; and other factors, many of which may be beyond the control of the Company. There can be no assurance that the Company will be able to generate and maintain sufficient license renewals, particularly given the Company's shift from long-term to annual licenses, and failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Technologies Licensed from or Developed by Third Parties. Certain of the Company's technologies have been acquired or licensed from third parties, or have been developed in connection with one of the Company's consortia. Changes in certain third-party license agreements and relationships, or termination thereof, could materially affect the Company's ability to continue to develop and market its current products or new products. From time to time, the Company experiences disruptions in its relationships with third parties from whom the Company obtains technology. As a result of these disruptions, the Company has on occasion experienced delays in distribution of products and product enhancements and has otherwise had difficulties developing, distributing or licensing, in a timely manner, third-party products based on such technology. There can be no assurance that the Company will be able to successfully acquire or develop, alone or as part of consortia, new technologies. Furthermore, there can be no assurance that such technologies, if acquired, can be successfully integrated and commercialized by the Company. Inability to license, maintain, upgrade or integrate new technologies could have a material adverse effect on the Company's business, financial condition and results of operations. There also can be no assurance that there will be no disruptions in the Company's relationships with third parties from whom the Company obtains technology, or that any disruptions that do arise will be resolved in a timely and cost-effective manner, if at all. Any such disruptions could have a material adverse effect on the Company's business, financial condition and results of operations. Acquisition-Related Risks; Need to Integrate Acquired Technologies. The Company has a history of acquiring or otherwise combining with other companies that have similar and different products. As a result of such acquisitions and combinations, the Company has experienced overlapping product features, inconsistent product standards and unintended concentrations of employees, management and distributors. In connection with the acquisition of Biosym in 1995, the Company recorded a $4.5 million restructuring charge, a $6.5 million write-off of acquired in-process research and development, and a $1.1 million write-off of capitalized software. There can be no assurance that the Biosym acquisition will be successful in the long term. Following the acquisition of Biosym, the Company and Corning each received informal inquiries from the Antitrust Division of the United States Department of Justice concerning the acquisition. The Antitrust Division requested and was provided certain information concerning the Company's business and the markets for the Company's and Biosym's products. No Civil Investigative Demand was issued and neither the Company nor Corning has received any further contact from the Antitrust Division since December 1995. However, there can be no assurance that the Antitrust Division will not request additional information or pursue an investigation, which could have a material adverse effect on the Company's business. In general, there can be no assurance that the Company will be successful in cost-effectively integrating the operations and personnel of acquired businesses into its business; incorporating new products and any other acquired technologies into its product lines; deriving future revenue from acquired technologies or products; establishing and maintaining uniform standards, controls, procedures and policies; avoiding the impairment of relationships with employees and customers; or overcoming other problems that may be encountered in connection with the Company's integration efforts. To the extent that the Company is unable to accomplish the foregoing, the Company's business, financial condition and results of operations would be materially adversely affected. Further, there can be no assurance that future acquisitions will not result in charges which could have a material, adverse effect on the Company's business, financial condition and results of operations. Future acquisitions by the Company may also result in dilutive issuances of equity securities or the incurrence of debt and amortization expenses related to goodwill and other intangible assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Notes 3 and 4 of MSI Consolidated Financial Statements. Concentration of Revenue from Certain Industries. The Company derives a substantial portion of its total revenue from sales of products and services to companies in the pharmaceutical, biotechnology and chemical industries, all of which can be highly cyclical. Accordingly, the Company's future success is dependent upon the continued demand for simulation software by companies in those industries. The Company believes its customers' cost containment measures have led to delays and reductions in certain research and development, capital and operating expenditures by many of such companies in the past, and such delays or reductions could recur in the future. In addition, certain of the Company's customers in these industries are subject to regulatory and economic changes, and such changes could also lead to delays or reductions in research and development and capital expenditures. The Company experienced a decline in revenue in 1993 and essentially flat revenue in 1994, due in part to the reluctance of the pharmaceutical and biotechnology industries to make research and development investments following the announcement of the Clinton health care initiative as well as the worldwide recession in the chemical industry during this period. Any such delays, reductions or fluctuations could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company's products or product enhancements targeting other industries, if ever introduced, will reduce the Company's risk of industry concentration. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Risks Associated with International Operations. During 1996, approximately 54% of the Company's total revenue was derived from customers outside the United States. Approximately 28% of the Company's revenue was derived from operations in Europe and approximately 26% was derived from export sales to the Asia/Pacific region, primarily from sales through TMSI. The Company anticipates that international revenue will continue to account for a significant percentage of revenue in the future. In particular, the Company expects to continue to generate substantial revenue from sales by its European subsidiaries and TMSI. The Company's international operations are subject to risks inherent in the conduct of international business, including unexpected changes in regulatory requirements, longer payment cycles, exchange rate fluctuations, export license requirements, tariffs and other barriers, political and economic instability, limited intellectual property protection, difficulties in collecting trade receivables, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary or joint venture operations, and potentially adverse tax consequences. There can be no assurance that the Company will be able to sustain or increase international revenue from licenses or from service or maintenance arrangements, and there can be no assurance that any of the foregoing factors will not have a material adverse effect on the Company's international operations, and therefore its business, financial condition and results of operations. The Company's direct international sales generally are denominated in local currencies, and the impact of future exchange rate fluctuations on the Company's operating results and financial condition cannot be accurately predicted. The Company does not currently engage in currency exchange rate hedging transactions, and there can be no assurance that fluctuations in currency exchange rates in the future will not have a material adverse impact on revenue from international sales, and thus the Company's business, financial condition and results of operations. The Company may engage in hedging in the future; however, there can be no assurance that any currency hedging policies implemented by the Company in the future will be successful. See "--Fluctuations in Future Operating Results; Seasonality; Lengthy Sales Cycles" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Management of Growth. Following the Company's merger with Biosym in August 1995, management and other personnel focused a significant amount of attention on the integration of Biosym with the Company. Future acquisitions of companies or technologies, expansion of the Company's product lines or additional product development and product introductions, when added to the day-to-day activities of the Company, will place a strain on the Company's resources and personnel. In addition, although the Company is currently investing, and plans to continue to invest, significant resources to expand its sales force and to develop additional distribution relationships, the Company has at times experienced and continues to experience difficulty in recruiting and retaining qualified sales personnel and in establishing necessary sales representative relationships. There can be no assurance that the Company will be successful in attracting and retaining the necessary personnel. If Company management is unable to effectively manage growth, the Company's business, financial condition and results of operations will be materially and adversely affected. See "--Dependence on Technologies Licensed from or Developed by Third Parties," and "Business--Sales and Marketing." Dependence upon Product Development; Rapid Technological Change. The market in which the Company competes is subject to rapid technological change, frequent product introductions, changes in customer demand and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. It will also be important for the Company to address the increasingly sophisticated needs of its customers by supporting existing and emerging hardware, software, database and networking platforms, including Web-based technology. Substantially all of the Company's current products operate in the UNIX operating system. In the event that another operating system, such as Windows NT, were to achieve broad acceptance in the simulation software industry, the Company would be required to port its products to such an operating system which would be costly and time consuming and could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will be successful in developing and marketing enhancements that respond to technological change, evolving industry standards or customer product and service requirements; that the Company will not experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements or services; or that such enhancements or services will adequately meet the requirements of the marketplace and achieve market acceptance. From time to time, the Company experiences delays in the release dates of enhancements to certain of its products. If release dates of any significant new products or product enhancements are delayed or if such products or enhancements fail to achieve market acceptance, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, the introduction or announcement of new product offerings or enhancements or services by the Company or the Company's competitors may cause customers to defer or forego purchases of current versions of the Company's products or services, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Product Development." Proprietary Rights; Risks of Infringement. The Company relies primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company also has two United States patents. The Company also believes that factors such as the technological and creative skills of its personnel, new product development, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technical leadership position. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Further, there can be no assurance that the Company's patents or trademarks will offer any protection or that they will not be challenged, invalidated or circumvented. Furthermore, there can be no assurance that others will not develop technologies that are similar or superior to the Company's technology. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. In limited instances, the Company has released source codes of certain products to customers or collaborators. Policing unauthorized use of the Company's products therefore may be difficult. In addition, the laws of some foreign countries do not protect proprietary rights as fully as do the laws of the United States. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competition will not independently develop similar technology. There can be no assurance that third parties will not claim infringement by the Company of their intellectual property rights. From time to time the Company receives letters from third parties claiming or suggesting that its products may infringe patents or other intellectual property rights. In particular, the Company has received letters from Tripos, Inc. and Immunex Corporation stating that the Company's products may be relevant to patents held by them. The Company has investigated these matters and believes that they are without merit or immaterial. There can be no assurance, however, that the Company's products do not infringe upon the patent or other intellectual property rights of these or other third parties, that the Company will not be required to seek licenses for or otherwise acquire rights to technology as a result of claims of infringement or that these or other companies will not bring infringement suits against the Company. The Company expects in general that simulation software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segments grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all. In the event of a successful claim of product infringement against the Company, the failure or inability of the Company to license or design around the infringed technology would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Intellectual Property and Other Proprietary Rights." Dependence on Distributors. The Company is dependent in part upon distributors for its European sales, and upon TMSI as its sole distributor in the Asia/Pacific region. The Company believes that its success in penetrating markets for its products depends in large part on its ability to maintain these relationships and to cultivate additional distribution relationships. There can be no assurance that any distributor will not discontinue its relationship with the Company or form competing arrangements with the Company's competitors. Further, relationships with distributors may create channel conflicts with the Company's own direct sales force. In addition, the Company's distributors other than TMSI generally offer other products and are involved in other ventures, and they may give higher priority to such other activities. The loss of, or a significant reduction in revenue from, the distributors through which the Company sells its products could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Risks Associated with International Operations." Competition. The market for the Company's products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants. The Company's competitors offer a variety of products and services to address this market. The Company believes that the principal competitive factors in this market are product quality, flexibility, ease-of-use, scientific validation and performance, functionality and features, open architecture, quality of support and service, reputation and price. Competition currently comes from five principal sources: other molecular simulation software packages; desktop software applications, including chemical drawing, molecular modeling and analytical data simulation applications; consulting and outsourcing services; other types of simulation software provided to engineers; and firms supplying databases, such as chemical information databases, and information technology. In addition, certain of the Company's licenses grant the right to sublicense the Company's software. As a result, the Company's customers and third-party licensees could develop specific simulation applications using the Company's software developer's kit and compete with the Company by distributing such programs to potential customers of the Company. Customers or licensees could also develop their own simulation technology and cease using the Company's products and services. Certain of MSI's competitors and potential competitors have longer operating histories than the Company and have greater financial, technical, marketing and other resources. Further, many of the Company's competitors offer products and services directed at more specific markets than those targeted by the Company, enabling these competitors to focus a greater proportion of their efforts on such markets. There can be no assurance that the Company's current or potential competitors will not develop products or services comparable or superior to those developed by the Company or that they will not adapt more quickly than the Company to new technologies and new customer demands, thereby increasing their market share relative to that of the Company. Any significant decrease in the demand for the Company's products would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Competition." Dependence upon Key Personnel. The Company's future performance depends in significant part upon the continued service of its key technical, sales and senior management personnel. The loss of the services of one or more of the Company's executive officers or key technical or sales personnel could have a material adverse effect on the Company's business, financial condition and results of operations. Competition for qualified technical, sales and managerial personnel is intense, and there can be no assurance that the Company can retain its key employees or that it can attract, assimilate or retain other highly qualified personnel in the future. See "Management." Product Liability; Product Defects. The Company's sales and license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. The sale and support of the Company's simulation software may entail the risk of product liability claims, which are likely to be substantial in light of the applications in which the Company's products are used. The Company maintains insurance against claims associated with the use of its products, but there can be no assurance that its insurance coverage would adequately cover any claim asserted against the Company. A successful product liability claim brought against the Company in excess of its insurance coverage or outside the scope of such coverage would have a material adverse effect upon the Company's business, financial condition and results of operation. Software and other products as complex as those offered by the Company frequently contain errors or failures, especially when first introduced or when new versions are released. Also, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after a product has been installed and used by customers. Such errors or performance problems may cause delays in product introductions and shipments or require design modifications that could materially and adversely affect the Company's competitive position and operating results. There can be no assurance that, despite testing by the Company and its current and potential customers, and despite the Company's attempts to collaborate with its customers during the development process, errors will not be found in new products or releases after commencement of commercial shipments, resulting in loss of revenue or delay in market acceptance, diversion of development resources, damage to the Company's reputation or increased service and warranty costs, any of which would have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business--Product Development." Influence of Existing Stockholders. Upon completion of this offering, the Company's executive officers, directors and affiliated entities, including Corning, together will beneficially own approximately 47.5% of the outstanding shares of Common Stock (45.5% if the Underwriters over-allotment option is exercised in full). Corning will beneficially own approximately 40.5% of the outstanding shares of Common Stock (38.7% if the Underwriters over-allotment option is exercised in full) after selling 362,219 shares of Common Stock in this offering. As a result, these stockholders may as a group be able to exercise control over matters requiring stockholder approval, including the election of directors or an acquisition of or by the Company. See "Principal and Selling Stockholders." No Prior Public Market for Common Stock; Possible Volatility of Stock Price. Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or be sustained after the offering. The initial public offering price will be determined by negotiations between the Company, the representatives of the Selling Stockholders and the representatives of the Underwriters. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The trading price of the Company's Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, changes in earning estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, general conditions in the software and computer industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price for many companies in industries similar or related to that of the Company and that have been unrelated to the operating performance of these companies. These market fluctuations may materially and adversely affect the market price of the Company's Common Stock. In the past, volatility in the market price of securities has occasionally resulted in class action lawsuits. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect in the Company's business, financial condition and results of operations. Shares Eligible for Future Sale; Registration Rights. Sales of substantial numbers of shares of Common Stock in the public market following this offering could adversely affect the market price for the Common Stock. Upon completion of this offering, the Company will have outstanding an aggregate of 8,045,952 shares of Common Stock, assuming no exercise of the Underwriters over-allotment option and no exercise of outstanding options. Of these shares, 2,500,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such shares are purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. The remaining 5,525,635 shares of Common Stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k), 145 or 701 promulgated under the Securities Act. Holders of an aggregate of 5,335,276 of the Restricted Shares agreed that they will not, without the consent of Hambrecht & Quist LLC, directly or indirectly, sell, offer, contract to sell, transfer the economic risk of ownership in, make any short sale, pledge or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for or any other rights to purchase or acquire shares of Common Stock owned by them during the 180-day period commencing on the date of this Prospectus. However, Hambrecht & Quist LLC may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lockup agreements. Any such release could have a material adverse effect on the market price of the Common Stock. With respect to the shares not subject to such lock-up agreements, upon the closing of this offering 695,924 shares will be eligible for sale without restriction pursuant to Rule 144(k), 1,571,199 shares will be eligible for sale pursuant to Rule 144, and 93,611 shares will be eligible for sale 90 days after this offering pursuant to Rule 701. Upon expiration of the lock-up period, approximately 695,924 shares of Common Stock held by existing stockholders will be eligible for sale without restriction pursuant to Rule 144(k) or Rule 701, and approximately 1,571,199 shares held by existing stockholders will be eligible for sale subject to the volume and other restrictions of Rule 144. In addition, as of December 31, 1996, 1,567,912 shares were subject to outstanding options. Substantially all of these shares are subject to the lock-up agreements described above. Upon the expiration of such lock-up agreements, approximately 1,014,700 shares subject to such options will be vested. Following the completion of this offering, 2,263,053 of the shares outstanding will be entitled to registration rights with respect to such shares upon termination of lock-up agreements. The number of shares sold in the public market could increase if registration rights are exercised. See "Description of Capital Stock" and "Shares Eligible for Future Sale." Immediate and Substantial Dilution. Investors participating in this offering will incur immediate, substantial dilution of $9.56 per share. To the extent outstanding options to purchase the Company's Common Stock are exercised, there will be further dilution. If the net proceeds of this offering, together with available funds and cash generated from operations, are insufficient to satisfy the Company's cash needs, the Company may be required to sell additional equity or convertible debt securities. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's stockholders. See "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."

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+ RISK FACTORS AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY IS SPECULATIVE IN NATURE AND INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. FOR EXAMPLE, THE WORDS "BELIEVES," "ANTICIPATES," "PLANS," "EXPECTS," "INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THERE ARE A NUMBER OF IMPORTANT FACTORS, INCLUDING THE RISK FACTORS SET FORTH BELOW, THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. EARLY STAGE OF PRODUCT DEVELOPMENT; TECHNOLOGICAL UNCERTAINTIES The Company is at an early stage of development, and the successful commercialization of any products will require significant further research, development, testing and regulatory approvals and additional investment. Substantially all of the Company's resources have been, and for the foreseeable future will continue to be, dedicated to the development of products for cancer and viral diseases, most of which are still in the early stages of development and testing. There are a number of technological challenges that the Company must successfully address to complete most of its development efforts. In addition, the product development programs conducted by the Company and its collaborators are subject to the risks of failure inherent in the development of product candidates based on new technologies. These risks include the possibility that the technologies used by the Company will prove to be ineffective or any or all of the Company's product candidates will prove to be unsafe or otherwise fail to receive necessary regulatory approvals; that the product candidates, if safe and effective, will be difficult to manufacture on a large scale or uneconomical to market; that the proprietary rights of third parties will preclude the Company or its collaborators from marketing the products utilizing the Company's technologies; or that third parties will market superior or equivalent products. To the Company's knowledge, no cancer therapeutic vaccine and no drug designed to treat HIV infection by blocking viral entry has been approved for marketing and there can be no assurance that any of the Company's products will be successfully developed. The commercial success of the Company's products, if any, when and if approved for marketing by the U.S. Food and Drug Administration (the "FDA"), will depend upon their acceptance by the medical community and third party payors as clinically useful, cost-effective and safe. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Product Development," "--Manufacturing," "--Government Regulation" and "--Competition." UNCERTAINTY ASSOCIATED WITH PRECLINICAL AND CLINICAL TESTING The grant of regulatory approvals for the commercial sale of any of the Company's potential products will depend in part on the Company and/or its collaborators successfully conducting extensive preclinical and clinical testing to demonstrate their safety and efficacy in humans. The results of preclinical studies by the Company and/or its collaborators may be inconclusive and may not be indicative of results that will be obtained in human clinical trials. In addition, results attained in early human clinical trials relating to the products under development by the Company may not be indicative of results that will be obtained in later clinical trials. As results of particular preclinical studies and clinical trials are received, the Company and/ or its collaborators may abandon projects which they might otherwise have believed to be promising, some of which may be described in this Prospectus. Although human clinical trials have commenced with respect to the development of GMK, MGV and PRO 542, the Company is developing other therapeutic products, including PRO 367, on which it plans to file investigational new drug applications ("INDs") with the FDA or make equivalent filings outside of the U.S., and there can be no assurance that necessary preclinical studies on these products will be completed satisfactorily, if at all, or that the Company otherwise will be able to make its intended filings. Further, there can be no assurance that the Company will be permitted to undertake and complete human clinical trials of any of the Company's potential products, either in the U.S. or elsewhere, or, if such trials are permitted, that such products will not have undesirable side effects or other characteristics that may prevent them from being approved or limit their commercial use if approved. Clinical testing is very expensive, and the Company and/or its collaborators will have to devote substantial resources for the payment of clinical trial expenses. The rate of completion of the human clinical trials involving the Company's product candidates, if permitted, will be dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the availability of alternative treatments, the proximity of eligible patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment might result in increased costs and delays, which could have a material adverse effect on the Company. The Company, its collaborators or the FDA or other regulatory agencies may suspend clinical trials at any time if the subjects or patients participating in such trials are being exposed to unacceptable health risks. In addition, clinical trials are often conducted with patients having the most advanced stages of disease. During the course of treatment, these patients can suffer adverse medical effects or die for reasons that may not relate to the product being tested, but which can nevertheless affect adversely any results generated from clinical trials. In addition, there can be no assurance that clinical trials of products under development will demonstrate safety and efficacy at all or to the extent necessary to obtain regulatory approvals. Companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials. Consequently, the period of time necessary to complete clinical testing and receive regulatory approval can be quite extensive and involve many years. The Company's most advanced product candidates are intended for treating patients with relatively early stage cancer and are designed to delay or prevent recurrence of disease. As a consequence, clinical trials involving these product candidates are likely to take longer to complete than clinical trials involving other types of therapeutics. The failure to adequately demonstrate the safety and efficacy of a therapeutic product under development could delay or prevent regulatory approval of the product and would have a material adverse effect on the Company. Lastly, the Company has limited experience in conducting clinical trials. In certain circumstances the Company and its corporate collaborators rely, in part, on academic institutions and on clinical research organizations to conduct and monitor certain clinical trials. There can be no assurance that such entities will conduct the clinical trials successfully. In addition, certain clinical trials for the Company's products will be conducted by government-sponsored agencies. Because the conduct of such trials will be dependent on government participation and funding, the Company will have less control over such trials than if the Company were the sole sponsor thereof. As a result, there can be no assurance that these trials will commence or be completed as planned. Failure to commence or complete any of its planned clinical trials could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business--Product Development," "--Cancer Therapeutics," "--HIV Therapeutics" and "--Government Regulation." RISKS RELATING TO CORPORATE COLLABORATIONS Progenics' business strategy includes entering into collaborations or marketing and distribution arrangements with corporate partners, primarily pharmaceutical companies, for the development (including clinical development), commercialization, marketing and distribution of certain of its product candidates. The Company has entered into a significant corporate collaboration with BMS. The compounds covered by this collaboration represent the most advanced product candidates of the Company to date. Pursuant to its agreements with BMS, Progenics has granted to BMS the exclusive worldwide license to manufacture, use and sell GMK and MGV and any other products to which Progenics has rights that include the GM2 or GD2 ganglioside antigens for the treatment or prevention of human cancer. As a result of the governing agreements, the Company is dependent on BMS to fund clinical testing, to make certain regulatory filings and to manufacture and market products resulting from the collaboration. There can be no assurance that the arrangements with BMS or any collaborator will be scientifically, clinically or commercially successful. In the event that any such arrangement is terminated, such action could adversely affect the Company's ability to develop, commercialize, market and distribute certain of its product candidates. The Company's product candidates will only generate milestone payments and royalties after significant preclinical and/or clinical development, the procurement of requisite regulatory approvals, the establishment of manufacturing capabilities and/or the successful marketing of the product. The amount and timing of resources dedicated by BMS or any collaborator to their collaborations with the Company is not within the Company's control. If any such collaborator breaches or terminates its agreements with the Company, or fails to conduct its collaborative activities in a timely manner, the commercialization of product candidates may be adversely affected. There can be no assurance that the Company's collaborative partners will not change their strategic focus or pursue alternative technologies or develop alternative products either on their own or in collaboration with others, including the Company's competitors, as a means for developing treatments for the diseases targeted by these collaborative programs. For example, BMS manufactures and sells a number of products that may compete against the products that BMS has licensed from Progenics. The Company's business also will be affected by the effectiveness of its corporate partners in marketing any successfully developed products. A reduction in sales efforts or a discontinuance of sales of any developed products by any collaborative partner could result in reduced revenues and have a material adverse effect on the Company's business, financial position and results of operations. There can be no assurance that the Company's existing strategic alliances will continue or be successful or that the Company will receive any further research funding or milestone or royalty payments. If the Company's partners do not develop products under these collaborations, there can be no assurance that the Company would be able to do so. Disputes may arise between the Company and its collaborators as to a variety of matters, including ownership of intellectual property rights. These disputes may be both expensive and time-consuming and may result in delays in the development and commercialization of certain product candidates. There can be no assurance that the Company will be able to negotiate any additional collaborative or marketing and distribution arrangements, that such arrangements will be available to the Company on acceptable terms or that any such relationships, if established, will be scientifically or commercially successful. Furthermore, any additional collaborations would likely be subject to some or all of the risks described above with respect to the Company's current collaborations. See "Business--BMS Collaboration." HISTORY OF OPERATING LOSSES AND ACCUMULATED DEFICIT; NO PRODUCT REVENUE AND UNCERTAINTY OF FUTURE PROFITABILITY The Company has incurred substantial losses in each year since its inception. As of September 30, 1997, the Company had an accumulated deficit of approximately $17.9 million. Such losses have resulted principally from costs incurred in the Company's research and development programs and general and administrative costs associated with the Company's development. The Company has derived only limited revenues from federal research grants and from the sale of research reagents. Although through September 30, 1997, the Company had received approximately $13.3 million under its agreement with BMS, no revenues had been generated by the Company from product sales (other than for research purposes) or royalties and no product sales (other than sales of research reagents) or royalties are likely for a number of years, if ever. The Company expects to incur additional operating losses over at least the next several years and expects losses in the future to increase significantly as the Company expands development and clinical trial efforts. The Company expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. The Company's ability to achieve profitability is dependent in part on obtaining regulatory approvals for products and entering into agreements for commercialization of such products. There can be no assurance that such regulatory approvals will be obtained or such agreements will be entered into. The failure to obtain any such necessary regulatory approvals or to enter into any such necessary agreements could delay or prevent the Company from achieving profitability and would have a material adverse effect on the business, financial position and results of operations of the Company. Further, there can be no assurance that the Company's operations will become profitable even if any product under development by the Company or any collaborators is commercialized. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." NEED FOR ADDITIONAL FINANCING AND UNCERTAIN ACCESS TO CAPITAL FUNDING Progenics' current development projects require substantial capital. The Company does not have committed external sources of funding for certain of its drug discovery and development projects. The Company believes that the net proceeds of this offering, together with the Company's present capital resources, should be sufficient to fund operations at least through the end of 1999, based on the Company's current operating plan. No assurance can be given that there will be no change that would consume the Company's liquid assets before such time. The Company will require substantial funds in addition to the net proceeds of this offering to conduct development activities, preclinical studies, clinical trials and other activities relating to the successful commercialization of any potential products. The Company anticipates that it will seek these funds from external sources. There can be no assurance, however, that the Company will be able to negotiate such arrangements or obtain the additional funds it will require on acceptable terms, if at all. In addition, the Company's cash requirements may vary materially from those now planned because of results of research and development, results of product testing, potential relationships with in-licensors and collaborators, changes in the focus and direction of the Company's research and development programs, competitive and technological advances, the cost of filing, prosecuting, defending and enforcing patent claims, the regulatory approval process, manufacturing, marketing and other costs associated with the commercialization of products following receipt of regulatory approvals and other factors. If adequate funds are not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its programs; to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates or products that the Company would otherwise seek to develop or commercialize itself; or to license the rights to such technologies, product candidates or products on terms that are less favorable to the Company than might otherwise be available. If the Company raises additional funds by issuing equity securities, further dilution to stockholders may result and new investors could have rights superior to existing stockholders. See "Use of Proceeds," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." COMPETITION AND TECHNOLOGICAL CHANGE Competition in the biopharmaceutical industry is intense. The Company faces competition from many companies and major universities and research institutions in the United States and abroad. Many of the Company's competitors have substantially greater resources, experience in conducting preclinical studies and clinical trials and obtaining regulatory approvals for their products, operating experience, research and development and marketing capabilities and production capabilities than those of the Company. There can be no assurance that the Company's competitors will not develop technologies and products that are safer or more effective than any being developed by the Company or which would render the Company's technology and products obsolete and noncompetitive, and the Company's competitors may succeed in obtaining FDA approval for products more rapidly than the Company. The Company will face competition from companies marketing existing products or developing new products for diseases targeted by the Company's technologies. The development of new products for those diseases for which the Company is developing products could render the Company's product candidates noncompetitive and obsolete. There can be no assurance that the products under development by the Company and its collaborators will be able to compete successfully with existing products or products under development by other companies, universities and other institutions or that they will attain regulatory approval in the United States or elsewhere. With respect to GMK, the FDA and certain other regulatory authorities have approved high-dose alpha interferon for marketing as a treatment of patients with high risk melanoma. High-dose alpha interferon has demonstrated some efficacy for this indication. With respect to the Company's products for the treatment of HIV infection, two classes of products made by competitors of the Company have been approved for marketing by the FDA for the treatment of HIV infection and AIDS: reverse transcriptase inhibitors and protease inhibitors. Both types of drugs are inhibitors of viral enzymes that have shown efficacy in reducing the concentration of HIV in the blood and prolonging asymptomatic periods in HIV-positive individuals, especially when administered in combination. A significant amount of research in the biopharmaceutical field is also being carried out at academic and government institutions. The Company's strategy is to in-license technology and product candidates from academic and government institutions. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more aggressive in pursuing patent protection and negotiating licensing arrangements to collect royalties for use of technology that they have developed. These institutions may also market competitive commercial products on their own or in collaboration with competitors and will compete with the Company in recruiting highly qualified scientific personnel. Any resulting increase in the cost or decrease in the availability of technology or product candidates from these institutions may affect the Company's business strategy. LIMITED MANUFACTURING CAPABILITIES In order to successfully commercialize its product candidates, Progenics and/or its collaborators must be able to manufacture its products in commercial quantities, in compliance with regulatory requirements, at acceptable costs and in a timely manner. The manufacture of the types of biopharmaceutical products being developed by the Company presents several risks and difficulties. For example, the manufacture of recombinant proteins used in certain of the Company's current HIV products in development is complex, can be difficult to accomplish even in small quantities, can be difficult to scale-up when large scale production is required and can be subject to delays, inefficiencies and poor or low yields of quality products. Although Progenics has constructed two pilot-scale manufacturing facilities, one for the production of vaccines and one for the production of recombinant proteins, which it believes will be sufficient to meet the Company's initial needs for clinical trials, these facilities may be insufficient for all of its late-stage clinical trials and for its commercial-scale manufacturing requirements, if any. Accordingly, the Company may be required to expand its manufacturing staff and facilities and obtain new facilities or to contract with corporate collaborators or other third parties to assist with production. Manufacture of some of Progenics' initial products for commercialization may require third party contract manufacturers at a significant cost to the Company. In employing third party manufacturers, Progenics will not control all aspects of the manufacturing process. There can be no assurance that the Company will be able to obtain from third party manufacturers adequate supplies in a timely fashion for commercialization, or that commercial quantities of any such products, if approved for marketing, will be available from contract manufacturers at acceptable costs. In the event the Company decides to establish a full-scale commercial manufacturing facility, the Company will require substantial additional funds and will be required to hire and train significant numbers of employees and comply with the extensive regulations applicable to such a facility. There is no assurance that Progenics will be able to develop a current Good Manufacturing Practices ("cGMP") manufacturing facility sufficient for all clinical trials or commercial-scale manufacturing. The cost of manufacturing certain products may make them prohibitively expensive. In addition, in order to successfully commercialize its product candidates, the Company may be required to reduce the cost of production, and there can be no assurance that the Company will be able to do so. See "Business-- Manufacturing." AVAILABILITY OF MATERIALS Although Progenics has not experienced any significant difficulties in obtaining the raw materials necessary to perform its research, development and manufacturing activities to date, there can be no assurance that sufficient quantities of these materials will be available to support continued research, development or commercial manufacture of any of the Company's planned products. The Company currently obtains supplies of critical materials used in production of GMK and MGV from single sources. Specifically, commercialization of the Company's GMK and MGV cancer vaccine candidates requires a certain adjuvant from Aquila Biopharmaceuticals Inc. ("Aquila"). The Company has entered into a license and supply agreement with Aquila pursuant to which Aquila agreed to supply the Company with all of its requirements for the QS-21 adjuvant for use in certain ganglioside-based cancer vaccines, including GMK and MGV. In connection with the Company's collaboration with BMS, Progenics granted to BMS a non-exclusive sublicense under the Company's license and supply agreement with Aquila, and BMS entered into a supply agreement with Aquila. There can be no assurance that Aquila will be able to supply sufficient quantities of QS-21 to the Company or BMS or that the Company or BMS will have the right or capability to manufacture sufficient quantities of QS-21 to meet its needs if Aquila is unable or unwilling to do so. In addition, the Company currently relies on one source of pharmaceutical grade keyhole limpet hemocyanin ("KLH"), which is one of the components of the Company's cancer vaccines. There can be no assurance that the Company will not be subject to delays or disruption in the supply of this component. Any delay or disruption in the availability of QS-21 or KLH could have a material adverse effect on the Company's business, financial condition or results of operations. See "Business--Manufacturing." GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL The Company and its products are subject to comprehensive regulation by the FDA in the United States and by comparable authorities in other countries. These national agencies and other federal, state, and local entities regulate, among other things, the preclinical and clinical testing, safety, effectiveness, approval, manufacture, labeling, marketing, export, storage, record keeping, advertising, and promotion of the Company's products. See "--Uncertainty Associated with Preclinical and Clinical Testing." Among other requirements, FDA approval of the Company's products, including a review of the manufacturing processes and facilities used to produce such products, will be required before such products may be marketed in the United States. In order to obtain FDA approval of a product, the Company must demonstrate to the satisfaction of the FDA that such product is safe and effective for its intended uses and that the Company is capable of manufacturing the product with procedures that conform to the FDA's cGMP regulations, which must be followed at all times. The process of obtaining FDA approvals can be costly, time consuming, and subject to unanticipated delays and the Company has had only limited experience in filing and pursuing applications necessary to gain regulatory approvals. There can be no assurance that such approvals will be granted on a timely basis, or at all. The Company's analysis of the results of its clinical studies is subject to review and interpretation by the FDA, which may differ from the Company's analysis. There can be no assurance that the Company's data or its interpretation of data will be accepted by the FDA. In addition, delays or rejections may be encountered based upon changes in applicable law or FDA policy during the period of product development and FDA regulatory review. Any failure to obtain, or delay in obtaining, FDA approvals would adversely affect the ability of the Company to market its proposed products. Moreover, even if FDA approval is granted, such approval may include significant limitations on indicated uses for which a product could be marketed. Both before and after approval is obtained, a product, its manufacturer and the sponsor of the marketing application for the product are subject to comprehensive regulatory oversight. Violations of regulatory requirements at any stage, including the preclinical and clinical testing process, the approval process, or post-approval marketing activities may result in various adverse consequences, including the FDA's delay in approving or refusal to approve a product, withdrawal of an approved product from the market, and/or the imposition of criminal penalties against the manufacturer and/or the holder of the marketing approval for the product. In addition, later discovery of previously unknown problems relating to a marketed product may result in restrictions on such product, manufacturer, or the holder of the marketing approval for the product, including withdrawal of the product from the market. Also, new government requirements may be established that could delay or prevent regulatory approval of the Company's products under development. The Company is also subject to numerous and varying foreign regulatory requirements governing the design and conduct of clinical trials and the manufacturing and marketing of its products. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval set forth above, and there can be no assurance that foreign regulatory approvals will be obtained on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory authorities in other foreign countries. There can be no assurance that the Company or its partners will file for regulatory approvals or receive necessary approvals to commercialize product candidates in any market. Delays in receipt of or failure to receive regulatory approvals, or the loss of previously received approvals, would have a material adverse effect on the Company's business, financial condition and results of operations. The Company relies, in part, on academic institutions, clinical research organizations and its corporate collaborators to conduct and monitor certain of its clinical trials. There can be no assurance that such entities will perform these tasks successfully. In addition, certain clinical trials for the Company's products will be conducted by government-sponsored agencies. Because the conduct of such trials will be dependent on government participation and funding, the Company will have less control over such trials than if the Company were the sole sponsor. As a result, there can be no assurance that these trials will commence or be completed as planned. Failure to commence or complete any planned clinical trial could have a material adverse affect on the Company's business, financial position or results of operations. See "Business-- Government Regulation." DEPENDENCE ON THIRD PARTIES The Company relies heavily on third parties (in addition to its reliance on corporate collaborators described above under "--Risks Relating to Corporate Collaborations") for a variety of functions, including certain functions relating to research and development, manufacturing, clinical trials management and regulatory affairs. As of September 30, 1997, the Company had only 31 full-time employees. The Company is party to several collaborative agreements which place substantial responsibility on third parties for clinical development of the Company's products. The Company also in-licenses technology from medical and academic institutions in order to minimize investments in early research and enters into collaborative arrangements with certain of these entities with respect to clinical trials of product candidates. Except for payments made to the Company under its collaboration with BMS, most of the Company's revenues to date have been derived from federal research grants. The government's obligation to make payments under these grants is subject to appropriation by the United States Congress for funding in each year. Moreover, it is possible that Congress or the government agencies that administer these government research programs will determine to scale back these programs or terminate them or that the government will award future grants to competitors of the Company instead of the Company. In addition, there can be no assurances that the Company will be awarded any such grants in the future or that any amounts derived therefrom will not be less than those received to date. Certain of the Company's clinical trials are expected to be partially paid for by government funds. Any future reduction in the funding the Company receives either from federal research grants or with respect to clinical trials could adversely affect the Company's business, financial condition and results of operations. There can be no assurance that Progenics will be able to establish and maintain any of the relationships described above on terms acceptable to the Company, that the Company can enter into these arrangements without undue delays or expenditures, or that these arrangements will allow the Company to compete successfully against other companies. LACK OF SALES AND MARKETING EXPERIENCE If FDA and other approvals are obtained with respect to any of its products, Progenics expects to market and sell its products through distribution, co-marketing, co-promotion or licensing arrangements with third parties. The Company's agreement with BMS grants to BMS the exclusive right to market any products resulting from this collaboration. Progenics has no experience in sales, marketing or distribution and its current management and staff are not trained in these areas. To the extent that the Company enters into distribution, co-marketing, co-promotion or licensing arrangements for the marketing and sale of its products, any revenues received by the Company will be dependent on the efforts of third parties. The Company would not control the amount and timing of marketing resources such third parties would devote to the Company's products. If any of such parties were to breach or terminate its agreement with the Company or otherwise fail to conduct marketing activities successfully and in a timely manner, the commercialization of product candidates would be delayed or terminated, which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, if the Company markets products directly, significant additional expenditures and management resources would be required to develop an internal sales force. There can be no assurance that the Company will be able to establish a successful sales force. See "Business--Business Strategy." DEPENDENCE ON AND UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS The Company's success is dependent in part on obtaining, maintaining and enforcing patent and other proprietary rights. Under a license agreement with Sloan-Kettering, the Company obtained worldwide, exclusive rights to certain technology relating to ganglioside conjugate vaccines, including GMK and MGV, and their use to treat or prevent cancer. In addition, the Company licensed from Columbia University worldwide, exclusive rights to certain technology relating to CD4 and its use to treat or prevent HIV infection including patents and patent applications. Progenics has also filed a number of U.S. and foreign patent applications on its UnAB, ProSys and ProVax technologies and uses of these technologies. The Company is required to make substantial cash payments and achieve certain milestones and requirements, including, without limitation, filing INDs, obtaining product approvals and introducing products, to maintain its rights under these licenses. There is no assurance that the Company will be able to make required cash payments when due or achieve the milestones and requirements in order to maintain its rights under these licenses. Termination of any of such licenses could result in the Company being unable to continue development of its product candidates and production and marketing of approved products, if any. Consequently, termination of the licenses could have a material adverse effect on the business, financial condition and results of operations of the Company. There can be no assurance that patent applications owned by or licensed to the Company will result in patents being issued or that, if issued, the patents will afford protection against competitors with similar technology. Although a patent has a statutory presumption of validity in the United States, the issuance of a patent is not conclusive as to such validity or as to the enforceable scope of the claims of the patent. There can be no assurance that the Company's issued patents or any patents subsequently issued to or licensed by the Company will not be successfully challenged in the future. The validity or enforceability of a patent after its issuance by the patent office can be challenged in litigation. The cost of litigation to uphold the validity of patents and to prevent infringement can be substantial. If the outcome of the litigation is adverse to the owner of the patent, third parties may then be able to use the invention covered by the patent without payment. There can be no assurance that the Company's patents will not be infringed or successfully avoided through design innovation. The Company may not retain all rights to developments, inventions, patents and other proprietary information resulting from its collaborative arrangements, whether in effect as of the date hereof or which may be entered into at some future time with third parties. As a result, the Company may be required to license such developments, inventions, patents or other proprietary information from such third parties, possibly at significant cost to the Company. The Company's failure to obtain any such licenses could have a material adverse effect on the business, financial condition and results of operations of the Company. ADARC is a co-owner with the Company of one of the patent applications relating to the HIV co-receptor CCR5 and upon which the Company's HIV co-receptor/fusion program is based. Unless the Company acquires from ADARC an exclusive license to ADARC's rights in this patent application, there can be no assurance that ADARC will not license such patent to a competitor of the Company. There may be patent applications and issued patents belonging to competitors that may require the Company to alter its products, pay licensing fees or cease certain activities. If the Company's products conflict with patents that have been or may be granted to competitors, universities or others, such other persons could bring legal actions against the Company claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If any such actions are successful, in addition to any potential liability for damages, the Company could be required to obtain a license in order to continue to manufacture or market the affected products. There can be no assurance that the Company would prevail in any such action or that any license required under any such patent would be made available on acceptable terms or at all. There is significant litigation in the biopharmaceutical industry regarding patent and other intellectual property rights. Any litigation involving the Company could require substantial resources and have a material adverse effect on the Company's business, financial position and results of operations. Progenics has also filed a number of U.S. and foreign patent applications (one of which is owned jointly with ADARC) relating to the discovery of the HIV co-receptor CCR5. In addition to the risks described above, the Company is aware that other groups have claimed discoveries similar to that covered by the Company's patent applications. These groups may have made their discoveries prior to the discoveries covered by the Company's patent applications and may have filed their applications prior to the Company's patent applications. The Company does not expect to know for several years the relative strength of its patent position as compared to these other groups. In addition to the patents, patent applications, licenses and intellectual property processes described above, the Company also relies on unpatented technology, trade secrets and information. No assurance can be given that others will not independently develop substantially equivalent information and techniques or otherwise gain access to the Company's technology or disclose such technology, or that the Company can meaningfully protect its rights in such unpatented technology, trade secrets and information. The Company requires each of its employees, consultants and advisors to execute a confidentiality agreement at the commencement of an employment or consulting relationship with the Company. The agreements generally provide that all inventions conceived by the individual in the course of employment or in providing services to the Company and all confidential information developed by, or made known to, the individual during the term of the relationship shall be the exclusive property of the Company and shall be kept confidential and not disclosed to third parties except in limited specified circumstances. There can be no assurance, however, that these agreements will provide meaningful protection for the Company's information in the event of unauthorized use or disclosure of such confidential information. See "Business--Patents and Proprietary Technology." DEPENDENCE UPON KEY PERSONNEL Progenics is dependent upon certain key management and scientific personnel. In particular, the loss of Dr. Maddon could have a materially adverse effect on Progenics, unless a qualified replacement could be found. Progenics maintains a key-man life insurance policy on Dr. Maddon in the amount of $2.5 million. The Company's employment agreement with Dr. Maddon expires in December 1998, and there can be no assurance that it will be renewed by the parties thereto. See "Management--Executive Compensation." ATTRACTION AND RETENTION OF PERSONNEL Competition for qualified employees among companies in the biopharmaceutical industry is intense. Progenics' future success depends upon its ability to attract, retain and motivate highly skilled employees. Although Progenics has established relationships with the scientists who serve on its Scientific Advisory Boards, these individuals do not devote a substantial portion of their time to Progenics-related activities and do not participate directly in the development of Progenics' products on a daily basis. Attracting desirable employees will require Progenics to offer competitive compensation packages, including stock options. In order to successfully commercialize its products, the Company must substantially expand its personnel, particularly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and marketing. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel. Managing the integration of new personnel and Company growth generally could pose significant risks to the Company's development and progress. The addition of such personnel may result in significant changes in the Company's utilization of cash resources and its development schedule. See "Business--Human Resources." UNCERTAINTY RELATED TO HEALTH CARE REFORM MEASURES AND REIMBURSEMENT In recent years, there have been numerous proposals to change the health care system in the United States. Some of these proposals have included measures that would limit or eliminate payments for certain medical procedures and treatments or subject the pricing of pharmaceuticals to government control. Significant changes in the health care system in the United States or elsewhere might have a substantial impact on the manner in which the Company conducts its business. Such changes also could have a material adverse effect on the Company's ability to raise capital. Furthermore, the Company's ability to commercialize products may be adversely affected to the extent that such proposals have a material adverse effect on the business, financial condition and profitability of other companies that are collaborators or prospective collaborators of the Company. In addition, significant uncertainty exists as to the reimbursement status of newly-approved health care products. The Company's and its collaborators' success in generating revenue from sales of products may depend, in part, on the extent to which reimbursement for the costs of such products will be available from third-party payors, such as government health administration authorities, private health insurers and health maintenance organizations ("HMOs"). In addition, the trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs, which could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reduce government insurance programs, may all result in lower prices for products and could affect the market for products. If the Company or one or more of its collaborators succeeds in bringing one or more of Progenics' products to market, there can be no assurance that such products will be considered cost-effective or that adequate third-party insurance coverage will be available to establish and maintain price levels sufficient for realization of an appropriate return on the Company's investment in product development. Third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement of new products approved for marketing by the FDA. If adequate coverage and reimbursement levels are not provided by government and third-party payors for uses of the Company's products, the market acceptance of such products would be adversely affected. RISK OF PRODUCT LIABILITY; LIMITED AVAILABILITY OF INSURANCE The Company's business exposes it to potential product liability risks which are inherent in the testing, manufacturing, marketing and sale of human vaccine and therapeutic products, and there can be no assurance that the Company will be able to avoid significant product liability exposure. Product liability insurance for the biopharmaceutical industry is generally expensive, if available at all. The Company has obtained product liability insurance coverage in the amount of $5 million per occurrence, subject to a $5 million aggregate limitation. However, there can be no assurance that the Company's present insurance coverage is now or will continue to be adequate as the Company further develops products. In addition, certain of the Company's license and collaborative agreements require the Company to obtain product liability insurance and it is possible that license and collaborative agreements which the Company may enter into in the future may also include such a requirement. There can be no assurance that in the future adequate insurance coverage will be available in sufficient amounts or at a reasonable cost, or that a product liability claim or recall would not have a material adverse effect on the Company. HAZARDOUS MATERIALS; ENVIRONMENTAL MATTERS The Company's research and development work and manufacturing processes involve the use of hazardous, controlled and radioactive materials. The Company is subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company maintains safety procedures for handling and disposing of such materials that it believes comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, the Company could be held liable for any damages that result and any such liability could exceed the resources of the Company. Although the Company believes that it is in compliance in all material respects with applicable environmental laws and regulations, there can be no assurance that the Company will not be required to incur significant costs to comply with environmental laws and regulations in the future, or that the operations, business or assets of the Company will not be materially or adversely affected by current or future environmental laws or regulations. The research and development efforts sponsored by the Company involve laboratory animals. The Company may be adversely affected by changes in laws, regulations or accepted procedures applicable to animal testing or by social pressures that would restrict the use of animals in testing or by actions against the Company or its collaborators by groups or individuals opposed to such testing. ABSENCE OF PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock, and there is no assurance that an active market will develop or be sustained after this offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price will be determined by negotiation between the Company and the representatives of the Underwriters and may bear no relationship to the price at which the Common Stock will trade after completion of this offering. See "Underwriting" for factors to be considered in determining such offering price. The market price of the shares of Common Stock, like that of the common stock of many other biopharmaceutical companies, is likely to be highly volatile. Factors such as the results of preclinical studies and clinical trials by the Company, its collaborators or its competitors, other evidence of the safety or efficacy of products of the Company, its collaborators or its competitors, announcements of technological innovations or new commercial products by the Company, its collaborators or its competitors, governmental regulation, changes in reimbursement policies, health care legislation, developments in patent or other proprietary rights, developments in the Company's relationships with existing and, if any, future collaborative partners, public concern as to the safety and efficacy of products developed by the Company or its collaborators, fluctuations in the Company's operating results, and general market conditions may have a significant impact on the market price of the Common Stock. CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS Upon the completion of this offering, certain current stockholders of the Company, including Dr. Maddon and stockholders affiliated with Tudor Investment Corporation and Weiss, Peck & Greer, will beneficially own or control a substantial portion of the outstanding shares of Common Stock and therefore may have the ability, acting together, to elect all of the Company's directors, to determine the outcome of most corporate actions requiring stockholder approval and otherwise control the business of the Company. Such control could have the effect of delaying or preventing a change in control of the Company and consequently adversely affect the market price of the Common Stock. In addition, the Company's Board of Directors is authorized to issue from time to time shares of Preferred Stock, without further stockholder authorization, in one or more designated series or classes. The issuance of Preferred Stock, as well as certain provisions in certain of the Company's stock options which provide for acceleration of exercisability upon a change of control of the Company and certain provisions of the Delaware General Corporation Law (Section 203, in particular), could make the takeover of the Company or the removal of the Company's management more difficult, discourage hostile bids for control of the Company in which stockholders may receive a premium for their shares of Common Stock or otherwise dilute the rights of holders of Common Stock and depress the market price of the Common Stock. See "Principal Stockholders" and "Description of Capital Stock." FUTURE SALES OF COMMON STOCK; REGISTRATION RIGHTS; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET PRICE A substantial number of outstanding shares of Common Stock and shares of Common Stock issuable upon exercise of outstanding options and warrants will become eligible for future sale in the public market at prescribed times. Sales of substantial numbers of shares of Common Stock in the public market following this offering could adversely affect prevailing market prices. Commencing one year after the date of this Prospectus, certain stockholders of the Company (which stockholders held, as of September 30, 1997, approximately 6.6 million shares of Common Stock and had the right to acquire 330,455 shares of Common Stock upon the exercise of outstanding warrants) are entitled to certain rights with respect to the registration of such shares of Common Stock for offer or sale to the public. The Company plans to file a Form S-8 registration statement registering shares issuable pursuant to the Company's stock option plans. Any sales by existing shareholders or holders of options or warrants may have an adverse effect on the Company's ability to raise needed capital and may adversely affect the market price of the Common Stock. See "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting." DILUTION The initial public offering price will be substantially higher than the net tangible book value per share of the Company which, at September 30, 1997, was $1.13 per share. Investors purchasing shares of Common Stock in this offering will suffer immediate, substantial net tangible book value dilution of $5.50 per share, assuming an initial public offering price of $8.00 per share. In addition, this dilution will be increased to the extent that holders of outstanding options and warrants to purchase Common Stock at prices below the net tangible book value per share of the Company after this offering exercise such options or warrants. See "Dilution." ABSENCE OF DIVIDENDS The Company has never paid any cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. The Company currently intends to retain earnings, if any, for the development of its business. See "Dividend Policy."

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+ RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the shares of Common Stock offered hereby. ABSENCE OF PROVEN TECHNOLOGY/MARKET ACCEPTANCE. The Company is continuing to develop its ConSyGen Conversion and ConSyGen 2000 tool sets, and there can be no assurance that such toolsets will perform to market expectations, be well received, or generate substantial revenues, if any. The Company is not currently generating any significant revenue from either its ConSyGen 2000 or its ConSyGen Conversion toolset, or otherwise. Although the Company is currently working on a revenue generating year 2000 conversion, the Company has yet to complete a year 2000 conversion on a commercial basis with its ConSyGen 2000 toolset. Moreover, the Company has not completed a revenue generating migration project with its ConSyGen Conversion toolset since 1995. There can be no assurance that the Company's ConSyGen 2000 toolset will enable the Company to successfully convert software programs on a commercial basis so that they are year 2000 compliant. Nor can there be any assurance that the Company's ConSyGen Conversion toolset will enable the Company to successfully perform migration projects on a commercial basis. Failure of the Company's ConSyGen 2000 or ConSyGen Conversion toolsets to enable successful year 2000 conversions and migrations will have a material adverse effect on the price of the Company's common stock and the Company's business, financial condition and results of operations. There can be no assurance that the Company will be able to compete effectively in the market for its services. The failure of the Company to penetrate its target market would have a material adverse effect upon its operations and prospects. Market acceptance of the Company's services will depend upon the ability of the Company to demonstrate the advantages of its toolsets over competing technologies. ACCUMULATED DEFICIT; NET LOSSES. The Company has not been profitable and had accumulated losses at August 31, 1997 of approximately $19.6 million. Management believes that the Company's long-term ability to continue as a going concern is dependent upon obtaining adequate long-term financing and the achievement of profitability. The Company has not yet generated significant revenue from either its ConSyGen 2000 or ConSyGen Conversion toolset, or otherwise. Nor has the Company completed a Year 2000 conversion on a commercial basis with its ConSyGen 2000 toolset. Moreover, the Company has not since 1995 completed a migration project using its ConSyGen Conversion toolset. There can be no assurance that the Company will be able to generate significant revenue from services related to either its ConSyGen 2000 or ConSyGen Conversion toolset. See "Risk Factors - Absence of Proven Technology/Market Acceptance." Nor can there be any assurance that the Company will be able to obtain adequate long term financing. See "Risk Factors -- Future Capital Needs." The failure of the Company to generate significant revenue from its conversion services or obtain adequate long term financing will have a material adverse effect on the Company's ability to continue as a going concern. There can be no assurance that the Company will be successful in achieving these goals. NEED TO DEVELOP ADDITIONAL PRODUCTS AND SERVICES. Although the Company has yet to generate any revenue from providing year 2000 conversion services, the Company currently devotes significant resources to developing services that address the year 2000 problem. Although the Company believes that the demand for services relating to the year 2000 problem will continue to exist for a limited time beyond the year 2000, eventually, the demand for such services will be non-existent. Moreover, the Company is not currently generating any significant revenue from its ConSyGen Conversion toolset, the toolset it uses to migrate software applications from mainframe environments to open systems. There can be no assurance that the Company will be able to diversify and develop and market products and services (including its ConSyGen Conversion toolset) to enable the Company to generate business from non-Year 2000 related services. The failure of the Company to generate business unrelated to the year 2000 market will have a material adverse effect on the Company's business, financial condition and results of operations. SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales may occur, could adversely affect the prevailing market price of the Common Stock. Upon completion of this Offering, the Company will have approximately 15,265,494 shares of Common Stock outstanding. Of those shares, approximately 6,860,102 shares will be freely tradable without restriction under the Securities Act of 1933, as amended (the "Securities Act"). Upon completion of the Offering, 8,593,610 shares of Common Stock will be eligible for sale in the public market without registration, subject to certain volume and other limitations, pursuant to Rule 144 under the Securities Act. The remaining shares of Common Stock held by existing stockholders, including shares issuable upon exercise of warrants, will become eligible for sale under Rule 144 or otherwise at various times thereafter. The Company is obligated to register under the Securities Act shares of Common Stock held by certain stockholders of the Company. Except for approximately 100,000 of such shares, all of such shares are registered on the Registration Statement, of which this Prospectus is a part. In addition, there are currently outstanding warrants to purchase 1,400,000 shares of Common Stock, of which 1,300,000 are currently exercisable, and options to purchase 2,270,000 shares of Common Stock, of which 1,211,250 are currently exercisable. The Company may in the future file a registration statement on Form S-8 registering the shares issuable upon exercise of these options. If any portion of the Shares of Common Stock registered hereunder or issuable upon exercise of the outstanding warrants or options are sold in the public market, such sales may have a material adverse effect on the market price of the Common Stock. See "Risk Factors - Limited Trading Market." The sale of such shares may also have a material adverse effect on the Company's ability to raise needed capital. DEVELOPMENT OF NEW TECHNOLOGIES. The Company's success is dependent upon the successful development and marketing of its current and future services and products, as well as upon generating substantial revenue. The likelihood of the Company's success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the development of new technologies. These include, but are not limited to, competition, the need to develop customer support capabilities and market expertise, and setbacks in product development, market acceptance and sales and marketing. FUTURE CAPITAL NEEDS. The Company's future capital requirements will depend on many factors, including the Company's ability to generate cash flow from operations, if any, continued progress in its research and development programs, the development of superior technologies by the Company's competitors, and the Company's ability to market its services successfully. See "Risk Factors - - Accumulated Deficit, Net Losses", " - Absence of Proven Technology/Market Acceptance," and "- Development of New Technologies." The Company may need to raise additional funds in the future through equity and/or debt financings. Any such financings will result in dilution to the Company's then existing stockholders, and any financing, if available at all, may not be on terms favorable to the Company. There can be no assurance that the Company will be able to obtain needed financing or that the terms of such financing will be favorable to the Company. If adequate funds are not available, there would be a material adverse effect on the Company's ability to continue as a going concern. LIMITED TRADING MARKET. There is currently a very limited public market for the Common Stock of the Company. There can be no assurance that the current limited public trading market for the Company's Common Stock is sustainable. Because there is only a very limited public trading market for the Company's Common Stock, the price of the Common Stock, as quoted on the OTC Bulletin Board, is highly volatile. See "Price Range of Common Stock." The sale of a small number of shares of Common Stock could cause the quoted price of the Common Stock to drop dramatically. Due to the volatility of the market price of the Company's Common Stock, an investor may not be able to dispose of the Common Stock without losing all or a substantial portion of its investment. See "Risk Factors - Shares Eligible for Future Sale." RELIANCE ON KEY PERSONNEL/NEED FOR ADDITIONAL PERSONNEL. The Company is highly dependent on the knowledge and experience of its key officers for its growth and profitable operation. The Company relies heavily, at present, on its four key officers, Ronald I. Bishop, President and CEO; Robert L. Stewart, Chairman, Jeffrey Richards, Vice President, Sales and Marketing, and James Vales, Vice President, Operations. While the Company will hire and train others to assist them, should they become unable to serve or leave the Company in the near future, such an event may have a material adverse effect on the Company. The Company does not currently hold key man life insurance policies on any such officers. The ability of the Company to generate revenues in the future will depend in part on its success in adding and managing a significant number of management, research and product development, operations, marketing, sales and sales support personnel. Due to the level of technical and marketing expertise necessary to support and market the Company's service offerings, the Company must attract and retain highly qualified and well trained personnel. There are a limited number of persons with the requisite skills to serve in these positions and it may become increasingly difficult for the Company to hire and retain such personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to attract and retain such personnel. COMPETITION. The Company's business is extremely competitive. Many of the Company's competitors have greater market recognition and greater financial, technical, marketing and human resources than the Company. There can be no assurance that the Company will be able to compete successfully against existing companies or new entrants to the marketplace. Furthermore, the development by competitors of new or improved products and technologies may render the Company's services or proposed services obsolete or less competitive, which could have a material adverse effect on the Company. TECHNOLOGICAL OBSOLESCENCE. The market in which the Company operates is characterized by extensive research and development and rapid technological change, resulting in relatively short life cycles for the Company's service offerings. Development by others of new or improved products, processes or technologies may make the Company's services or proposed services or products obsolete or less competitive. The Company will be required to devote substantial efforts and financial resources to enhance its existing services and to develop new services or products. CONTROLLING SHAREHOLDER. More than a majority of the outstanding shares of Common Stock is beneficially owned by Robert L. Stewart, Chairman of the Company. Mr. Stewart will be able to control the board of directors and the Company for the foreseeable future. NO ANTICIPATED DIVIDENDS. The Company has not paid any cash dividends on its capital stock since its inception and does not intend to pay any dividends in the foreseeable future. Although the Company has not had any earnings to date, the Company intends to retain any future earnings for use in its business operations. POTENTIAL LIABILITY FOR DEFECTS IN CONVERSION SERVICES. Conversion services as complex as those offered by the Company frequently result in errors or failures, especially when first introduced or when subsequently modified The Company has in the past encountered difficulties while performing pilot conversion services. There can be no assurance that the Company will not in the future encounter further difficulties while performing conversion services on a commercial basis, resulting in loss of revenue or delay in market acceptance, diversion of development resources, damages to the Company's reputation, increased service and warranty costs, and legal claims for damages, any of which could have a material adverse effect on the Company. The Company does not have insurance to cover potential liabilities related to the provision of defective conversion services. IMMEDIATE AND SUBSTANTIAL DILUTION. Investors purchasing shares from the selling stockholders in this offering will incur immediate and substantial dilution of $6.38 (95%) per share between the adjusted net tangible book value per share after this offering, $.37, and the estimated public offering price of $6.75 (the closing price of the Common Stock on November 13, 1997, as quoted on the OTC Bulletin Board. The holders of the convertible notes acquiring shares from the Company upon conversion of the such notes will incur immediate and substantial dilution of $4.36 (92%) per share between the adjusted net tangible book value per share after this offering, $.37, and the assumed conversion price of $4.73 (70% of $6.75, the closing price of the Common Stock on November 13, 1997, as quoted on the OTC Bulletin Board). INTELLECTUAL PROPERTY. The Company's ability to compete effectively depends to a significant extent on its ability to protect is proprietary information. The Company relies primarily upon confidentiality procedures, trade secrets and trademark and trade name laws to protect its intellectual property rights. The Company generally enters into confidentiality agreements with its customers, key employees and its marketing partners, and generally controls access to its technology, software and other proprietary information. Despite these precautions, it may be possible for competitors or customers to copy all or part of the Company's technology or obtain information from the Company which the Company regards as proprietary. Furthermore, there can be no assurance that others will not independently develop technology similar to that developed or planned by the Company. Although the Company intends to defend its intellectual property, there can be no assurance that the steps taken by the Company to protect its proprietary information will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. The Company is also subject to the risk of alleged infringement of intellectual property rights of others. Although the Company believes that its software does not infringe on the proprietary rights of others and has not received any written notice of claimed infringement, because of the rapid technological development of the computer industry, certain of the Company's technologies could infringe on existing proprietary rights of third parties. If any such infringement exists or occurs there can be no assurance that any necessary licenses or rights could be obtained on terms satisfactory to the Company, if at all. Further, in such event, the Company may be required to modify the infringing technology. There can be no assurance that the Company would be able to do so in a timely manner, upon acceptable terms and conditions or at all, and the failure to do so could have material adverse effect on the Company. In addition, litigation may be necessary to enforce the Company's intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company. NASD REVIEW. The National Association of Securities Dealers, Inc. ("NASD") in December 1996 advised the Company that it was conducting a review of trading in the Company's Common Stock following the acquisition of ConSyGen, Inc., a privately held Arizona corporation ("ConSyGen-Arizona"). The NASD made a written inquiry of the Company to which the Company responded in writing in January 1997. The NASD made inquiry with respect to, among other things, a private placement by ConSyGen-Arizona, the acquisition of ConSyGen-Arizona by the Company, and issuances of Common Stock by the Company during 1996. The NASD has not yet responded in writing to the Company's written response. Subsequent to the Company's written response, the NASD made verbal inquiries primarily focused on participation by NASD members in private placements. The NASD has not made any inquiry of the Company for approximately eight months. The outcome of the NASD review could have a material adverse effect on the Company and the price of and trading market for the Company's Common Stock.

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+ RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. History of Operating Losses. The Company incurred net losses of $2.2 million, $1.2 million and $115,000 for fiscal 1996, 1995 and 1994, respectively. There can be no assurance that the Company will be able to achieve profitability for fiscal 1997 and beyond. The Company anticipates that completing its products under development, including those purchased from PrysmTech, ReMACS and Twenty/20, and marketing existing products and new releases will require substantial expenditures. Accordingly, an investment in the Common Stock is extremely speculative in nature and involves a high degree of risk. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Management of Growth. The growth in the size and complexity of the Company's business and the expansion of its product lines and its customer base will place a significant strain on the Company's management and operations. An increase in the demand for the Company's products could strain the Company's resources or result in delivery problems, delayed software releases, slow response time, or insufficient resources for assisting customers with implementation of the Company's products and services, which could have a material adverse effect on the Company's business, operating results and financial condition. The Company anticipates that continued growth, if any, will require it to recruit, hire and assimilate a substantial number of new employees, including consulting, product development, sales and marketing personnel. Since September 1995, the Company has hired a new President and Chief Operating Officer, a new Chief Financial Officer and several other members of senior management. There can be no assurance that the new management can effectively manage the Company's operations. The Company's ability to compete effectively and to manage future growth, if any, also will depend on its ability to continue to implement and improve operational, financial and management information systems on a timely basis and to expand, train, motivate and manage its work force, particularly its direct sales force and consulting services organization. There can be no assurance that the Company will be able to manage any future growth, and any failure to do so could have a material adverse effect on the Company's business, operating results and financial condition. The Company's ability to undertake new projects and increase revenues is dependent on the availability of the Company's personnel to assist in the development and implementation of the Company's technology solutions. The Company currently is attempting to increase consulting capacity in anticipation of future sales. Should the Company increase its consulting capacity and such sales fail to materialize, the Company's business, operating results and financial condition would be adversely affected. Growth Through Acquisition. As part of its operating history and growth strategy, the Company has consummated and may seek to consummate the acquisition of other businesses. The Company continually seeks acquisition candidates in selected markets and from time to time engages in exploratory discussions with suitable candidates. There can be no assurance, however, that the Company will be able to identify and acquire targeted businesses or obtain financing for such acquisitions on satisfactory terms. The process of integrating acquired businesses into the Company's operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention. In particular, the integration of acquired technologies with the Company's existing products could cause delays in the introduction of new products. In connection with future acquisitions, the Company may incur significant charges to earnings as a result of, among other things, the write-off of purchased research and development. For instance, in the second quarter of 1997, the Company will record one-time accounting charges of approximately $19.8 million for the write-off of purchased research and development and compensation expense in connection with its acquisitions of ReMACS and Twenty/20. Future acquisitions may be financed through the issuance of Common Stock, which may dilute the ownership of the Company's shareholders, or through the incurrence of additional indebtedness. Furthermore, there can be no assurance that competition for acquisition candidates will not escalate, thereby increasing the costs of making acquisitions or making suitable acquisitions unattainable. See "Business" and pro forma financial information included elsewhere in this Prospectus. Fluctuations in Quarterly Operating Results. The Company has experienced and expects to continue to experience quarterly fluctuations in its operating results. The Company's recent revenue growth should not be taken as indicative of the rate of revenue growth, if any, that can be expected in the future. The Company believes that period-to-period comparisons of its operating results are not meaningful and that the results for any period should not be relied upon as an indication of future performance. Moreover, a significant portion of the Company's quarterly revenues has been derived from a limited number of customers in the convenience store market. The Company currently anticipates that this trend will continue. With a limited number of customers, fluctuations in their purchasing patterns resulting from budgeting or other considerations can have a significant effect on the Company's quarterly results. For example, in the fourth quarter of 1995 a large customer accelerated its purchase of the Company's products, which resulted in higher revenues and earnings for the Company in that quarter. As a result, systems sales to this customer were lower in the following quarter. Any significant cancellation or deferral of customer orders could also have a material adverse effect on the Company's operating results in any particular quarter. The introduction of new research and development projects requires the Company to significantly increase its operating expenses to fund greater levels of product development and to develop and commercialize additional products and services. To the extent that such expenses precede or are not subsequently followed by increased revenues, the Company's business, results of operations and financial condition will be materially and adversely affected. The Company's operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside the Company's control. These factors include the level of usage of computer-based and consumer-activated products and services, the size and timing of individual customer orders, the introduction of new products or services by the Company or its competitors, pricing changes in the industry, technical difficulties with respect to the use of computer-based products and services developed by the Company, general economic conditions and economic conditions specific to the computer, convenience store, restaurant and entertainment markets. As a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect on the Company's business, results of operations and financial condition. Due to all of the foregoing factors, in some future quarters the Company's operating results may fall below the expectations of securities analysts and investors. In such event, the trading price of the Company's Common Stock would likely be materially and adversely affected. Industry Concentration and Cyclicality. All of the Company's total revenues in 1995 and approximately 74.8% of the Company's total revenues in 1996 were related to the convenience store market, which is dependent on the domestic and international economy. The convenience store market is affected by a variety of factors, including global and regional instability, governmental policy and regulation, natural disasters, consumer buying habits, consolidation in the petroleum industry, war and general economic conditions. Adverse developments in the convenience store market could materially affect the Company's business, operating results and financial condition. In addition, the Company believes the purchase of its products is relatively discretionary and generally involves a significant commitment of capital, because purchases of the Company's products are often accompanied by large scale hardware purchases. As a result, although the Company believes its products can assist convenience stores in a competitive environment, demand for the Company's products and services could be disproportionately affected by instability or downturns in the convenience store market which may cause customers to exit the industry or delay, cancel or reduce planned expenditures for information management systems and software products. Concentration of Customers. The Company sells systems and services to a number of major customers. During 1996, approximately 60.2% of the Company's total revenues were derived from four customers. During 1995 and 1994, approximately 59.4% and 75.9%, respectively, of the Company's total revenues were derived from two customers. There can be no assurance that the loss of one or more of these customers will not have a material adverse effect on the Company's business, operating results and financial condition. New Product Development and Rapid Technological Change. The Company has a substantial ongoing commitment to research and development. In this regard, the Company is currently designing, coding and testing a number of new products and developing expanded functionality of its current products that will be important for the Company to remain competitive. The cost of the Company's research and development efforts are expected to be approximately $7.1 million in 1997, including the costs of integrating and developing products acquired from ReMACS and Twenty/20. The Company and its prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in the rapidly evolving market for computer-based products and services. To address these risks, the Company must, among other things, continue to respond to competitive developments; attract, retain and motivate qualified personnel; implement and successfully execute its sales strategy; develop and market additional products and services in present and future markets; upgrade its technologies and commercialize products and services incorporating such technologies. There can be no assurance that the Company will be successful in addressing such risks. The types of products sold by the Company are subject to rapid and continual technological change. Products available from the Company, as well as from its competitors, have increasingly offered a wider range of features and capabilities. The Company believes that in order to compete effectively in selected vertical markets, it must provide compatible systems incorporating new technologies at competitive prices. There can be no assurance that the Company will be able to continue funding research and development at levels sufficient to enhance its current product offerings or will be able to develop and introduce on a timely basis new products that keep pace with technological developments and emerging industry standards and address the evolving needs of customers. There can also be no assurance that the Company will not experience difficulties that will result in delaying or preventing the successful development, introduction and marketing of new products in its existing markets or that its new products and product enhancements will adequately meet the requirements of the marketplace or achieve any significant degree of market acceptance. Likewise, there can be no assurance as to the acceptance of Company products in new markets, nor can there be any assurance as to the success of the Company's penetration of these markets, or to the revenue or profit margins with respect to these products. The inability of the Company, for any reason, to develop and introduce new products and product enhancements in a timely manner in response to changing market conditions or customer requirements could materially adversely affect the Company's business, operating results and financial condition. See "Business--Product Development and Technology Platform." In addition, the Company strives to achieve compatibility between the Company's products and retail systems the Company believes are or will become popular and widely adopted. The Company invests substantial resources in development efforts aimed at achieving such compatibility. Any failure by the Company to anticipate or respond adequately to technology or market developments could materially adversely affect the Company's business, operating results and financial condition. Competition. The market for retail information systems is intensely competitive. The Company believes the principal competitive factors in such market are product quality, reliability, performance and price, vendor and product reputation, financial stability, features and functions, ease of use and quality of support. A number of companies offer competitive products addressing certain of the Company's target markets. The Company competes with in-house systems developed by the Company's targeted customers and with third- party suppliers such as Dresser Industries, Inc., CanMax Inc., Gilbarco, Inc., Verifone, Ltd., International Business Machines Corporation, NCR Corporation, Matsushita Electric Corporation of America (Panasonic), JDA Software Group, Inc. and Tandem Computers, Inc., among others. In addition, the Company believes that new market entrants may attempt to develop fully integrated systems targeting the retail industry. In the market for consulting services, the Company competes with the consulting divisions of the big six accounting firms, Electronic Data Systems, Inc. and other systems integrators. Many of the Company's existing competitors, as well as a number of potential new competitors, have significantly greater financial, technical and marketing resources than the Company. There can be no assurance that the Company will be able to compete successfully against its current or future competitors or that competition will not have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Company Operations--Convenience Store Market-- Competition," "--Restaurant Market--Competition" and "--Entertainment Market-- Competition." Broad Discretion over Use of Proceeds. A substantial portion of the net proceeds of this offering ($53.9 million) are allocated to general corporate purposes, including possible strategic acquisitions, product development and working capital. The Company's management will have broad discretion over the application of these funds. There can be no assurance that management will make such application effectively or in a manner that will not result in a material adverse effect on the Company or its results of operations. See "Use of Proceeds." Dependence on Key Personnel; Ability to Attract and Retain Technical Personnel. The Company's future success depends in part on the performance of its executive officers and key employees. The Company does not have in place employment agreements with any of its executive officers other than H. Martin Rice, who heads the PrysmTech division, and David H. Douglas, who heads the Radiant Hospitality Systems division. The Company maintains a $1.0 million "key person" life insurance policy on each of Erez Goren and Alon Goren, the Chief Executive Officer and Chief Technology Officer, respectively, of the Company. The loss of the services of any of its executive officers or other key employees could have a material adverse effect on the business, operating results and financial condition of the Company. The Company is heavily dependent upon its ability to attract, retain and motivate skilled technical and managerial personnel, especially highly skilled engineers involved in ongoing product development and consulting personnel who assist in the development and implementation of the Company's total business solutions. The market for such individuals is intensely competitive. Due to the critical role of the Company's product development and consulting staffs, the inability to recruit successfully or the loss of a significant part of its product development or consulting staffs would have a material adverse effect on the Company. The software industry is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. There can be no assurance that the Company will be able to retain its current personnel, or that it will be able to attract, assimilate or retain other highly qualified technical and managerial personnel in the future. The inability to attract, hire or retain the necessary technical and managerial personnel could have a material adverse effect upon the Company's business, operating results and financial condition. See "Business--Employees" and "Management." Dependence on Proprietary Technology. The Company's success and ability to compete is dependent in part upon its ability to protect its proprietary technology. The Company relies on a combination of patent, copyright and trade secret laws and non-disclosure agreements to protect this proprietary technology. The Company enters into confidentiality and non-compete agreements with its employees and license agreements with its customers and potential customers which limits access to and distribution of its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology or that the Company's competitors will not independently develop technologies that are substantially equivalent or superior to the Company's technology. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. Certain technology used in conjunction with the Company's products is licensed from third parties, generally on a non-exclusive basis. The termination of any such licenses, or the failure of the third-party licensors to adequately maintain or update their products, could result in delay in the Company's ability to ship certain of its products while it seeks to implement technology offered by alternative sources, and any required replacement licenses could prove costly. While it may be necessary or desirable in the future to obtain other licenses relating to one or more of the Company's products or relating to current or future technologies, there can be no assurance that the Company will be able to do so on commercially reasonable terms or at all. See "Business--Proprietary Rights." Ownership by Management. Upon completion of the offering, the Company's executive officers will collectively own approximately 47.7% of the Common Stock then outstanding (approximately 46.2% if the Underwriters' over- allotment option is exercised in full). Consequently, together they will continue to be able to exert significant influence over the election of the Company's directors, the outcome of most corporate actions requiring shareholder approval and the business of the Company. See "Principal and Selling Shareholders." Dilution. Investors in the offering will experience immediate and substantial dilution of the net tangible book value of the Common Stock, and current shareholders will receive a material increase in the net tangible book value of their shares of Common Stock. See "Dilution." Shares Eligible for Future Sale; Registration Rights. Upon completion of this offering, the Company will have 15,067,259 shares of Common Stock outstanding, assuming no exercise of the Underwriters' over-allotment option. Of these shares, approximately 6,422,000 shares will be eligible for sale in the open market without restriction. All of the remaining 8,645,259 shares of Common Stock are "restricted securities" as that term is defined in Rule 144 promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Of these restricted securities, approximately 7,535,000 shares are currently eligible for sale in the public market. Additional shares of Common Stock, including shares issuable upon exercise of options, will also become eligible for sale in the public market pursuant to Rule 144 from time to time. The Company has agreed, however, not to sell any shares of Common Stock (other than the shares to be sold by the Company in this offering) for a period of 90 days from the date of this Prospectus without the prior written consent of the Underwriters. Directors, executive officers and certain shareholders of the Company, who will own upon completion of this offering an aggregate of 8,473,186 shares of Common Stock and options representing the right to purchase 1,710,430 shares of Common Stock, have agreed not to offer, sell, sell short or otherwise dispose of any such shares of Common Stock beneficially owned by them or any shares issuable upon exercise of stock options for a period of 120 days from the date of this Prospectus without the prior written consent of Alex. Brown & Sons Incorporated; provided, however, that the lockup period shall be 60 days from the date of this Prospectus for up to one-third of such shares or options, and 90 days from the date of this Prospectus for up to two-thirds of such shares or options. Following this offering, sales and potential sales of substantial amounts of the Company's Common Stock in the public market pursuant to Rule 144 or otherwise could adversely affect the prevailing market prices for the Common Stock and impair the Company's ability to raise additional capital through the sale of equity securities. See "Principal and Selling Shareholders," "Description of Capital Stock," "Shares Eligible for Future Sale" and "Underwriting." Upon the completion of this offering, the holders of 602,199 shares of Common Stock will be entitled to certain piggyback registration rights with respect to such shares. If the Company were required to include in a Company- initiated registration shares held by such holders pursuant to the exercise of their piggyback registration rights, such sale might have an adverse effect on the Company's ability to raise needed capital in the capital markets at a time and price favorable to the Company. See "Description of Capital Stock" and "Shares Eligible for Future Sale." Volatility of Market Price for Common Stock; Absence of Dividends. The market price for the Company's Common Stock has risen substantially since its initial public offering in February 1997. The Common Stock has experienced substantial price volatility and such volatility may occur in the future. Quarterly operating results of the Company or of other companies participating in the computer-based products and services industry, changes in conditions in the economy, the financial markets of the computer products and services industries, natural disasters or other developments affecting the Company or its competitors could cause the market price of the Common Stock to fluctuate substantially. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market price of many technology stocks in particular and that have often been unrelated or disproportionate to the operating performance of these companies. For the foreseeable future, it is expected that earnings, if any, generated from the Company's operations will be used to finance the growth of its business, and that no dividends will be paid to holders of the Common Stock. See "Price Range of Common Stock" and "Dividend Policy." Anti-Takeover Provisions. The Company's Amended and Restated Articles of Incorporation authorize the Board of Directors to issue up to 5,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of the preferred stock without further vote or action by the Company's shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. While the Company has no present intention to issue additional shares of preferred stock, such issuance, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. See "Description of Capital Stock-- Preferred Stock." In addition, certain provisions of the Company's Articles of Incorporation and Bylaws may discourage proposals or bids to acquire the Company. This could limit the price that certain investors might be willing to pay in the future for shares of Common Stock. The Company's Articles of Incorporation divide the Board of Directors into three classes, as nearly equal in size as possible, with staggered three-year terms. One class will be elected each year. The classification of the Board of Directors could have the effect of making it more difficult for a third party to acquire control of the Company. The Company is also subject to certain provisions of the Georgia Business Corporation Code which relate to business combinations with interested shareholders. See "Description of Capital Stock--Certain Charter and Bylaw Provisions."

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+ RISK FACTORS Regent and the Bank experienced significant losses in the years ended December 31, 1995 and 1996 and for the six months ended June 30, 1997 due primarily to an increase in the provision for loan losses that was attributable to delinquent loans. For these and other reasons, shares of Regent Common Stock involve a high degree of risk. The following factors should be considered carefully in evaluating an acquisition of Regent Common Stock. Recent Operating Losses and Resultant Undercapitalization For the six months ended June 30, 1997, Regent had a net loss of $393 thousand, compared to a net loss of $2.8 million for the six months ended June 30, 1996. For the year ended December 31, 1995, Regent had a net loss of $3.1 million, and for the year ended December 31, 1996, Regent had a net loss of $2.7 million. These losses resulted primarily from charge-offs of loans 120 or more days past due and increases in the reserve for potential loan losses on the loans that remained outstanding. As a result of the Bank's losses and its resultant undercapitalization, on October 10, 1996, the Bank entered into the Regulatory Agreement with the OCC pursuant to 12 U.S.C. ss.1818(b). See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for information relating to the Regulatory Agreement. On April 16, 1997, the Bank completed the Bank Offering, as a result of which the Bank's Tier 1 leverage ratio increased to approximately 10.12% as of that date. On June 25, 1997, the OCC terminated the Regulatory Agreement and the Bank now meets the OCC's requirements for a well-capitalized institution. See "Capitalization" and "Supervision and Regulation." Remaining Regulatory Restrictions The Federal Reserve Bank of Philadelphia (the "FRBP") formally notified Regent, in a letter dated September 6, 1996, of its determination that Regent was in "troubled condition." As a consequence of such condition, Regent must provide the FRBP with 30 days' notice prior to adding any members to its board of directors or engaging any new senior executive officers. In addition to the notice requirement, the FRBP has prohibited Regent, without prior written FRBP approval, from declaring or paying any dividends, repurchasing or redeeming any of its stock and incurring any additional debt, and required Regent to notify the FRBP immediately of any material event that significantly impacts the financial condition of Regent and the Bank. However, the regulatory restrictions will remain in effect unless and until the FRBP determines that it is appropriate to remove the restrictions. See "Supervision and Regulation." Adverse Impact on Net Interest Income During 1997, the Bank's net interest income has been and will continue to be adversely affected by the sale in 1996 of approximately $34.2 million in loans to Carnegie Bank, N.A. and the run-off of the IPF portfolio in the approximate amount of $10 million as well as by the Bank's higher than average level of non-performing assets as of December 31, 1996. Regent reported a net loss for the first six months of 1997 of $393 thousand compared to a net loss for the first six months of 1996 of $2.8 million. The loss for the first six months of 1997 was primarily related to a reduction in net interest income from $4.5 million for the first six months of 1996 to $3.0 million for the first six months of 1997. The increase in noninterest -11- <PAGE> income from $139 thousand in the first six months of 1996 to $568 thousand for the first six months of 1997 was more than offset by an increase in noninterest expense to $4.6 million in the first six months of 1997 from $3.4 million for the first six months of 1996. Regulatory Capital Requirements; Recent Undercapitalization Section 38 of the Federal Deposit Insurance Act (the "FDIA"), as amended by the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), effective December 1991, and the regulations of the FDIC implementing the prompt corrective action provisions of FDICIA, effective December 1992, require that the federal banking agencies establish five capital levels for insured depository institutions --"well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized" -- and requires or permits such agencies to take certain supervisory actions as an insured institution's capital level falls. From June 30, 1996 through April 16, 1997, the Bank was significantly undercapitalized. See "Supervision and Regulation." At June 30, 1997, the Bank had a ratio of Total capital 19.58%. A bank is designated as "well capitalized" if it has a ratio of Total capital of 10% or greater. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." There can be no assurance that the Bank will remain "well capitalized" or that it will not be subject to additional capital requirements in the future, either as a result of regulations, guidelines and policies of general applicability or individual regulatory capital requirements that are applied to the Bank. Pursuant to Section 18 of the FDIA, federal banking agencies are required to review their capital standards for insured depository institutions biennially to determine whether those standards require sufficient capital to facilitate prompt corrective action to prevent or minimize loss to the deposit insurance funds. Regulatory authorities could also limit the ability of companies such as Regent and the Bank to include certain deferred income tax assets permitted under generally accepted accounting principles for regulatory capital and regulatory reporting purposes. See "Supervision and Regulation." Reliance on New Management Since January 1, 1997, Regent has retained a new President and Chief Executive Officer, who also has been retained as the Bank's new Chairman of the Board and Chief Executive Officer, and a new Executive Vice President and Chief Financial Officer, and the Bank has retained a new Executive Vice President and Chief Lending Officer. In addition, Barbara H. Teaford, formerly Executive Vice President of Regent and the Bank, has become the Bank's new President. Although Regent's new President and Chief Executive Officer and new Executive Vice President and Chief Financial Officer and the Bank's Executive Vice President and Chief Credit Officer have extensive experience in commercial banking, none of them has had prior experience in Regent's market area. Regent's future results of operations will be substantially dependent on its new management personnel. See "Management." Extensive Regulation The federal and state laws and regulations that are applicable to bank holding companies and banks give regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and generally have been promulgated to protect depositors and deposit insurance funds and not for the purpose of protecting stockholders. Any change in such regulations, whether by an applicable federal or state regulatory authority or federal or state legislative bodies, could have a significant impact on Regent and the Bank. See "Supervision and Regulation." -12- <PAGE> Impact of Economic Conditions Prevailing economic conditions, as well as government policies and regulations concerning, among other things, monetary and fiscal affairs, significantly affect the operations of financial institutions such as Regent and the Bank. In particular, because the Bank's lending and deposit-taking activities are conducted primarily in the greater Philadelphia area, economic conditions in that area may affect Regent's financial condition and results of operations. See "Business." The Bank's net interest income, which is the difference between the interest income received on its interest-earning assets, including loans and investment securities, and the interest expense incurred in connection with its interest-bearing liabilities, including deposits and borrowings, can be significantly affected by changes in market interest rates. The Bank actively monitors its assets and liabilities in an effort to minimize the effects of changes in interest rates, primarily by altering the mix and maturity of the Bank's loans, investments and funding sources. Ability to Achieve Profitability Regent's ability to achieve profitability will depend on its ability to attract additional deposits, locate sound loan and investment opportunities, expand the services from which it realizes fee income and identify potential acquisition candidates. In addition, Regent's ability to achieve profitability also depends on the ability of its officers and key employees to manage growth effectively, to attract and retain skilled employees and to expand the capabilities of Regent's management information systems. Accordingly, there can be no assurance that Regent will be successful in managing its growth and the failure to do so would adversely affect Regent's financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Adequacy of Allowance for Loan Losses Regent attempts to maintain an allowance for loan losses at a sufficient level to provide for potential losses in the Bank's loan portfolio. The amount of the allowance for loan losses is periodically determined by management based upon consideration of several factors, including an ongoing review of the quality, mix and size of the overall loan portfolio, historical loan loss experience, an evaluation of non-performing loans, an assessment of economic conditions and their related effects on the existing portfolio and the amount and quality of collateral securing loans. However, there is no precise method of predicting loan losses and there can be no assurance that the allowance for loan losses will be sufficient to absorb future loan losses. In addition, Regent is seeking to increase rapidly and substantially the size of its loan portfolio. It is not possible to predict how newly originated loans will perform. If loan losses exceed the allowance for loan losses or if new management's view of the risk inherent in the lending function changes, these changes could have an adverse impact on Regent's results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Elements." -13- <PAGE> No Dividends Paid in the Past or Currently Anticipated; Dividend Restrictions Because dividends from the Bank are currently Regent's sole source of income, any restrictions on the Bank's ability to pay dividends will act as a restriction on Regent's ability to pay dividends. Under the National Bank Act and the regulations of the OCC applicable to the Bank, the Bank may not pay dividends in a given year in excess of the Bank's net profits, as defined, for that year plus the Bank's retained net profits for the preceding two years without prior permission from the OCC. For the two years ended December 31, 1996 and for the six months ended June 30, 1997, the Bank had no net profits and therefore is currently legally prohibited from paying dividends without the permission of the OCC. In addition, unless a national bank's capital surplus equals or exceeds the stated capital for its common stock, no dividends may be declared unless the Bank makes transfers from retained earnings to capital surplus. Unless the Bank has sufficient net profits or obtains the permission of the OCC, as to either of which no assurance can be given, the Bank will not be permitted to pay a dividend to Regent to fund the interest payment of $106 thousand due on Regent's subordinated debentures on September 30, 1997, and Regent will have to seek alternative sources of funds to make this payment, such as the private placement of Regent securities. Regent has never paid cash dividends on its Common Stock and does not intend to pay cash dividends on its Common Stock for the foreseeable future. The payment of dividends by Regent is subject to the prior written approval of the FRBP pursuant to the terms of the FRBP's September 6, 1996 letter to Regent. See "Regent Stock Information -- Dividend Policy." Intense Competition Intense competition exists in all of the major areas in which Regent and the Bank currently engage in business, particularly for deposits and creditworthy borrowers. Regent and the Bank face competition from various financial and non-financial businesses, many of which have substantially greater resources and capital than do Regent and the Bank. Particularly intense competition exists for loans and deposits. See "Business -- Competition." Control by Management The executive officers, directors and 5% or greater stockholders of Regent currently own approximately 33.2% of the Regent Common Stock outstanding and will own approximately 26.4% of the Regent Common Stock outstanding after giving effect to the exchange of all of the Bank Common Stock issued in the Bank Offering for Regent Common Stock and the conversion of all outstanding shares of Regent Preferred Stock into Regent Common Stock. Accordingly, such persons will have significant control over the election of the members of Regent's Board of Directors and any other matter submitted to a vote of Regent's stockholders. See "Principal Stockholders." Effect of Future Issuances of Securities In order to have sufficient capital to facilitate its growth strategy or to fund potential future acquisitions, Regent may have to issue additional securities in the future. If Regent's assets increase in accordance with management's strategy, additional capital could be needed to support those new assets -14- <PAGE> within two to three years. Regent cannot predict the effect, if any, that future issuances of securities will have on the market price of Regent Common Stock, which could be adversely affected. Anti-takeover Provisions As a New Jersey corporation, Regent is subject to the New Jersey Shareholders Protection Act which prohibits certain business combinations between Regent and any holder of 10% or more of Regent's outstanding Common Stock. See "Description of Securities -- Anti-takeover Provisions." Forward-Looking Statements All statements contained in this Prospectus that are not historical facts are based on current expectations. These statements are forward-looking (as defined in the Private Securities Litigation Reform Act of 1995) in nature and involve a number of risks and uncertainties. Actual results may vary materially, as discussed in this "Risk Factors" section. The factors that could cause actual results to vary materially include: the ability of the Bank to achieve profitable operations and the adequacy of its allowance for loan losses, general business and economic conditions in the Bank's primary lending and deposit-taking areas, future interest rate fluctuations, competition from various financial and non-financial businesses, the ability of Regent and the Bank to comply with current regulatory provisions and any future changes in such provisions, the ability of the Bank to generate loan growth and to improve its net interest margin and other risks that may be described from time to time in the reports that Regent is required to file with the Securities and Exchange Commission (the "Commission"). Regent cautions potential investors not to place undue reliance on any such forward-looking statements.

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+ RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in the shares of Common Stock offered by this Prospectus. Risk of Significant Fluctuations in Operating Results; Timing of Revenues. The Company has experienced, and expects to continue to experience, significant fluctuations in operating results, on an annual and a quarterly basis, which may result in volatility in the price of the Company's Common Stock. Such fluctuations may result from a number of factors, many of which are outside of the Company's control. These factors include the size and timing of customer orders; changes in the level of operating expenses; customer budget cycles; the timing of introductions or enhancements of products by the Company or its competitors; customer order deferrals in anticipation of new products or product enhancements; customer renewal of maintenance and support agreements; changes in pricing policy of the Company or its competitors; the mix of distribution channels and products sold; increased competition; technological changes; the ability of Landmark to develop or acquire, introduce and market on a timely basis new products or enhancements to its existing products; the quality of products sold; market acceptance of new products and product enhancements; seasonality of revenues; the Company's ability to expand its sales and marketing programs; personnel changes; foreign currency exchange rates; costs or other nonrecurring charges in connection with the acquisition of or investment in companies, products or technologies; and general economic conditions. Order backlog at the beginning of any quarter has represented only a small portion of that quarter's total revenues because products are typically shipped on a trial basis prior to the receipt of customer orders. As a result, total revenues in any quarter are substantially dependent on orders obtained during that quarter. Because Landmark's expense levels are based in significant part on expectations as to future revenues, expense levels are relatively fixed in the short run. If near-term demand for the Company's products weakens or if sales do not close in any quarter as anticipated, the Company's results of operations for that quarter would be adversely affected. Even though sales activities, such as product demonstrations, presentations and trials, are conducted throughout each quarterly period, in the Company's experience, most license transactions come to closure at or near the end of a quarter. Accordingly, Landmark has often recognized a significant portion of its license revenues in the last weeks of a quarter. As a result, the magnitude of quarterly fluctuations may not become evident until late in, or after the close of, a quarter. Landmark believes that its annual and quarterly revenues, expenses and operating results may vary significantly in the future, that period-to-period comparisons of its results of operations are not necessarily meaningful and that, in any event, such comparisons should not be relied upon as indications of future performance. See "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quarterly Results." History of Operating Losses. Although the Company had operating profits in the fourth quarter of 1996 and the first, second and third quarters of 1997, the Company has experienced operating losses for the years ended December 31, 1992, 1993, 1994, 1995 and 1996. In recent years, the Company has expanded its product line to include products for the client/server computing environment, has increased its research and development expenditures, has established an international direct sales force to supplement or replace certain third party distributors and has instituted company-wide cost controls. As a result of these various initiatives and their potential impact on the Company's financial condition, prediction of the Company's future operating results is difficult. There can be no assurance that the Company will be able to continue generating operating profits on a quarterly basis or achieve consistent operating profitability on an annual basis. See "-- Risk of Significant Fluctuations in Operating Results; Timing of Revenues" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Intense Competition. The market for the Company's performance management software products is highly competitive, fragmented and characterized by increasingly rapid technological developments, evolving standards and rapid changes in customer requirements. To maintain and improve its position in this market, the Company must continue to enhance current products and develop new products in a timely fashion. The Company competes primarily with vendors that provide mainframe performance management software and vendors that provide performance management software for client/server computing environments. Landmark believes that its principal competitors with respect to mainframe performance management software products include Candle Corporation and Boole and Babbage, Inc. In the client/server market, the Company believes that its principal competitors include BMC Software, Inc., Compuware Corporation, BGS Systems Inc. and Platinum technology, inc. See "Business -- Competition." Some of Landmark's competitors have longer operating histories and substantially greater financial, technical, sales, marketing and other resources, as well as greater name recognition and a larger customer base, than those of the Company. The Company's current and future competitors could introduce products with more features, greater scalability, increased functionality and lower prices than the Company's products. These competitors could also bundle existing or new products with other, more established products in order to compete with Landmark. In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of the Company's prospective customers. Moreover, there can be no assurance that the Company will be able to differentiate its products from the products of its competitors. Due to potentially lower barriers to entry for platform-specific niche products in the performance management software market, the Company believes that emerging companies may enter this market, particularly in the client/server environment. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which could materially and adversely affect the Company's business, financial condition and results of operations. Any material reductions in the prices of Landmark's products would negatively affect gross margins and would require the Company to increase sales in order to maintain gross profits. There can be no assurance that the Company will be able to compete successfully against current or future competitors, and the failure to do so could have a material adverse effect upon Landmark's business, financial condition and results of operations. See "Business -- Competition." Rapid Technological Change; Product Development. The market for performance management software products is increasingly characterized by rapid technological advances, changes in customer requirements and frequent new product introductions and product enhancements. Landmark's future success will depend in large part on its ability to enhance its current products and to develop and introduce new products that keep pace with technological developments, achieve market acceptance and respond to increasingly complex customer requirements. Landmark believes that its future operating results will be dependent upon the continued market acceptance of its products, the timing of orders for such products and the level and effectiveness of research and development expenses incurred in connection with the Company's ongoing and planned product development programs. Responding to rapid technological change and the need to develop and introduce new products quickly to meet its customers' evolving needs will require the Company to make substantial investments in research and product development. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements or any significant delays in product development or introduction could result in a loss of competitiveness and could materially and adversely affect the Company's business, financial condition and results of operations. There can be no assurance that new products will be successfully developed or marketed by the Company, that any new products will achieve market acceptance or that other software vendors will not develop and market products which are superior to Landmark's products or that such products will not achieve greater market acceptance. See "Business -- Product Development." Dependence on Certain Products. Landmark has historically derived, and in the foreseeable future expects to continue to derive, a substantial majority of its revenues from performance management software products and services for use in mainframe-based computing environments. The Company derived 93.0%, 90.3%, 89.2% and 87.8% of its revenues from mainframe products and services in 1994, 1995, 1996 and for the nine months ended September 30, 1997, respectively. Accordingly, Landmark's future success will depend in part on the continued market acceptance of its performance management software products and services for mainframe-based systems. A decline in demand for these products and services, whether as a result of an actual or a perceived decline in the use of mainframe-based systems, new product introductions, increased competition, technological change, failure of the Company's existing and new products to address customer requirements or otherwise, could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on New Products and Markets. Landmark has recently introduced a number of performance management software products for use in client/server computing environments. The Company expects these products to generate a significant portion of the Company's future revenue growth. Landmark's client/ server products are designed for use in complex, distributed computing environments comprised of a variety of hardware platforms, operating systems and databases, each of which may come from a different vendor. The market for performance management software in the client/server computing environment is relatively new and still emerging. The Company's future financial performance will depend in part on continued growth in the market for performance management products in complex, heterogeneous environments, which in turn will depend on growth in the number of large and medium sized organizations with such computing environments which deploy performance management solutions. There can be no assurance that the market for performance management products in the client/server computing environment will continue to grow or that Landmark will be able to respond effectively to the evolving requirements of this market. Moreover, if the Company's recently introduced products for client/server computing environments, or future releases of new products or product enhancements for client/server systems, do not achieve meaningful market acceptance, Landmark's business, financial condition and results of operations could be materially and adversely affected. Need to Attract and Retain Qualified Technical Personnel. The Company's future success will depend in large part on its ability to hire, train and retain technical personnel who have expertise in a wide array of network and computer systems and a broad understanding of the markets Landmark serves. Competition for such technical personnel is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. Although the Company to date has not experienced significant employee turnover, there can be no assurance that it will not experience such turnover in the future. Any inability of the Company to hire, train and retain a sufficient number of qualified technical personnel could, among other things, impair the Company's ability to develop new products and enhance existing products in a timely manner, which, in turn, would have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Key Personnel. Landmark's future success will depend on the continued contributions of its executive officers and key employees. The loss of the services of any one of the Company's executive officers or other key employees or the decision of one or more of such officers or employees to join a competitor or otherwise compete directly or indirectly with the Company could have a material adverse effect on the business, financial condition and results of operations of the Company. With the exception of Ralph E. Alexander, who is President, Chief Operating Officer and Chief Financial Officer of the Company, Landmark does not have employment contracts with any of its executive officers. Mr. Alexander's employment agreement is for a term of three years beginning April 9, 1997. The Company's future success will also depend on its continuing ability to identify, hire, train and retain highly qualified sales, marketing and managerial personnel. Competition for such personnel is intense, and there can be no assurance that Landmark will be able to attract, assimilate or retain such highly skilled personnel in the future. The inability to attract, hire and retain the necessary sales, marketing and managerial personnel could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management." Potential Acquisitions. As part of its business strategy, the Company intends to acquire or invest in complementary companies, products and technologies, although the Company is not engaged in any negotiations and has no current or pending arrangements, agreements or understandings with respect to any acquisitions or investments. Any such future transactions would be accompanied by the risks commonly encountered in making acquisitions of companies, products and technologies. Such risks include, among other things, the difficulty associated with assimilating the personnel and operations of the acquired companies, the potential disruption of the Company's ongoing business, the distraction of management and other resources, the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired personnel and technology rights, the maintenance of uniform standards, controls, procedures and policies and the impairment of relationships with employees and customers of both the Company and the acquired business as a result of the integration of new management personnel. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with any such acquisitions. In addition, future acquisitions by the Company could result in the issuance of dilutive equity securities, the incurrence of debt or contingent liabilities and the amortization of goodwill and other intangible assets, any of which could have a material adverse effect on the Company's business, financial condition and results of operations and on the market price of the Company's Common Stock. See "Business -- Strategy." International Sales. Revenues from customers outside the United States and Canada were 27.6%, 32.4%, 32.4% and 34.2% of total revenues in 1994, 1995, 1996 and for the nine months ended September 30, 1997, respectively. Landmark intends to continue to expand its operations outside of the United States and Canada and to enter additional international markets, which will require significant management attention and financial resources. The Company intends to establish additional international operations and hire additional personnel in order to increase its sales levels and gross margins on products sold in these markets. To the extent that the Company is unable to do so, the Company's growth, if any, in international sales could be limited, and the Company's business, financial condition and results of operations could be materially and adversely affected. There can be no assurance that the Company will be able to maintain or increase international market demand for its products. International revenue transactions are denominated in local currencies. Any future unfavorable changes in the exchange rates of foreign currencies would reduce the U.S. dollar amount of the Company's revenues from international sales, and would therefore adversely affect the year to year comparisons of the Company's results of operations. The Company has not sustained material foreign currency exchange losses and presently does not attempt to hedge its exposure to fluctuations in foreign currency exchange rates because this exposure has historically been minimal. The Company could experience foreign currency exchange losses based upon the amount of cash and receivables denominated in local currencies held by the Company's subsidiaries. These amounts have not been significant. Furthermore, the Company is not exposed to foreign currency exchange losses with respect to its receivables from international distributors because the distributor's obligation to the Company is denominated in U.S. dollars at the time a transaction occurs. Additional risks inherent in Landmark's international business activities generally include unexpected changes in regulatory requirements, tariffs and other trade barriers, costs and risks of localizing products for foreign countries, longer accounts receivable payment cycles in certain territories, adverse tax consequences, restrictions on repatriating earnings and the burdens of complying with a wide variety of foreign laws. There can be no assurance that such factors will not have a material adverse effect upon the Company's future international revenues and, consequently, the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Sales and Marketing." Reliance on Third Party Distributors. Landmark has historically relied primarily on third-party distributors to market its products internationally. Revenues attributable to such distributors were 27.6%, 28.9%, 27.5% and 19.0% of total revenues in 1994, 1995, 1996 and for the nine months ended September 30, 1997, respectively. Any material increase in the Company's sales through such third-party distributors as a percentage of total revenues will adversely affect the Company's average selling prices and gross margins due to the lower unit prices the Company receives when selling through such distributors. The Company's agreements with its distributors generally permit the distributor to market software products in addition to Landmark's. As a result, there can be no assurance that these distributors will give a priority to marketing the Company's products or that they will continue to carry the Company's products. In addition, some agreements allow the distributor to terminate the relationship without cause or restrict Landmark's ability to terminate the relationship. There can be no assurance that Landmark will retain any of its current distributors or that the Company could successfully replace such distributors. Any of the foregoing changes in Landmark's distribution channels could materially adversely affect the Company's business, financial condition and results of operations. See "Business -- Sales and Marketing." In addition, although the Company employs certain controls to ensure an accurate accounting of revenues generated by distributors, there can be no assurance that all such revenues will be properly reported to the Company. Trademarks and Proprietary Rights; Risks of Infringement. The Company regards its products and technology as proprietary and attempts to protect them with licensing agreements, patents, trademark and trade secret laws, copyrights, restrictions on disclosure and confidentiality procedures. Although Landmark generally enters into license agreements with its customers, distributors and corporate partners, and confidentiality agreements with its employees and other third parties and controls access to and distribution of its documentation and other proprietary information, there can be no assurance that any such person will not copy or otherwise obtain and use the Company's proprietary technology or products without its permission, or develop similar technology independently. Landmark pursues the registration of its trademarks in the United States and internationally, and has registered certain of its trademarks, including "The Monitor," and has applied for registration of "Performance Works." Landmark also pursues U.S. registrations of certain of its copyrights, particularly of the Company's software products. It is difficult to police unauthorized use of Landmark's technology, products and trademarks and the Company is unable to determine the extent to which piracy and misappropriation of its products, technology and trademarks occur. Software piracy and misappropriation may adversely affect the Company's results of operations. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. The Company may in the future rely on "shrink wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. Accordingly, there can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate or that third parties will not infringe or misappropriate the Company's trademarks, trade secrets and proprietary technology and rights. The Company is not aware that any of its software products infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to its current or future products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Intellectual Property." Risk of Software Defects. Software products as complex as those offered by Landmark may contain errors or defects, especially when first introduced or when new versions or enhancements are released. The Company has in the past discovered software errors in certain of its products and has experienced delays in shipments of products during the period required to correct these errors. Despite testing by the Company and by current and potential customers, there can be no assurance that defects and errors will not be found in new versions or enhancements of existing products or in new products, after commencement of commercial shipments. Any such defects and errors could result in adverse customer reactions, delays in market acceptance, expensive product changes or loss of revenues, any of which could have a material adverse effect upon the Company's business, financial condition and results of operations. Benefits of the Offering to Current Shareholders. Patrick H. McGettigan, a director and Chairman of the Board of the Company, Katherine K. Clark, a director and Chief Executive Officer of the Company, Jeffrey H. Bergman, a director of the Company, and the Bergman Family Trust are offering for sale in the Offering an aggregate of 1,200,000 shares of Common Stock (1,680,000 shares of Common Stock if the over-allotment option is exercised in full). The Selling Stockholders will receive an aggregate of approximately $10.0 million in net proceeds ($14.1 million in net proceeds if the over-allotment option is exercised in full), based upon an assumed initial offering price of $9.00 per share and after deducting the estimated underwriting discount. In addition, all of the current shareholders of the Company will benefit from the creation of a public market for the Common Stock held by them. Immediately following the Offering, the executive officers and directors of the Company will beneficially own shares of Common Stock having a market value of $71.2 million, based on an assumed initial offering price of $9.00 per share. The average price per share paid to the Company upon issuance of the shares held by the current shareholders was $0.37. See "Dilution" and "Principal and Selling Stockholders." Control by Existing Shareholders. Following the Offering, the Company's officers, directors and their affiliated entities together will beneficially own approximately 69.1% of the outstanding shares of Common Stock (64.9% if the Underwriters' over-allotment option is exercised in full). Accordingly, such persons, if they were to act as a group, would be able to elect all of the Company's directors and to otherwise control the outcome of corporate actions requiring stockholder approval, regardless of how other stockholders of the Company may vote. In addition, this concentration of ownership may have the effect of delaying or preventing a change of control of the Company. See "Principal and Selling Stockholders." Shares Eligible for Future Sale; Registration Rights. Sales of a substantial number of shares of Common Stock in the public market following the Offering could adversely affect the market price for the Company's Common Stock. The sale of Common Stock in the public market is limited by restrictions under the Securities Act of 1933, as amended (the "Securities Act"), and lock-up agreements (the "Lock-Up Agreements") under which the holders of such shares have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus (the "Lock-Up Period") without the prior written consent of C.E. UNTERBERG, TOWBIN. However, C.E. UNTERBERG, TOWBIN may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the Lock-Up Agreements. Any such release could have a material adverse effect upon the market price of Landmark's Common Stock. Based on shares of Common Stock outstanding as of September 30, 1997 and assuming the date of this Prospectus is November 1, 1997, on the date of this Prospectus, 68,096 shares not subject to Lock-Up Agreements will be eligible for sale in the public market in reliance or Rule 144(k) and 49,170 shares will be eligible for sale in the public market beginning 90 days after the date of this Prospectus in reliance on Rule 701. Upon expiration of the Lock-Up Period, 7,542,895 shares will be eligible for sale in the public market subject to compliance with Rule 144 or Rule 701, of which 7,324,237 are held by affiliates of the Company and will be subject to the volume and other resale limitations of Rule 144, other than the one-year holding period. The remaining 218,658 shares not held by Affiliates will be freely tradeable after expiration of the Lock-Up Period. On September 30, 1997, options to acquire a total of 2,915,259 shares of Common Stock were outstanding. Of this amount, options to acquire 2,242,186 shares are subject to Lock-Up Agreements, and options to acquire the remaining 673,073 shares are not subject to the Lock-Up Agreements and will be eligible for sale in the public market beginning 90 days after the date of this Prospectus, subject to applicable vesting requirements and compliance with the Securities Act and applicable state securities laws. The Company intends to file a registration statement on Form S-8 under the Securities Act (the "Form S-8") covering approximately 3,920,603 shares issued or reserved under its stock incentive and stock purchase plans. Of the shares covered by the Form S-8, 986,541 shares are subject to vested options as of September 30, 1997. Of these options, options to acquire 915,808 shares are subject to Lock-Up Agreements and options to acquire 70,734 shares are not subject to Lock-Up Agreements. The Form S-8 is expected to be filed approximately 90 days after the date of this Prospectus and will become effective automatically upon filing. Further, upon expiration of the Lock-Up Period, holders of approximately 7,316,293 shares of Common Stock will be entitled to certain demand and piggyback registration rights with respect to such shares. If such holders, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, such sales could have a material adverse effect on the market price of the Company's Common Stock. See "Description of Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale." No Prior Public Market; Potential Volatility of Stock Price. Prior to this Offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active trading market will develop or be sustained after the Offering. The public offering price has been determined through negotiations among the Company, the Selling Stockholders and the representatives of the Underwriters based on several factors and may not be indicative of the market price of the Common Stock after the Offering. The market price of the shares of Common Stock is likely to be highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's results of operations, announcements of technological innovations or new products by the Company or its competitors, developments with respect to patents, copyrights or proprietary rights, conditions and trends in the mainframe and client/server computing environments and other technology industries, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stock of technology companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. See "Underwriting." Dilution. Investors participating in the Offering will incur immediate and substantial dilution. To the extent outstanding options or warrants to purchase Common Stock are exercised, there will be further dilution. See "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Anti-Takeover Effects of Certain Charter Provisions. Landmark's Board of Directors has the authority to issue up to 8,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders of the Company. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, also could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. After giving effect to the mandatory redemption of 54,944 shares of Series A Preferred Stock on November 1, 1997, Landmark currently has two series of Preferred Stock outstanding, including 855,165 shares of Series A Preferred Stock and 395,195 shares of Series B Preferred Stock. Upon completion of the Offering, all shares of Series A and Series B Preferred Stock will be converted into Common Stock and, as a result, no Preferred Stock will be outstanding after the Offering. The Company has no present intention to issue additional shares of Preferred Stock. In addition, certain provisions of the Company's Articles of Incorporation and Bylaws and of Virginia law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. See "Management" and "Description of Capital Stock."

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+ RISK FACTORS In addition to the other information contained in this Prospectus, before tendering their Old Notes for the Exchange Notes offered hereby, holders of Old Notes should consider carefully the following factors, which may be generally applicable to the Old Notes as well as to the Exchange Notes. CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES Holders of Old Notes who do not exchange their Old Notes for Exchange Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes, as set forth in the legend thereon, as a consequence of the issuance of the Old Notes pursuant to the exemptions from, or in transactions not subject to, the registration requirements of the Securities Act and applicable state securities laws. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act and applicable state securities laws, or pursuant to an exemption therefrom. Except under certain limited circumstances, the Company does not intend to register the Old Notes under the Securities Act. In addition, any holder of Old Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the Exchange Notes may be deemed to have received restricted securities and, if so, will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. To the extent Old Notes are tendered and accepted in the Exchange Offer, the trading market, if any, for the Old Notes not so tendered could be adversely affected. See "The Exchange Offer" and "Old Notes Registration Rights; Additional Interest." COMPANY IS HIGHLY LEVERAGED On a pro forma basis, at September 30, 1996, assuming the issuance of the Old Notes, borrowings under the Credit Facility and application of the net proceeds therefrom, the Company would have had total indebtedness of $153.9 million, representing 82.4% of total capitalization. Effective March 8, 1996, the Company agreed to increase the interest rate on the Company's 12% Senior Subordinated Notes due 2003 (the "Existing Notes") by one percent until the Company achieves and maintains a specified level of earnings as defined in the Fourth Supplemental Indenture to the Indenture dated as of January 11, 1994 (as such Indenture has been and may be amended, restated, supplemented or otherwise modified from time to time, the "Existing Indenture") governing the Existing Notes. The Indenture governing the Notes contains an identical increased interest rate provision. The degree to which the Company is leveraged could have important consequences to holders of the Notes, including, but not limited to, the following: (i) the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited; (ii) a substantial portion of the Company's cash flow from operations will be dedicated to the payment of the principal of, and interest on, its debt; (iii) the agreements governing the Company's long-term debt contain certain restrictive financial and operating covenants which could limit the Company's ability to expand; (iv) the Company's substantial leverage may make it more vulnerable to economic downturns and reduce its flexibility in responding to changing business and economic conditions; and (v) the level of the Company's leverage may make it more difficult for the Company to obtain performance and similar bonds. The ability of the Company to pay interest and principal on the Notes and to satisfy its other debt obligations will be dependent on the future operating performance of the Company, which could be affected by changes in economic conditions and other factors, including factors beyond the control of the Company. A failure to comply with the covenants and other provisions of its debt instruments could result in events of default under such instruments, which could permit acceleration of the debt under such instruments and in some cases acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions. If the Company is unable to generate sufficient cash flow to meet its debt obligations, the Company may be required to renegotiate the terms of the instruments relating to its long-term debt or to refinance all or a portion of its long-term debt. However, there can be no assurance that the Company will be able to successfully renegotiate such terms or refinance its indebtedness, or, if the Company were able to do so, that the terms available would be favorable to the Company. In the event that the Company were unable to refinance its indebtedness or obtain new financing under these circumstances, the Company would have to consider various other options such as the sale of certain assets to meet its required debt service, negotiation with its lenders to restructure applicable indebtedness or other options available to it under law. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." HISTORY OF NET LOSSES As shown in the following table, for three of the past five fiscal years, the Company has had net losses; fiscal 1992 reflects an after-tax charge of $52.4 million associated with the disposal and restructuring of certain businesses. The Company's cumulative deficit at September 30, 1996 was $30.8 million. <TABLE> <CAPTION> TEN MONTHS NINE MONTHS YEAR ENDED FEBRUARY 28 OR 29, ENDED ENDED ---------------------------------- DECEMBER 31, SEPTEMBER 30, 1992 1993 1994 1995 1995 1996 -------- ------ -------- ------- ------------ ------------- (UNAUDITED) (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Net income (loss)....... $(40,516) $8,639 $(18,497) $(1,661) $2,252 $3,720 Net income (loss) available for common shareholders........... (42,932) 3,346 (25,322) (3,815) 449 2,089 </TABLE> RECENT AND ANTICIPATED RESULTS For the three months ended September 30, 1996, the Company's operating income decreased $2.8 million from the corresponding period in 1995, primarily due to a decrease in operating income from engineering and construction operations. The Company's service revenue and operating results for the fourth quarter will be significantly lower than the third quarter. For the nine months ended September 30, 1996, the Company's Federal Programs Group had significant increases in costs associated with marketing activities in pursuit of large-scale projects, including approximately $2.1 million in 1996 associated with the Company's unsuccessful recompete bid on the U.S. Department of Energy's ("DOE") proposal at its Hanford site ("Hanford") and significant costs associated with other DOE proposals. In August 1996, the Company was informed that it was unsuccessful in its bid for the DOE's new management and integration contract at Hanford. The Company's existing contract at Hanford, the operating income from which has been significant to the Company's results, was set to expire in March 1997, and effectively was terminated by DOE on October 1, 1996. Management believes the impact on earnings due to the closeout of the Hanford contract will be material in the fourth quarter of 1996. Management also believes the impact on earnings due to the closeout of the Hanford contract will be material in future periods, unless replaced with new contracts or offset by savings from the Company's on- going cost reduction program. There can be no assurance, however, that the Company will be able to enter into new contracts or achieve cost savings that will, in the aggregate, totally offset the effect of the loss of the Hanford contract. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In March 1996, the Company and Nova Hut, an integrated steel maker based in the Ostrava region of the Czech Republic, signed a two-year $102 million contract to provide engineering and construction services for the initial phase of a mini-mill project. The Company is currently negotiating a contract with Nova Hut for the next phase of the mini-mill project and expects to complete negotiations in the first quarter of 1997. If negotiations are successful, anticipated earnings associated with this contract for the next phase of work are expected to be material to the Company's operating results. There can be no assurance, however, that such negotiations will be completed. The Company has sold (the "Disposition") its interest in entities owning and operating a pulverized coal injection facility in Indiana ("PCI"). Although the sale will result in a gain in the fourth quarter of 1996, the negative effect of the sale in future periods on earnings and cash flows will be significant. See "Unaudited Pro Forma Consolidated Financial Statements." LIMITED ABILITY TO INCUR ADDITIONAL DEBT Excluding borrowings under the Credit Facility, the Existing Indenture and the Indenture (together, the "Indentures") limit the Company's ability to incur additional Indebtedness (as defined). The amount of available additional indebtedness may be insufficient for working capital needs, potential acquisitions, significant capital expenditures, repayment of debt or other purposes. See "Description of the Notes--Certain Covenants--Limitations on Additional Indebtedness" and "Description of the Credit Facility." COMPANY DEPENDENT ON FEDERAL GOVERNMENT CONTRACTS A substantial portion of ICF Kaiser's revenues are derived from services performed directly or indirectly under contracts with various agencies and departments of the Federal government. During the ten months ended December 31, 1995, approximately 78% of the Company's consolidated gross revenue was derived from contracts with the U.S. Government. During the ten months ended December 31, 1995, the DOE accounted for approximately 68% of consolidated gross revenue; the U.S. Department of Defense ("DOD"), the U.S. Environmental Protection Agency ("EPA") and other Federal agencies collectively accounted for approximately 10% of the Company's consolidated gross revenue. The Company's existing contract at Hanford effectively was terminated by DOE on October 1, 1996. As a result, and based on the Company's current assessment of the closeout of the Hanford contract, management believes the impact on earnings will be material in the fourth quarter of 1996, as well as in future periods, unless replaced with new contracts and/or cost reductions. In response to the reduction and eventual elimination of the Hanford contract, in August 1996 the Company initiated a significant operational efficiency and cost savings program, together with management changes, with the objective of minimizing the long-term impact associated with the termination of the Hanford contract. See "--Recent and Anticipated Results." Contracts made with the U.S. Government generally are subject to annual approval of funding. Limitations imposed on spending by Federal government agencies, which might result from efforts to reduce the Federal deficit or for other reasons, may limit the continued funding of the Company's existing Federal government contracts and may limit the ability of the Company to obtain additional contracts or task orders under existing contracts. These limitations, if significant, could have a material adverse effect on the Company. The Company has a substantial number of cost-reimbursement contracts with the U.S. government, the costs of which are subject to audit by the U.S. government. As a result of pending audits relating to fiscal years 1986 forward, the government has asserted, among other things, that certain costs claimed as reimbursable under government contracts either were not allowable or not allocated in accordance with federal procurement regulations. The Company is actively working with the government to resolve these issues. The Company has provided for the potential effect of disallowed costs for the periods currently under audit and for periods not yet audited, although the amounts at issue have not been quantified by the government or the Company. This provision will be reviewed periodically as discussions with the government progress. Based on the information currently available, management believes the potential effects of these pending audits will not have a material adverse effect on the Company's financial position, results of operations or cash flows. All Federal contracts may be terminated by the U.S. Government at any time, with or without cause. There can be no assurance that existing or future Federal government contracts would not be terminated or that the government will continue to use the Company's services at levels comparable to current use. RISK ASSOCIATED WITH COMPANY'S PLEDGE OF ASSETS The Company and most of its subsidiaries have granted a security interest in substantially all of their accounts receivable and certain other assets to secure all debt incurred pursuant to the Credit Facility. The Company would not be able to incur additional debt (including additional debt permitted by the Indentures) if the Company were required to pledge assets in connection with the incurrence of such additional debt. In the event of bankruptcy or liquidation of the Company there can be no assurance that sufficient assets would be available for payment of the Notes. LIMITED ABILITY TO MAKE ACQUISITIONS AND OTHER INVESTMENTS The Credit Facility limits the Company's ability to make acquisitions and other investments, and the Indentures limit the Company's ability to make restricted payments, including certain payments in connection with investments and acquisitions. Limitations in the Existing Indenture are based in part on the Company's Consolidated Net Income (as defined) during the period since August 31, 1993; the losses incurred by the Company during fiscal 1994 and 1995 have the effect of making this limitation very restrictive. The indebtedness, investment, acquisitions and restricted payments limitations in the Credit Facility and the Indentures discussed above mean that during the next several years it likely will be necessary for the Company to issue additional equity securities to fund any significant acquisitions and to invest significant amounts in joint ventures. These limitations may make it more difficult for the Company to compete effectively in its markets. FRAUDULENT CONVEYANCE LAWS The incurrence by the Company of indebtedness such as the Notes may be subject to review under relevant state and federal fraudulent conveyance laws if a bankruptcy case or lawsuit is commenced on behalf of unpaid creditors of the Company. Under these statutes, if a court were to find that (i) the Notes were incurred with the intent of hindering, delaying or defrauding creditors or that the Company received less than a reasonably equivalent value or fair consideration for the Notes and (ii) at the time the Notes were issued, the Company was insolvent, was rendered insolvent by the issuance of the Notes, was engaged in a business or transaction for which the assets remaining with the Company constituted unreasonably small capital, or intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court could void the Company's obligations under the Notes, or subordinate the Notes to all other indebtedness of the Company. In that event, there would be no assurance that any repayment on the Notes would ever by recovered by holders of the Notes. The measure of insolvency for purposes of the foregoing would vary depending upon the law of the jurisdiction which is being applied. Generally, however, the Company would be considered to have been insolvent at the time the Notes were issued if the sum of its debts was then greater than all of its property at a fair valuation, or if the then fair saleable value of its assets was less than the amount that was then required to pay its probable liability on its existing debts as they become absolute and matured. There can be no assurance as to what standard a court would apply in order to determine whether the Company was "insolvent" as of the date the Notes were issued, or that, regardless of the method of valuation, a court would not determine that the Company was insolvent on that date. Nor can there be any assurance that a court would not determine, regardless of whether the Company was insolvent on the date the Notes were issued, that the payments constituted fraudulent transfers on another of the grounds listed above. LIMITATIONS ON CHANGE OF CONTROL In the event of a Change of Control, the Company would be required, subject to certain conditions, to offer to purchase all outstanding Existing Notes and Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, thereon to the date of purchase. As of September 30, 1996, the Company did not have sufficient funds available to purchase all of the Existing Notes and Notes were they to be tendered in response to an offer made as a result of such a Change of Control. There can be no assurance that, at the time of a Change of Control, the Company will have sufficient cash to repay all amounts due under the Existing Notes and Notes. The terms of the Credit Facility prohibit the optional payment or prepayment or any redemption of the Existing Notes and Notes. If, following a Change of Control, the Company has insufficient funds to purchase all the Existing Notes and Notes tendered pursuant to such an offer, an event of default in respect of such Notes would occur. The Change of Control provisions of the Indentures may have the effect of discouraging attempts by a person or group to take control of the Company. See "Description of the Notes--Change of Control." The Company's Restated Certificate of Incorporation, By-laws, Shareholder Rights Plan and certain other agreements contain provisions that could have the effect of delaying or preventing a change of control of the Company or affect the Company's ability to engage in certain extraordinary transactions. COMPANY DEPENDENT ON GOVERNMENTAL ENVIRONMENTAL REGULATION CONTINUING A substantial portion of the Company's business has been generated either directly or indirectly as a result of Federal and state laws, regulations and programs related to environmental issues. Accordingly, a reduction in the number or scope of these laws and regulations, or changes in government policies regarding the funding, implementation or enforcement of such laws, regulations and programs, could have a material adverse effect on the Company's business. In addition, any significant effort by the DOE to reduce the role of private contractors in environmental projects could have a material adverse effect on the Company. POTENTIAL ENVIRONMENTAL LIABILITY FOR COMPANY'S WORK The assessment, analysis, remediation, handling, management, and disposal of hazardous substances necessarily involve significant risks, including the possibility of damages or personal injuries caused by the escape of hazardous materials into the environment, and the possibility of fines, penalties or other regulatory action. These risks include potentially large civil and criminal liabilities for violations of environmental laws and regulations, and liabilities to customers and to third parties for damages arising from performing services for clients. Potential Liabilities Arising Out of Environmental Laws and Regulations All facets of the Company's business are conducted in the context of a rapidly developing and changing statutory and regulatory framework. The Company's operations and services are affected by and subject to regulation by a number of Federal agencies, including the EPA and the Occupational Safety and Health Administration, as well as applicable state and local regulatory agencies. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") addresses cleanup of sites at which there has been a release or threatened release of hazardous substances into the environment. Increasingly, there are efforts to expand the reach of CERCLA to make environmental contractors responsible for cleanup costs by claiming that environmental contractors are owners or operators of hazardous waste facilities or that they arranged for treatment, transportation, or disposal of hazardous substances. Several recent court decisions have accepted these claims. Should the Company be held responsible under CERCLA for damages caused while performing services or otherwise, it may be forced to bear such liability by itself, notwithstanding the potential availability of contribution or indemnity from other parties. The Resource Conservation and Recovery Act ("RCRA") governs hazardous waste generation, treatment, transportation, storage and disposal. RCRA, or EPA-approved state programs at least as stringent, govern waste handling activities involving wastes classified as "hazardous." Substantial fees and penalties may be imposed under RCRA and similar state statutes for any violation of such statutes and the regulations thereunder. Potential Liabilities Involving Clients and Third Parties In performing services for its clients, the Company could potentially be liable for breach of contract, personal injury, property damage and negligence (including improper or negligent performance or design, failure to meet specifications and breaches of express or implied warranties). The damages available to a client, should it prevail in its claims, are potentially large and could include consequential damages. Environmental contractors, in connection with work performed for clients, potentially face liabilities to third parties from various claims, including claims for property damage or personal injury stemming from a release of hazardous substances or otherwise. Claims for damage to third parties could arise in a number of ways, including through a sudden and accidental release or discharge of contaminants or pollutants during the performance of services; through the inability, despite reasonable care, of a remedial plan to contain or correct an ongoing seepage or release of pollutants; through the inadvertent exacerbation of an existing contamination problem; or through reliance on reports or recommendations prepared by the Company. Personal injury claims could arise contemporaneously with performance of the work or long after completion of the project as a result of alleged exposure to toxic or hazardous substances. In addition, increasing numbers of claimants assert that companies performing environmental remediation should be adjudged strictly liable, i.e., liable for damages even though its services were performed using reasonable care, on the grounds that such services involved "abnormally dangerous activities." Clients frequently attempt to shift various of the liabilities arising out of remediation of their own environmental problems to contractors through contractual indemnities. Such provisions seek to require the Company to assume liabilities for damage or personal injury to third parties and property and for environmental fines and penalties including liabilities arising as a result of breaches by the Company of specified standards of care. For EPA contracts involving field services in connection with response actions under Superfund, a program established under CERCLA to clean up hazardous waste sites and provide for penalties and punitive damages for noncompliance with EPA orders, the Company is eligible for indemnification under Section 119 of CERCLA, for pollution and environmental damage liability resulting from release or threatened release of hazardous substances. Recently, EPA has constricted significantly the circumstances under which it will indemnify its contractors against liabilities incurred in connection with CERCLA projects. There are other proposals both in Congress and at the regulatory agencies to further restrict indemnification of contractors from third-party claims. Kaiser-Hill Company, LLC ("Kaiser Hill") (a limited liability company owned equally by the Company and CH2M Hill Companies, Ltd.) signed a five-year Performance Based Integrating Management contract in 1995 to perform work at the DOE's Rocky Flats Environmental Technology Site near Golden, Colorado. The terms of that contract govern any liability (including without limitation, a claim involving strict or absolute liability and any civil fine or penalty, expense or remediation cost, but limited to those of a civil nature), which may be incurred by, imposed on, or asserted against Kaiser-Hill arising out of any act or failure to act, condition, or exposure which occurred before Kaiser-Hill assumed responsibility on July 1, 1995 ("pre-existing conditions"). To the extent the acts or omissions of Kaiser-Hill constitute willful misconduct, lack of good faith, or failure to exercise prudent business judgment on the part of Kaiser-Hill's managerial personnel and cause or add to any liability, expense or remediation cost resulting from pre- existing conditions, Kaiser-Hill shall be responsible, but only for the incremental liability, expense or remediation caused by Kaiser-Hill. The contract further provides that Kaiser-Hill will not be reimbursed for liabilities and expenses to third parties caused by the willful misconduct or lack of good faith of Kaiser-Hill's managerial personnel or the failure to exercise prudent business judgment by Kaiser-Hill's managerial personnel. MARKET FOR COMPANY'S SERVICES HIGHLY COMPETITIVE The market for the Company's services is highly competitive. The Company and its subsidiaries compete with many other environmental consulting, engineering and construction firms ranging from small firms to large multinational firms having substantially greater financial, management, and marketing resources than the Company. Other competitive factors include quality of services, technical qualifications, reputation, geographic presence, price, and the availability of key professional personnel. See "Business--Competition and Contract Award Process."

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+ RISK FACTORS PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER CAREFULLY THE FACTORS SET FORTH BELOW, TOGETHER WITH OTHER INFORMATION SET FORTH IN THIS PROSPECTUS. CONCENTRATION ON MD-80 AND DC-9 AIRCRAFT The Company's net parts sales are concentrated in the aftermarket for MD-80 and DC-9 aircraft, which aircraft at December 31, 1996 accounted for approximately 15% of the commercial aircraft in service worldwide according to the World Jet Inventory. The DC-9 is no longer in production and Boeing has indicated its intention to cease production of the MD-80 around mid-1999 or when current production commitments end. Any decline in the use of MD-80 and DC-9 aircraft by aircraft operators, the unscheduled removal from service of large numbers of MD-80 and DC-9 aircraft or the grounding of such aircraft by governmental authorities for any reason could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, all DC-9 aircraft operated in the United States and European Union will need to be hush-kitted, relocated to other areas or removed from service by 2000 and 2002, respectively. In the event these aircraft are removed from service, demand for the Company's MD-80 and DC-9 parts could decline and the supply of spare parts may increase, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business." BROADENING OF PRODUCT LINE The Company has recently expanded its product line to include aftermarket parts for certain commuter aircraft including Shorts, de Havilland and British Aerospace aircraft. In addition, the Company intends to broaden its product line following this offering to include parts for McDonnell Douglas DC-10, Boeing 767 and Airbus A-300 series aircraft. The Company has limited experience with respect to the purchase and sale of spare parts for these aircraft models. There can be no assurance that the Company will have the same level of success in managing its parts inventories for such aircraft that it has had with parts for MD-80 and DC-9 aircraft. The failure to successfully broaden its product line could have a material adverse effect on the Company's ability to implement its growth strategy. See "Business." RISKS REGARDING THE COMPANY'S INVENTORY The Company obtains most of its parts inventory by purchasing individual parts from airlines, repair facilities or other redistributors, by purchasing excess inventory from aircraft operators, or by purchasing aircraft for disassembly. The Company's business is substantially dependent on its purchasing activities because its net parts sales are directly influenced by the level and composition of inventory available for sale. Because the size and composition of the Company's inventory is critical to its results of operations and because there is no organized market to procure surplus inventory, the Company's operations are materially dependent on the success of management in identifying potential sources of inventory and effecting timely purchases at acceptable prices. There can be no assurance that inventory will be available on acceptable terms or at the times required by the Company. In addition, once acquired, the market value of the Company's inventory could be adversely affected by factors beyond the Company's control, such as the sudden availability of additional inventory, a sudden decline in demand for the Company's parts due to a decline in use of certain aircraft types, regulatory changes mandating uneconomic improvements to items in inventory, or a decision by an OEM to begin manufacturing new parts that would compete with aftermarket parts. The failure to identify and purchase inventory in a timely fashion at acceptable prices or a decline in the value of the Company's inventory would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Operations of the Company-- Inventory Acquisition." IMPACT OF GOVERNMENT REGULATION The aviation industry is highly regulated by the FAA in the United States and similar regulatory agencies of other countries. Before spare parts are installed on an aircraft, they must meet certain standards as to their condition and have appropriate documentation. Parts owned or acquired by the Company may not meet currently applicable standards, or standards may change in the future, causing parts already contained in the Company's inventory to be scrapped or modified. While the Company's operations are not currently regulated directly by the FAA, the independent facilities that repair and overhaul the Company's products and the aircraft operators that ultimately utilize the Company's products are subject to extensive regulation. In September 1996, the FAA issued an advisory circular to support the implementation of a voluntary accreditation program for civil aircraft parts suppliers. The accreditation program establishes quality standards applicable to aftermarket suppliers such as the Company, and designates FAA approved organizations such as ASA to perform quality assurance audits for initial and continued accreditation of such aftermarket suppliers. In August 1997, the Company received accreditation from the ASA. Standards established by the FAA and other regulatory agencies relating to the operation and maintenance of aircraft have significant effects on aircraft operations and the composition of airline and air cargo fleets. Noise and emission standards, and related additional maintenance for older aircraft, may increase the cost of operating aircraft such as the DC-9 and 727, which could lead to a decline in the demand for the products provided by the Company. The inability of the Company to supply its customers with spare parts on a timely basis, or any occurrence of the Company providing products which subsequently fail, may adversely affect the Company's relationships with its customers and have a material adverse effect on its business, financial condition and results of operations. There can also be no assurance that new and more stringent government regulations, if enacted, would not have a direct or indirect adverse effect on the Company. See "Business--Regulation." EFFECTS OF THE ECONOMY ON THE OPERATIONS OF THE COMPANY The Company's customers consist of a wide variety of domestic and international air cargo carriers, major commercial and regional passenger airlines, maintenance and repair facilities and other redistributors. As a result, the Company's business can be impacted by the economic factors that affect the airline and air cargo industries. When such factors adversely affect the airline and air cargo industries, they tend to cause downward pressure on the pricing for aircraft spare parts and increase the credit risk associated with doing business with airlines and air cargo carriers. Additionally, factors such as the price of fuel affect the aircraft spare parts market for older aircraft, since older aircraft become less competitive with newer model aircraft as the price of fuel increases. There can be no assurance that economic and other factors which might affect the airline and air cargo industries will not have a material adverse effect on the Company's business, financial condition and results of operations. FLUCTUATIONS IN OPERATING RESULTS The Company's operating results, both on an annual and a quarterly basis, are affected by many factors, including the timing of large orders from customers, the timing of expenditures to purchase inventory in anticipation of future sales, the timing of bulk inventory purchases, the mix of available aircraft spare parts contained at any time in the Company's inventory, the timing of aircraft or engine sales or leases, unanticipated aircraft or engine lease terminations, default by any lessees and many other factors largely outside the Company's control. Since the Company typically does not obtain long-term purchase orders or commitments from its customers, it must anticipate the future volume of orders based upon the historic purchasing patterns of its customers and discussions with customers as to their future requirements. Cancellations, reductions or delays in orders by a customer or group of customers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, due to the value of a single aircraft or engine sale relative to the value of parts typically sold by the Company, any concentration of aircraft or engine sales in a particular quarter may obscure existing or developing trends in the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Fluctuations in Operating Results." CUSTOMER CONCENTRATION In fiscal 1997, two customers accounted for between 5% and 10% of the Company's revenues with no customer accounting for more than 10% of the Company's revenues. Currently, the Company believes that it has no customer, the loss of which would have a material adverse effect on the Company's business, financial condition and results of operations. In a given period, a substantial portion of the Company's revenues may be attributable to the sale of one or more aircraft or engines. Such sales are unpredictable transactions dependent, in part, upon the Company's ability to purchase an aircraft or engine at an attractive price and resell it within a relatively brief period of time. The revenues from the sale of an aircraft or engine, the timing of inventory sales or a lease transaction during a given period may result in a customer being considered a major customer of the Company for that period. See "Business--Sales and Marketing; Customers." RISKS ASSOCIATED WITH LEASES The Company currently leases three Boeing 727 freighter aircraft to a major cargo carrier and four Pratt & Whitney JT8D series engines to a smaller cargo and charter passenger carrier and is holding for lease or sale two newly acquired DC-9 aircraft. The success of an operating lease depends in part upon having the aircraft and engines returned to the Company in marketable condition as required by the lease of such aircraft and engines. In addition, the financial return to the Company from a leased aircraft or engine depends in part on the re-lease of aircraft and engines on favorable terms on a timely basis, the ability to sell the aircraft or engines at favorable prices or realize sufficient value from the disassembly for parts of the aircraft or engines at the end of the lease term. Numerous factors, many of which are beyond the control of the Company, may have an impact on the Company's ability to re-lease or sell aircraft, engines and parts. These factors include general market conditions, regulatory changes (particularly those imposing environmental, maintenance and other requirements on the operation of aircraft and engines), changes in the supply or cost of aircraft and engines and technological developments. Consequently, there can be no assurance that the Company's estimated residual value for aircraft or engines will be realized. If the Company is unable to re-lease, sell its aircraft or engines on favorable terms or realize sufficient value from the disassembly for parts of the aircraft or engines on a timely basis upon expiration of the related lease, its business, financial condition and results of operations may be adversely affected. In the event that a lessee defaults in the performance of its obligations, the Company may be unable to enforce its remedies under a lease. The Company's inability to collect lease payments when due or to repossess aircraft or engines in the event of a default by a lessee could have an adverse effect on the Company's business, financial condition and results of operations. If the Company were to acquire an aircraft or engines and such acquisitions were not financed by additional borrowings, it could result in a reduction of the Company's liquidity. See "Business--Operations of the Company--Aircraft and Engine Sales and Leasing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." PRODUCT LIABILITY The commercial aviation industry periodically experiences catastrophic losses. As a redistributor, the Company may be named as a defendant in a lawsuit as a result of such catastrophic loss if a part sold by the Company were installed in an incident-related aircraft. The Company currently has in force product liability insurance with coverage limits for each occurrence which it believes to be in sufficient amount and on terms that are generally consistent with industry practice. To date, the Company has not experienced any aviation related claims, and has not experienced any product liability claims related to its products. However, an uninsured or partially insured claim, or a claim for which third-party indemnification is not available, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Product Liability." RISKS ASSOCIATED WITH ACQUISITIONS One of the Company's strategies for growth is to pursue acquisitions of aftermarket redistributors. Currently, the Company has no acquisition agreements, understandings or commitments for any acquisitions and, in order to consummate an acquisition, the Company would be required to receive the consent of the lender under its Credit Agreement. There can be no assurance that any such acquisitions will be completed on reasonable terms, if at all. Certain of the Company's competitors may also seek to acquire the same companies which the Company seeks to acquire. This may increase the price and related costs at which the Company could otherwise have acquired such companies, perhaps materially. The Company's inability to complete acquisitions on reasonable terms could limit the Company's ability to grow its business. The Company may expend significant funds to pursue and consummate acquisitions. Such use of funds would reduce the Company's working capital. In addition, the Company may fund acquisitions in whole or in part by issuing equity securities, and any such issuances, individually or in the aggregate, may be dilutive to holders of the Common Stock. Acquisitions also may result in the Company incurring additional debt and amortizing costs related to goodwill and other intangible assets, either of which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company may experience difficulties in assimilating the operations, services and personnel of acquired companies and may be unable to sustain or improve the historical revenue and earnings levels of acquired companies, any of which may materially adversely affect the Company's business, financial condition and results of operations. In addition, to the extent it becomes necessary for the Company to fund the working capital requirements of acquired companies, the Company's working capital available for its currently existing operations would decrease. Acquisitions involve a number of additional risks, including the diversion of management's attention from ongoing business operations and the potential loss of key employees of acquired companies. There can be no assurance that the Company can successfully implement its acquisition strategy. The failure to consummate acquisitions on reasonable terms or the inability to successfully integrate and manage acquired operations and personnel could have a material adverse impact on the Company's business, financial condition and results of operations. RELIANCE ON EXECUTIVE OFFICERS The continued success of the Company is dependent to a significant degree upon the services of its executive officers and upon the Company's ability to attract and retain qualified personnel experienced in the various phases of the Company's business. The ability of the Company to operate successfully could be jeopardized if one or more of its executive officers were unavailable and capable successors were not found. The Company does not maintain key man insurance on any of its executive officers. The Company has employment agreements with Alexius A. Dyer III, its Chairman of the Board, President and Chief Executive Officer, and George Murnane III, its Executive Vice President and Chief Financial Officer. The employment agreements between the Company and Messrs. Dyer and Murnane are individually terminable by each executive officer upon a change of control of the Company. See "Management." COMPETITION The aircraft spare parts redistribution market is highly competitive. The market consists of a limited number of well-capitalized companies selling a broad range of products and numerous small competitors serving distinct market niches. Certain of these competitors have substantially greater financial, marketing and other resources than the Company. The Company believes that current industry trends will benefit larger, well-capitalized companies. The Company believes that range and depth of inventories, quality and traceability of products, service and price are the key competitive factors in the industry. The principal companies with which the Company competes are AAR Corp., AGES, Aviation Sales Company and Banner Aerospace, all of which are significantly larger than the Company. Customers in need of aircraft parts have access, through computer-generated inventory catalogues, to a broad array of suppliers, including aircraft manufacturers, airlines and aircraft services companies, which may have the effect of increasing competition for, and lowering prices on, parts sales. See "Business--Competition." POSSIBLE VOLATILITY OF STOCK PRICE The Common Stock has been listed on the AMEX since April 21, 1997. Since then, the per share price of the Common Stock has risen substantially from the price of $3.625 per share on the date of such listing. During and after this offering, the market price of the Common Stock may be highly volatile and could be subject to wide fluctuations in response to quarterly variations in operating results, changes in financial estimates by securities analysts, announcements of material events by the Company, developments in the redistribution industry or other events or factors. The market price of the Common Stock also may be affected by the Company's ability to meet analysts' expectations, and any failure to meet such expectations, even if minor, could have a material adverse effect on the market price of the Common Stock. In addition, changes in general conditions in the economy or the financial markets could adversely affect the market price of the Common Stock. NO DIVIDENDS The Company does not anticipate that it will pay any dividends on the Common Stock in the foreseeable future. The Credit Agreement contains provisions prohibiting the Company from paying dividends without the consent of the lender. See "Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE Immediately after this offering, the Company's executive officers and directors will beneficially own approximately 9.3% of the outstanding Common Stock, after giving effect to options exercisable within 60 days of the date of this Prospectus (approximately 8.8% if the over-allotment option is exercised in full). Subject to the restrictions set forth below, the officers and directors will be free to sell such shares and may determine to sell them from time to time to take advantage of favorable market conditions or for any other reason. Future sales of shares of Common Stock by the Company and its stockholders could adversely affect the prevailing market price of the Common Stock. The Company, its executive officers and directors have entered into a lock-up agreement with Cruttenden Roth Incorporated, as representative of the Underwriters, pursuant to which the Company, its executive officers and directors have agreed, subject to certain exceptions, not to, directly or indirectly, (i) sell, grant any option to purchase or otherwise transfer or dispose of any Common Stock or securities convertible into or exchangeable or exercisable for Common Stock or to file a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the foregoing or (ii) enter into any swap or other agreement or transaction that transfers, in whole or in part, the economic consequence of ownership of the Common Stock for a period of 180 days after the date of this Prospectus, without the prior written consent of Cruttenden Roth Incorporated. After such time, 426,328 shares of Common Stock, including shares of Common Stock issuable on exercise of options, beneficially held by its executive officers and directors will be eligible for sale pursuant to Rule 144 promulgated under the Securities Act. See "Shares Eligible for Future Sale" and "Underwriting." ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW; "BLANK CHECK" PREFERRED STOCK Certain provisions of the Delaware General Corporation Law (the "DGCL") and the Company's Certificate of Incorporation and Bylaws (the "Bylaws") could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. Such provisions could limit the price that investors might be willing to pay in the future for the Common Stock. The Board of Directors of the Company has the authority to issue up to 2,000,000 shares of Preferred Stock (the "Preferred Stock") and to determine the price, rights, preference, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plans to issue shares of Preferred Stock. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the DGCL. In general, this statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder unless such business combination is approved in the prescribed manner. Further, the Board of Directors is divided into three classes of directors elected for staggered three-year terms. Such staggered terms may affect the ability of the holders of the Common Stock to effect a change in control of the Company by limiting the number of directors subject to election at any one time. See "Description of Capital Stock--Preferred Stock" and "--Anti-takeover Effects of Certain Provisions of the Company's Restated Certificate of Incorporation and Bylaws."

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+ RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Common Stock. ABSENCE OF PROFITABLE OPERATIONS The Company commenced operations in 1989 and has recorded net losses from its LaserVision Centers division in every year since inception. The accumulated deficit as of October 31, 1996 was approximately $20.9 million, at which time the Company anticipated its cash and cash equivalents were sufficient to fund operating expenses for the next nine months. The Company anticipates continued losses from operations due to expenditures required to support its U.S. expansion. There can be no assurance that the Company will be able to achieve profitability, or that, if achieved, profitability will be sustained. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." UNCERTAINTY OF MARKET ACCEPTANCE The Company believes that its profitability and growth will depend upon broad acceptance of PRK in the United States and key international markets targeted by the Company. There can be no assurance that PRK will be accepted by either the ophthalmic community or the general population as an alternative to existing methods of treating refractive vision disorders. To date, PRK has not achieved sufficient market acceptance in Europe or Canada for the Company to sustain profitable operations, and there can be no assurance that PRK will obtain sufficient market acceptance in the U.S. to achieve profitable operations. Currently, patients are charged approximately $1,500 to $2,200 per eye for the procedure. The acceptance of PRK may be affected adversely by its cost, concerns relating to its safety and efficacy, general resistance to surgery, the effectiveness of alternative methods of correcting refractive vision disorders, the lack of long-term follow-up data, the possibility of unknown side effects and the lack of third-party reimbursement for the procedure. Many consumers may choose not to have PRK procedures performed due to the availability of nonsurgical methods for vision correction. Any future reported adverse events or other unfavorable publicity involving patient outcomes from use of PRK systems could also adversely affect acceptance of the procedure. Market acceptance could also be affected by the ability of the Company and other participants in the PRK market to train a broad population of ophthalmologists in the procedure. Promotional efforts by suppliers of products or procedures which are alternatives to PRK procedures, including eyeglasses and contact lenses, may also adversely affect the market acceptance of PRK. The failure of PRK to achieve broad market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The market for providing access to excimer lasers is subject to increasingly intense competition. The Company competes with several other companies, including at least one manufacturer of laser equipment, in providing access to excimer lasers in the United States and internationally. Summit, one of two suppliers of laser equipment to the Company, opened 19 laser centers in the United States during 1996. In January 1997 Summit announced that it planned to divest, through sale or spin off, its vision center business. Other companies are currently in the process of gaining FDA approval for their lasers and these companies may elect to enter the laser center business. Other non-manufacturing companies which have indicated they intend to operate or already operate laser centers in the United States are: Beacon Laser Centers, Inc., Global Vision, Inc., LCA Vision, Inc., Sight Resources, Inc., Sterling Vision, Inc., The Laser Centre (TLC) and 20/20 Laser Centers, Inc. The Company will also compete with laser centers operated by local operators in certain markets. There can be no assurance that any reduction in per procedure fees that may result from increased competition will be compensated for by an increase in procedure volume. The procedures offered by the Company's LaserVision Centers also compete with other present forms of treatment for refractive disorders, including eyeglasses, contact lenses, refractive surgery, corneal transplants and other technologies currently under development. The Company expects that companies which have developed or are developing new technologies or products, as well as other companies (including established and newly formed companies) may attempt to develop new products directly competitive with the excimer lasers that are to be utilized by the Company or could introduce new or enhanced products with features which render the equipment to be used by the Company obsolete or less marketable. The ability of the Company to compete successfully will depend in large part on its ability to adapt to technological changes and advances in the treatment of refractive vision disorders. There can be no assurance that, as the market for excimer laser surgery and other treatments of eye disorders develops, the Company's equipment will not become obsolete, and if this occurs, that the Company will be able to secure new equipment to allow it to compete effectively. The advertising and marketing businesses in which the Company's MarketVision and MedSource divisions are engaged are highly competitive. Clients have the freedom to move from one advertising agency to another with comparative ease since the relationships normally can be terminated on short notice. The MarketVision and MedSource divisions compete with several national and regional ophthalmic specialty marketing companies, as well as national and local advertising agencies which may handle diverse client activities. MarketVision and MedSource may be hampered by their affiliation with LaserVision Centers in that some customers may consider them competitors which could adversely affect the ability of these divisions to continue to attract outside business. GOVERNMENT REGULATION The manufacturing, labeling, distribution and marketing of medical devices such as the excimer lasers to which the Company provides access are subject to extensive and rigorous government regulation in the United States by the FDA. Excimer lasers cannot be marketed in the United States for ophthalmic use unless they have been approved by the FDA. Two excimer lasers, manufactured by VISX and Summit, have received FDA approval and are marketed for PRK for low to moderate myopia (nearsightedness) and for PTK. The Company has procured only approved excimer lasers for use in the United States. Changes to an approved excimer laser that affect safety and effectiveness require additional FDA approval. An example of such a change is marketing approved excimer lasers for other uses, such as astigmatism and hyperopia; the lasers cannot be marketed or promoted for these uses until such approvals are obtained. There can be no assurance that the FDA will approve any excimer laser for any other use in a timely fashion or at all. Failure of timely FDA approval for these other indications could have a material adverse effect on the Company's planned expansion in the United States market. The FDA might also take the position that an additional approval is required for the Company's practice of transporting fixed-site lasers between sites. If the FDA were to determine that the lasers being transported require an additional approval, the Company could be subject to enforcement action and could be required to stop transporting fixed-site lasers between sites. There can be no assurance that the Company would be able to obtain such an approval in a timely fashion or at all. Enforcement action or an inability to transport lasers between sites could have a material adverse effect on the Company. Once FDA approval is obtained, manufacturers are subject to continuing FDA obligations. Medical devices are required to be manufactured in accordance with regulations setting forth current Good Manufacturing Practices, which require that devices be manufactured and records be maintained in a prescribed manner with respect to manufacturing, testing and control activities. It is the FDA's view that with respect to excimer lasers, users, as well as manufacturers are required to comply with FDA requirements with respect to labeling and promotion. Discovery of problems, violations of the Radiation Control for Health and Safety Act, or future legislative or administrative action could adversely affect the manufacturer's or the Company's ability to retain approval of its equipment. Failure to comply with applicable FDA requirements could subject the Company to enforcement action, including product seizures, recalls, withdrawal of approvals, and civil and criminal penalties, any one or more of which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, approvals could be withdrawn in appropriate circumstances. Failures of the Company or its principal suppliers to comply with regulatory requirements, or any adverse regulatory action, could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the failure of VISX, Summit or any other manufacturers that supply excimer lasers to the Company to comply with applicable federal, state, or foreign regulatory requirements, or any adverse regulatory action against such manufacturers, could limit the supply of lasers or limit the ability of the Company to use the lasers. The inability of the Company to obtain lasers for sale or use in the United States or elsewhere due to lack of regulatory approval, or otherwise, could prevent the Company from establishing or maintaining LaserVision Centers or MobilExcimers, which would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Government Regulation." Medical device laws and regulations are also in effect in many of the countries in which the Company currently conducts or may in the future conduct business outside the U.S. These range from comprehensive device approval requirements to requests for product data or certifications. The number and scope of these requirements are increasing. International regulatory requirements vary by country and there can be no assurance that the manufacturers of the excimer lasers to which the Company provides access will receive additional international regulatory approvals. Failure to receive such approvals in, or meet the requirements of, any country could prevent the Company from operating in that country, which could have a material adverse effect on the Company's business, financial condition and results of operations. Medical device laws and regulations are also in effect in some states in which the Company currently conducts or may in the future conduct business. State and foreign medical device laws and regulations could have a material adverse effect on the Company's business, financial condition and results of operation. UNCERTAINTY OF FDA APPROVAL OF MOBILEXCIMER Certain FDA officials have advised the Company that they believe that excimer lasers are not approved for use in the MobilExcimer, and that such approval would be required before the Company could operate the MobilExcimer in the United States. The MobilExcimer system has not been approved for use in the United States by the FDA. In June 1996, the Company submitted a PMA application with the FDA for the use of the excimer laser for treatment of low to moderate myopia, which is the first step in seeking approval for the MobilExcimer. In November 1996, the company received FDA approval of its PMA and immediately filed a supplement with the FDA for approval of the MobilExcimer. The process of obtaining approval of a PMA supplement can be lengthy, expensive and uncertain. It is uncertain when, if ever, the FDA will approve excimer lasers for mobile use. If the FDA approves the excimer laser for use on the MobilExcimer, postmarket restrictions, possible loss of approval or other FDA enforcement action, need for non-U.S. approvals and/or state and local restrictions may apply. See "Risk Factors -- Government Regulation." The Company believes that FDA approval for the use of an excimer laser on a mobile unit may not be necessary. Although the Company has no present plans to do so, the Company may decide to operate the MobilExcimer without FDA approval. If the Company were to operate MobilExcimer units in the United States without first receiving FDA approval, the FDA is likely to take enforcement action against the Company, which action could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Government Regulation." LACK OF LONG-TERM FOLLOW-UP DATA; UNDETERMINED MEDICAL RISKS Concerns with respect to the safety and efficacy of PRK include predictability and stability of results. Potential complications and side effects include: post-operative discomfort; corneal haze during healing (an increase in the light scattering properties of the cornea); glare/halos (undesirable visual sensations produced by bright lights); decreases in contrast sensitivity; temporary increases in intraocular pressure in reaction to procedure medication; modest fluctuations in refractive capabilities during healing; modest decreases in best corrected vision (i.e., with corrective lenses); unintended over- or under-corrections; regression of effect; disorders of corneal healing; corneal scars; corneal ulcers and induced astigmatism. The procedure involves the removal of "Bowman's layer," an intermediate layer between the epithelium (outer corneal layer) and the stroma (middle corneal layer). Although clinical studies conducted to date have demonstrated no significant adverse reactions to excimer laser removal of Bowman's layer, it is unclear what effect this will ultimately have on the patient. There can be no assurance that long-term follow-up data will not reveal additional complications that may have a material adverse effect on acceptance of PRK which in turn would have a material adverse effect on the Company's business, financial conditions and results of operations. Concern over the safety of PRK or other procedures could in turn adversely affect market acceptance of PRK or result in adverse regulatory action, including product recalls, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. PRODUCT LIABILITY AND PROFESSIONAL LIABILITY Inherent in the use of human health care devices is the potentially significant risk of physical injury to patients which could result in product liability or other claims based upon injuries or alleged injuries associated with a defect in the product's performance, which may not become evident for a number of years. Therefore, the operation of any LaserVision Center and the use of refractive laser equipment may result in substantial claims against the Company by patients who allege they were injured as a result of surgical procedures using the refractive laser equipment. The Company has "umbrella" product and professional liability insurance in the amounts of $1.0 million (aggregate and per occurrence), but primarily relies and intends to continue to rely on physicians' professional liability insurance policies and manufacturers' insurance policies for product liability coverage. The Company requires its center operators to maintain certain levels of professional liability insurance, and the agreements between the Company and its center operators contain certain cross indemnification provisions. There can be no assurance, however, that physician users will carry sufficient insurance and a partially or completely uninsured successful claim against the Company could have a material adverse effect on the Company's business, financial condition and results of operations. MANAGEMENT OF GROWTH The Company's net revenues have increased in each of the last four fiscal years. While the Company has increased its expense levels to support its recent and expected growth, including the hiring of additional personnel, there can be no assurance that the Company's revenue growth can be sustained. To accommodate its recent growth, the Company will need to implement a variety of new or expanded business and financial systems, procedures and controls, including the improvement of its accounting, marketing and other internal management systems. There can be no assurance that the implementation of such systems, procedures and controls can be completed successfully, or without disruption of the Company's operations. Continued expansion of the Company could significantly strain the Company's management, financial and other resources. In addition, the Company has hired and will be required to hire in the future substantial numbers of new employees, particularly personnel to support its MobilExcimer operations. There can be no assurance that the Company's systems, procedures, controls and staffing will be adequate to support the Company's operations. Failure to manage the Company's growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE UPON MANAGEMENT The future success of the Company is dependent in part on its ability to recruit and retain certain key personnel, including John J. Klobnak, Chief Executive Officer and Chairman of the Board. The loss of the services of certain members of management, or other key personnel, could have a material adverse effect on the Company. The Company is the beneficiary of key-man life insurance policies ranging from $500,000 to $1.0 million on certain members of management, but there can be no assurance that the benefits under these policies will be sufficient to compensate the Company for the loss of the services of any of such persons. NEED FOR ADDITIONAL FINANCING The Company anticipates that it will require additional financing to fund the Company's operations, including its proposed expansion of its mobile laser access capability, during the next 24 months. As of January 31, 1997, the company anticipates that its cash and cash equivalents are sufficient to fund operating expenses through July 1997. The Company's future liquidity and capital requirements will depend on numerous factors, many of which are outside the control of the Company. Future financings may result in the issuance of senior securities or in dilution to the holders of the Common Stock. Any such financing, if required, may not be available on satisfactory terms or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." VOLATILITY OF STOCK PRICE The market price of the Common Stock has historically been subject to substantial price volatility. Such volatility may recur in the future due to overall market conditions or business specific factors such as the Company's ability to effectively penetrate the market, new technological innovations and products, changes in government regulations, developments with respect to patent or proprietary rights, public concerns with regard to safety and efficacy of various medical procedures, the issuance of new or changed stock market analyst reports and recommendations, the Company's ability to meet analysts' projections and fluctuations in the Company's financial results. In addition, the Common Stock could experience extreme fluctuations in market price which are wholly unrelated to the operating performance of the Company. QUARTERLY FLUCTUATIONS IN OPERATING RESULTS Results of operations have varied and may continue to fluctuate significantly from quarter to quarter and will depend upon numerous factors, including: (i) the opening and closing of centers; (ii) the purchase of additional lasers and other equipment; (iii) competition and (iv) seasonal factors. Historically, the Company's third quarter results have reflected fewer procedures due to holiday schedules and less available disposable income to pay for elective surgery such as PRK. Due to such past and future quarterly fluctuations in operating results, quarter-to-quarter comparisons of the Company's operating results are not necessarily meaningful and should not be relied upon as indications of likely future performance or annual operating results. SHARES ELIGIBLE FOR FUTURE SALE As of October 31, 1996, options issued pursuant to the Company's Incentive and Non-Qualified Stock Option Plans to purchase up to 546,245 shares of Common Stock exercisable over the next several years were outstanding at prices ranging from $3.00 to $16.625. As of October 31, 1996, non-qualified warrants issued to employees and consultants to purchase up to 1,164,700 shares of Common Stock exercisable over the next several years at prices ranging from $5.00 to $12.625 were outstanding. As of October 31, 1996, Class C, D and E warrants and certain warrants issued to underwriters in connection with the Company's 1993 public offering to purchase an aggregate of 63,650 shares of Common Stock exercisable over the next several years at prices ranging from $5.00 to $7.25 were outstanding. The shares of Common Stock issuable upon exercise of the foregoing options and warrants have been registered and will be freely tradeable upon exercise. As of October 31, 1996, additional warrants to purchase 510,000 shares of Common Stock issued to employees, directors and consultants of the Company and exercisable over the next several years at prices ranging from $5.25 to $9.00 were outstanding. The shares of Common Stock issuable upon exercise of these warrants are not registered and may be sold only if registered under the Securities Act or sold in accordance with an applicable exemption from registration, such as Rule 144 or Rule 701. As of October 31, 1996, 2,331,483 shares of Common Stock were reserved for issuance upon exercise of such warrants and options. As of October 31, 1996, there were 8,805,383 shares of Common Stock outstanding. Upon this registration, 8,656,748 of these outstanding shares will be freely tradeable without restriction under the Securities Act unless held by affiliates. EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; PREFERRED STOCK The Company's Amended Certificate of Incorporation authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Common Stock, thus making it difficult for a third party to obtain voting control of the Company. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. The Company's Amended Certificate of Incorporation includes certain anti-takeover provisions designed to make the Company a less attractive target for an acquisition of control by an outsider that does not have the support of the Company's Board of Directors. These provisions include requirements that certain business combinations involving persons owning beneficially at least 10% of the Company's shares be approved by both an 80% vote of all outstanding shares and also a majority vote of all outstanding shares not owned beneficially by persons involved in such business combinations. These provisions may discourage a third party from attempting to acquire control of the Company and may lower the price that an investor may be willing to pay for shares of the Common Stock. ABSENCE OF DIVIDENDS The Company has never declared or paid any cash dividends and anticipates that for the foreseeable future it will follow a policy of not declaring dividends and instead retaining earnings, if any, for use in its business. INTELLECTUAL PROPERTY/PROPRIETARY TECHNOLOGY The names LASERVISION(R), LASERVISION CENTERS AND DESIGN(R), LASERVISION CENTERS(R), LASERVISION CENTER(R) and MobilExcimer(R) are registered U.S. service marks of the Company. In addition, the Company owns service mark registrations in a number of foreign countries. The Company has also secured a patent for the MobilExcimer mounting system. The Company's service marks, MobilExcimer patent and other proprietary technology may offer the Company a competitive advantage in the marketplace and could be important to the success of the Company. There can be no assurance that one or all of these registrations will not be challenged, invalidated or circumvented in the future. The Company is currently involved in two legal proceedings which could result in an adverse impact on its rights to certain of such registrations. Litigation regarding intellectual property is common and there can be no assurance that the Company's service mark registrations and patent will significantly protect the Company's intellectual property. The defense and prosecution of intellectual property proceedings is costly and involves substantial commitments of management time. Failure to successfully defend the Company's rights with respect to its intellectual property could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Legal Proceedings."

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+ RISK FACTORS In addition to the Risk Disclosure Statement appearing at the beginning of this Prospectus, prospective subscribers should consider the following risks before subscribing for Units. RISKS RELATING TO FUTURES INTERESTS TRADING AND THE FUTURES INTERESTS MARKETS FUTURES INTERESTS TRADING IS SPECULATIVE AND VOLATILE. Futures interests prices are highly volatile. Price movements of futures interests are influenced by, among other things: changing supply and demand relationships; weather; agricultural, trade, fiscal, monetary, and exchange control programs and policies of governments; domestic and foreign political and economic events and policies; and changes in interest rates. The Partnership's trading has been volatile. See "Performance Record of the Partnership." The Partnership is also subject to the risk of failure of any of the exchanges on which it trades or of their clearinghouses, if any. In addition, under certain circumstances, such as the inability of a customer of the Commodity Broker or the Commodity Broker itself to satisfy substantial deficiencies in such customer's account, the Partnership may be subject to a risk of loss of its funds on deposit with such Commodity Broker. See "The Futures, Options and Forward Markets." FUTURES INTERESTS TRADING IS HIGHLY LEVERAGED. Because of the low margin deposits normally required in futures interests trading (typically between 2% and 15% of the value of the contract purchased or sold), an extremely high degree of leverage is typical of a futures interests trading account. As a result, a relatively small price movement in a futures interest may result in immediate and substantial losses to the investor. The Partnership uses substantial leverage which could, depending on performance, result in increased gain or loss. See "Performance Record of the Partnership." For example, if at the time of purchase 10% of the price of a contract is deposited as margin, a 10% decrease in the price of the contract would, if the contract is then closed out, result in a total loss of the margin deposit before any deduction for brokerage commissions. A decrease of more than 10% would result in a loss of more than the total margin deposit. See "The Futures, Options and Forward Markets-- Margins" and "The Limited Partnership Agreement--Nature of the Partnership." FUTURES INTERESTS TRADING MAY BE ILLIQUID. Most United States futures exchanges limit fluctuations in certain futures interests prices during a single day by regulations referred to as "daily price fluctuation limits" or "daily limits." Pursuant to such regulations, during a single trading day no trades may be executed at prices beyond the daily limits. Once the price of a particular futures interest has increased or decreased by an amount equal to the daily limit, positions in the futures interest can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. Prices in various futures interests have occasionally moved the daily limit for several consecutive days with little or no trading. Similar occurrences could prevent the Partnership from promptly liquidating unfavorable positions and subject it to substantial losses. While daily limits may reduce or effectively eliminate the liquidity of a particular market, they do not limit ultimate losses, and may in fact substantially increase losses because they may prevent the liquidation of unfavorable positions. There is no limitation on daily price moves in trading currency forward contracts. In addition, the Partnership may not be able to execute trades at favorable prices if little trading in the futures interests involved is taking place. Under some circumstances, the Partnership may be required to accept or make delivery of the underlying commodity if the position cannot be liquidated prior to its expiration date. See "Investment Program, Use of Proceeds and Trading Policies--Trading Policies." It also is possible that an exchange or the CFTC may suspend trading in a particular futures interest, order immediate liquidation and settlement of a particular futures interest, or order that trading in a particular futures interest be conducted for liquidation only. Similarly, trading in options on a particular futures interest may become restricted if trading in the underlying futures interest has become restricted. During periods in October 1987, for example, trading in certain stock index futures was too illiquid for markets to function efficiently and was at one point actually suspended. See "The Futures, Options and Forward Markets." The principals who deal in the forward contract markets are not required to continue to make markets in the forward contracts they trade. There have been periods during which certain participants in forward markets have refused to quote prices for forward contracts or have quoted prices with an unusually wide spread between the price at which they are prepared to buy and that at which they are prepared to sell. SPECIAL RISKS ASSOCIATED WITH FORWARD TRADING. The Partnership trades in forward contracts, primarily currency forward contracts. Based on the anticipated allocation of the Partnership's assets among the Trading Advisor's trading programs, forward contracts are expected to comprise up to 50% of the Partnership's trading activities. A forward contract is a contractual obligation to purchase or sell a specified quantity of a commodity at a specified date in the future at a specified price and, therefore, is similar to a futures contract. However, forward contracts are not traded on exchanges and, as a consequence, investors in forward contracts are not afforded the regulatory protections of such exchanges or the CFTC; rather, banks and dealers act as principals in such markets. Neither the CFTC nor banking authorities regulate trading in forward contracts on currencies, and foreign banks may not be regulated by any United States governmental agency. Generally, when the Trading Advisor instructs the Partnership to either sell or buy a particular currency or other forward contract, DWR will do back-to-back principal trades in order to carry out such instructions. DWR, as principal, will arrange bank lines of credit and contract with a United States or foreign bank or dealer to make or take future delivery of a specified quantity of currency or other commodity at a negotiated price. DWR, again as principal, will in turn contract with the Partnership to make or take future delivery of the same specified quantity of currency or other commodity at the same price. DWR will charge the Partnership a transaction fee for effecting a forward contract transaction, but will not attempt to profit from any mark-up or spread on the trade with the Partnership. Because performance of forward contracts on currencies and other commodities is not guaranteed by any exchange or clearinghouse, the Partnership is subject to the risk of the inability or refusal to perform with respect to such contracts on the part of the principals or agents with or through which the Partnership trades. Currently the sole counterparty with whom the Partnership trades is DWR. Any such failure or refusal, whether due to insolvency, bankruptcy or other causes, could subject the Partnership to substantial losses. The Partnership and DWR will trade forward contracts only with banks, brokers, dealers and other financial institutions which the General Partner, in conjunction with DWR, has determined to be creditworthy. The CFTC has published for comment in the United States Federal Register a statement concerning its jurisdiction over transactions in the foreign currency markets, including transactions of the type which may be engaged in by the Partnership. In the future, the CFTC might assert that forward contracts of the type entered into by the Partnership constitute unauthorized futures contracts subject to the CFTC's jurisdiction and attempt to prohibit the Partnership from participating in transactions in such contracts. If the Partnership were restricted in its ability to trade in the currency markets, the trading strategies of the Trading Advisor could be materially affected. SPECIAL RISKS ASSOCIATED WITH TRADING ON FOREIGN EXCHANGES. The Partnership trades in futures, forward, and option contracts on exchanges located outside the United States where CFTC regulations do not apply. Based on the anticipated allocation of the Partnership's assets among the Trading Advisor's trading programs, trading on foreign exchanges is expected to comprise up to 50% of the Partnership's trading activities. Some foreign exchanges, in contrast to domestic exchanges, are "principals' markets" in which performance with respect to a contract is the responsibility only of the individual member with whom the trader has entered into a contract and not of the exchange or clearinghouse, if any. In the case of trading on foreign exchanges, the Partnership will be subject to the risk of the inability of, or refusal by, the counterparty to perform with respect to such contracts. Although DWR monitors the creditworthiness of the foreign exchanges and clearing brokers with which it does business for clients, DWR does not have the capability to precisely quantify the Partnership's exposure to risks inherent in its trading activities on foreign exchanges, and as a result, the risk is not monitored by DWR on an individual client basis (including the Partnership). Trading on foreign exchanges may involve certain other risks not applicable to trading on United States exchanges, such as the risks of exchange controls, expropriation, burdensome or confiscatory taxation, moratoriums, or political or diplomatic events. In addition, certain foreign markets are newly formed and may lack personnel experienced in floor trading as well as in monitoring floor trades for compliance with exchange rules. For an additional discussion of the credit risks relating to trading on foreign exchanges, see "Risk Factors--Risks Relating to Futures Interests and the Futures Interest Markets--Special Risks Associated with Trading on Foreign Exchanges." Furthermore, as the Partnership determines its Net Assets in United States dollars, with respect to trading on foreign markets the Partnership is subject to the risk of fluctuation in the exchange rate between the local currency and dollars, and to the possibility of exchange controls. Unless the Partnership hedges itself against fluctuations in exchange rates between the United States dollar and the currencies in which trading is done on such foreign exchanges, any profits which the Partnership might realize in such trading could be eliminated as a result of adverse changes in exchange rates, and the Partnership could even incur losses as a result of any such changes. See "The Futures, Options and Forward Markets--Regulations." SPECIAL RISKS ASSOCIATED WITH TRADING OF OPTIONS ON FUTURES. Options on futures contracts and options on physical commodities are traded on United States commodity exchanges and may be traded by the Partnership on certain foreign exchanges. The Partnership is authorized to trade options and the Trading Advisor has included options in its trading. Each such option is a right, purchased for a certain price, to either buy or sell the underlying futures contract or physical commodity during a certain period of time for a fixed price. Such trading involves risks substantially similar to those involved in trading futures contracts in that options are speculative and highly leveraged. Specific market movements of the underlying futures contract or physical commodity cannot be accurately predicted. The purchaser of an option is subject to the risk of losing the entire purchase price of the option. The writer of an option is subject to the risk of loss resulting from the difference between the premium received for the option and the price of the commodity or futures contract underlying the option which the writer must purchase or deliver upon exercise of the option. See "The Futures, Options, and Forward Markets--Options on Futures." THE PARTNERSHIP HAS CREDIT RISK TO DWR. The Partnership has credit risk because DWR acts as the futures commission merchant or the sole counterparty with respect to most of the Partnership's assets. Exchange traded futures contracts are marked to market on a daily basis, with variations in value credited or charged to the Partnership's account on a daily basis. DWR, as futures commission merchant for the Partnership's exchange traded futures contracts, is required, pursuant to CFTC regulations, to segregate from its own assets, and for the sole benefit of its commodity customers, all funds held by DWR with respect to exchange traded futures contracts, including an amount equal to the net unrealized gain on all open futures contracts. With respect to the Partnership's off-exchange traded foreign currency forward contracts, there are no daily settlements of variations in value. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Instruments." POSSIBLE EFFECTS OF SPECULATIVE POSITION LIMITS. The CFTC and the United States futures exchanges have established limits referred to as "speculative position limits" or "position limits" on the maximum net long or net short futures or options contract position which any person or group of persons may own, hold, or control in particular futures or options contract. All futures and option accounts owned, controlled or managed by the Trading Advisor and its principals will be combined for position limit purposes, to the extent they may be applicable. In this connection, the Management Agreement provides that if speculative position limits are exceeded by the Trading Advisor in the opinion of independent counsel, the CFTC or any regulatory body, exchange, or board, the Trading Advisor and its principals and affiliates will promptly liquidate positions in all of their accounts, including the Partnership's account, as to which positions are attributed to the Trading Advisor, as nearly as possible in proportion to the accounts' respective amounts available for trading (taking into account different degrees of leverage and "notional equity") to the extent necessary to comply with applicable position limits. See "The Management Agreement." From time to time, the trading approach or instructions of the Trading Advisor may have to be modified, and positions held by the Partnership may have to be liquidated, in order to avoid exceeding such limits. Such modification or liquidation, if required, could adversely affect the operations and profitability of the Partnership. See "Conflicts of Interest--Management of Other Accounts by the Trading Advisor." The Partnership is also subject to the same speculative position limits and may have to modify or liquidate positions if such limits are, or are about to be, exceeded by the Partnership as a whole. Speculative position limits are not applicable to forward contract trading, although the principals with which DWR or the Partnership may deal in the forward markets may limit the positions available to DWR or the Partnership as a consequence of credit considerations. RISKS RELATING TO THE PARTNERSHIP AND THE OFFERING OF UNITS PAST RESULTS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE. The past performance results of the Partnership (see "Performance Record of the Partnership"), are not necessarily indicative of the future performance of the Partnership. SUBSTANTIAL CHARGES TO THE PARTNERSHIP. The Partnership is subject to substantial charges to its Net Assets from the payment of the monthly management fee, brokerage commissions, other transaction fees and costs, administrative expenses, and any extraordinary costs, regardless of whether the Partnership realizes profits. For the years ended December 31, 1996, 1995, and 1994, the Partnership had total revenues of $28,663,110, $26,524,038, and $3,634,209, respectively, and total expenses of $10,269,161, $8,066,200, and $7,855,844, respectively. Because the incentive fee which the Partnership pays to the Trading Advisor is determined on a quarterly rather than on an annual basis, the Partnership may be subject to substantial incentive fees in any given 12 consecutive month period despite a decline in the Partnership's Net Assets for such period as a whole. See "Description of Charges to the Partnership." RESTRICTED INVESTMENT LIQUIDITY IN THE UNITS. The Units cannot be assigned or transferred except on the terms and conditions set forth in the Limited Partnership Agreement, and there will be no public market for the Units. See "The Limited Partnership Agreement--Restrictions on Transfers or Assignments." A Limited Partner, after proper notice has been given, may require the Partnership to redeem all or part of his Units as of, but not before, the sixth month-end following the closing, in the manner described herein. Thereafter, Units may be redeemed as of the end of any month. However, no Limited Partner may redeem fractions of Units, except that fractions of Units may be redeemed if a Limited Partner is redeeming in multiples of $1,000 or is redeeming his entire interest in the Partnership. Redemptions of Units are subject to redemption charges through the twenty-fourth month following the closing at which such Units are issued. The foregoing redemption charges and the six month limitation will not apply to Limited Partners who purchase Units pursuant to Exchanges. An investor who purchases $500,000 or more of Units will not be subject to the redemption charges described above. Similarly, investors who are Limited Partners in the Partnership immediately prior to the Closing will not be subject to the minimum six-month holding period or the redemption charges, described above, with respect to Units purchased during the Offering Period. The right to obtain payment on redemption is contingent upon (a) the Partnership having assets sufficient to discharge its liabilities on the effective date of the redemption, and (b) the timely receipt by the General Partner of a Request for Redemption. All liabilities of the Partnership are accrued daily and are reflected in the daily Net Asset Value of the Partnership. See "Redemptions." Under certain circumstances (including, but not limited to, the Partnership's inability to liquidate or a delay in liquidating positions or the default or delay in payments due the Partnership from dealers, brokers, banks, or other persons), the Partnership may delay payment to Limited Partners requesting redemptions of the proportionate part of the redemption requests represented by the sums which are the subject of any such default or delay. See "Redemptions." CONFLICTS OF INTEREST IN THE PARTNERSHIP STRUCTURE. DWR and the General Partner were instrumental in the organization of the Partnership and may be deemed "promoters" of the Partnership within the meaning of Rule 405 under the Securities Act of 1933, as amended (the "1933 Act"). Moreover, the Partnership, DWR and the General Partner are affiliated entities and are represented by a single counsel. As a consequence of the foregoing, there is an absence of arm's-length negotiation with respect to some of the terms of this offering. See "Conflicts of Interest." LIMITED PARTNERS WILL NOT PARTICIPATE IN MANAGEMENT. Limited Partners will not participate in the management of the Partnership or in the conduct of its business. See "The Limited Partnership Agreement--Management of Partnership Affairs." However, the Limited Partnership Agreement provides that certain actions may be taken upon the affirmative vote of Limited Partners owning more than 50% of the Units then owned by Limited Partners. See "The Limited Partnership Agreement--Amendments; Meetings." RELIANCE ON THE GENERAL PARTNER. A Limited Partner is relying on the ability of the General Partner in the selection of a successful trading advisor for the Partnership. The selection by the General Partner of the Trading Advisor involved numerous considerations. The General Partner evaluated the performance record of the Trading Advisor and determined if the Trading Advisor was suitable for the Partnership's overall trading approach, trading policies and investment objectives. The General Partner reviewed other aspects of the Trading Advisor (including the prospective Trading Advisor's trading programs, experience, volatility of trading, futures interests traded, amount of management and incentive fees normally charged, reputation of the Trading Advisor and its personnel and amount of funds under management), and made certain subjective judgments in retaining the Trading Advisor. Although the General Partner carefully weighed the above factors in making its selections, other factors not considered by the General Partner may also be important. In the future, the General Partner may be required to terminate and replace the Trading Advisor by reason of its poor performance or for other reasons or to retain additional trading advisors for the Partnership and similar judgments will have to be made from time to time. RISKS RELATING TO THE TRADING ADVISOR RELIANCE ON THE TRADING ADVISOR TO TRADE SUCCESSFULLY. Futures interests trading decisions for the Partnership are made by the Trading Advisor, upon whose judgment and abilities the success of the Partnership largely depends. No assurance can be given that the trading programs utilized by the Trading Advisor will prove successful under all or any market conditions. MARKET FACTORS MAY ADVERSELY INFLUENCE TRADING PROGRAMS. Any factor which may lessen the prospect of major trends in the future (for example, increased governmental control of, or participation in, the currency markets) may reduce the Trading Advisor's ability to trade profitably in the future. Any factor which would make it more difficult to execute timely trades, such as a significant lessening of liquidity in a particular market, would also be detrimental to profitability. As a result of these factors and the general volatility of the futures interests markets, investors should view their investment as long term (at least 2 years) in order to permit the programs of the Trading Advisor to function over time. Further, the Trading Advisor may alter its programs from time to time in an attempt to better evaluate market movements. As a result of such periodic modifications, it is possible that the trading programs used by the Trading Advisor in the future may be different from those presently in use. LIMITED TERM OF THE MANAGEMENT AGREEMENT MAY LIMIT ACCESS TO THE TRADING ADVISOR. The Management Agreement with the Trading Advisor will continue in effect for two years from the date of the Closing. Thereafter, the Trading Advisor may terminate the Management Agreement upon 90 days' prior written notice to the Partnership. In addition, the Management Agreement is terminable by the Partnership at any time without penalty at any month end upon 5 days' prior written notice to the Trading Advisor, and at any time upon written notice under certain circumstances specified therein. The Management Agreement is also terminable by the Trading Advisor upon 30 days' prior written notice to the Partnership under certain circumstances specified therein. See "The Management Agreement." Upon the expiration or termination of the Management Agreement, the General Partner will make other arrangements for providing trading advice. In the selection of any trading advisor upon the termination of a Management Agreement (including any retention of the Trading Advisor thereafter), the General Partner will take into account all relevant factors, including the prospective trading advisor's trading performance, experience, volatility of trading, futures interests traded, amount of management and incentive fees normally charged, reputation of the trading advisor and its personnel and amount of funds under management, as well as the trading policies and investment objectives of the Partnership. There can be no assurance that the services of a trading advisor will be available on the same or similar terms in case of expiration or termination of a Management Agreement. POSSIBLE ADVERSE EFFECTS OF INCREASING THE ASSETS TRADED BY THE TRADING ADVISOR. A trading advisor is limited in the amount of assets that it can successfully manage, both by the difficulty of executing substantially larger trades made necessary by the larger amount of equity under management and by the restrictive effect of speculative position limits. Increased equity generally results in a larger demand for the same futures interests among the accounts managed by a trading advisor. Furthermore, while there has been substantial debate on the subject, a considerable number of analysts believe that a trading advisor's rate of return tends to decrease as the amount of equity under management increases. The Trading Advisor has not agreed to limit the amount of additional equity that it may manage. There can be no assurance that the Trading Advisor's trading programs will not be adversely affected by additional equity, including the proceeds of this offering. TRADING DECISIONS BASED ON TECHNICAL TRADING APPROACH MAY NOT PERFORM UNDER CERTAIN MARKET CONDITIONS. Trading decisions of the Trading Advisor are based on "technical" trading programs as opposed to "fundamental" trading methods. Fundamental trading methods attempt to examine external factors (such as governmental policies, national and international political and economic events, changing trade prospects, and similar factors which affect the supply and demand for a particular futures interest) in order to predict future prices. Technical trading systems, however, generate buy and sell signals which are not based on analysis of fundamental supply and demand factors, but rather are based, in most cases, upon a study of actual daily, weekly, and monthly price fluctuations, volume variations and changes in open interest and other related mathematical, statistical or quantitative data utilizing charts and/or computers. The profitability of both technical and fundamental analysis in futures interests trading generally depends upon the accurate forecasting of major price moves or trends in some futures interests. No assurance can be given of the accuracy of the forecasts or the existence of some major price move. The best trading approach will not be profitable if there are sustained periods in which there are no price moves or trends of the kind the trading approach seeks to identify and follow. In the past, there have been periods without discernible trends and, presumably, such periods will continue to occur in the future. Periods without such price moves may produce losses. Any factor which would lessen the prospect of major trends occurring in the future (such as increased governmental control of or participation in the markets) may reduce the prospect that a particular trading approach will be profitable in the future. Moreover, any factor which would make it more difficult to execute trades at desired prices in accordance with a trading approach (such as a significant lessening of liquidity in a particular market) would also be detrimental to profitability. Many other trading approaches utilize similar analyses in making trading decisions; therefore, bunching of buy and sell orders can occur which makes it more difficult for a position to be taken or liquidated. No assurance can be given that the Trading Advisor's trading programs and trading decisions will be successful under all or any market conditions. A limiting factor in the use of technical analysis is that such an approach generally requires price movement data which can be translated into price trends sufficient to dictate a market entry or exit decision. Any trading approach which is based upon such technical concepts may not perform well when futures interests markets are trendless or erratic, because a technical approach may fail to identify a trend on which action should be taken or it may react to minor price movements and thus establish a position contrary to overall price trends, which may result in losses. In addition, a technical trading approach may underperform other trading approaches when fundamental factors dominate price moves within a given market. For example, since technical analysis generally does not take into account fundamental factors such as supply, demand, and political and economic events (except insofar as such factors may have influenced price and other technical data constituting input information for such approach), a technical trading approach may be unable to respond to fundamental causative events until after their impact has ceased to influence the markets; positions dictated by such resultant price movements may be incorrect in light of the fundamental factors then affecting the markets. The calculations which underlie the Trading Advisor's trading programs involve many variables and are determined primarily by computer. The use of a computer in developing and operating a trading system does not assure the success of the system because a computer is merely an aid in compiling and organizing trading information. No assurance is given that the trading strategies employed by the Trading Advisor will produce profits or will not lose money. POSSIBLE EFFECTS OF OTHER TREND-FOLLOWING SYSTEMS. Futures interests trading systems employing trend-following signals, based either exclusively on technical analysis or on a combination of fundamental and technical analysis, are not new. If many traders follow very similar systems, similar buy and sell orders can be placed at or about the same time, which makes it more difficult for a position to be established or liquidated at a given price. The General Partner is aware of an increase in both the use of trend-following systems in recent years and in the overall volume of trading and liquidity of the futures interests markets. However, it is difficult to be certain whether the total amount of funds traded on a trend-following basis, either for futures contracts as a whole or for a particular futures interests, is greater in proportion to the overall volume and liquidity of markets presently than has been the case in the past. While the effect of any increase in the proposition of funds traded pursuant to trend-following systems in recent years cannot be determined, any such increase could alter trading patterns or affect execution of trades to the detriment of the Partnership. TAXATION AND REGULATORY RISKS POSSIBILITY OF TAXATION AS A CORPORATION. The General Partner has been advised by its legal counsel, Cadwalader, Wickersham & Taft, that in its opinion under current United States federal income tax (hereinafter "federal income tax") laws and regulations, the Partnership will be classified as a partnership and not as an association taxable as a corporation. This status has not been confirmed by a ruling from, and such advice is not binding upon, the United States Internal Revenue Service (the "Internal Revenue Service"). No such ruling has been or will be requested. The facts and authorities relied upon by counsel in their opinion may change in the future. If the Partnership were taxed as a corporation for federal income tax purposes, income or loss of the Partnership would not be passed through to Partners and the Partnership would be subject to tax on its income at the rates of tax applicable to corporations, without any deductions for distributions to the Partners. In addition, all or a portion of distributions made to the Partners could be taxable to the Partners as dividends or capital gains. See "Material Federal Income Tax Considerations." PARTNER'S TAX LIABILITY MAY EXCEED DISTRIBUTIONS. If the Partnership has profits for a taxable year, such profit will be taxable to the Partners in accordance with their distributive shares of Partnership profit, whether or not the profit actually has been distributed to the Partners. Accordingly, taxes payable by Partners with respect to Partnership profit may exceed the amount of Partnership distributions, if any, for a taxable year. Further, the Partnership may sustain losses offsetting such profit in a succeeding taxable year, so that Partners may never receive the profit on which they were taxed in the prior year. See "Material Federal Income Tax Considerations." POSSIBLE LIMITATION ON DEDUCTION OF CERTAIN EXPENSES. The deductibility of certain miscellaneous itemized deductions is limited to the extent such expenses exceed 2% of the adjusted gross income of an individual, trust or estate. In addition, certain of an individual's itemized deductions are further reduced by an amount equal to the lesser of (i) 3% of such individual's adjusted gross income over a certain threshold amount and (ii) 80% of such itemized deductions. Based upon the activities of the Partnership, the General Partner has been advised by its legal counsel that in its opinion various expenses incurred by the Partnership should not be subject to these limitations except to the extent that the Internal Revenue Service promulgates regulations that so provide. See "Material Federal Income Tax Considerations." POSSIBILITY OF TAX AUDIT. There can be no assurance that the Partnership's tax return will not be audited by the Internal Revenue Service or that adjustments to such return will not be made as a result of such an audit. If an audit results in an adjustment, Limited Partners may be required to file amended returns (which may themselves also be audited) and to pay back taxes plus interest and/or penalties that may then be due. See "Material Federal Income Tax Considerations." ABSENCE OF REGULATIONS APPLICABLE TO SECURITIES MUTUAL FUNDS AND THEIR ADVISERS. The Partnership is not registered as an investment company or a "mutual fund" under the Investment Company Act of 1940, as amended (or any similar state law), and neither the General Partner nor the Trading Advisor is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (or any similar state law). Investors, therefore, are not accorded the protective measures provided by such legislation. However, in accordance with the provisions of the Commodity Exchange Act, as amended (the "CEAct"), the regulations of the CFTC thereunder and the NFA rules, the General Partner is registered as a commodity pool operator, the Trading Advisor is registered as a commodity trading advisor, and DWR is registered as a futures commission merchant, each subject to regulation by the CFTC and each a member of the NFA in such respective capacities. THE FOREGOING RISK FACTORS DO NOT PURPORT TO BE A COMPLETE EXPLANATION OF ALL THE RISKS INVOLVED IN THIS OFFERING. POTENTIAL INVESTORS SHOULD READ THIS PROSPECTUS IN ITS ENTIRETY BEFORE DETERMINING WHETHER TO INVEST IN THE UNITS. CONFLICTS OF INTEREST RELATIONSHIP OF THE GENERAL PARTNER TO THE COMMODITY BROKER The General Partner is a wholly-owned subsidiary of Dean Witter, Discover & Co. ("DWD"), a principal subsidiary of which, DWR, acts as the commodity broker for, and receives brokerage commissions from, the Partnership pursuant to a Customer Agreement. Because the General Partner is affiliated with DWR, the General Partner will have a conflict of interest between its responsibilities to limit and reduce the brokerage commissions paid by the Partnership and otherwise manage the Partnership for the benefit of the Limited Partners and its interest in obtaining for DWR favorable brokerage commissions. Most customers of DWR who maintain commodity trading accounts over $1,000,000 pay commissions at negotiated rates which are substantially less than the rate which is paid by the Partnership. Four of the 22 currently actively trading commodity pools for which Demeter acts as general partner are charged flat-rate asset based brokerage fees, 16 of such commodity pools are charged brokerage fees on a roundturn brokerage commission basis (I.E., a charge for entering and exiting each futures interest transaction) and such fees are subject to a monthly asset-based cap, and two are charged on a roundturn brokerage commission basis without a monthly asset-based cap. See "The Commodity Broker" and "Fiduciary Responsibility." The General Partner selected the Trading Advisor and will participate in the selection of any new trading advisor for the Partnership. However, because the selection of trading advisors who engage in a high volume of trades will increase the costs to DWR of serving as commodity broker for the Partnership (if commissions for any month exceed the asset-based cap described under "Description of Charges to the Partnership"), without DWR's receipt of an offsetting increase in revenue, the General Partner has an incentive to select trading advisors and trading systems which engage in a volume of trades which generate commission revenue up to, but not exceeding the cap. In addition, the Partnership, DWR and the General Partner are affiliated entities and are represented by a single counsel. As a consequence of the foregoing, there is an absence of arm's-length negotiation with respect to some of the terms of this offering. While the Customer Agreement is nonexclusive, so that the Partnership has the right to seek lower commission rates from other brokers at any time, the General Partner believes that the Customer Agreement and other arrangements between the Partnership and DWR are fair, reasonable and competitive, and represent the best prices and services available, considering the matters discussed in this paragraph below and in the immediately following paragraph. In addition to DWR's cost of executing futures interests trades for the Partnership, DWR is subject to the risk and expense of offering the Units, and the General Partner, an affiliate of DWR, will provide ongoing services to the Partnership, which include administering the redemption of Units, and the General Partner has financial obligations as the general partner of the Partnership. A significant portion of the brokerage commissions to be paid to DWR by the Partnership will be paid by DWR to certain of its employees for providing continuing assistance to Limited Partners to whom they have sold Units. Such DWR employees who provide continuing advice to Limited Partners as to when and whether to redeem Units may have a conflict of interest by reason of their continuing receipt of a portion of the brokerage commissions paid to DWR by the Partnership. The General Partner will review the brokerage arrangements at least annually to ensure they are fair, reasonable and competitive, and that they represent the best price and services available, taking into consideration the size and trading activity of the Partnership and the services provided, and costs, expenses, and risk borne, by DWR and the General Partner. See "The Commodity Broker" and "Fiduciary Responsibility." The Partnership trades in forward contracts through DWR. The General Partner has a conflict of interest in selecting its affiliate as the party with and through which the Partnership executes its forward trades and selecting other persons which might be able to make a better price or superior execution available to the Partnership. The General Partner will review the Partnership's forward trading arrangements from time to time in an attempt to determine whether such arrangements are competitive with those of other comparable pools in light of the circumstances. See "Risk Factors-- Risks Relating to Futures Interests Trading and the Futures Interests Markets--Special Risks Associated with Forward Trading" and "The Futures, Options and Forward Markets." DWR and the General Partner may, from time to time, be subject to conflicting demands in respect of their obligations to the Partnership and other commodity pools and accounts. Certain pools may generate larger brokerage commissions to DWR, resulting in increased payments to DWR employees as described above. Since DWR employees may receive greater compensation from the sale of units of one pool over another, such employees are subject to a conflict of interest in providing advice to Limited Partners. ACCOUNTS OF AFFILIATES OF THE GENERAL PARTNER, THE TRADING ADVISOR AND DWR While the General Partner does not trade futures interests for its own account (other than indirectly as a consequence of its position as general partner of commodity pools), certain officers, directors and employees of the General Partner, the Trading Advisor and DWR, and their affiliates, principals, directors, officers, and employees, may trade futures interests for their own accounts. The records of such trading will not be available to Limited Partners. In addition, DWR is a large futures commission merchant, handling substantial customer business in physical commodities and futures interests, and is a clearing member of all of the major commodity exchanges in the United States. It is possible that DWR will effect transactions for the Partnership in which the other party to such transactions is an employee of or otherwise affiliated with the General Partner, DWR, or their affiliates. Such persons might also compete with the Partnership in bidding on purchases or sales of futures interests without knowing that the Partnership is also bidding. It is possible that transactions for the officers, directors, affiliates, employees, customers and correspondents of DWR, the General Partner or the Trading Advisor might be effected when similar trades for the Partnership are not executed or are executed at less favorable prices. In addition, certain of the officers and directors of the General Partner (who are also employees of and are compensated by the Commodity Broker) may individually receive from DWR compensation and bonuses based on various factors, including brokerage commissions generated by the Partnership. See "The General Partner" and "The Commodity Broker." The Limited Partnership Agreement provides that, except as described therein or in this Prospectus, no person may receive, directly or indirectly, any advisory, management, or incentive fee for investment advice who shares or participates in per trade commodity brokerage commissions paid by the Partnership. No commodity broker for the Partnership may pay, directly or indirectly, rebates or "give ups" to the General Partner or any trading advisor, and such prohibitions may not be circumvented by any reciprocal business arrangements. MANAGEMENT OF OTHER ACCOUNTS BY THE TRADING ADVISOR The Management Agreement allows the Trading Advisor to manage futures interests accounts in addition to the Partnership's account. The Trading Advisor and its principals and affiliates may at any time be trading their own proprietary accounts, advising accounts for other commodity pools and/or individual customers, and operating other commodity pools, and will continue such activities in the future. The Trading Advisor also operates additional trading programs and uses other trading programs in its management of accounts, some of which programs will not be used in trading for the Partnership. Such other trading programs have in the past and may in the future experience significantly different performance results than the programs used in trading for the Partnership. The Trading Advisor is required to aggregate futures and option positions in other accounts managed by it with futures and option positions in the Partnership's account for speculative position limit purposes. Such aggregation of positions could require the Trading Advisor to liquidate or modify positions for all such accounts, and such liquidation or modification may adversely affect the Partnership. The Trading Advisor may have a conflict of interest in rendering advice because its compensation for managing some other accounts may exceed its compensation for managing the Partnership's account, and therefore may provide an incentive to favor such other accounts. Moreover, if the Trading Advisor makes trading decisions for such accounts and the Partnership's account at or about the same time, the Partnership may be competing with such other accounts for the same or similar positions. While the records of accounts of the Trading Advisor's employees and accounts managed by the Trading Advisor will not be made available to Limited Partners, the Management Agreement permits the General Partner access to such records in order to determine that the Partnership's account is traded fairly. The Management Agreement also provides that the Trading Advisor will deal with the Partnership in a fiduciary capacity to the extent recognized by applicable law and will not enter into transactions where it knowingly or deliberately favors itself or another client over the Partnership. CUSTOMER AGREEMENT WITH DWR Under the Partnership's Customer Agreement with DWR, all funds, futures interests positions, securities, and credits carried for the Partnership are held as security for the Partnership's obligations to DWR; the margins required to initiate or maintain open positions will be as established by DWR from time to time; and DWR may close out positions, purchase futures interests, or cancel orders at any time it deems necessary for its protection, without the consent of the Partnership. The Partnership also has agreed to indemnify and defend DWR and its stockholders, employees, officers, directors and affiliates against certain liabilities incurred by them by reason of acting as the Partnership's commodity broker. DWR, the General Partner or the Limited Partners by majority vote may terminate the brokerage relationship and close the Partnership's futures interests accounts at DWR at any time upon 60 days' notice. If so terminated, the Partnership would have to negotiate a new customer agreement with a commodity broker upon terms and conditions, including brokerage commission rates, which cannot now be determined. OTHER COMMODITY POOLS The General Partner is or has been the general partner for 27 other commodity pools. DWR is the commodity broker for such pools and several other commodity pools. Each may in the future establish and/or be the general partner or commodity broker for additional commodity pools, and any such pool may be said to be in competition with the Partnership in that any one or more of such pools might compete with the Partnership for the execution of trades. FIDUCIARY RESPONSIBILITY Investors should be aware that the General Partner has a fiduciary duty under the Partnership Act to the Limited Partners to exercise good faith and fairness in all dealings affecting the Partnership. The General Partner's fiduciary duty to the Limited Partners under the Limited Partnership Agreement is in accordance with the fiduciary duty owed to limited partners by a general partner under Delaware law. The Limited Partnership Agreement prohibits the Limited Partners from limiting, by any means, the fiduciary duty of the General Partner owed to the Limited Partners under statutory or common law. In the event that a Limited Partner believes that the General Partner has violated its responsibilities, the Limited Partner may seek legal relief for himself and all other similarly situated Limited Partners or on behalf of the Partnership under the Partnership Act, the CEAct, applicable federal and state securities laws and other applicable laws to recover damages from, or to require an accounting by, the General Partner. The Trading Advisor also has a fiduciary responsibility under applicable law to the Partnership. The Limited Partnership Agreement, the Customer Agreement, and the Management Agreement generally provide that the General Partner, DWR, the Trading Advisor and their "affiliates" (as defined in the Limited Partnership Agreement) shall not be liable to the Partnership, the Limited Partners, its or their successors or assigns, for any act, omission, conduct, or activity undertaken by or on behalf of the Partnership which the General Partner, DWR or the Trading Advisor, as applicable, determines, in good faith, to be in the best interests of the Partnership, unless such act, omission, conduct, or activity of or by the General Partner, DWR, the Trading Advisor or their affiliates, as applicable, constituted misconduct or negligence. The Limited Partnership Agreement, the Customer Agreement, the Selling Agreement, and the Management Agreement generally provide that the Partnership will indemnify, defend, and hold harmless the General Partner, DWR, the Trading Advisor and their affiliates from and against any loss, liability, damage, cost, or expense (including attorneys' and accountants' fees and expenses incurred in defense of any demands, claims, or lawsuits) actually and reasonably incurred arising from acts, omissions, activities, or conduct undertaken by or on behalf of the Partnership, including, without limitation, any demands, claims, or lawsuits initiated by a Limited Partner (or assignee thereof), PROVIDED that (1) the General Partner, DWR, or the Trading Advisor, as applicable, has determined, in good faith, that the act, omission, activity or conduct giving rise to the claim for indemnification was in the best interests of the Partnership, and (2) the act, omission, activity, or conduct that was the basis for such loss, liability, damage, cost, or expense was not the result of misconduct or negligence. Payment of any indemnity to such person by the Partnership would reduce the Net Assets of the Partnership. The General Partner does not carry insurance covering such potential losses and it is not contemplated that the Partnership will carry liability insurance covering its potential indemnification exposure. Notwithstanding the foregoing, in any action brought by a Limited Partner in the right of the Partnership, the General Partner or any affiliate thereof may only be indemnified to the extent and subject to the conditions specified in the Partnership Act (which presently permits indemnification of any partner to the extent provided in the Limited Partnership Agreement, as described in the immediately preceding paragraph). Also, no indemnification of the General Partner, DWR, the Trading Advisor or their affiliates by the Partnership shall be permitted for losses, liabilities, or expenses arising from or out of alleged violations of federal or state securities laws unless: (1) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee, or (2) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee, or (3) a court of competent jurisdiction approves a settlement of the claims against the particular indemnitee and finds that indemnification of the settlement and related costs should be made, PROVIDED, with regard to such court approval, the indemnitee must apprise the court of the position of the SEC, and the positions of the respective securities administrators of Massachusetts, Missouri, Tennessee and/or those other states and jurisdictions in which the plaintiffs claim they were offered or sold Units, with respect to indemnification for securities laws violations, before seeking court approval for indemnification. Note that, with respect to indemnification for liabilities arising under the 1933 Act for directors, officers or controlling persons of the Partnership or the General Partner, it is the opinion of the SEC that such indemnification is against public policy, as expressed in the 1933 Act, and is therefore unenforceable. The CFTC has issued a statement of policy relating to indemnification of officers and directors of a futures commission merchant (such as DWR) and its controlling persons under which the CFTC has taken the position that whether such an indemnification is consistent with the policies expressed in the CEAct will be determined by the CFTC on a case-by-case basis. PERFORMANCE RECORD OF THE PARTNERSHIP PERFORMANCE RECORD Table 1 sets forth the actual past performance record of the Partnership from the commencement of trading operations on February 1, 1991 through December 31, 1996. Since the commencement of trading operations, all assets of the Partnership have been allocated to the Trading Advisor for trading. However, the General Partner will in the future allocate the assets of the Partnership to trading systems of the Trading Advisor in proportions different than previously employed, and will allocate assets of the Partnership to trading systems of the Trading Advisor never previously employed for the Partnership. These differences from historical allocations may affect future performance, including greater (or lesser) volatility of returns. INVESTORS ARE CAUTIONED THAT THE INFORMATION SET FORTH IN THE CAPSULE PERFORMANCE SUMMARY AND FOOTNOTES THERETO IS NOT INDICATIVE OF, AND HAS NO BEARING ON, ANY TRADING RESULTS WHICH MAY BE ATTAINED BY THE PARTNERSHIP IN THE FUTURE, SINCE PAST RESULTS ARE NOT A GUARANTEE OF FUTURE RESULTS. THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP WILL MAKE ANY PROFITS AT ALL OR WILL BE ABLE TO AVOID INCURRING SUBSTANTIAL LOSSES. INVESTORS SHOULD ALSO NOTE THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT PORTION OF A COMMODITY POOL'S TOTAL INCOME AND, IN CERTAIN INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED OR UNREALIZED LOSSES FROM FUTURES INTERESTS TRADING. TABLE 1 PERFORMANCE OF DEAN WITTER PORTFOLIO STRATEGY FUND L.P. Type of Pool: Publicly-Offered Pool Inception of Trading: February 1991 Aggregate Capital Contributions: $100,491,090 Current Capitalization: $87,312,143 Largest Monthly % Drawdown (Month/Year): (14.40)%-(1/92) Largest Month-End Peak-to-Valley Drawdown: (25.65)%-(4 months)(1/92-4/92) <TABLE> <CAPTION> 1996 1995 1994 1993 1992 1991 MONTHLY RATES OF RETURN % % % % % % - ---------------------------------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> January........................... 4.15 (3.70) (2.33) (0.67) (14.40) February.......................... (4.54) 10.40 (1.61) 9.17 (9.10) (1.04) March............................. 1.61 11.65 5.45 (1.34) 0.21 5.63 April............................. 1.77 4.56 0.53 4.95 (4.64) (0.73) May............................... (0.91) (0.02) 1.34 2.32 0.45 1.68 June.............................. 1.36 (1.29) 3.59 0.25 13.01 0.33 July.............................. (1.93) (1.98) (4.70) 7.41 13.09 (9.15) August............................ (0.52) 2.38 (2.82) (2.61) 10.57 0.05 September......................... 3.79 (1.47) 1.40 (0.42) (7.37) 7.86 October........................... 11.85 0.86 1.79 (2.38) (4.45) (2.76) November.......................... 9.05 0.89 (4.34) (1.17) 0.79 2.98 December.......................... (1.61) 1.72 (3.29) 3.56 (0.55) 22.87 Compound Annual (Period) Rate of Return........................... 25.50 25.37 (5.41) 19.88 (6.37) 27.68 </TABLE> PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. FOOTNOTES TO TABLE 1 "DRAWDOWN" MEANS DECLINE IN NET ASSET VALUE PER UNIT. "WORST MONTH-END PEAK-TO-VALLEY DRAWDOWN" AS USED HEREIN IS EQUIVALENT TO THE "DRAWDOWN" EXPERIENCED BY THE PARTNERSHIP, DETERMINED IN ACCORDANCE WITH CFTC RULE 4.10 AND REPRESENTS THE GREATEST PERCENTAGE DECLINE FROM ANY MONTH-END NET ASSET VALUE PER UNIT WHICH OCCURS WITHOUT SUCH MONTH-END NET ASSET VALUE PER UNIT BEING EQUALED OR EXCEEDED AS OF A SUBSEQUENT MONTH-END. IN DOLLAR TERMS, FOR EXAMPLE, IF THE NET ASSET VALUE PER UNIT OF THE PARTNERSHIP DECLINED BY $1 IN EACH OF JANUARY AND FEBRUARY, INCREASED BY $1 IN MARCH AND DECLINED AGAIN BY $2 IN APRIL, A "PEAK-TO-VALLEY DRAWDOWN" ANALYSIS CONDUCTED AS OF THE END OF APRIL WOULD CONSIDER THAT "DRAWDOWN" TO BE STILL CONTINUING AND TO BE $3 IN AMOUNT, WHEREAS IF THE NET ASSET VALUE OF A UNIT HAD INCREASED BY $2 IN MARCH, THE JANUARY-FEBRUARY DRAWDOWN WOULD HAVE ENDED AS OF THE END OF FEBRUARY AT THE $2 LEVEL. SUCH "DRAWDOWNS" ARE MEASURED ON THE BASIS OF MONTH-END NET ASSET VALUES ONLY, AND DO NOT REFLECT INTRA-MONTH FIGURES. "MONTHLY RATE OF RETURN" IS NET PERFORMANCE FOR THE MONTH (GROSS REALIZED PROFIT (LOSS), PLUS INCREASE (DECREASE) IN UNREALIZED PROFIT (LOSS), PLUS INTEREST INCOME, MINUS BROKERAGE COMMISSIONS, MANAGEMENT AND INCENTIVE FEES AND OTHER EXPENSES), DIVIDED BY THE BEGINNING NET ASSET VALUE FOR THE MONTH. "COMPOUND ANNUAL (PERIOD) RATE OF RETURN" IS CALCULATED BY MULTIPLYING ON A COMPOUND BASIS EACH OF THE MONTHLY RATES OF RETURN AND NOT BY ADDING OR AVERAGING SUCH MONTHLY RATES OF RETURN. FOR PERIODS OF LESS THAN ONE YEAR, THE RESULTS ARE YEAR-TO-DATE. DEAN WITTER PORTFOLIO STRATEGY FUND L.P. HISTORICAL PERFORMANCE EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC <TABLE> <CAPTION> JAN-91 1000 <S> <C> Feb-91 989.63 Mar-91 1045.37 Apr-91 1037.69 May-91 1055.12 Jun-91 1058.6 Jul-91 961.72 Aug-91 962.26 Sep-91 1037.82 Oct-91 1009.13 Nov-91 1039.16 Dec-91 1276.79 Jan-92 1092.93 Feb-92 993.52 Mar-92 995.58 Apr-92 949.34 May-92 953.57 Jun-92 1077.6 Jul-92 1218.66 Aug-92 1347.5 Sep-92 1248.25 Oct-92 1192.66 Nov-92 1202.12 Dec-92 1195.52 Jan-93 1187.51 Feb-93 1296.45 Mar-93 1279.06 Apr-93 1342.32 May-93 1373.5 Jun-93 1376.94 Jul-93 1479.01 Aug-93 1440.37 Sep-93 1434.39 Oct-93 1400.24 Nov-93 1383.91 Dec-93 1433.13 Jan-94 1399.79 Feb-94 1377.32 Mar-94 1452.33 Apr-94 1460.03 May-94 1479.66 Jun-94 1532.76 Jul-94 1460.8 Aug-94 1419.62 Sep-94 1439.5 Oct-94 1465.23 Nov-94 1401.67 Dec-94 1355.58 Jan-95 1305.41 Feb-95 1441.19 Mar-95 1609.12 Apr-95 1682.52 May-95 1682.16 Jun-95 1660.54 Jul-95 1627.72 Aug-95 1666.45 Sep-95 1642.02 Oct-95 1656.06 Nov-95 1670.75 Dec-95 1699.44 Jan-96 1769.92 Feb-96 1689.64 Mar-96 1716.92 Apr-96 1747.26 May-96 1731.28 Jun-96 1754.76 Jul-96 1720.95 Aug-96 1712.08 Sep-96 1777.03 Oct-96 1987.62 Nov-96 2167.59 Dec-96 2132.79 </TABLE> PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS PORTFOLIO STRATEGY FUND VS. BARCLAY CTA INDEX HISTORICAL PERFORMANCE EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC <TABLE> <CAPTION> PORTFOLIO STRATEGY FUND BARCLAY CTA INDEX <S> <C> <C> Jan-91 1000 1000 Feb-91 989.63 991.7 Mar-91 1045.37 1034.14 Apr-91 1037.69 1014.6 May-91 1055.12 995.26 Jun-91 1058.6 1024.82 Jul-91 961.72 990.38 Aug-91 962.26 971.37 Sep-91 1037.82 997.79 Oct-91 1009.13 988.71 Nov-91 1039.16 991.28 Dec-91 1276.79 1090.71 Jan-92 1092.93 1041.3 Feb-92 993.52 1014.12 Mar-92 995.58 995.76 Apr-92 949.34 987.8 May-92 953.57 980.59 Jun-92 1077.6 1024.13 Jul-92 1218.66 1068.26 Aug-92 1347.5 1092.83 Sep-92 1248.25 1075.24 Oct-92 1192.66 1077.28 Nov-92 1202.12 1090.1 Dec-92 1195.52 1080.73 Jan-93 1187.51 1061.17 Feb-93 1296.45 1119.21 Mar-93 1279.06 1113.62 Apr-93 1342.32 1149.25 May-93 1373.5 1156.38 Jun-93 1376.94 1167.71 Jul-93 1479.01 1211.03 Aug-93 1440.37 1173.37 Sep-93 1434.39 1163.4 Oct-93 1400.24 1156.65 Nov-93 1383.91 1158.38 Dec-93 1433.13 1192.79 Jan-94 1399.79 1153.42 Feb-94 1377.32 1136.82 Mar-94 1452.33 1159.89 Apr-94 1460.03 1139.36 May-94 1479.66 1171.04 Jun-94 1532.76 1200.31 Jul-94 1460.8 1187.83 Aug-94 1419.62 1150.89 Sep-94 1439.5 1170.22 Oct-94 1465.23 1171.16 Nov-94 1401.67 1190.83 Dec-94 1355.58 1185 Jan-95 1305.41 1163.79 Feb-95 1441.19 1203.36 Mar-95 1609.12 1280.61 Apr-95 1682.52 1295.6 May-95 1682.16 1302.02 Jun-95 1660.54 1285.4 Jul-95 1627.72 1269.59 Aug-95 1666.45 1299.18 Sep-95 1642.02 1297.36 Oct-95 1656.06 1296.97 Nov-95 1670.75 1310.46 Dec-95 1699.44 1346.62 Jan-96 1769.92 1382.45 Feb-96 1689.64 1316.5 Mar-96 1716.92 1324.4 Apr-96 1747.26 1403.2 May-96 1731.28 1375.56 Jun-96 1754.76 1371.16 Jul-96 1720.95 1348.4 Aug-96 1712.08 1339.9 Sep-96 1777.03 1372.86 Oct-96 1987.62 1471.98 Nov-96 2167.59 1490.95 Dec-96 2132.79 1469.93 </TABLE> NOTE THAT WHILE THE BARCLAY CTA INDEX (PREPARED BY THE BARCLAY TRADING GROUP, LTD., FAIRFIELD, IOWA) REFLECTS RESULTS NET OF ACTUAL FEES AND EXPENSES, IT INCLUDES ACCOUNTS WITH TRADING ADVISORS AND FEE STRUCTURES THAT DIFFER FROM PUBLIC MANAGED FUTURES FUNDS (SUCH AS THE PARTNERSHIP). ACCORDINGLY, WHILE THE BARCLAY CTA INDEX IS BELIEVED TO BE REPRESENTATIVE OF MANAGED FUTURES IN GENERAL, THE PERFORMANCE OF PUBLIC MANAGED FUTURES FUNDS AS A SUBCLASS MAY DIFFER. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

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+ RISK FACTORS The following risks factors should be considered carefully in addition to the other information in this Prospectus before purchasing the Common Stock offered by this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Important factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein. Rapidly Changing Telecommunications Market Over the last decade, the market for telecommunications services has been characterized by rapid technological developments, evolving industry standards, dramatic changes in the regulatory environment and frequent new product introductions. The Company's success will depend upon its ability to enhance its existing products and services, and to introduce new products and services which will respond to these market requirements as they evolve. To date, substantially all of the Company's revenues are attributable to wireless customers. While the Company believes that systems and services which it offers to address the needs of the wireless market will also permit it to attract customers in other segments of the telecommunications services industry, there can be no assurance that it will be able to do so. In addition, technologies, services or standards may be developed which could require significant changes in the Company's business model, development of new products, or provision of additional services, at substantial cost to the Company. Such developments may also result in the introduction of additional competitors into the marketplace. Furthermore, if the overall market for telecommunications services fails to evolve and converge in the manner contemplated by the Company or grows more slowly than anticipated, or if the Company's products and services fail in any respect to achieve market acceptance, there could be a material adverse effect on the Company's business, financial condition and results of operations. The telecommunications industry is also characterized by significant and rapid strategic alignments. Merger or consolidation of one or more telecommunications services providers could result in the loss to the Company of customers or sales opportunities. In addition, there can be no assurance that new entrants to the market will become customers of the Company. Management of Growth The Company has experienced rapid growth and intends to continue to aggressively expand its operations. The Company's total revenues have increased from $3.1 million in 1993 to $16.7 million in 1996. The growth in the size and complexity of its business, as well as its customer base, has placed and is expected to continue to place significant demands on the Company's administrative, operational and financial personnel and systems. Additional expansion by the Company may further strain the Company's management, financial and other resources. There can be no assurance that the Company's systems, procedures, controls and existing space will be adequate to support expansion of its operations. The Company's future operating results will depend on the ability of its officers and key employees to manage changing business conditions and to implement and improve its operational, financial control and reporting functions. If the Company is unable to respond to and manage expansion of its operations, the quality of the Company's services, its ability to retain key personnel and its business, financial condition and results of operations could be materially adversely affected. The number of the Company's employees has increased from 26 as of January 1993 to 188 as of February 1997. The Company anticipates that continued growth will require it to recruit and hire a substantial number of new development, managerial, finance, sales and marketing support personnel. The Company is currently in the process of establishing and hiring personnel for its marketing and sales operations. There can be no assurance that the Company will be successful in hiring or retaining any of the foregoing personnel. The Company's ability to compete effectively and to manage future growth, if any, will depend on its ability to improve operational systems and to expand, train, motivate and manage its workforce. New Products and Rapid Technological Change The market for the Company's products and services is characterized by rapid technological change. The Company believes that its future success depends in part upon its ability to enhance its current products and services and develop new products and services that address the increasingly complex needs of its customers. In addition, the introduction of new products or services by third parties could render the Company's existing products and services obsolete or unmarketable. The Company's ability to anticipate changes in technology and successfully develop and introduce new or enhanced products incorporating such technology on a timely basis will be significant factors in its ability to remain competitive. There can be no assurance that the Company will complete the development of new or enhanced products or services on a timely or successful basis or successfully manage transitions from one product release to the next, that the Company will not encounter difficulties or delays in the introduction of new or enhanced products, or that defects will not be found in such new or enhanced products after installation, resulting in a loss of, or delay in, market acceptance. In particular, the Company is currently developing a series of enhancements to its existing software system, including incorporation of a Windows 95 compatible user interface, incorporation of an Oracle relational database management system, and support of Unix based file servers. The Company believes that these enhancements will permit the Company to compete effectively as technology evolves and facilitate its ability to address the requirements of larger telecommunications services providers. If the Company is unable to introduce these new enhancements on a timely basis, or such enhancements result in the introduction of "bugs" or other performance impairments in the Company's systems, the Company's business, financial condition and results of operations could be materially adversely affected, and its ability to expand its sales activities could be significantly limited. Dependence on Cellular Telephone Industry Although the Company's products have been designed to adapt to a variety of current and future technologies, a significant majority of its revenues to date have been generated by sales of its systems and services to service providers in the cellular telephone industry. A decrease in the number of cellular service subscribers served by the Company's customers could result in lower revenues for the Company. Although the cellular market has experienced substantial growth in the number of subscribers in the past, there can be no assurance that such growth will be sustained. In addition, industry reports have indicated that the average monthly bill per subscriber has decreased in recent years. Such decreases could result in increased price competition among billing service providers. Furthermore, any adverse development in the cellular telephone industry could have a material adverse effect on the business, financial condition and results of operations of the Company. See "Business--Customers." Reliance On Significant Customers For the year ended December 31, 1996, revenue from Aliant Communications Co. (formerly, The Lincoln Telephone and Telegraph Company) and its affiliated companies represented approximately 19.1% (reflects the acquisition of Nebraska Cellular by Aliant in 1996) of the Company's total revenue, and revenue from Horizon Cellular Group represented approximately 12.5% of the Company's total revenue. The Company has long-term contracts with all of its significant customers, however there can be no assurance that any such customer will renew its contract with the Company at the end of the contract term or may not seek to terminate its contract on the basis of alleged contractual defaults or other grounds. Loss of all or a significant part of the business of any of the Company's substantial customers would have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, the acquisition by a third party of one of the Company's substantial customers could result in the loss of that customer and have a material adverse effect on the business, financial condition and results of operations of the Company. Since October 1996, Horizon Cellular Group has divested certain of its remaining cellular markets, the majority of which were acquired by existing customers of the Company. Because the majority of these markets were acquired by the Company's existing customers, the Company does not expect that the significant reduction in revenue from Horizon Cellular Group expected in 1997 will have a material adverse effect on the business, financial condition or results of operations of the Company. See "Business--Sales and Marketing." Expansion of Sales Activities To date, the Company has sold its products and services primarily through the efforts of its senior management. The Company's current customers, while significant to the Company, are relatively small in comparison with many of the national and multinational telecommunication services providers. In order to achieve significant long-term growth in revenues and its overall strategic goals, the Company intends to attract a number of larger telecommunications services providers as customers. In order to do so, and to expand its business generally, the Company believes that it must expand the sales and marketing organization. While the Company is still in the process of hiring sales and marketing personnel, it currently has five persons dedicated to sales and marketing efforts. There can be no assurance that the Company will be able to achieve anticipated expansion of its business, attract larger telecommunications services providers as customers or build an efficient and effective sales and marketing organization. Failure to achieve any one or more of the foregoing goals could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Management of Growth." Dependence on Key Personnel The Company's performance depends substantially on the performance of its executive officers and key employees. The Company's long-term success will depend upon its ability to recruit, retain and motivate highly skilled personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to attract, assimilate or retain highly skilled personnel in the future. The inability to attract and retain the necessary personnel could have a material adverse effect upon the Company's business, financial condition and results of operations. Charles L. Bakes, the Company's President and Chief Executive Officer, Mark D. Spitzer, the Company's Executive Vice President and Chief Financial Officer, Lewis D. Bakes, the Company's Executive Vice President and Chief Operating Officer, and certain other executive officers have been primarily responsible for the development and expansion of the Company's business. In November 1996, Joseph Juliano joined the Company as Executive Vice President of Strategic Product Management. Mr. Juliano is party to an employment agreement with the Company and none of Messrs. C. Bakes, Spitzer or L. Bakes is party to an employment agreement with the Company. The Company does not maintain any key person insurance. The loss of the services of one or more of these individuals could have a material adverse affect on the Company's business, financial condition and results of operations. See "Business--Employees", "Management" and "Certain Transactions." In January 1997, David Wells resigned as Executive Vice President, Chief Information Officer and director of the Company to pursue other opportunities. In connection with his departure, Mr. Wells' duties have been assumed by the other executive officers of the Company. Competition The market for billing and management information systems for the telecommunications services industry is highly competitive and the Company expects that the high level of growth within the telecommunications services industry will encourage new entrants, both domestically and internationally, in the future. The Company competes with independent providers of transactional systems and services, with the billing services of management consulting companies and with internal billing departments of telecommunications services providers. The Company anticipates continued growth in competition in the telecommunications services industry and consequently the entrance of new competitors into its market in the future. In addition, merger or consolidation of telecommunications services providers could result in the loss to the Company of customers or sales opportunities to competitors. Many of the Company's current and potential future competitors have significantly greater financial, technical and marketing resources, generate higher revenues and have greater name recognition than does the Company. In addition, many of the Company's competitors have established commercial relationships or joint ventures with major cellular and other telecommunications services providers. As a result, the Company's competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of products than the Company. Dependence on Proprietary Technology The Company's success is dependent in part upon its proprietary software technology. The Company relies on trademark, copyright and trade secret laws, employee and third-party non-disclosure agreements and other methods to protect its proprietary rights. There can be no assurance that its agreements with employees, consultants and others who participate in the development of its software will not be breached, that the Company will have adequate remedies for any breach, or that the Company's trade secrets will not otherwise become known to or independently developed by competitors. Furthermore, there can be no assurance that the Company's efforts to protect its rights through trademark and copyright laws will prevent the development and design by others of products or technology similar to or competitive with those developed by the Company. The computer technology industry is characterized by frequent and substantial intellectual property litigation. The Company is not aware of any patent infringement or any violation of other proprietary rights claimed by any third party relating to the Company or the Company's products. The Company's success will depend in part on its continued ability to obtain and use licensed technology that is important to certain functionalities of its products. The inability to continue to procure or use such technology could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Proprietary Technology." Fluctuations in Quarterly Performance The Company's revenues and operating results may fluctuate from quarter to quarter due to a number of factors, including the timing, size and nature of the Company's contracts; the longer sales cycles typically associated with larger customers, which requires the Company to make a larger investment in the conversion process prior to the generation of revenue; the hiring of additional staff; seasonal variations in cellular telephone subscriptions; the timing of the introduction and the market acceptance of new products or product enhancements by the Company or its competitors; changes in the Company's operating expenses; and fluctuations in economic and financial market conditions. Fluctuations in quarterly operating results may result in volatility in the price of the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Government Regulation Currently, the Company's business is not subject to direct government regulation; however, the Company's existing and potential customers are subject to extensive regulation. Changes in regulation which adversely affect the Company's existing and potential customers could have a material adverse effect on the business, financial condition and results of operations of the Company. See "Business--Overview of the Communications Industry Background." Concentration of Stock Ownership Upon completion of this offering, the present directors, executive officers and their respective affiliates will beneficially own approximately 31.6% of the outstanding Common Stock, assuming no exercise of the Underwriters' over-allotment option and approximately 28.1% of the outstanding Common Stock assuming full exercise of the Underwriters' over-allotment option. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Such concentration of ownership may also have the effect of delaying or preventing a change in control of the Company. See "Description of Capital Stock--Delaware Law and Certain Charter and By-Law Provisions" and "Principal and Selling Stockholders." Limited Public Market; Possible Volatility of Stock Price The Common Stock has traded on the Nasdaq National Market since October 1996 and has a limited public market history. There can be no assurance that future market prices for the shares will equal or exceed the price to public set forth on the cover page of this Prospectus. The price at which the Common Stock will trade is likely to be highly volatile and could be subject to wide fluctuations in response to quarterly fluctuations in operating results; announcements of technological innovations or new products by the Company or its competitors; changes in financial estimates by securities analysts; fluctuations in economic and financial market conditions, or other events or factors. In addition, the stock market has experienced significant price and volume fluctuations that have particularly affected the market price of equity securities of many high technology companies and that often have been unrelated to the operating performance of such companies. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business, financial condition and results of operations. These broad market fluctuations may adversely affect the market price of the Common Stock. See "--Fluctuations in Quarterly Performance" and "Underwriting." Discretionary Use of Unallocated Net Proceeds The principal purposes of this offering are to provide liquidity for the Company's existing stockholders, to increase the Company's equity capital and to increase the Company's visibility in the marketplace. As of the date of this Prospectus, the Company has no specific plans for the use of a substantial portion of the net proceeds of this offering. The Company expects to use such unallocated proceeds for working capital and other general corporate purposes, including payment of expenses related to this offering and potential acquisitions. Consequently, the Board of Directors and management of the Company will have significant flexibility in applying the unallocated net proceeds of this offering. See "Use of Proceeds." Shares Eligible for Future Sale Sales of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price for the Common Stock. See "Shares Eligible for Future Sale." Certain Anti-Takeover Effect Provisions Affecting Stockholders The Company's Certificate of Incorporation (the "Certificate of Incorporation") and By-laws (the "By-laws") provide that any action required or permitted to be taken by stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing, and require reasonable advance notice by a stockholder of a proposal or director nomination which such stockholder desires to present at any annual or special meeting of stockholders. Special meetings of stockholders may be called only by the Chairman of the Board, the Chief Executive Officer or, if none, the President of the Company or by the Board of Directors. The Certificate of Incorporation and By-laws provide for a classified Board of Directors, and members of the Board of Directors may be removed only for cause upon the affirmative vote of holders of at least two-thirds of the shares of capital stock of the Company entitled to vote. The Board of Directors has the authority, without further action by the stockholders, to fix the rights and preferences of, and issue shares of, the Company's authorized Preferred Stock. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of any holders of Preferred Stock that may be issued in the future. The Company has no present plans to issue any shares of the Company's Preferred Stock. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which such stockholder became an "Interested Stockholder" unless the business combination is approved in a prescribed manner. The application of Section 203 could have the effect of delaying or preventing a change of control of the Company. These provisions, and the provisions of the Certificate of Incorporation and By-laws, may have the effect of deterring hostile takeovers or delaying or preventing changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. See "Description of Capital Stock--Preferred Stock" and "--Delaware Law and Certain Charter and By-law Provisions."

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+ RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON SHARES OFFERED HEREBY. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN THE SECTIONS ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS." FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company has experienced fluctuations in its quarterly operating results and anticipates that such fluctuations will continue and may intensify. The Company's quarterly operating results are affected by a number of factors that could materially and adversely affect revenues and profitability, including demand for the Company's software products and services, competitive conditions in the industry, the timing of the introduction or market acceptance of new or enhanced products offered by the Company or its competitors, the potential for delay or deferral of customer purchases of the Company's products in anticipation of product enhancements or new product offerings by the Company or its competitors, the timing of any acquisitions and related write-offs, if any, the mix of product and services net revenues, the mix of North American and international net revenues, general economic conditions and other factors affecting capital expenditures by customers. The purchase of the Company's products and services may involve a significant commitment of capital and other resources by its customers with the attendant delays frequently associated with large capital expenditures and authorization procedures within an organization. As a result of these or other factors, the sales cycles for the Company's products, from initial evaluation to delivery of software, vary from customer to customer, typically ranging between three and nine months, and are subject to a number of significant risks over which the Company has little or no control, including customers' budgetary constraints and internal authorization procedures. Consequently, the timing of individual sales has been difficult to predict, and sales can occur in quarters subsequent to those anticipated by the Company. Revenues in any quarter are substantially dependent on orders signed and shipped in that quarter. Like many software companies, the Company's revenues occur predominantly in the third month of each quarter and tend to be concentrated in the latter half of that third month. Since the Company's operating expenses are based on anticipated revenue levels, and because a high percentage of the Company's expenses are relatively fixed in the short term, any shortfall from anticipated revenue or any delay in realizing revenues could result in significant variations in operating results from quarter to quarter. Accordingly, the Company's quarterly operating results are difficult to predict, and delays in product delivery or in closings of sales near the end of a quarter could cause quarterly revenues and, to a greater degree, net income to fall substantially short of anticipated levels. These factors are likely to continue to affect quarter-to-quarter comparisons. The Company has generally realized higher revenues in its second and fourth fiscal quarters. The Company believes that its second quarter (ending December 31) revenues generally are positively affected by calendar year-end capital expenditures by certain customers. In the Company's fourth quarter (ending June 30), revenues are positively affected by the incentives provided pursuant to the Company's sales compensation plans. In contrast, the Company has generally realized comparatively lower revenue in its first quarter (ending September 30), due to the Company's sales compensation plans, which compensate personnel based on fiscal year performance quotas, and due to reduced economic activity in Europe in the summer months. This trend may increase as the Company's European sales increase. Furthermore, the Company has generally realized comparatively lower revenue in the quarter ending March 31, due to the concentration by some customers of purchases in the quarter ending December 31 which leads to lower purchasing activity during the immediately following quarter. Based on all of the foregoing, the Company believes that future revenue, expenses and operating results are likely to vary significantly from quarter to quarter. As a result, quarter-to-quarter comparisons of operating results are not necessarily meaningful or indicative of future performance. It is possible that the Company's quarterly operating results could fail to meet the expectations of securities analysts or investors. In such event, the price of the Company's Common Shares would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Quarterly Financial Results." COMPETITION. The market for Enterprise Resource Planning ("ERP") software is intensely competitive, rapidly changing and significantly affected by new product offerings and other market activities. The Company has a large number of competitors which vary in size, preferred computing environment and overall product scope. Within its market, the primary competition comes from independent software vendors in two distinct groups: (i) large system developers who are moving into the Company's market, including Baan Company N.V. ("Baan"), J.D. Edwards & Company ("J.D. Edwards"), Oracle Corporation ("Oracle"), PeopleSoft, Inc. ("PeopleSoft") and SAP Aktiengellschaft ("SAP"), and (ii) traditional mid- market competitors, including DataWorks Corporation, Effective Management Systems, Inc., Fourth Shift Corporation and QAD, Inc. A number of companies offer products which are similar to the Company's products and are directed at the market for ERP systems for mid-market manufacturers. Many of the Company's existing competitors, as well as a number of potential new competitors, have more established and larger marketing and sales organizations, significantly greater financial, technical and other resources and a larger installed base of customers than the Company. Other competitors leverage vertical market expertise, reputation and price as competitive advantages. There can be no assurance that competitors will not offer or develop products that are superior to the Company's products or that achieve greater market acceptance. Several large companies which develop management information software applications for large multinational manufacturers are beginning to market to the mid-market manufacturers targeted by the Company or otherwise develop applications that compete in the Company's markets. As the market for ERP software solutions expands, other companies may enter the Company's market or increase their market presence by acquiring or entering into alliances with competitors of the Company. As a result of all these factors, competition is likely to increase substantially, which may result in price competition, loss of market share or delayed purchasing decisions. There can be no assurance that the Company will be able to compete successfully against its competitors or that the competitive pressures faced by the Company will not adversely affect its financial performance. See "Business--Competition." MANAGEMENT OF GROWTH. Although the Company has experienced significant revenue growth in fiscal 1997, such growth is not necessarily indicative of future revenue growth. This growth has resulted in new and increased responsibilities for management personnel and has placed, and continues to place, a significant strain upon the Company's management and operating and financial resources. There can be no assurance that such strain will not have a material adverse effect on the Company's business, operating results or financial condition. To manage its operations, the Company must continuously evaluate the adequacy of its management structure and its existing procedures, including, among others, its financial and internal controls, and refine such procedures. There can be no assurance that management will adequately anticipate all of the changing demands that growth may impose on the Company's internal procedures and structure. Any failure to anticipate and respond adequately to such changing demands may have a material adverse effect on the Company's business, operating results or financial condition. The rapid growth of the Company's business has required the Company to make significant recent additions in personnel, particularly in sales, product development, marketing, service and support. The Company believes that its future operating results depend in significant part on its ability to manage its operations and to continue to attract and retain highly skilled technical, managerial, sales, marketing, service and support personnel. Although the Company has increased the number of its technical, sales, marketing, service and support personnel in recent years, the Company has experienced, and expects to continue to experience, difficulty in recruiting such personnel. The Company anticipates that it will need to continue to increase the size of its direct sales, services and support personnel in future periods. If the Company is unable to hire qualified personnel on a timely basis, the Company's business, operating results and financial condition would be materially adversely affected. RISKS RELATED TO ACQUISITIONS. One of the Company's business strategies is to pursue acquisitions of products, technologies, services and/or businesses that will complement its existing operations or provide it with an entry into markets it does not presently serve. Acquisitions involve numerous risks, including the risk of improper valuation of the acquired business, difficulties in the assimilation of operations, services, products and personnel of the acquired company and entering markets in which the Company has limited or no experience. Future acquisitions may result in potentially dilutive issuance of equity securities, the incurrence of additional debt, the write-off of software development costs and expenses associated with the amortization of goodwill and other intangible assets, the diversion of management's attention from other business concerns and the potential loss of key employees of the acquired company, all of which could have a material adverse effect on the business, operating results and financial condition of the Company. There can be no assurance that suitable acquisition candidates will be available, that the Company will be able to acquire or profitably manage acquired companies or that future acquisitions will further the successful implementation of the Company's overall strategy or that such acquisitions ultimately will produce returns that justify the investment. In addition, the Company may compete for acquisition and expansion opportunities with companies which have significantly greater resources than the Company. Except for the Merger, the Company currently has no agreements or understandings with regard to any acquisitions. No assurances can be given that the Company will be able to integrate Pritsker, or any future acquisitions, into its current business in a timely manner or profitably market and distribute Pritsker's product lines after completion of the acquisition. In connection with the Merger, it is currently estimated that the Company will incur a nonrecurring charge of approximately $6.4 million relating to the write-off of acquired in-process technology of Pritsker, which will occur in the quarter in which the Merger is completed. DEPENDENCE ON DIRECT SALES AND MARKETING FORCE. The Company principally sells and supports its products and services through a direct sales force. The Company has made significant expenditures in recent years to expand its direct sales and marketing force, primarily outside the United States, and plans to continue to expand its direct sales and marketing force. The Company's future success will depend in part upon the effectiveness of its direct sales and marketing force and the ability of the Company to continue to attract, integrate, train, motivate and retain new sales and marketing personnel. Competition for sales and marketing personnel in the software industry is intense. In addition, there can be no assurance that the Company's direct sales and marketing organization will be able to compete successfully against the sales and marketing operations of many of the Company's current and potential competitors. If the Company is unable to develop and manage its direct sales and marketing force effectively, the Company's business, operating results and financial condition would be materially adversely affected. See "Business--Sales and Distribution." RELIANCE ON THIRD PARTY DISTRIBUTION CHANNELS. In addition to its direct sales and marketing force, the Company sells and supports its products and services through an indirect sales channel of approximately 40 business partners worldwide. The Company's business partners in North America target the lower end of the mid-range manufacturing market while its business partners in Asia Pacific and Europe primarily sell independently to companies within their geographic territory. The Company will need to maintain and expand its relationships with its existing business partners and enter into relationships with additional business partners in order to expand the distribution of its products. There can be no assurance that current or future business partners will provide the level of expertise and quality of service required to license the Company's products successfully, that the Company will be able to maintain effective, long-term relationships with such business partners or that selected business partners will continue to meet the Company's sales needs. Further, there can be no assurance that these business partners will not market software products in competition with the Company in the future or will not otherwise reduce or discontinue their relationships with, or support of, the Company and its products. If the Company fails to maintain successfully its existing business partner relationships or to establish new relationships in the future, or if any such business partner exclusively adopts a product other than the Company's products, materially reduces its sales efforts relating to the Company's products or materially increases its support for competitive products, the Company's business, operating results and financial condition could be materially and adversely affected. The Company has entered into cooperative marketing programs with International Business Machines Corporation and Data General Corporation and has informal marketing relationships with other hardware vendors such as Hewlett-Packard Company, Unisys Corporation and Digital Equipment Corporation. The Company has responsibility for providing support for its software to its customers under each agreement and the various hardware vendors are responsible for their products. No assurance can be given that such arrangements will continue in the future. The failure of the Company to establish or maintain successful formal or informal relationships with such third parties could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Sales and Distribution." DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant extent upon senior management and other key employees. The loss of one or more key employees could have a material adverse effect on the Company. The Company does not have employment agreements with its executive officers, except Stephen A. Sasser, President and Chief Operating Officer, and does not maintain key man life insurance on its executive officers. In addition, the Company believes that its future success will depend in part on its ability to attract and retain highly skilled technical, managerial, sales, marketing, service and support personnel. Competition for such personnel in the computer software industry is intense. There can be no assurance that the Company will be successful in attracting and retaining such personnel, and the failure to do so could have a material adverse effect on the Company's business, operating results or financial condition. See "Management--Employment Agreement and Change-in-Control Arrangements." DEPENDENCE ON PROGRESS. SyteLine and SYMIX Version 4.0 are written in PROGRESS, a proprietary fourth-generation programming language licensed from Progress Software Corporation ("PSC"). The Company depends on the availability of PROGRESS for license to its customer base and the acceptance of PROGRESS by its customers. The Company resells PROGRESS, receiving revenue from its customers and paying royalties to PSC. The Company has entered into a non-exclusive application partnership agreement with PSC pursuant to which the Company is authorized to market and distribute PROGRESS in connection with sales of the Company's products. Under the terms of the agreement, the Company bears primary responsibility for assisting customers in developing applications with PROGRESS and agrees to provide appropriate support to PROGRESS customers. The current term of the agreement expires in June 1998 and will continue thereafter unless either party gives ninety (90) days' written notice of its intention to terminate. In addition, the agreement may be terminated immediately by either party if a material breach of the agreement by the other party continues after thirty (30) days' written notice. See "Business--Products." The Company has in the past and may in the future experience product release delays because of delays in the release of PROGRESS products or product enhancements. Any such delays could have a material adverse effect on the Company's business, operating results and financial condition. The failure of PSC to continue its relationship with the Company or to develop, support or enhance PROGRESS in a manner competitive with enhancements of other present or future programming languages, the unavailability of PROGRESS licenses, the loss of market acceptance of PROGRESS and its associated relational database management system among mid-range discrete manufacturers, or the Company's inability to migrate its software to other languages on a timely basis if PROGRESS were no longer to be available could have a material adverse effect on the Company's business, operating results and financial condition. RISKS ASSOCIATED WITH NEW VERSIONS AND NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE. The market for the Company's products is characterized by rapid technological change, evolving industry standards in computer hardware and software technology, changes in customer requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards can cause customers to delay their purchasing decisions and render existing products obsolete and unmarketable. The life cycles of the Company's software products are difficult to estimate. As a result, the Company's future success will depend, in part, upon its ability to continue to enhance existing products and to develop and introduce in a timely manner new products with technological developments that satisfy customer requirements and achieve market acceptance. There can be no assurance that the Company will successfully identify new product opportunities and develop and bring new products to market in a timely and cost-effective manner or that products, capabilities or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive or shorten the life cycles of the Company's products. See "--Competition." If the Company is unable to develop on a timely and cost-effective basis new software products or enhancements to existing products, or if such new products or enhancements do not achieve market acceptance, the Company's business, operating results and financial condition may be materially adversely affected. As a result of the complexities inherent in software development, and in particular development for multi-platform environments, and the broad functionality and performance demanded by customers for ERP products, major new product enhancements and new products can require long development and testing periods before they are commercially released. The Company has on occasion experienced delays in the scheduled introduction of new and enhanced products, and future delays could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON WINDOWS NT ACCEPTANCE. The preferred operating system environment for SyteLine is Windows NT, and the Company's development efforts are focused on developing products for the Windows NT environment. As a result, the Company's future success depends upon the adoption of Windows NT as an operating system environment by mid-size discrete manufacturers for mission critical applications. Delays in the widespread adoption of Windows NT by the Company's target customers may adversely affect the Company's business, operating results or financial condition. DEPENDENCE ON SYTELINE. Substantially all of the Company's net revenues are derived from the sale of its core ERP product SyteLine and complementary products and services. As a result, the Company's success depends upon continued market acceptance of SyteLine by mid-range discrete manufacturers as well as the Company's ability to develop new versions of SyteLine and to develop or acquire complementary products or product lines to meet the needs of new and existing customers. INTERNATIONAL OPERATIONS AND CURRENCY FLUCTUATIONS. The Company derived approximately 25% of its fiscal 1997 net revenues from sales outside of North America, and the Company expects that revenue from international customers will continue to account for a significant portion of the Company's total revenue. The Company has sales and support offices worldwide, including eight in Asia Pacific and three in Europe. The Company expects to continue to expand its existing international operations and to enter additional international markets, which will require significant management attention and financial resources. Historically, the Company's international operations have been characterized by lower operating margins during the period in which marketing and distribution channels were being developed. Costs associated with international expansion include the establishment of additional foreign offices, the hiring of additional personnel, the localization and marketing of its products for particular foreign markets and the development of relationships with international service providers. If international revenue is not adequate to offset the expense of expanding foreign operations, the Company's business, operating results or financial condition could be materially adversely affected. A significant portion of the Company's international revenue is received in currencies other than U.S. dollars and, in the past, the Company has not engaged in hedging activities. As a result, the Company is subject to risks associated with foreign exchange rate fluctuations. Due to the substantial volatility of foreign exchange rates, there can be no assurance that foreign exchange rate fluctuations will not have a material adverse effect on the Company's business, operating results or financial condition. The Company's international operations are subject to other risks inherent in international business activities, such as the impact of a recessionary environment in economies outside the United States, cultural and language difficulties associated with servicing customers, localization and translation of products for foreign countries, difficulties in staffing and managing international operations, difficulties in collecting accounts receivable and longer collection periods, reduced protection for intellectual property rights in some countries, exchange controls, restrictions on the repatriation of foreign earnings, political instability, trade restrictions, tariff changes and the impact of local economic conditions and practices. The Company's success in expanding its international business will be dependent, in part, on its ability to anticipate and effectively manage these and other risks. There can be no assurance that these and other factors will not have a material adverse effect on the Company's business, operating results or financial condition. LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY; RISKS OF INFRINGEMENT; USE OF LICENSED TECHNOLOGY. The Company's ability to compete is dependent in part upon its internally developed, proprietary intellectual property. The Company regards its products as proprietary trade secrets and confidential information. The Company relies largely upon its license agreements with customers; distribution agreements with distributors; and its own security systems, confidentiality procedures and employee agreements to maintain the trade secrecy of its products. The Company seeks to protect its programs, documentation and other written materials under copyright law. In addition, SYMIX is a registered trademark and SyteLine, SyteSelect, SytePower, SyteService, SyteGuide, FieldPro and SyteEDI are trademarks of the Company. There can be no assurance that the Company's means of protecting its proprietary rights in the United States or abroad will be adequate or that competitors will not independently develop similar technology. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the United States. Preventing or detecting unauthorized use of the Company's products is difficult. There can be no assurance that the steps taken by the Company will prevent misappropriation of its technology or that its license agreements will be enforceable. In addition, litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results or financial condition. Although the Company does not believe that its products infringe the proprietary rights of third parties, there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims) will not be asserted or prosecuted against the Company or that any such assertions or prosecutions will not materially adversely affect the Company's business, operating results or financial condition. Regardless of the validity or the successful assertion of such claims, defending against such claims could result in significant costs and diversion of resources with respect to the defense thereof, which could have a material adverse effect on the Company's business, operating results or financial condition. In addition, the assertion of such infringement claims could result in injunctions preventing the Company from distributing certain products, which would have a material adverse effect on the Company's business, operating results and financial condition. If any claims or actions are asserted against the Company, the Company may seek to obtain a license to such intellectual property rights. There can be no assurance, however, that such a license would be available on reasonable terms or at all. The Company also relies on certain other technology which it licenses from third parties, including software that is integrated with internally developed software and used in the Company's products to perform key functions. Although the Company is generally indemnified by third parties against claims that such third parties' technology infringes the proprietary rights of others, such indemnification is not always available for all types of intellectual property rights (for example, patents may be excluded) and in some cases the geographic scope of indemnification is limited. The result is that the indemnity that the Company receives against such claims is often less broad than the indemnity that the Company provides to its customers. Even in cases in which the indemnity that the Company receives from a third-party licenser is as broad as the indemnity that the Company provides to its customers, the third-party licensers from whom the Company would be receiving indemnity are often not well-capitalized and may not be able to indemnify the Company in the event that such third-party technology infringes the proprietary rights of others. Accordingly, the Company could have substantial exposure in the event that technology licensed from a third party infringes another party's proprietary rights. The Company currently does not have any liability insurance to protect against the risk that licensed third-party technology infringes the proprietary rights of others. There can be no assurance that infringement or invalidity claims arising from the incorporation of third-party technology, and claims for indemnification from the Company's customers resulting from such infringement claims, will not be asserted or prosecuted against the Company or that any such assertions or prosecutions will not materially adversely affect the Company's business, operating results or financial condition. The Company has in the past and may in the future resell certain software which it licenses from third parties. In addition, the Company has in the past and may in the future jointly develop software in which the Company will have co-ownership or cross-licensing rights. See "Business--Products." There can be no assurance that these third-party software arrangements and licenses will continue to be available to the Company on terms that provide the Company with the third-party software it requires to provide adequate functionality in its products, on terms that adequately protect the Company's proprietary rights or on terms that are commercially favorable to the Company. The loss of or inability to maintain or obtain any of these software licenses, including as a result of third-party infringement claims, could result in delays or reductions in product shipments until equivalent software, if any, could be identified, licensed and integrated, which could materially and adversely affect the Company's business, operating results or financial condition. DEPENDENCE ON MANUFACTURING INDUSTRY AND GENERAL ECONOMIC AND MARKET CONDITIONS. The Company's business depends substantially upon the capital expenditures of mid-size discrete manufacturers, which in part depend upon the demand for such manufacturers' products. A recession or other adverse event affecting the manufacturing industry in North America, Europe, Asia Pacific or other markets served by the Company could affect such demand, forcing manufacturers in the Company's target markets to curtail or postpone capital expenditures on business information systems. Any such change in the amount or timing of capital expenditures in its target markets could have a material adverse effect on the Company's business, operating results or financial condition. Because the Company has to date targeted certain vertical markets, and may in the future target new vertical markets in which the Company has expertise, any economic downturns in general or in existing or new targeted vertical segments in particular, would have a material adverse effect on the Company's business, operating results and financial condition. RISK OF SOFTWARE DEFECTS. Software programs as complex as those offered by the Company may contain undetected errors or "bugs" when first introduced or as new versions are released that, despite testing by the Company, are discovered only after a product has been installed and used by customers. The Company has on occasion experienced delays in the scheduled introduction of new and enhanced products. There can be no assurance that errors will not be found in existing or future releases of the Company's software or that the Company will not experience material delays in releasing product improvements or new products. The occurrence of such errors could result in significant losses to the Company or to customers. Such occurrences could also result in reduced market acceptance of the Company's products, which would have a material adverse effect on the Company's business, operating results and financial condition. CONTROL BY PRINCIPAL SHAREHOLDERS. Upon completion of the offering, Lawrence J. Fox, Chairman of the Board and Chief Executive Officer of Symix, and his wife will jointly beneficially own 29.52% of the Company's outstanding Common Shares and current directors and executive officers as a group will own approximately 36.18% of the Common Shares. See "Principal and Selling Shareholders." Consequently, the directors and executive officers, and Mr. and Mrs. Fox in particular, will be able to veto significant change in control transactions, which may have the effect of delaying or preventing a change in control of the Company. ANTI-TAKEOVER PROVISIONS. The Company's Amended Articles of Incorporation (the "Amended Articles") authorize the issuance of "blank check" preferred stock, which may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals that a shareholder might consider favorable. See "Description of Capital Stock."

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+ RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be carefully considered in evaluating the Company and its business before purchasing the Common Stock offered hereby. All statements, trend analyses and other information contained in this Prospectus relative to markets for the Company's products and trends in revenue, gross margin and anticipated expense levels, as well as other statements including such words as "anticipate," "believe," "plan," "estimate," "expect," and "intend" and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business and economic risks, and the Company's actual results of operations may differ materially from those contained in the forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. BRIEF HISTORY OF PROFITABILITY; ACCUMULATED DEFICIT The Company has been profitable on an annual basis since 1993. However, the Company incurred annual losses of $8.5 million, $6.3 million and $10.7 million in 1990, 1991 and 1992, respectively, and as of March 31, 1997 on a pro forma basis had an accumulated deficit of approximately $33.0 million, of which approximately $20.9 million resulted from operating losses. As a result of these losses, the Company has experienced constraints in the availability of working capital and has reported working capital deficits at December 31, 1992, 1993, 1994, 1995 and 1996 and at March 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Moreover, even in the profitable years, the Company has experienced frequent quarterly operating losses, and in each of the last four years substantially all of the operating income has been based on profits achieved in the fourth quarter. There can be no assurance that the Company will be profitable in any future period, and recent operating results are not necessarily indicative of future financial performance. FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY The Company's quarterly revenue and operating results have fluctuated significantly in the past due to seasonal trends, cost overruns associated with certain fixed price services projects, sales staff turnover and timing of new product deliveries. The Company's quarterly revenue and operating results are likely to vary significantly in the future as a result of these and a number of other factors including the demand for the Company's software; the size, timing and contractual terms of significant orders; the timing and significance of software product enhancements and new software product announcements by the Company or its competitors; the productivity of the Company's sales channels; changes in pricing policies by the Company or its competitors; changes in the Company's or its competitors' business strategies; budgeting cycles of its potential customers; changes in the mix of software products and services the Company sells; changes in the mix of revenue attributable to domestic and international sales; software defects and other product quality problems; the ability of the Company to recruit and retain qualified personnel; investments to develop sales distribution channels; changes in the level of operating expenses; and general domestic and international economic and political trends. The Company's license revenue has experienced and is expected to continue to experience a high degree of seasonality, in part due to customer buying patterns. In recent years, the Company has generally had stronger sales of its software products during the quarter ending in December and weaker sales in the following quarter. In addition, sales of the Company's software products tend to be flat in the third quarter compared to the second quarter, due to reduced sales activity in the summer months, especially in Europe. Moreover, the Company has experienced frequent quarterly operating and net losses, and in each of the last four years substantially all of its operating income has been based on profits achieved in the fourth quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, the timing of revenue recognition can diverge from expectations as a result of a variety of factors, including the timing of contract execution and delivery, and customer acceptance, if applicable. When an undeliverable product affects the usability of other products in a customer order, recognition of that customer order's revenue may be delayed until all products constituting part of that customer order can be delivered. Specifically, quarterly results in 1995 were affected as revenue recognition of Obsydian sales which included the AS/400 Non-Programmable Terminal ("NPT") generator was delayed until the generator was delivered in December 1995. These and other factors affecting the timing of revenue recognition can contribute to fluctuations in quarterly results. Software revenue is also difficult to forecast because the market for high-end client/server software products is rapidly evolving, especially for the emerging Windows NT market, and because the Company's sales cycle, from initial contact to purchase and implementation, varies substantially from customer to customer. In the event of any downturn in potential customers' businesses or the economy in general, or a lack of market acceptance of the Windows NT computing platform in general or the Company's Obsydian products (including Obsydian for Windows NT) in particular, planned purchases of the Company's products may be deferred or canceled, which could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Company's North American sales operation historically has not achieved levels of productivity realized elsewhere in the business. The Company has recently implemented a change in the structure and leadership of the North American sales operation, but there can be no assurance that the operation's performance will improve. See "-- Continued Importance of Synon/2E; Dependence on Obsydian; Dependence on Market for High-End Client/Server Applications," "-- Limited Customer Use of Obsydian for Windows NT; Market Acceptance of Windows NT Platform" and "-- Sales and Marketing Productivity." The Company typically ships product orders shortly after receipt, and consequently, order backlog at the beginning of any quarter has in the past represented an inconsequential portion of that quarter's revenue. As a result, to achieve its quarterly revenue objectives, the Company is dependent upon obtaining orders in any given quarter for shipment in that quarter. Furthermore, the Company has often recognized a substantial portion of its revenue in the last month, or even weeks or days, of a quarter and therefore quarterly revenue is difficult to predict with any significant degree of accuracy. The Company's expense levels are based, in significant part, on the Company's expectations as to future revenue and are, therefore, relatively fixed in the short term. If revenue levels fall below expectations, net income would likely be disproportionately adversely affected because a proportionately smaller amount of the Company's expenses varies with its revenue. There can be no assurance that the Company will be able to achieve or maintain profitability on a quarterly or annual basis in the future. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. CONTINUED IMPORTANCE OF SYNON/2E; DEPENDENCE ON OBSYDIAN; DEPENDENCE ON MARKET FOR HIGH-END CLIENT/SERVER APPLICATION DEVELOPMENT TOOLS In the last three years, revenue attributable to the Synon/2E product family has declined as a percentage of the Company's total revenue, but continues to be important to the Company. The Company derived approximately 87%, 60% and 45% of its license revenue in 1994, 1995 and 1996, respectively, from the Company's Synon/2E product family and approximately 100%, 95% and 88% of its maintenance revenue in 1994, 1995, and 1996, respectively, from the Company's Synon/2E product family. Moreover, the license revenue attributable to the Synon/2E product family has declined significantly in absolute dollars in each of the last three years. Although the Company continues to invest in enhancements to its Synon/2E product family and plans to continue product updates and introduction of new releases for such products, the Company expects further declines in Synon/2Eproduct family license revenue and declines in Synon/2E product family maintenance and professional services revenue, both in absolute dollars and as a percentage of total revenue, as customers migrate away from the Synon/2E product. In the event that the decline in revenue from the Synon/2E product family is not more than offset by growth in revenue attributable to the Obsydian product family, the Company's results of operations will be materially adversely affected. Beginning in 1995, a substantial portion of the Company's license revenue has been attributable to sales of the Obsydian product family, which accounted for approximately 13%, 40% and 55% of the Company's license revenue in 1994, 1995 and 1996, respectively. The Company expects the Obsydian product family to account for an increasingly significant portion of the Company's license revenue for the foreseeable future. However, total license revenue declined in each of 1994, 1995 and 1996 as the growth in Obsydian product family license revenue was more than offset by declines in Synon/2E product family license revenue. Growing Obsydian product family revenue will be required not only to counteract the effect of declining Synon/2E product family revenue, but also to generate in large part any future Company revenue growth. As a result, factors adversely affecting the pricing of or demand for the Obsydian product family, such as competition or technological change, would have a material adverse effect on the Company's business, operating results and financial condition. Moreover, the Company's future financial performance will depend, in significant part, on the successful development, introduction and customer acceptance of new and enhanced versions of the Company's Obsydian product and other software products that keep pace with continuing changes in software application development technology, evolving industry standards and changing customer preferences. In particular, customer acceptance of the recently released Obsydian for the Enterprise Windows NT computing platform, which the Company expects will account for an increasingly significant portion of Obsydian revenue in the future, is important to the Company's future success. There can be no assurance that the Company will continue to be successful in marketing, or that customers will accept, the Obsydian product family or any new or enhanced software products, including Obsydian for the Windows NT computing platform. See "--Limited Customer Use of Obsydian for Windows NT, Market Acceptance of Windows NT Platform." Although the Company has recently experienced growth in sales of Obsydian, continued growth is in part dependent on ongoing demand for high-end client/server applications, and there can be no assurance that such market will continue to grow. The market for software used in the development, deployment and management of high-end client/server applications is relatively new and is characterized by ongoing technological developments, frequent new product announcements and introductions, evolving industry standards and changing customer requirements. The Company's future financial performance will depend in large part on continued growth in the number of organizations adopting high-end client/server applications and computing environments and the number of applications developed for use in those environments. If the high-end client/server market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially and adversely affected. Moreover, there can be no assurance that the Company's customers will expand usage of the Company's software on an enterprise-wide basis or implement new software products introduced by the Company. The failure of the Company's software to perform according to customer expectations or otherwise to be deployed on an enterprise-wide basis would have a material adverse effect on the ability of the Company to increase revenue from new as well as existing customers. See "Business -- Industry Background," "-- Strategy," "-- Technology and Products" and "-- Competition." LIMITED CUSTOMER USE AND MARKET ACCEPTANCE OF OBSYDIAN FOR WINDOWS NT; MARKET ACCEPTANCE OF WINDOWS NT PLATFORM The Company expects to generate a substantial portion of its future revenue from sales of Obsydian for the Windows NT computing platform. Consequently, customer acceptance of such product is important to the Company. See "--Continued Importance of Synon/2E; Dependence on Obsydian; Dependence on Market for High-End Client Server Applications." The Company first shipped Obsydian for the Windows NT computing platform in March 1997. To date, only a limited number of the Company's customers have completed the development of software applications for the Windows NT computing platform using Obsydian. As with all complex software products, a substantial investment of time and resources is required for users to become educated and fluid with the Obsydian product family, and to date only a relatively small group of users is qualified to use such products or manage the Windows NT operating environment more generally. If any of the Company's customers are not able to successfully develop and deploy applications for the Windows NT computing platform using Obsydian, the Company's reputation could be damaged and future sales of Obsydian for the Windows NT computing platform could suffer. In addition, even if customers are successful developing and deploying applications for the Windows NT computing platform using Obsydian, limited market acceptance of the Windows NT platform would adversely affect sales of Obsydian for the Windows NT computing platform. There can be no assurance that existing customers will be successful developing or deploying applications for the Windows NT computing platform using Obsydian, that the Obsydian for Windows NT product will achieve significant market acceptance or that the Windows NT platform will become widely adopted. The failure of any of these to occur would have a material adverse effect on the Company's business, financial condition and results of operations. COMPETITION The software development market is highly fragmented and serviced by many firms. The market for advanced software used in the development, deployment and management of high-end client/server application software systems is intensely competitive and characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and rapidly changing customer requirements. The Company's development tools are targeted primarily at developers of large business applications running on the AS/400 and the Windows NT operating platform. In the market for high-end client/server application development software tools, the Company expects to compete primarily with Forte Software, Inc. and Texas Instruments Incorporated with respect to users of the Windows NT operating platform, and currently competes primarily with Progress Software Corporation and several small software companies with respect to users of the AS/400. In the market for less complex client/server application development software tools, the Company competes primarily with Powersoft Corporation, IBM's Visual Age product line and Microsoft's Visual Basic with respect to users of the Windows NT operating platform and with IBM's Visual Age product line with respect to users of the AS/400. Software that can be developed and deployed using the Company's Obsydian environment can also be implemented using a combination of first generation application development tools and more powerful server programming techniques such as stored procedures in relational databases, C or C++ programming, and networking and database middleware to connect the various components. Consequently, the Company experiences competition from potential customers' decisions to pursue this approach as opposed to utilizing an application environment such as Obsydian. Similarly, the Company's products compete against the alternative of conventional software development in the AS/400's native RPG language. As a result, the Company must continuously educate existing and prospective customers as to the advantages of the Company's products. There can be no assurance that these customers or potential customers will perceive sufficient value in the Company's products to justify purchasing them. The Company also competes indirectly with database vendors such as Oracle Corporation ("Oracle"), Informix Corporation ("Informix") and others that offer their own development tools for use with their databases. The Company will in the future face additional direct or indirect competition from IBM or Microsoft as such companies continue to develop their own application development tools for the AS/400, Windows NT or other computing platforms or enter into strategic relationships with any of the Company's competitors. In addition, since the software industry has relatively low barriers to entry, the Company may in the future face additional competition from start-up or other companies in the software application development tool industry. Most of the Company's current competitors have, and future competitors may have, significantly greater financial, technical, marketing and other resources than the Company. The Company's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion and sale of their products than the Company. Also, most current and potential competitors have greater name recognition and more extensive customer bases that could be leveraged, thereby gaining market share to the Company's detriment. The Company expects to face additional competition as other established and emerging companies enter the application development tools market and new products and technologies are introduced. Increased competition could result in price reductions, reduced purchases of licenses, professional services and maintenance, lower gross margins or loss of market share, any of which would materially adversely affect the Company's business, operating results and financial condition. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties or make strategic acquisitions to increase the ability of their products to address the needs of the Company's prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly acquire significant market share. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. Further, there can be no assurance that products or technologies developed by others will not render the Company's products non-competitive or obsolete. In addition, regardless of the Company's success in the marketplace, a negative perception of the Company generated by industry analysts or the public more generally could detract from the Company's competitiveness. The Company's market is still evolving and there can be no assurance that the Company will be able to compete successfully against current and future competitors, and the failure to do so successfully will have a material adverse effect upon the Company's business, operating results and financial condition. See "Business -- Competition." SALES AND MARKETING PRODUCTIVITY An important element of the Company's strategy is to increase the productivity and effectiveness of its sales and marketing organizations. In particular, the Company intends to improve the productivity of its North American sales operation, which has not achieved levels of productivity realized elsewhere in the business. See "-- Fluctuations in Quarterly Results; Seasonality." The Company believes that its ability to improve sales and marketing productivity, as well as its future success more generally, will depend in large part upon its ability to identify, attract, train and retain highly skilled sales, marketing and management personnel. Competition for such personnel in the computer software industry is intense. There can be no assurance the Company will be successful in identifying, attracting, training and retaining such personnel, or retaining existing key personnel, each of whom presently has an at-will employment relationship with the Company. The failure to do any of the foregoing could have a material adverse effect on the Company's business, operating results or financial condition. DEPENDENCE ON RELATIONSHIPS WITH IBM AND MICROSOFT The Company's development, marketing and distribution activities are in part dependent on the Company's relationships with IBM's AS/400 division and Microsoft. Although certain aspects of the Company's relationships with each of IBM's AS/400 division and Microsoft are contractual in nature, many important aspects of each relationship depend on the continued cooperation of IBM and Microsoft, respectively, and there can be no assurance that the Company will be able to work successfully with either IBM or Microsoft for an extended period of time. Specific risks to each relationship include the fact that the Company and IBM and Microsoft also compete in the area of development tools for one or all of the AS/400, Windows NT and other computing platforms, as well as the risks of divergence in strategy between Synon and either company, a change in focus by either company or establishment of strategic relationships between either company and a competitor or competitors of Synon, any of which events would materially adversely impact Synon's ability to develop, market, sell or support its products. See "-- Competition." POTENTIAL FINANCIAL EXPOSURE FROM FIXED-PRICE CONTRACTS The Company has in the past entered into agreements with customers involving application development projects, including multi-million dollar projects, in which the Company has committed to achieve a specific result for a fixed price. The Company's operating margins for 1995 and 1996 were negatively impacted by cost overruns, and in certain cases losses, incurred in completing certain fixed-price projects. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company has implemented new practices intended to enable it to more effectively evaluate its ability to achieve the result required by a fixed-price contract before entering into any such contract in the future. However, there can be no assurance that the cost of fulfilling the Company's obligations under any such contract will not exceed the Company's estimate of such costs or the fixed price payable to the Company under such contract, in which event the Company's operating results would likely be materially adversely affected. RISKS ASSOCIATED WITH DISTRIBUTION CHANNELS To date, the Company has sold its products primarily through its direct sales force and distributors. Revenue from distributors accounted for approximately 26%, 21% and 30% of the Company's software license revenue for 1994, 1995 and 1996, respectively. In addition, the Company relies on its foreign distributors to provide first level customer support. The success of the Company is therefore dependent in significant part upon the performance of its distributors, which is primarily outside the Company's control. The Company's ability to achieve significant revenue growth in the future will depend in large part on its success in maintaining and establishing additional relationships with distributors worldwide. The loss of any of the Company's major distributors, or their promotion of competitive products, or the failure of these distributors to take the actions necessary to support Obsydian, especially Obsydian for the Windows NT computing platform, or the failure of the Company to attract new distributors, could have a material adverse effect on the Company's business, operating results and financial condition. See "Business -- Strategy" and "-- Sales and Marketing." LENGTHY SALES CYCLE The evaluation of, and purchase decision with respect to, the Company's software products generally involves a significant commitment of management attention and resources by prospective customers. Accordingly, the Company's sales process is often subject to delays associated with the long approval process that generally accompanies significant initiatives or capital expenditures. For these and other reasons, the sales cycle associated with the license of the Company's products is often lengthy (typically three to nine months) and subject to a number of significant delays over which the Company has little or no control. It is likely that the Company will continue to experience a lengthy sales cycle in the future, which could contribute to variability in quarterly operating results. See "-- Potential Fluctuations in Quarterly Results; Seasonality" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS Revenue from foreign operations accounted for approximately 47%, 48% and 46% of the Company's total revenue in 1994, 1995 and 1996, respectively. Although the Company has had international operations for a number of years, there can be no assurance that the Company will be able to successfully market, sell and deliver its products in international markets in the future. In addition, the Company believes that in order to increase sales opportunities and profitability, as well as to meet growing market needs, it may be required to expand its international operations, including hiring additional personnel and recruiting additional distributors. To the extent that the Company is unable to do so in a timely manner, the Company's growth, if any, in international sales may be limited, and the Company's business, operating results and financial condition could be materially adversely affected. The Company's international operations (including export sales) are exposed to risks from fluctuations in foreign currency exchange rates with respect to a number of currencies, including fluctuations among and between the United States dollar, British pound, German deutschemark, Japanese yen, French franc and Italian lira. The Company's sales outside the U.S. are made primarily through its foreign subsidiaries and are denominated in the local currencies of the countries in which such subsidiaries are based. The Company's direct export sales are limited and generally are priced in U.S. Dollars. The Company's foreign subsidiaries are obligated to pay the Company royalties based upon sales in their respective geographic regions, which typically are denominated in the local currency of the foreign subsidiary. Foreign currency transaction gains and loses arising from the change in foreign exchange rates between the dates of booking and collecting the intercompany receivable are credited to or charged against earnings in the period incurred. As a result, fluctuations in the value of the currencies in which the Company conducts its business have caused and will continue to cause currency transaction gains and losses with their associated impact on results of operations and liquidity. In 1996, the Company incurred $167,000 in foreign currency transaction losses, compared to a $227,000 gain in 1995. The Company incurred a $225,000 foreign currency transaction loss in the first quarter of 1997. The Company does not currently engage in foreign currency management activities or hedging transactions. Additional risks inherent in the Company's international business activities generally include the impact of possible recessionary environments in economies outside the United States, unexpected changes in government policies and regulatory requirements, tariffs, export controls and other trade barriers, costs of localizing products for foreign markets, lack of acceptance of localized products in foreign countries, longer accounts receivable payment cycles, difficulties and costs of staffing and managing international operations, potentially adverse tax consequences, restrictions on the repatriation of earnings, the burdens of complying with a wide variety of foreign laws and transportation delays. While a majority of the Company's revenue from international operations is derived from European operations, various countries in which the Company operates, particularly those in Asia, Africa and Latin America, are subject to political and economic instability which may adversely impact the Company's results of operations in those areas. There can be no assurance that the Company or its distributors will be able to sustain or increase international revenue from licenses or from maintenance or professional services, or that the foregoing factors will not have a material adverse effect on the Company's results associated with its international operations, and, consequently, on the Company's overall business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and "Business -- Sales and Marketing." DEPENDENCE ON PROPRIETARY RIGHTS AND TECHNOLOGY; RISKS OF INFRINGEMENT The Company's success is heavily dependent upon proprietary technology. The Company also believes that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance are essential to establishing and maintaining a technology leadership position. The Company relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company currently has no patents or patent applications pending. Despite precautions taken by the Company, it may be possible for unauthorized third parties to copy aspects of its products or future products or to obtain and use information that the Company regards as proprietary. In particular, for the Synon Model Applications ("SMA") financial product and class libraries, the Company provides its licensees with access to its data model and other proprietary information underlying its licensed applications. There can be no assurance that the Company's means of protecting its proprietary rights now or in the future will be adequate or that the Company's competitors will not independently develop similar or superior technology. Litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect the Company's trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, operating results and financial condition. The Company, Dysys Limited, a United Kingdom company ("Dysys"), and Simon Williams and Melinda Horton, founders and major stockholders of the Company, are parties to an agreement dated September 15, 1992 (the "Dysys Agreement") in connection with which the Company acquired certain intellectual property which was included in the Company's Obsydian product. In connection with the Dysys Agreement, the Company currently incurs a liability to pay Mr. Williams and Ms. Horton a 1.0% and 0.5% royalty, respectively, on Obsydian license and maintenance revenue for all transactions entered into through June 30, 1999. Pursuant to the Dysys Agreement, Mr. Williams and Ms. Horton also retain certain rights with respect to the intellectual property, including the non-exclusive right to use and exploit it under certain circumstances, including the Company's failure to pay required royalty amounts required in connection with the Dysys Agreement. See "Certain Transactions -- Dysys Agreement." Policing unauthorized use of the Company's software is difficult, and, while the Company does not believe software piracy is a significant problem to the Company at present, there can be no assurance that it will not become a problem in the future. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. The Company is not aware that any of its software product offerings infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement by the Company with respect to current or future products. The Company expects that software developers will increasingly be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company or at all, which could have a material adverse effect on the Company's business, operating results and financial condition. Any such delays or reductions in product shipments could materially and adversely affect the Company's business, operating results and financial condition. See "Business -- Intellectual Property and Other Proprietary Rights." RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT RISKS The market for the Company's products is subject to rapid technological change, changing customer needs and evolving industry standards that may render existing products and services obsolete. As a result, the Company's position in its existing markets or other markets that it may enter could be eroded rapidly by product advances. The Company's vulnerability to rapid technological change and changing customer needs is heightened by the focus of its product development efforts on the Obsydian product line and Obsydian for the Windows NT computing platform. The Company's product development efforts are expected to require, from time to time, substantial investments by the Company, but there can be no assurance that the Company will have sufficient resources to make the necessary investments. In addition, the Company has in the past experienced development delays, and there can be no assurance that the Company will not experience such delays in the future, which could delay or prevent the successful development, introduction or marketing of new or enhanced products such as the Java generator. Such products, even if developed successfully on a timely basis, may not meet the requirements of the marketplace or achieve market acceptance. If the Company is unable, for technological or other reasons, to develop and introduce new and enhanced products in a timely manner, the Company's business, results of operations and financial condition could be materially adversely affected. Software products as complex as those offered by the Company may contain errors that may be detected at any point in the products' life cycles. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found, resulting in loss of, or delay in, market acceptance and sales, diversion of development resources, injury to the Company's reputation, or increased service and warranty costs, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business -- Technology and Products" and "-- Product Development." DEPENDENCE ON KEY PERSONNEL; NEW SYSTEMS AS PUBLIC COMPANY Synon's success depends on the continued contributions of certain senior corporate managers and key employees, each of whom has an at-will employment relationship with the Company. The Company presently maintains "key person" insurance for its own benefit on certain such personnel in connection with potential liabilities to IBM, which liabilities will terminate effective upon the Offering. The Company does not expect to renew such insurance upon expiration and does not otherwise maintain "key person" insurance. The loss of services of any of such personnel could have a material adverse effect on the Company. The Company also depends on its continued ability to attract and retain other highly skilled and qualified personnel, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. See "Management -- Executive Officers, Directors and Key Employees -- Severance and Change in Control Arrangements." Moreover, in order to compete effectively and manage its obligations as a public company, the Company must continue to implement and improve information systems, procedures and controls and expand, train and manage its work force. FINANCIAL EXPOSURE FROM EXCESS FACILITIES As a result of the restructuring of its European operations, the Company currently has excess facilities under long term leases in the United Kingdom. While these facilities are currently sublet, there can be no assurance that the Company will not incur liabilities in connection with these excess facilities in the future, which could have a material adverse effect on the Company's business, operating results and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 12 of Notes to Consolidated Financial Statements. PRODUCT LIABILITY The Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in the Company's license agreements may not be effective under existing or future laws of certain jurisdictions. Although the Company has not experienced any material product liability claims to date, the sale and support of products by the Company may entail the risk of such claims, and there can be no assurance that the Company will not be subject to such claims in the future. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, operating results and financial condition. EFFECT OF CERTAIN CHARTER PROVISIONS; LIMITATION OF LIABILITY OF DIRECTORS; ANTITAKEOVER EFFECTS OF DELAWARE LAW Effective upon the closing of this Offering, the Company will be authorized to issue up to 5,000,000 shares of undesignated Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, liquidation preferences and the number of shares constituting a series or the designation of such series, without any further vote or action by the Company's stockholders. The issuance of any such Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the market price of the Common Stock and the voting and other rights of the holders of Common Stock. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, and may under certain circumstances involve the loss of voting control to others. The Company has no current plans to issue any shares of Preferred Stock. Certain provisions of the Company's Amended and Restated Certificate of Incorporation and Bylaws eliminate the right of stockholders to act by written consent without a meeting and specify certain procedures for nominating directors and submitting proposals for consideration at stockholder meetings. Such provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage certain types of transactions which may involve an actual or threatened change of control of the Company. Such provisions are designed to reduce the vulnerability of the Company to an unsolicited acquisition proposal and, accordingly, could discourage potential acquisition proposals and could delay or prevent a change in control of the Company. Such provisions are also intended to discourage certain tactics that may be used in proxy fights but could also have the effect of discouraging others from making offers for the Company's shares and, consequently, may inhibit fluctuations in the market price of the Company's Common Stock that could result from actual or rumored takeover attempts. These provisions may also have the effect of reducing or preventing changes in the management of the Company. The Company is subject to Section 203 of the Delaware General Corporation Law (the "Antitakeover Law"), which regulates corporate acquisitions. The Antitakeover Law prevents certain Delaware corporations, including those having securities listed for trading on the Nasdaq National Market, from engaging, under certain circumstances, in a "business combination" with any "interested stockholder" for three years following the date that such stockholder became an interested stockholder. For purposes of the Antitakeover Law, a "business combination" includes, among other things, a merger or consolidation involving the Company and the interested stockholder, as well as the sale of more than ten percent (10%) of the Company's assets. In general, the Antitakeover Law defines an "interested stockholder" as any entity or person beneficially owning 15% or more of the outstanding voting stock of the Company and any entity or person affiliated with or controlling or controlled by such entity or person. A Delaware corporation may "opt out" of the Antitakeover Law with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from amendments approved by the holders of at least a majority of the Company's outstanding voting shares. The Company has not "opted out" of the provisions of the Antitakeover Law. See "Description of Capital Stock." BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS The completion of the Offering made by this Prospectus will benefit the Selling Stockholders through the sale of shares at a large gain. Sales by directors and officers will account for of such shares. In addition, this Offering will benefit all current stockholders of the Company, including its directors and executive officers, indirectly by, among other things, creating a public market for the Company's Common Stock, thereby increasing liquidity and potentially increasing the market value of such stockholders' investment in the Company. The Company's directors and executive officers and their affiliates beneficially own, prior to this Offering, an aggregate of shares of Common Stock. Assuming a public offering price of $ per share, such shares beneficially owned (including shares subject to options) will have an aggregate market value of approximately $ million. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following this Offering could adversely affect the market price for the Company's Common Stock. See "Description of Capital Stock" and "Shares Eligible for Future Sale." IMMEDIATE DILUTION The Offering price is substantially higher than the book value per share of the Company's Common Stock. Investors purchasing Common Stock in this Offering will, therefore, incur immediate dilution of $ in the pro forma net tangible book value per share of Common Stock (based upon the Offering price of $ per share and after deducting estimated underwriting discounts and commissions and Offering expenses payable by the Company) from the Offering price and will incur additional dilution upon the exercise of outstanding stock options. See "Dilution." CONTROL BY PRINCIPAL STOCKHOLDERS, OFFICERS AND DIRECTORS Upon completion of this Offering, the Company's executive officers, directors and principal stockholders and their affiliates will beneficially own approximately % of the outstanding shares of Common Stock ( % if the Underwriters' over-allotment option is exercised in full). As a result, these stockholders, if acting in concert, will be able to control most matters requiring stockholder approval, including the election of directors, and the approval of mergers, consolidations and sales of all or substantially all of the assets of the Company. This may prevent or discourage tender offers for the Company's Common Stock unless the terms are approved by such stockholders. See "Principal and Selling Stockholders." NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this Offering there has been no public market for the Common Stock of the Company. The Offering price will be determined by negotiations among the Company, the Selling Stockholders and the representatives of the Underwriters. See "Underwriting" for a discussion of the factors to be considered in determining the Offering price. There can be no assurance that an active public market will develop or be sustained after this Offering or that the market price of the Common Stock will not decline below the Offering price. The market price of the Company's Common Stock is likely to be highly volatile and may be significantly affected by future announcements concerning the Company or its competitors, quarterly or annual variations in results of operations, announcements of technological innovations, the introduction of new products or changes in pricing policies by the Company or its competitors, proprietary rights or other litigation, changes in earnings estimates by analysts, the Company's failure to meet analysts' estimates or other factors. In addition, stock prices for many technology companies fluctuate widely for reasons which may be unrelated to results of operations. These fluctuations, as well as general economic, market and political conditions such as recessions or military conflicts, may materially and adversely affect the market price of the Company's Common Stock. DISCRETION AS TO USE OF PROCEEDS The primary purposes of this Offering are to create a public market for the Company's Common Stock, to facilitate future access to public markets and to obtain additional working capital. As of the date of this Prospectus, the Company has no specific plans to use the net proceeds from this Offering other than for working capital and general corporate purposes. Accordingly, the Company's management will retain broad discretion as to the allocation of the net proceeds from this Offering. Pending any such uses, the Company plans to invest the net proceeds in investment grade, interest-bearing securities. See "Use of Proceeds."

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+ RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully before purchasing the Common Stock offered hereby. This Prospectus contains forward-looking statements within the meaning of the Securities Act of 1933, as amended (the 'Securities Act'), and the Securities Exchange Act of 1934, as amended (the 'Exchange Act'). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the risk factors set forth below. See 'Special Note Regarding Forward-Looking Statements'. SUBSTANTIAL LEVERAGE Following the Offering, the Company will remain substantially leveraged. At August 2, 1997, total debt outstanding was $327.6 million, representing 96.4% of total book capitalization. After giving effect to the Offering (assuming an initial public offering price of $19.50 per share) and increased borrowings under the Revolving Credit Facility to finance the Diamond Park Acquisition, Finlay's total indebtedness would have been $396.0 million, representing 89.1% of total book capitalization. See 'Capitalization'. The degree to which Finlay is leveraged could have important consequences to holders of the Common Stock, including the following: (i) Finlay's ability to obtain additional financing in the future may be impaired; (ii) a substantial portion of Finlay's cash flow from operations must be dedicated to service its indebtedness, including an annual balance reduction requirement under Finlay's Revolving Credit Facility; (iii) the credit agreement (as amended, the 'Revolving Credit Agreement') relating to Finlay's Revolving Credit Facility, the indenture (the 'Note Indenture') relating to Finlay Jewelry's 10 5/8% Senior Notes due 2003 (the 'Notes'), the indenture (the 'Debenture Indenture', and, together with the Note Indenture, the 'Indentures') relating to Finlay's 12% Senior Discount Debentures due 2005 (the 'Debentures') and the Company's gold consignment agreement (the 'Gold Consignment Agreement') all contain provisions which restrict the ability of the Company to pay dividends; (iv) the Revolving Credit Agreement and the Indentures impose other operating and financial restrictions on Finlay Jewelry which may limit its operations and development, including its ability to finance acquisitions or to repay indebtedness; (v) future financing arrangements will likely impose similar restrictions on Finlay; (vi) changes in interest rates or rates charged under the Revolving Credit Facility and the Gold Consignment Agreement could adversely affect the Company's results of operations or financial condition; (vii) Finlay may be more leveraged than other providers of similar products and services, which may place Finlay at a competitive disadvantage; and (viii) Finlay's significant degree of leverage could make it more vulnerable to changes in general economic conditions. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations'. SEASONALITY Finlay's business is highly seasonal, with a significant portion of its sales and income from operations generated during the fourth quarter of each year, which includes the year-end holiday season. The fourth quarter accounted for an average of 42% of Finlay's sales and 86% of operating income (excluding nonrecurring expenses) for 1994, 1995 and 1996. Finlay has typically experienced losses in the first three quarters of its fiscal year. During these periods, working capital requirements have been funded by the Revolving Credit Facility. This pattern is expected to continue. Accordingly, the results for any of the first three quarters of any given fiscal year, taken individually or in the aggregate, are not indicative of annual results. A substantial decrease in sales during the fourth quarter would have a material adverse effect on Finlay's profitability. The Company's quarterly results of operations also may fluctuate significantly as a result of a variety of factors, including the timing of new Department openings, net sales contributed by new Departments, increases or decreases in comparable Department sales, timing of certain holidays, changes in the Company's selection of merchandise, general economic, industry and weather conditions that affect consumer spending and actions of competitors. In addition, since jewelry purchases are discretionary and a majority of jewelry purchases by store customers are made using credit, declines in general economic conditions or consumer credit availability, or increases in prevailing interest rates, could adversely affect the business and financial condition of Finlay, particularly if such changes were to occur in the fourth quarter of Finlay's fiscal year. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality' and 'Business -- Seasonality'. DEPENDENCE ON HOST STORE RELATIONSHIPS During 1996, approximately 48% of Finlay's sales were generated by Departments operated in store groups owned by May, and approximately 22% of Finlay's sales were generated by Departments operated in store groups owned by Federated. Management believes that its relationships with the May and Federated store groups are excellent. Nevertheless, a decision by either company to transfer the operation of some or all of their Departments to a competitor, or to assume the operation of those Departments themselves, could have a material adverse effect on the business and financial condition of Finlay. Such adverse effects could also be caused by consolidation transactions effected by May, Federated or other host store groups. In recent years the department store industry has been consolidating. Although Finlay has, in the past, benefitted from host store consolidations, no assurance can be given that significant host store relationships of Finlay will not be terminated as a result of such consolidation. For example, when Federated acquired Emporium/Weinstocks, 30 stores in which Finlay operated Departments were integrated into Federated's Macy's division, which currently operates its own fine jewelry business. See 'Business -- Store Relationships'. Finlay's lease agreements typically have an initial term of one to five years, and contain renewal options or provisions for automatic renewal absent prior notice of termination by either party. Each year, a substantial number of leases are subject to renewal. For example, all of Finlay's leases with May host stores are subject to renewal in January 1998 or January 1999. Although Finlay's leases have historically been renewed in the ordinary course, there can be no assurance that such leases will continue to be renewed, or, if renewed, on comparable terms. Finlay's lease agreements also give host stores termination rights based on certain performance and other factors. See 'Business -- Store Relationships'. AVAILABILITY OF CONSIGNED MERCHANDISE In recent years, on average, approximately 50% of Finlay's domestic merchandise has been carried on consignment (pursuant to written agreements or other arrangements) or otherwise financed by vendors, thereby reducing Finlay's direct capital investment in inventory to levels which it believes are low for the retail jewelry industry. Although Finlay does not believe that its consignment agreements or arrangements with its vendors will be subject to substantial adverse changes in the future, there can be no assurance that Finlay will be able to continue to obtain substantial amounts of merchandise on these terms. See 'Management's Discussion and Analysis of Financial Condition and Results of Operations' and 'Business -- Purchasing and Inventory'. COMPETITION Finlay faces competition for retail jewelry sales from national and regional jewelry chains, other department stores, local independently owned jewelry stores and chains, specialty stores, mass merchandisers, catalog showrooms, discounters, direct mail suppliers and televised home shopping. Several of Finlay's competitors are substantially larger and have greater financial resources than Finlay. With respect to the operation of Departments in host store groups, Finlay competes with a limited number of established Department lessees and department store chains. See 'Business -- Competition'. EXPANSION A significant portion of Finlay's growth in sales and income from operations in recent years has resulted from Finlay's obtaining leases to operate Departments in new host store groups and the addition of new Departments in existing host store groups. Finlay cannot predict the number of Departments it will operate in the future or whether its expansion, if any, will be at levels comparable to that experienced to date. In many cases, Finlay is subject to limitations under its lease agreements which prohibit Finlay from operating Departments for other host store groups within a certain geographical radius of the host stores (typically five to ten miles). Such limitations restrict Finlay from further expansion within areas where it currently operates Departments, including expansion by possible acquisitions. However, Finlay has from time to time obtained the consent of an existing host store group to operate Departments for another host store group within the prohibited area. May and Federated have granted consents of this type to Finlay with respect to one another's host stores. There can be no assurance that additional consents will be obtained in the future. The existence of these geographic limitations may impede Finlay's ability to enter into leases with other potential host store groups. In addition, in certain cases, Finlay has found that, notwithstanding the absence of any geographical limitation in a lease agreement, it may be limited as a practical matter from opening Departments for competing host store groups in close proximity to each other because of the adverse effect such openings might have on its overall host store group relationships. See 'Business - -- Store Relationships'. The Company may also from time to time examine opportunities to acquire or invest in companies or businesses that complement the Company's existing business. For example, on September 3, 1997, the Company entered into an agreement to acquire Diamond Park. There can be no assurance that the Diamond Park Acquisition or future acquisitions by the Company will be successful or improve the Company's operating results. In addition, the Company's ability to complete acquisitions will depend on the availability of both suitable target businesses and acceptable financing. Any future acquisitions may result in a potentially dilutive issuance of additional equity securities, the incurrence of additional debt or increased working capital requirements. Any such acquisition may also result in earnings dilution, the amortization of goodwill and other intangible assets or other charges to operations, any of which could have a material adverse effect on the Company's business, financial condition or results of operations. Such acquisitions could involve numerous additional risks, including, without limitation, difficulties in the assimilation of the operations, products, services and personnel of any acquired company and the diversion of management's attention from other business concerns. See 'Business - -- Recent Developments'. DEPENDENCE ON KEY OFFICERS Finlay's recent success has depended to a significant degree on the efforts of Arthur E. Reiner, President, Chief Executive Officer and Vice Chairman of the Company and Chairman and Chief Executive Officer of Finlay Jewelry, as well as David B. Cornstein, Chairman of the Company. Finlay's operations may be adversely affected if its current officers cease to be active in management. Messrs. Reiner and Cornstein have employment agreements with Finlay for a period ending January 31, 2001 and 1999, respectively. Upon the expiration of the term of his employment agreement on January 31, 1999, Mr. Cornstein is expected to become Chairman Emeritus of the Company. See 'Management -- Executive Compensation -- Employment Agreements and Change of Control Arrangements'. LIMITED PUBLIC MARKET FOR COMMON STOCK; VOLATILITY OF MARKET PRICE Upon completion of the Offering, the Company will have 9,616,449 shares of Common Stock outstanding of which 5,798,376 shares are expected to be held by non-affiliates of the Company. The Common Stock has been included in the Nasdaq National Market since completion of an initial public offering in April 1995 (the 'Initial Public Offering'). During the twelve months ended August 31, 1997, the average daily volume of Common Stock traded in the Nasdaq National Market was approximately 8,500 shares. During that period, there were 37 trading days on which no shares of the Common Stock were traded. There can be no assurance that the market for the Common Stock will become more active following the Offering. Although several securities firms act as market-makers for the Common Stock, a less active market for the Common Stock may cause the price of the Common Stock to be more volatile than it otherwise would be. In addition, there can be no assurance that market prices after the Offering will equal or exceed the initial public offering price per share set forth on the cover page of this Prospectus. The market price of the Common Stock could be subject to significant fluctuations in response to Finlay's operating results and developments relating to the Company, its competitors, general retailing and economic conditions and other external factors. In addition, in recent years the stock market in general has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These market fluctuations, as well as general economic conditions, may adversely affect the market price of the Common Stock. AVAILABILITY AND COST OF PRECIOUS METALS AND PRECIOUS AND SEMI-PRECIOUS STONES The jewelry industry in general is affected by fluctuations in the prices of precious metals and precious and semi-precious stones. The availability and prices of gold, diamonds and other precious metals and precious and semi-precious stones may be influenced by cartels, political instability in exporting countries and inflation. Shortages of these materials or sharp changes in their prices could have a material adverse effect on the Company's results of operations or financial condition. Although the Company attempts to protect against such fluctuations in the price of gold by entering into futures contracts, there can be no assurance that these hedging techniques will be successful or that hedging transactions will not adversely affect the Company's results of operations or financial condition. CONCENTRATION OF OWNERSHIP In May 1993, affiliates of Thomas H. Lee Company (together with its affiliated transferees, the 'Lee Investors') and partnerships managed by Desai Capital Management Incorporated (the 'Desai Investors') acquired a controlling interest in the Company in connection with a series of transactions that recapitalized the Company (the 'Recapitalization Transactions'). Before giving effect to the Offering, the Lee Investors, the Desai Investors and Messrs. Cornstein and Reiner (collectively, the 'Management Stockholders') beneficially own, in the aggregate, 61.9% of the Common Stock. Equity-Linked Investors, L.P., one of the Desai Investors, in connection with the scheduled winding-up of this partnership, is selling all of the Common Stock owned by it in the Offering. After giving effect to the Offering, the Lee Investors, the Desai Investors and the Management Stockholders will beneficially own, in the aggregate, 38.8% of the Common Stock, of which 24.4% will be held by the Lee Investors, 7.3% will be held by the Desai Investors and 7.1% will be held by the Management Stockholders. See 'Principal and Selling Stockholders'. The Company, the Lee Investors, the Desai Investors, the Management Stockholders and certain third parties are parties to a Stockholders' Agreement (as amended, the 'Stockholders' Agreement'). The Stockholders' Agreement provides, among other things, that all of the parties thereto will, subject to certain conditions, vote their shares to fix the number of members of the Board of Directors at eight and that each of the Lee Investors, the Desai Investors and the Management Stockholders have the right to nominate certain members of the Company's Board of Directors, totaling six nominees. Each of the parties to the Stockholders' Agreement have agreed to vote in favor of such nominees. The nomination and election of the remaining two directors is not governed by the Stockholders' Agreement, although the Stockholders' Agreement does require that such directors not be parties to the Stockholders' Agreement. See 'Management', 'Principal and Selling Stockholders' and 'Certain Transactions -- Stockholders' Agreement'. Although none of the Lee Investors, the Desai Investors nor the Management Stockholders individually currently own, and following the Offering none of them individually will own, a majority of the voting securities of the Company, their respective significant beneficial ownership of the Common Stock and rights to nominate directors under the Stockholders' Agreement enable each of them to exercise substantial influence over the management of Finlay. The concentration of beneficial ownership of the Company may have the effect of delaying, deferring or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of the Common Stock. See 'Principal and Selling Stockholders', 'Certain Transactions' and 'Description of Capital Stock'. SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of Common Stock in the public market after the Offering under Rule 144 of the Securities Act ('Rule 144') or otherwise or the perception that such sales could occur may adversely affect prevailing market prices of the Common Stock. The Company has agreed not to register for sale, and the Company, the Lee Investors, the Desai Investors, the Selling Stockholder, the Over-Allotment Selling Stockholders and the current directors and executive officers of Finlay who hold Common Stock or options to purchase Common Stock have agreed, during the period beginning from the date of the underwriting agreement relating to the Offering (the 'Underwriting Agreement') and continuing to and including the date 180 days after the date of this Prospectus, not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock or any securities which are substantially similar to the shares of Common Stock or which are convertible into or exchangeable for, or represent the right to receive, shares of Common Stock or securities which are substantially similar to the shares of Common Stock without the prior written consent of the representatives of the Underwriters, except, in the case of the Company, the Selling Stockholder and the Over-Allotment Selling Stockholders, for the shares of Common Stock offered in connection with the Offering and, in the case of the Company, securities issued pursuant to employee stock option plans existing on the date of this Prospectus. The Lee Investors, the Desai Investors, the Management Stockholders and certain other individuals have the right to demand registration under the Securities Act of their shares of Common Stock and have the right to have their shares of Common Stock included in future registered public offerings of securities by the Company. These stockholders have agreed not to exercise such rights for a period of 180 days after the date of this Prospectus without the prior written consent of the representatives of the Underwriters. The exercise of such registration rights or the perception of an ability to do so could adversely affect the market price of the Common Stock and could impair Finlay's future ability to raise capital through an offering of the Company's equity securities. See 'Certain Transactions' and 'Shares Eligible for Future Sale'. DILUTION Purchasers of Common Stock in the Offering will experience immediate dilution of $26.69 per share ($26.30 per share if the Underwriters' over-allotment option is exercised in full) in net tangible book value per share, which exceeds the assumed $19.50 initial public offering price of the Common Stock offered hereby. The net tangible book value (deficiency) per share, after giving pro forma effect to the Offering, will be $(7.19) per share ($(6.80) per share if the Underwriters' over-allotment option is exercised in full). Existing stockholders will receive an increase in the net tangible book value of their shares of Common Stock. RESTRICTION ON PAYMENT OF DIVIDENDS The Company has no present intention to pay dividends on the Common Stock. In addition, various restrictions under Finlay's financing arrangements limit the ability of the Company to pay dividends or to make other similar distributions. See '-- Substantial Leverage' and 'Dividend Policy'. CHANGE OF CONTROL AND ANTI-TAKEOVER PROVISIONS The Debenture Indenture provides that, upon the occurrence of a Change of Control (as defined in the Debenture Indenture), the Company will be required to make an offer (a 'Change of Control Offer') to purchase all of the Debentures issued and then outstanding under the Debenture Indenture at a purchase price equal to 101% of the accreted value thereof on the date of purchase (if prior to May 1, 1998) or 101% of the principal amount thereof plus accrued and unpaid interest thereon to the date of purchase (if on or after May 1, 1998). Under the Debenture Indenture, a 'Change of Control' occurs when (a) a person or group other than certain of the Company's existing stockholders becomes the beneficial owner of 50% or more of the aggregate voting power of the Company; (b) during any period of two consecutive calendar years, certain changes in the composition of the Company's Board of Directors occur; or (c) the Company ceases to own 100% of Finlay Jewelry. A Change of Control under the Debenture Indenture would constitute a default under the Revolving Credit Agreement and would also constitute a Change of Control under the Note Indenture, accelerating all obligations under those agreements. In addition, employment agreements with certain members of senior management contain provisions requiring Finlay to make certain payments to such executives in the event such executives are terminated in connection with a Change of Control (as defined in such employment agreements). See 'Management -- Executive Compensation -- Employment Agreements and Change of Control Arrangements'. The foregoing provisions may have the effect of delaying, deferring or preventing a change of control of the Company, may discourage bids for the Common Stock and may adversely affect the market price of the Common Stock. Certain provisions of the Company's Amended and Restated Certificate of Incorporation (the 'Certificate of Incorporation') and Amended and Restated By-laws (the 'By-laws'), as well as provisions of the Delaware General Corporation Law (the 'DGCL'), may also have the effect of delaying, deferring or preventing a change of control of the Company, may discourage bids for the Common Stock and may adversely affect the market price of the Common Stock. For example, under the Certificate of Incorporation, the Board of Directors is authorized to issue one or more series of preferred stock having such designations, rights and preferences as may be determined by the Board, and the Certificate of Incorporation and the By-laws provide for a classified Board of Directors. See 'Description of Capital Stock'.

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+ RISK FACTORS An investment in the Trust involves certain risks, many of which are significant. The "RISK FACTORS" Section of this Prospectus contains a discussion of the most important risks associated with an investment in Class B Subordinated Interests. These risks include possible loss of voting control over such matters as removal of the Managing Trustee and amendments to the Trust Agreement, the subordination of certain Class B distributions to distributions to be made with respect to Class A Interests, Federal income tax risks and risks with respect to the business operations of the Trust. ESTIMATED USE OF PROCEEDS The Trust will use 20% of the proceeds of the Offering after payment of Offering expenses to make a special distribution to the Class A Investors (the "Special Class A Distribution") and the balance of such net proceeds are intended to be applied from time to time to enable the Trust to redeem Class A Interests during the Initial Redemption Period. Any net proceeds not so applied will be used from time to time throughout the Initial Redemption Period to make the Class B Capital Distributions. (See "ESTIMATED USE OF PROCEEDS.") COMPENSATION AND FEES The Managing Trustee, the Advisor and their Affiliates will not receive additional compensation or fees from the Trust as a result of the Offering. However, the Managing Trustee, the Advisor and certain of their Affiliates have received, and will continue to receive, substantial compensation and fees in connection with the organization, management and operation of the Trust. Also, the Trust has reimbursed, and will reimburse, the Managing Trustee and its Affiliates for certain expenses in connection with the Offering. (See "COMPENSATION AND FEES.") CONFLICTS OF INTEREST The Managing Trustee, the Advisor and certain of their Affiliates will have various conflicts of interest with respect to the Trust. These conflicts include, but are not limited to: - exercise of voting rights, particularly with respect to the rights, obligations and removal of the Managing Trustee and any amendments to the Trust Agreement; - determination of the amount and timing of the Distributions, in particular Distributions with respect to any Class B Subordinated Interests in the event such Interests are acquired, as expected, by the Special Beneficiary and its Affiliates; - competition with other equipment leasing programs sponsored by the Managing Trustee or its Affiliates for the acquisition, leasing, re-leasing and sale of equipment and with respect to the allocation of management time, services or functions to be provided by officers, directors and employees of the Managing Trustee and its Affiliates. The Trust Agreement contains provisions intended to reduce conflicts between the Managing Trustee and its Affiliates and the Beneficiaries. (See "SUMMARY OF THE TRUST AGREEMENT" and "CONFLICTS OF INTEREST.") FIDUCIARY RESPONSIBILITY The Managing Trustee is accountable to the Trust and the Beneficiaries as a fiduciary and, consequently, must exercise good faith and act with integrity in Trust affairs. However, the Trust will be required to provide certain indemnities to the Managing Trustee and its Affiliates. Further, the Managing Trustee and its Affiliates will be permitted to engage in certain activities which will involve conflicts of interest with the Trust. BUSINESS OF TRUST The Trust was organized as a Delaware business trust on August 31, 1992, for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment (the "Assets"). For a description of the Trust and its business, see "BUSINESS OF THE TRUST" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

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+ RISK FACTORS An investment in the Trust involves certain risks, many of which are significant. The "RISK FACTORS" Section of this Prospectus contains a discussion of the most important risks associated with an investment in Class B Subordinated Interests. These risks include possible loss of voting control over such matters as removal of the Managing Trustee and amendments to the Trust Agreement, the subordination of certain Class B distributions to distributions to be made with respect to Class A Interests, Federal income tax risks and risks with respect to the business operations of the Trust. ESTIMATED USE OF PROCEEDS The Trust will use 20% of the proceeds of the Offering after payment of Offering expenses to make a special distribution to the Class A Investors (the "Special Class A Distribution") and the balance of such net proceeds are intended to be applied from time to time to enable the Trust to redeem Class A Interests during the Initial Redemption Period. Any net proceeds not so applied will be used from time to time throughout the Initial Redemption Period to make the Class B Capital Distributions. (See "ESTIMATED USE OF PROCEEDS.") COMPENSATION AND FEES The Managing Trustee, the Advisor and their Affiliates will not receive additional compensation or fees from the Trust as a result of the Offering. However, the Managing Trustee, the Advisor and certain of their Affiliates have received, and will continue to receive, substantial compensation and fees in connection with the organization, management and operation of the Trust. Also, the Trust has reimbursed, and will reimburse, the Managing Trustee and its Affiliates for certain expenses in connection with the Offering. (See "COMPENSATION AND FEES.") CONFLICTS OF INTEREST The Managing Trustee, the Advisor and certain of their Affiliates will have various conflicts of interest with respect to the Trust. These conflicts include, but are not limited to: - exercise of voting rights, particularly with respect to the rights, obligations and removal of the Managing Trustee and any amendments to the Trust Agreement; - determination of the amount and timing of the Distributions, in particular Distributions with respect to any Class B Subordinated Interests in the event such Interests are acquired, as expected, by the Special Beneficiary and its Affiliates; - competition with other equipment leasing programs sponsored by the Managing Trustee or its Affiliates for the acquisition, leasing, re-leasing and sale of equipment and with respect to the allocation of management time, services or functions to be provided by officers, directors and employees of the Managing Trustee and its Affiliates. The Trust Agreement contains provisions intended to reduce conflicts between the Managing Trustee and its Affiliates and the Beneficiaries. (See "SUMMARY OF THE TRUST AGREEMENT" and "CONFLICTS OF INTEREST.") FIDUCIARY RESPONSIBILITY The Managing Trustee is accountable to the Trust and the Beneficiaries as a fiduciary and, consequently, must exercise good faith and act with integrity in Trust affairs. However, the Trust will be required to provide certain indemnities to the Managing Trustee and its Affiliates. Further, the Managing Trustee and its Affiliates will be permitted to engage in certain activities which will involve conflicts of interest with the Trust. BUSINESS OF TRUST The Trust was organized as a Delaware business trust on September 22, 1993, for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment (the "Assets"). For a description of the Trust and its business, see "BUSINESS OF THE TRUST" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

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+ RISK FACTORS THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. EACH PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS INHERENT IN, AND AFFECTING THE BUSINESS OF, THE COMPANY AND THIS OFFERING BEFORE MAKING AN INVESTMENT DECISION. LIMITED OPERATING HISTORY; ACCUMULATED LOSS; GOING CONCERN QUALIFICATION From the Company's inception in 1990 until May 1995, the Company was involved in the business of distributing software using encrypted CD-ROMs. During 1995 the Company made a strategic decision to focus its business on providing Internet-based customer service solutions for large organizations. In order to acquire the skills to participate in this new business the Company acquired Cimarron International, Inc., an interactive media firm and Navigist, Inc., a network engineering and consulting firm. In September 1995 the Company abandoned all efforts associated with the CD-ROM software distribution concept to focus its business solely on Internet-based customer service solutions. Accordingly, the Company has only limited operating history upon which an evaluation of its business and prospects can be based. Since adopting its current business strategy, the Company has continued to incur net losses from operations on a consolidated basis. The Company has incurred net losses in each year of its existence and expects that it will continue to incur net operating losses at least through fiscal 1997. As of December 31, 1996 the Company had an accumulated deficit of $19,149,721. These continuing losses are attributable to increases in development, marketing and sales costs related to the Company's new focus on Internet-related products as well as reduced revenues from Cimarron and Navigist operations. See "Management's Discussion and Analysis". There can be no assurance that the Company can generate substantial revenue growth, or that any revenue growth that is achieved can be sustained. Revenue growth that the Company has achieved or may achieve may not be indicative of future operating results. In addition, the Company has increased and plans to increase further, its operating expenses in order to enhance its currents products and services, fund higher levels of research and development, increase its sales and marketing efforts and increase its administrative resources in anticipation of future growth. To the extent that increases in such expenses precede or are not subsequently followed by increased revenues, the Company's business, operating results and financial condition will be materially adversely affected. The auditors report included in the Company's annual report for the year ended December 31, 1996 contains an explanatory paragraph which states that "the Company has experienced recurring losses from operations and requires cash to fund continuing operations that raise substantial doubt about its ability to continue as a going concern." The Company will not be able to continue its operations as a going concern or realize its business plan without achieving increased revenues or obtaining financing to meet its working capital needs, neither of which can be assured. In the event that the Company is unable to continue as a going concern, an investor holding equity securities of the Company would likely lose the value of his or her entire investment. TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCT DEVELOPMENT The Internet-based customer service industry is characterized by rapid technological change. A significant portion of the Company's success will depend on its ability to design, develop, test, market, sell and support new products and enhancements of current products on a timely basis in response to competitive products and evolving demands of the marketplace. There can be no assurance that the Company's financial and technological resources will permit it to develop or market new products successfully or respond effectively to technological changes. The Company anticipates that significant amounts of future revenue will be derived from products and product enhancements which either do not exist today or have not been sold in large enough quantities to ensure market acceptance. The development of new systems is a complex, expensive and uncertain process requiring technical innovation and the accurate anticipation of technological and market trends. The Company will need to continue to attract and retain appropriately skilled employees to successfully develop new systems. There can be no assurance that the Company will not experience difficulties that could delay or prevent the successful development and introduction of product enhancements or new products, or that such enhancements or new products will adequately meet the requirements of the marketplace or achieve market acceptance. If the Company is unable to develop and introduce product enhancements and new products in a timely and cost- effective manner in response to changing market conditions or client requirements, the Company's business, results of operations and financial condition could be materially and adversely affected. See "Business --Business Strategy". DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET The Company's future success is substantially dependent upon continued growth in the use of the Internet and the Web in order to support the market for Internet-based customer service solutions and other similar products and services the Company may develop. Rapid growth in the use of and interest in the Internet and the Web is a recent phenomenon. There can be no assurance that communication or commerce over the Internet will become widespread or that extensive content will continue to be provided over the Internet. The Internet may not prove to be a viable commercial marketplace for a number of reasons, including potentially inadequate development of the necessary infrastructure, such as reliable network backbone, or timely development of performance improvements, including high speed modems. In addition, to the extent that the Internet continues to experience significant growth in the number of users and level of use, there can be no assurance that the Internet infrastructure will continue to be able to support the demands placed upon it by such potential growth. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation. Changes in or insufficient availability of telecommunications services to support the Internet also could result in slower response times and adversely affect usage of the Web and FindNow-SM-. If use of the Internet does not continue to grow, or if the Internet infrastructure does not effectively support growth that may occur, the Company's business, results of operations and financial condition would be materially and adversely affected. See "Business-- Industry Background". EARLY STAGE RISKS; DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS The Company's recent adoption of a business strategy focused on Internet- based customer service solutions subjects the Company to the risks inherent in a speculative new enterprise, including the absence of a lengthy operating history, shortage of cash, undercapitalization, technology whose application to the Internet is relatively unproven, new untried products and competition from businesses with considerably greater resources. See "Business--Business Strategy". The markets for Internet products has only recently begun to develop, is rapidly evolving and is characterized by an increasing number of market entrants who have introduced or developed locator products and services for use on the Internet and the Web. As is typical in the case of a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Because the market for the Company's products is new and evolving, it is difficult to predict the future growth rate, if any, and size of this market. There can be no assurance either that the market for the Company's products will develop or that demand for the Company's products will emerge or become sustainable. The Company's ability to successfully develop additional products and services depends substantially on market acceptance of the Company's FindNow-SM- product. If FindNow-SM- sales fail to continue to grow, the Company's ability to establish enhancements and other products would be materially and adversely affected. If the market fails to develop or develops more slowly than expected or becomes saturated with competitors, or if the Company's products and services do not achieve or sustain market acceptance, the Company's business, results of operations and financial condition will be materially and adversely affected. See "Business--Industry Background." FLUCTUATION IN QUARTERLY OPERATING RESULTS The Company has experienced, and expects to continue to experience, significant fluctuations in its quarterly results of operations. Factors which have had an influence on and may continue to influence the Company's results of operations include the size and timing of customer orders, timing of product introductions or enhancements by the Company or its competitors, market acceptance of new products technology, changes in pricing strategy, and changes status of development expenditures. As a result of the foregoing and other factors, the Company anticipates that it may experience material fluctuation in operating results on a quarterly basis, which may contribute to the volatility in the price of the common stock. See "Management's Discussion and Analysis". DEPENDENCE ON LIMITED NUMBER OF CUSTOMERS AND FUTURE SALES As of the date of this Prospectus, the Company had contracted with ten customers for its FindNow-SM- service. The ongoing monthly revenue from these customers is not sufficient to cover operating costs of the Company. The success of the Company will require that the Company increase its customer base, and its failure to do so would materially and adversely affect its financial condition. The Company's current FindNow-SM- customers purchase the service pursuant to contracts with a duration of two years or less. The success of the Company is materially dependent on the ability of the Company to obtain renewal contracts with its existing customers. See "Business--Customers". DEPENDENCE ON SINGLE PRODUCT; DEPENDENCE ON NEW PRODUCTS The Company's primary product and service is the FindNow-SM- system. The Company is substantially dependent on the sales and market acceptance of FindNow-SM- to generate operating revenues and profits for its Internet Products group. Although the Company is in the process of developing additional products and services, these development efforts are largely focused on enhancing the functionality of the FindNow-SM- system. The failure of the Company to successfully market and sell the FindNow-SM- service would have a material adverse effect on the Company's business, results of operations, and financial condition. The Company may also develop other related products that allow customers to deliver customer service information via the Internet in order to broaden its product line and remain competitive with other offerings in the marketplace. The development of new products involve many risks, including technical, financial and market acceptance risks. There can be no assurance that the Company will be successful in developing and marketing new products and services or that these new offerings would gain market acceptance. See "Business--Business Strategy". COMPETITION The market for Internet-based customer service solutions, including the market for the Company's products and services, is intensely competitive, fragmented and rapidly evolving. Many of the Company's competitors are larger and have substantially greater financial, research and development, marketing and personnel resources than the Company. Competition for Internet-based locator services has caused the Company to revise the pricing for its FindNow-SM- product, and increased competition could result in further price reductions for the Company's products and services. Increased or stronger competition from existing competitors and competing products, or the introduction of new products superior to the Company's own products, would have a material adverse affect on the Company's financial condition. The Company's future success will be dependent upon its ability to remain competitive with respect to services offered and the technical capabilities of the products offered. See "Business--Competition". GENERAL BUSINESS RISKS The Company has developed its business plans and strategies based on the rapidly increasing size of the Internet markets and the Company's participation in those markets. In addition, the Company has made assumptions regarding estimated sales cycle, price and acceptance of the Company's products and services, and the costs of further developing and providing those products and services. Although these are based on the best estimates of management, there can be no assurance that these assumptions will prove to be correct. Future operational results of the Company will depend on many factors including future economic, market and competitive conditions, all of which are difficult or impossible to predict accurately and many of which are beyond the ability of the Company to control. See "Business--Business Strategy". DEPENDENCE ON INTERNET INFRASTRUCTURE AND ACCESS The sales of the Company's products and services are dependent on reliable access and operations of the Internet. Notwithstanding current interest and worldwide subscriber growth, the Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure or complementary products, such as high speed modems. Because global commerce and on-line exchange of information on the Internet and other open area networks are new and evolving, it is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace. There can be no assurance that the infrastructure or complementary products necessary to make the Internet a viable commercial marketplace will be developed or, if developed, that the Internet will in fact become a viable commercial marketplace. If the necessary infrastructure or complementary products are not developed, or if the Internet does not become a viable commercial marketplace, the Company's business, operating results and financial condition will be materially adversely affected. See "Business--Industry Background". LIMITED MARKET FOR SECURITIES; POSSIBLE VOLATILITY OF SHARE PRICE The Company's securities are traded on the NASD's "Electronic Bulletin Board" and on the Vancouver Stock Exchange. The Electronic Bulletin Board has been characterized by low trading volume, large price fluctuations and limited liquidity for many issuers listed on this market. The Company's Common Stock was recently approved for listing on the Vancouver Stock Exchange, which could provide greater trading volume, better news coverage and increased liquidity. However, the Common Stock has not been listed on the Vancouver Stock Exchange long enough to determine the nature or amount of activity in the Common Stock and there can be no assurance that the listing will result in increased liquidity of the Company's stock. As a result, an investor may find it difficult to dispose of, or to obtain accurate price quotations of the Company's securities. In addition, the fact that the Company's stock is not traded on Nasdaq or a national exchange may make it more difficult for the Company to obtain additional equity financing needed for expansion of its operations in the future. See "Market for the Company's Common Stock". POSSIBLE NEED FOR ADDITIONAL CAPITAL The Company's cash flow from operations is not sufficient to fund the operations of the Company. The Company is currently dependent upon and intends to use a significant portion of the proceeds from its December 1996 private placement to fund its ongoing operations as well as to execute its business plan with respect to the development of FindNow-SM- and related products. The Company currently projects that available cash balances together with projected cash flow from operations will be sufficient to fund the Company's operations through 1997. However, in the event that the market acceptance of the Company's products and services is not as robust as anticipated, competition is greater than anticipated, development of new products or enhancements to existing products is costlier or slower than expected, or that the Company's projections otherwise prove to be inaccurate, the Company may need to seek additional financing. In such case, the Company will generally be required to seek additional debt or equity financing to fund the costs of daily operations. There can be no assurance that the Company will be able to successfully obtain additional debt or equity financing, if needed, or that such financing would not result in substantial dilution of current shareholders. See "Management's Discussion and Analysis". DEPENDENCE ON THIRD PARTY TECHNOLOGY The Company's primary product, FindNow-SM-, incorporates technology developed and owned by third parties. The Company relies to a certain extent upon such third parties' ability to enhance their current products, and to develop new products on a timely and cost effective basis that will meet changing customer needs and respond to competitive and technological changes. If the Company were to breach its license agreements or the license agreements were terminated, the Company could lose the right to use the licensed software. There can be no assurance that the Company would be able to replace the functionality provided by the third party software currently offered in conjunction with the Company's products. In addition, if the Company were not able to obtain adequate support for third party software or such software were to become incompatible with the Company's software, the Company would need to redesign its software or seek comparable replacements. There can be no assurances that the Company could successfully redesign its software or that adequate replacements for third party software could be located and integrated into the Company's system. See "Business--Products and Services". CONTROL BY PRINCIPAL STOCKHOLDERS As of February 28, 1997, the Company had 5,515,872 shares of Common Stock outstanding. Of this total amount outstanding, officers, directors and those shares holders holding more than 5% of the outstanding shares control 43.7% of the outstanding shares, or approximately 54.8% assuming that these shareholders were to exercise options and warrants exercisable within the next 60 days. As a result, these shareholders acting together will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and the approval of significant corporate transactions. See "Principal Stockholders". DEPENDENCE UPON KEY PERSONNEL; CHANGES IN MANAGEMENT GROUP; ATTRACTION AND RETENTION OF QUALIFIED PERSONS The Company is substantially dependent upon the services of its senior management and key technical personnel. The loss of the services of one or more of such executives could have a material adverse effect on the Company. The Company's future growth and success depends, in large part, upon its ability to obtain, retain and expand its staff of technical and marketing personnel. There can be no assurance that the Company will be successful in its efforts to attract and retain such personnel. The Company has employment agreements with its chief executive officer and certain other senior officers but does not have employment agreements with its key technical personnel. See "Business-- Employees" and "Management". BUSINESS INTERRUPTIONS The Company's operations are dependent on its ability to protect its computer equipment against damage from fire, earthquakes, power loss, telecommunications failures and similar events. The Company's principal Web server equipment and operations are housed and maintained by Rocky Mountain Internet at its operations center in Denver, Colorado. Although these facilities have safeguard protections such as a halon fire system, redundant telecommunications access, off-site storage of backups and 24 hour systems maintenance support, the Company does not presently have redundant multiple site capability to maintain uninterrupted operation in the event of any such occurrence. In addition, despite the implementation of network security measures by the Company, its servers are vulnerable to computer viruses and similar disruptions from unauthorized tampering with the Company's computer systems. The occurrence of any of these events could result in interruptions or delays in service to the Company's customers which could have a material adverse effect on the Company's business, results of operations and financial condition. The Company also carries property insurance in the event of equipment damage. However, such safeguards and insurance may not be adequate to compensate for all losses that may occur from business interruptions. See "Business--Properties". SHARES ELIGIBLE FOR FUTURE SALE The registration statement of which this Prospectus is a part registers 2,860,301 shares of outstanding Common Stock previously unregistered and/or restricted under Rule 144 and also registers 1,652,382 shares of Common Stock underlying warrants. If all of such Warrants are exercised, the total number of shares of Common Stock outstanding would increase from 5,515,872 to 7,168,254. The exercise or potential exercise of such warrants, or the sale of substantial amounts of Common Stock in the public market in connection with or subsequent to this offering, or the perception that such sales could occur, may adversely affect prevailing market prices of the Company's securities and could impair the future ability of the Company to raise additional capital through an offering of its equity securities. See "Selling Stockholders" and "Shares Eligible for Future Sale". FUTURE ISSUANCE OF STOCK BY COMPANY WITHOUT SHAREHOLDER APPROVAL The Company currently has 15,000,000 shares of Common Stock authorized, of which 5,515,872 shares currently outstanding. In addition, the Company has 1,962,335 shares of authorized Preferred Stock available for issuance. The remaining authorized but unissued shares of Common Stock and Preferred Stock not reserved for specific purposes may be issued without any action or approval of the Company's stockholders. Although there are not current plans or agreements involving the issuance of such shares, except as disclosed in this prospectus, any such issuances could be used as a method of discouraging or delaying or preventing a change in control of the Company or could significantly dilute the public ownership of the Company, which could adversely affect the market for the Company's common stock. There can be no assurance that the Company will not undertake to issue such shares. See "Description of Securities". DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISKS OF THIRD PARTY INFRINGEMENT CLAIMS The Company presently has no patents with respect to its proprietary technology. Instead, the Company currently relies upon copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary products, all of which afford only limited protection. Accordingly, there can be no assurance that the Company's measures to protect its current proprietary rights will be adequate to prevent misappropriation of such rights or that the Company's competitors will not independently develop or patent technologies that are substantially equivalent or superior to the Company's technologies. Although the Company believes that its products and technologies do not infringe upon the proprietary rights of third parties, there can be no assurance that third parties will not assert infringement claims against the Company. In addition, infringement claims could be asserted against products and technologies which the Company licenses, or has the right to use, from third parties. Any such claims, if proved, could materially and adversely affect the Company's business and results of operations. In addition, although any such claims may ultimately be without merit, the necessary management attention to, and legal costs associated with, litigation or other resolution of such claims could materially and adversely affect the Company's business and results of operations. See "Business--Intellectual Property". MANAGEMENT OF GROWTH If future sales of the Company's Internet products results in significant growth of the Company, such growth could place a significant strain on the Company's management, operational and financial resources. The Company's ability to successfully manage growth effectively will require it to continue to implement and improve its operational, financial and management information systems, to develop the management skills of its managers and to train motivate and manage its employees. There can be no assurance that the Company can successfully increase its capabilities and scale its operations to meet customer demand. The Company's failure to effectively manage its growth would have a material adverse effect on the Company's business and results of operation. See "Business--Industry Background" and "Business--Business Strategy". ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Certificate of Incorporation may render more difficult or have the effect of discouraging unsolicited take-over bids from third parties. Under provisions of the Certificate of Incorporation, the Company's Board of Directors, without any further vote or action by the stockholders, will have the authority to issue up to 1,748,852 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock may delay, defer or prevent a change in control of the Company. The Company has no present plans to issue shares of Preferred Stock. See "Description of Securities". In addition, certain members of the Company's management will be entitled to receive severance payments if their employment is terminated for other than cause, following a change in control of the Company or otherwise. See "Management -- Employment Agreements". PRODUCT LIABILITY Because the Company's FindNow-SM- system provides location information which is accessible to the general public through the Internet, the Company may be subject to claims for negligence or other legal theories based on the nature and accuracy of the content of such materials. Although the Company has certain contractual provision and carries general liability insurance, the Company's insurance may not cover potential claims of this type or may not be adequate to indemnify the Company for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could have a material adverse effect on the Company's business, results of operations and financial condition. GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES The Company is not currently subject to direct regulation by any government agency, other than regulations applicable to business generally. However, due to the increasing popularity and use of the Internet, it is possible than a number of laws and regulations may be adopted with respect to the Internet , covering issues such as user privacy, liability for information provided via the Internet, unsolicited marketing and taxation of services on the Internet. The adoption of any such laws or regulations may decrease the growth of the Internet, which could result in lower demand for the Company's products and services and may increase the Company's cost of doing business. In addition, the applicability to the Internet of existing laws, governing issues such as intellectual property ownership, libel and personal privacy is uncertain. Any such changes could have a material adverse effect on the Company's business, operating results and financial condition. LIMITATION OF LIABILITY OF DIRECTORS The Company's Certificate of Incorporation substantially limits the liability of the Company's Directors to its shareholders for breach of fiduciary or other duties to the Company. See "Indemnification". INTEGRATION OF FUTURE ACQUISITIONS The Company may make acquisitions of, or investments in, complementary companies, products or technologies, although no such acquisitions or investments are currently pending. Any such future acquisitions would be accompanied by the risks commonly encountered in acquisitions of companies. Such risks include, among other things, the difficulty of assimilating the operations and personnel of the acquired companies, the potential disruption of the Company's ongoing business. In addition, there is no assurance that technology or rights acquired by the Company can be successfully incorporated into its products There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered in connection with such acquisitions. NO DIVIDENDS ON COMMON STOCK The Company intends to retain all future earnings for use in the development of its business and does not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy".

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+ RISK FACTORS AN INVESTMENT IN THE SHARES OF COMMON STOCK BEING OFFERED BY THIS PROSPECTUS INVOLVES A HIGH DEGREE OF RISK. IN ADDITION, THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. DISCUSSIONS CONTAINING SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL SET FORTH UNDER "PROSPECTUS SUMMARY," "RISK FACTORS," "THE COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "BUSINESS--INTRODUCTION," "BUSINESS--INDUSTRY BACKGROUND," "BUSINESS--STRATEGY," "BUSINESS--ACQUISITION PROGRAM," "BUSINESS--COMPLETED ACQUISITIONS" "BUSINESS-- OPERATIONS" AND "BUSINESS--ENVIRONMENTAL REGULATIONS," AS WELL AS IN THE PROSPECTUS GENERALLY. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONCERNING THE COMPANY AND ITS BUSINESS CONTAINED IN THIS PROSPECTUS, BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY ABILITY TO MANAGE GROWTH The Company's goal is to increase the scale of its operations significantly through the acquisition of other solid waste businesses and through internal growth. Consequently, the Company may experience periods of rapid growth with significantly increased staffing level requirements. Such growth could place a significant strain on the Company's management and on its operational, financial and other resources. The Company's ability to maintain and manage its growth effectively will require it to expand its management information systems capabilities and improve its operational and financial systems and controls. Moreover, the Company will need to attract, train, motivate, retain and manage its senior managers, technical professionals and other employees. Any failure to expand its management information system capabilities, to implement and improve its operational and financial systems and controls or to recruit appropriate additional personnel in an efficient manner at a pace consistent with the Company's business growth would have a material adverse effect on the Company's business, financial condition and results of operations. AVAILABILITY OF ADDITIONAL ACQUISITION TARGETS; INTEGRATION OF FUTURE ACQUISITIONS The Company's ongoing acquisition program is a key element of its acquisition-based growth strategy for expanding its solid waste management services. Consequently, the future growth of the Company depends in large part upon the successful continuation of this acquisition program. The Company may encounter substantial competition in its efforts to acquire landfills, transfer stations and collection companies. There can be no assurance that the Company will succeed in locating or acquiring appropriate acquisition candidates at price levels and on terms and conditions that the Company considers appropriate. In addition, if in the future the Company is successful in acquiring targeted companies, it will need to integrate these acquired companies into the Company's operations. There can be no assurance that the Company will successfully integrate future acquisitions into its operations. See "Business--Strategy," "--Acquisition Program" and "--Competition." HISTORY OF LOSSES AND WORKING CAPITAL DEFICITS; INTEGRATION OF COMPLETED ACQUISITIONS The Company has recorded net losses to common stockholders of approximately $2.4 million, $3.7 million and $370,000 during the fiscal years ended December 31, 1994, 1995 and 1996, respectively, and has had working capital deficits in the past. See "--Funding of Future Capital Requirements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Introduction." The financial position and results of operations of the Company will depend to a large extent on the Company's ability to integrate effectively the operations of the 41 companies it has acquired from January 1993 to date and to realize expected efficiencies and economies of scale from such acquisitions. There can be no assurance that the Company's efforts to integrate these operations will be effective, that expected efficiencies and economies of scale will be realized or that the Company will be able to consolidate successfully its operations. The failure to achieve any of these results could have a material adverse effect on the Company's business, financial condition and results of operations. SIGNIFICANT LEVERAGE Historically, the Company has incurred significant debt obligations in connection with financing its acquisitions and business growth. The Company has a $200 million credit facility with ING (U.S.) Capital Corporation, as administrative agent, Morgan Guaranty Trust Company of New York, as syndication agent, Union Bank of California, N.A., as documentation agent, BHF-Bank Aktiengesellschaft, as co-agent, and Bank of America Illinois, as co-agent (the "Credit Facility"). As of March 31, 1997, the Company's consolidated indebtedness was $106.8 million, its consolidated total assets were $186.5 million and its stockholders' equity was $58.5 million. The Company's ability to meet its debt service obligations will depend upon its future performance, which, in turn, will be subject to general economic conditions and to financial, business and other factors affecting the operations of the Company, many of which are beyond the Company's control. If the Company fails to generate sufficient cash flow to repay its debt, the Company may be required to refinance all or a portion of its existing debt or to obtain additional financing. There can be no assurance that such refinancing or any additional financing could be obtained on terms favorable to the Company or at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." HIGHLY COMPETITIVE INDUSTRY The solid waste collection and disposal business is highly competitive and requires substantial amounts of capital. The Company competes with numerous solid waste management companies, many of which are significantly larger and have greater financial resources than the Company. The Company also competes with those counties, municipalities and solid waste districts that maintain their own waste collection and disposal operations. These counties, municipalities and solid waste districts may have financial advantages due to the availability to them of user fees, charges or tax revenues and the greater availability to them of tax-exempt financing. In addition, competitors may reduce the price of their services in an effort to expand market share or to win competitively bid municipal contracts. There can be no assurance that the Company will be able to compete successfully. See "Business--Competition." FUNDING OF FUTURE CAPITAL REQUIREMENTS The Company's acquisition-based growth strategy has resulted in a steady increase in its capital requirements, and such increase may continue in the future as the Company pursues its strategy. The Company has incurred working capital deficits in the past, and there can be no assurance that its available working capital will be sufficient in the future as it pursues its growth strategy. To the extent that internally generated cash and cash available under the Credit Facility are not sufficient to provide the cash required for future operations, capital expenditures, acquisitions, debt repayment obligations and financial assurance obligations, the Company will require additional equity or debt financing in order to provide such cash. There can be no assurance, however, that such financing will be available or, if available, will be on terms satisfactory to the Company. Where appropriate, the Company may seek to minimize the use of cash to finance its acquisitions by using capital stock, assumption of indebtedness or notes. However, there can be no assurance the owners of the businesses the Company may wish to acquire will be willing to accept non-cash consideration in whole or in part. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Business--Acquisition Program." DEPENDENCE ON THIRD PARTY COLLECTION OPERATIONS A portion of the solid waste delivered to the Company's landfills is delivered by third party collection companies under informal arrangements or without long-term contracts. If these third parties discontinued their arrangements with the Company and if the Company were unable to replace these third party arrangements, the Company's business, financial condition and results of operations might be materially adversely affected. LIMITATIONS ON INTERNAL EXPANSION The Company's operating program depends on its ability to expand and develop its landfills, transfer stations and collection operations. The process of obtaining required permits and approvals to operate or expand solid waste management facilities, including landfills and transfer stations, has become increasingly difficult and expensive, often taking several years, requiring numerous hearings and compliance with zoning, environmental and other regulatory requirements, and often being subject to resistance from citizen or other groups. There can be no assurance that the Company will be successful in obtaining the permits it requires or that such permits will not contain onerous terms and conditions. An inability to receive such permits and approvals could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Extensive Environmental and Land Use Laws and Regulations." In some areas, suitable land may be unavailable for new landfill sites. There can be no assurance that the Company will be successful in obtaining new landfill sites or expanding the permitted capacity of its current landfills once its landfill capacity has been consumed. In such event, the Company could be forced to dispose of collected waste at landfills operated by its competitors, which could have a material adverse effect on the Company's landfill revenues and collection expenses. See "Business-- Operations--Landfills." EXTENSIVE ENVIRONMENTAL AND LAND USE LAWS AND REGULATIONS The Company is subject to extensive and evolving environmental and land use laws and regulations, which have become increasingly stringent in recent years as a result of greater public interest in protecting and cleaning up the environment. These laws and regulations affect the Company's business in many ways, including as set forth below. See "Business--Environmental Regulations" for further information concerning the matters set forth below. EXTENSIVE PERMITTING REQUIREMENTS. In order to develop and operate a landfill or other solid waste management facility, it is necessary to obtain and maintain in effect one or more facility permits and other governmental approvals, including those related to zoning, environmental and land use. In addition, the Company may be required to obtain similar permits and approvals in order to expand its existing landfill and solid waste management operations. These permits and approvals are difficult and time consuming to obtain and are frequently subject to community opposition, opposition by various local elected officials or citizens and other uncertainties. In addition, after an operating permit for a landfill or other facility is obtained, the permit may be subject to modification or revocation by the issuing agency, and it may be necessary to obtain periodically a renewal of the permit, which may reopen opportunities for opposition to the permit. Moreover, from time to time, regulatory agencies may delay the review or grant of these required permits or approvals or may modify the procedures or increase the stringency of the standards applicable to its review or grant of such permits or approvals. In addition, the Company may not be able to ensure that its landfill operations are included and remain in the solid waste management plan of the state or county in which such operations are conducted. The Company may also have difficulty obtaining host agreements with counties or local communities, or existing host communities may demand modifications of existing host agreements in connection with planned expansions, either of which could adversely affect the Company's operations and increase the Company's costs and reduce its margins. There can be no assurance that the Company will be successful in obtaining and maintaining in effect the permits and approvals required for the successful operation and growth of its business, including permits or approvals required for planned landfill expansions, and the failure by the Company to obtain or maintain in effect a permit significant to its business could materially adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." DESIGN, OPERATION AND CLOSURE REQUIREMENTS. The design, operation and closure of landfills are subject to extensive regulations. These regulations include, among others, the regulations (the "Subtitle D Regulations") establishing minimum federal requirements adopted by the United States Environmental Protection Agency (the "EPA") in October 1991 under Subtitle D of the Resource Conservation and Recovery Act of 1976 ("RCRA"). The Subtitle D Regulations generally became effective on October 9, 1993 (except for new financial assurance requirements, which became effective April 9, 1997). The Subtitle D Regulations require all states to adopt regulations regarding landfill design, operation and closure requirements that are as stringent as, or more stringent than, the Subtitle D Regulations. All states in which the Company's landfills are located have in place extensive landfill regulations consistent with the Subtitle D requirements. These federal and state regulations require the Company to design the landfill in accordance with stringent technical requirements, monitor groundwater, post financial assurances, and fulfill landfill closure and post-closure obligations. These regulations could also require the Company to undertake investigatory, remedial and monitoring activities, to curtail operations or to close a landfill temporarily or permanently. Furthermore, future changes in these regulations may require the Company to modify, supplement, or replace equipment or facilities at costs which may be substantial. LEGAL AND ADMINISTRATIVE PROCEEDINGS. In the ordinary course of its business, the Company may become involved in a variety of legal and administrative proceedings relating to land use and environmental laws and regulations. These may include proceedings by federal, state or local agencies seeking to impose civil or criminal penalties on the Company for violations of such laws and regulations, or to impose liability on the Company under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") or comparable state statutes, or to revoke or deny renewal of a permit; actions brought by citizens' groups, adjacent landowners or governmental entities opposing the issuance of a permit or approval to the Company or alleging violations of the permits pursuant to which the Company operates or laws or regulations to which the Company is subject; and actions seeking to impose liability on the Company for any environmental damage at its landfill sites or that its landfills or other properties may have caused to adjacent landowners or others, or at sites to which it transported waste, including groundwater or soil contamination. The Company could incur substantial legal expenses during the course of the aforementioned proceedings, and the adverse outcome of one or more of these proceedings could materially adversely affect the Company's business, financial condition and results of operations. See "Business--Legal Proceedings." During the ordinary course of its operations, the Company has from time to time received, and expects that it may in the future receive, citations or notices from governmental authorities that its operations are not in compliance with its permits or certain applicable environmental or land use laws and regulations. The Company generally seeks to work with the authorities to resolve the issues raised by such citations or notices. There can be no assurance, however, that the Company will always be successful in this regard, and the failure to resolve a significant issue could result in one or more of the adverse consequences to the Company described below under "Potential Liabilities." POTENTIAL LIABILITIES. There may be various adverse consequences to the Company in the event that a facility owned or operated by the Company (or a predecessor owner or operator whose liabilities the Company may have acquired expressly or under successor liability theories) causes environmental damage, in the event that waste transported by the Company (or a predecessor) causes environmental damage at another site, in the event that the Company fails (or a predecessor failed) to comply with applicable environmental and land use laws and regulations or the terms of a permit or outstanding consent order or in the event the Company's owned or operated facility or the soil or groundwater thereunder is or becomes contaminated. These may include the imposition of substantial monetary penalties on the Company; the issuance of an order requiring the curtailment or termination of the operations involved or affected; the revocation or denial of permits or other approvals necessary for continued operation or landfill expansion; the imposition of liability on the Company in respect of any environmental damage (including groundwater or soil contamination) at its landfill sites or that its landfills or other facilities or other Company-owned or operated facilities caused to adjacent landowners or others or environmental damage at another site associated with waste transported by the Company; the imposition of liability on the Company under CERCLA or under comparable state laws; and criminal liability for the Company or its officers. Any of the foregoing could materially adversely affect the Company's business, financial condition and results of operations. As described under "Business--Environmental Regulations," CERCLA and analogous state laws impose retroactive strict joint and several liability on various parties that are, or have been, associated with a site from which there has been, or is threatened, a release of any hazardous substance (as defined by CERCLA) into the environment. Liability under RCRA, CERCLA and analogous state laws may include responsibility for costs of site investigations, site cleanup, site monitoring, natural resources damages and property damages. Liabilities under RCRA, CERCLA and analogous state laws can be very substantial and, if imposed upon the Company, could materially adversely affect the Company's business, financial condition and results of operations. In the ordinary course of its landfill and waste management operations and in connection with its review of landfill and other operations to be acquired, the Company has discovered at one landfill, and may in the future discover at other landfills or waste management facilities, indications of groundwater contamination. In such events, the Company would seek or be required to determine the magnitude and source of the problem and, if appropriate or required by applicable regulations, to design and implement measures to remedy, or halt the spread of, the contamination. There can be no assurance, however, that contamination discovered at a landfill or at other Company sites will not result in one or more of the adverse consequences to the Company described above. TYPE, QUANTITY AND SOURCE LIMITATIONS. Certain permits and approvals may limit the types of waste that may be accepted at a landfill or the quantity of waste that may be accepted at a landfill during a given time period. In addition, certain permits and approvals, as well as certain state and local regulations, may limit a landfill to accepting waste that originates from specified geographic areas or seek to restrict the importation of out-of-state waste or otherwise discriminate against out-of-state waste. Generally, restrictions on the importation of out-of-state waste have not withstood judicial challenge. However, from time to time federal legislation is proposed which would allow individual states to prohibit the disposal of out-of-state waste or to limit the amount of out-of-state waste that could be imported for disposal and would require states, under certain circumstances, to reduce the amounts of waste exported to other states. Although such legislation has not yet been adopted by Congress, if this or similar legislation is enacted, states in which the Company operates landfills could act to limit or prohibit the importation of out-of-state waste. Such state actions could materially adversely affect landfills within those states that receive a significant portion of waste originating from out-of-state. In addition, certain states and localities may for economic or other reasons restrict the exportation of waste from their jurisdiction or require that a specified amount of waste be disposed of at facilities within their jurisdiction. In 1994, the United States Supreme Court held unconstitutional, and therefore invalid, a local ordinance that sought to impose flow controls on taking waste out of the locality. However, certain state and local jurisdictions continue to seek to enforce such restrictions and, in certain cases, the Company may elect not to challenge such restrictions based upon various considerations. In addition, the aforementioned proposed federal legislation, if adopted, could allow states and localities to impose certain flow control restrictions. These restrictions could result in the volume of waste going to landfills being reduced in certain areas, which may materially adversely affect the Company's ability to operate its landfills at their full capacity and/or affect the prices that can be charged for landfill disposal services. These restrictions may also result in higher disposal costs for the Company's collection operations. If the Company were unable to pass such higher costs through to its customers, the Company's business, financial condition and results of operations could be materially adversely affected. LIMITED OPERATING HISTORY Following the Exchange (as defined in "The Company"), the Company began operating as a consolidated entity effective as of January 1, 1996. Prior to 1996, the Company's operations were conducted by ADS, Inc. ("ADS") and County Disposal, Inc. ("CDI"), two subsidiaries of the Company, the operations of which were acquired by the Company's stockholders in 1993 and 1995, respectively. Accordingly, the Company has a limited history of operating as a consolidated entity and may experience difficulties as it integrates the operations of its subsidiaries. POTENTIAL LIABILITIES ASSOCIATED WITH ACQUISITIONS The businesses acquired by the Company may have liabilities that the Company did not discover or may have been unable to discover during its pre-acquisition investigations, including liabilities arising from environmental contamination or non-compliance by prior owners with environmental laws or regulatory requirements, and for which the Company, as a successor owner or operator, may be responsible. Any indemnities or warranties, due to their limited scope, amount, or duration, the financial limitations of the indemnitor or warrantor or other reasons, may not fully cover such liabilities. DEPENDENCE ON SENIOR MANAGEMENT The Company is highly dependent on its senior management team. The loss of the services of any member of senior management may have a material adverse effect on the Company's business, financial condition and results of operations. In an effort to minimize this risk, the Company has entered into employment contracts with certain members of senior management. The Company does not maintain "key man" life insurance with respect to members of senior management except for a $2.0 million policy maintained on the Company's President. LIMITS ON INSURANCE COVERAGE There can be no assurance that the Company's pollution liability insurance will provide sufficient coverage in the event an environmental claim were made against the Company or that the Company will be able to maintain in place such insurance at reasonable costs. An uninsured or underinsured claim of sufficient magnitude could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Liability Insurance and Bonding." INCURRENCE OF CHARGES RELATED TO CAPITALIZED EXPENDITURES In accordance with generally accepted accounting principles, the Company capitalizes certain expenditures and advances relating to acquisitions, pending acquisitions and landfill development and expansion projects. Indirect acquisition costs, such as executive salaries, general corporate overhead, public affairs and other corporate services, are expensed as incurred. The Company's policy is to charge against earnings any unamortized capitalized expenditures and advances (net of any portion thereof that the Company estimates will be recoverable, through sale or otherwise) relating to any operation that is permanently shut down, any pending acquisition that is not consummated, and any landfill development or expansion project that is not or not expected to be successfully completed. Therefore, the Company may be required to incur a charge against earnings in future periods, which charge, depending upon the magnitude thereof, could materially adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a discussion of capitalized expenditures in connection with certain operations and projects. USE OF ALTERNATIVES TO LANDFILL DISPOSAL Alternatives to landfill disposal, such as recycling and composting, are increasingly being used. In addition, incineration is an alternative to landfill disposal in certain of the Company's markets. There also has been an increasing trend at the state and local levels to mandate recycling and waste reduction at the source and to prohibit the disposal of certain type of wastes, such as yard wastes, at landfills. These developments may result in the volume of waste going to landfills being reduced in certain areas, which may affect the Company's ability to operate its landfills at their full capacity or affect the prices that can be charged for landfill disposal services. For example, Illinois, Ohio and Pennsylvania, states in which the Company operates landfills, have adopted bans on the disposal of yard waste or leaves in landfills located in those states, and all of the states in which the Company operates landfills have adopted rules restricting or limiting disposal of tires at landfills. In addition, each of the states in which the Company operates landfills has adopted plans or requirements which set goals for specified percentages of certain solid waste items to be recycled. These recycling goals are being phased in over the next few years. These alternatives, if and when adopted and implemented, may have a material adverse effect on the business, financial condition and results of operations of the Company. See "Business--Environmental Regulations--State and Local Regulations." ABILITY TO MEET FINANCIAL ASSURANCE OBLIGATIONS The Company is required to post a performance bond or a bank letter of credit or to provide other forms of financial assurance in connection with closure and post-closure obligations with respect to landfills or its other solid waste management operations and may be required to provide such financial assurance in connection with municipal residential collection contracts. As of May 31, 1997, the Company had outstanding approximately $24.5 million of performance bonds. If the Company were unable to obtain surety bonds in sufficient amounts, or to provide other required forms of financial assurance, it would be unable to remain in compliance with the Subtitle D Regulations or comparable state requirements and, among other things, might be precluded from entering into certain municipal collection contracts and obtaining or holding landfill operating permits. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and "Business--Liability Insurance and Bonding." SEASONALITY The Company's revenues tend to be somewhat lower in the winter months. This is primarily attributable to the fact that: (i) the volume of waste relating to construction and demolition activities tends to increase in the spring and summer months; and (ii) the volume of industrial and residential waste in the regions where the Company operates tends to decrease during the winter months. In addition, particularly harsh weather conditions may delay the development of landfill capacity and otherwise result in the temporary suspension of certain of the Company's operations and could materially adversely affect the Company's overall business, financial condition and results of operations. ANTI-TAKEOVER PROVISIONS The Board of Directors may issue up to 5,000,000 shares of Preferred Stock in the future without stockholder approval upon such terms as the Board of Directors may determine. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying or preventing a change in control of the Company without further action by the stockholders. The Company has no present plans to issue any shares of Preferred Stock. See "Description of Capital Stock-- Undesignated Preferred Stock." In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. See "Description of Capital Stock--Delaware Anti-Takeover Law and Certain Charter Provisions." ABSENCE OF DIVIDENDS The Company has never declared or paid dividends on its Common Stock and does not anticipate paying dividends in the foreseeable future. See "Dividend Policy."

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+ RISK FACTORS In addition to the other information contained in this Prospectus, the following factors should be considered carefully in evaluating an investment in the Units, which involves a high degree of risk. Statements contained in this Prospectus regarding Orion's expectations with respect to Orion 2 and Orion 3, related financings, future operations and other information, which can be identified by the use of forward looking terminology, such as "may," "will," "expect," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology, are forward looking statements. See "Forward Looking Statements." The discussions set forth below constitute cautionary statements identifying important factors with respect to such forward looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from results referred to in forward looking statements. There can be no assurance that Orion's expectations regarding any of these matters will be fulfilled. LIMITED OPERATIONS; HISTORY OF LOSSES AND NEGATIVE EBITDA; EXPECTATION OF FUTURE LOSSES From its inception in 1982 through January 20, 1995, when Orion 1 commenced commercial operations, Orion was a development stage company. Accordingly, Orion has limited experience operating its business. Orion has experienced net losses in each fiscal year since its inception, including a net loss of approximately $26.9 million and negative EBITDA of $15.4 million during 1995, and a net loss of $19.8 million during the nine months ended September 30, 1996. On a pro forma basis, giving effect to the Transactions, the Company would have had a net loss of $103.2 million and $67.3 million for 1995 and the nine months ended September 30, 1996, respectively. The increase in net loss on a pro forma basis is associated with the depreciation on the step up in the basis of the Orion 1 satellite and the amortization of excess cost over fair value resulting from the acquisition of the Limited Partners' partnership interests in Orion Atlantic, the net increase to interest expense as a result of the Transactions, and the elimination of minority interest as a result of the Exchange. See Notes to Pro Forma Condensed Consolidated Statements of Operations. The implementation of Orion's business plan regarding Orion 2 and Orion 3 will require substantial additional capital for the construction, launch, insurance, financing and start-up costs of those satellites. A substantial portion of these costs may be financed with indebtedness, which would substantially increase interest costs. The Company's negative cash flow (after payments for capital expenditures and interest) has been substantial and net losses and negative cash flows (after payments for capital expenditures and interest) are expected to increase over the next few years. NEED FOR SUBSTANTIAL ADDITIONAL CAPITAL The Company will need a substantial amount of capital over the next three years (and possibly thereafter) to fund the costs of Orion 2 and Orion 3, the purchase of VSATs and other capital expenditures and to make various other payments, such as principal and interest payments with respect to the TT&C Financing (as defined below), the Notes and any indebtedness incurred to finance Orion 2 or Orion 3. The Company's cash flows will be inadequate to cover its cash needs and the Company will seek financing from outside sources. Sources of additional capital may include public or private debt or equity financings. The Company is often involved in discussions or negotiations with respect to such potential financings and, because of its substantial capital needs, may consummate any such financings at any time. The Company has commenced construction of Orion 3 and intends to commence construction of Orion 2 immediately after consummation of the Offering, despite the fact that it does not have any commitment from any outside source to provide such financing. If the Company is unable to obtain financing from outside sources in the amounts and at the times needed, it could forfeit payments made on Orion 2 and Orion 3 and its rights to Orion 2 and Orion 3 under the Orion 2 Satellite Contract and Orion 3 Satellite Contract. Such a forfeiture would have a material adverse effect on the Company's ability to make payments on its indebtedness, including the Notes, and on the value of the Warrants and Common Stock. Expected payments prior to launch under the Orion 2 Satellite Contract and Orion 3 Satellite Contract and for launch insurance for Orion 2 and Orion 3 aggregate approximately $500 million. Of this amount, $3 million was paid in the fourth quarter of 1996, and Orion is required to make payments of approximately $98 million, $350 million and $50 million in 1997, 1998 and 1999, respectively. These amounts include the Company's estimate regarding the cost of launch insurance (but not in-orbit insurance, which the Company presently estimates will cost approximately $5 million to $6 million per annum per satellite), which estimate is based upon industry figures but not upon discussions with potential insurers or any commitment to provide insurance. The Company's actual payments could be substantially higher due to any change orders for the satellites, higher than expected insurance rates, delays and other factors. In addition, the Company expects to expend approximately $22 million, $30 million and $34 million on VSATs and other capital expenditures in 1997, 1998 and 1999, respectively. However, there can be no assurance that these amounts will not be substantially higher. The Company believes the costs of VSATs and other capital expenditures can be financed through capital leases or other secured financing arrangements. However, the Company has not engaged in material discussions with potential lenders and there can be no assurance that such financing can be obtained. The Company also expects to incur an aggregate of approximately $40 million of start-up losses and financing costs in connection with Orion 2 and Orion 3. Under the Orion 1 Satellite Contract, the contractor is entitled to receive incentive payments based upon the performance of Orion 1 in orbit. These incentive payments could reach an aggregate of approximately $44 million through 2007, if the transponders on Orion 1 continue to operate in accordance with specification during that period. As of September 30, 1996 Orion had obligations with a present value of approximately $21.7 million with respect to incentive payments. Orion will pay $13 million in satellite incentives concurrently with the closing of the Offering, of which $10 million will be re-invested in Orion in the Matra Marconi Investment. Under the Orion 2 Satellite Contract, Orion is obligated to pay $25,000 per day that the satellite is delivered prior to the scheduled delivery date. The foregoing estimates do not include any amounts for other possible financing requirements. The Company may from time to time enter into joint ventures and make acquisitions of complementary businesses and is often engaged in discussions or negotiations with regard to such potential joint ventures and acquisitions. Such joint ventures or acquisitions would need to be financed, which would increase the Company's need for additional capital. In addition, Orion intends to replace Orion 1 at the end of its useful life (expected to be in October 2005). Such replacement likely will require additional financing if the cash flow from Orion's operations is not sufficient to fund a replacement satellite. The Company's ability to raise public equity financing may be limited by the registration rights it has granted to certain investors. See "-- Potential Adverse Effect of Shares Eligible for Future Sale." SUBSTANTIAL LEVERAGE; SECURED INDEBTEDNESS As of September 30, 1996, after giving pro forma effect to the Transactions, Orion would have had approximately $426 million of long-term indebtedness, and will be highly leveraged. The accretion of original issue discount on the Senior Discount Notes will substantially increase Orion's liabilities. The Company also expects to incur substantial additional amounts of indebtedness. The Company will deposit approximately $72 million in escrow to pre-fund the first six scheduled payments of interest on the Senior Notes. However, the Company ultimately will need to service the cash interest expense on a very substantial amount of indebtedness (including the Notes) with cash generated by its operations. For 1995 and the three and nine months ended September 30, 1996 the Company had EBITDA of $(15.4) million, $1.7 million and $0.1 million and, on a pro forma basis, giving effect to the Transactions, interest costs of $50.6 million and $39.5 million for 1995 and the nine months ended September 30, 1996, respectively. Interest costs will increase substantially if, as expected, the Company incurs additional indebtedness, as described above under the caption "Need for Substantial Additional Capital." The Company does not have a revolving credit facility or other source of readily available capital. The Indentures will not limit the amount of secured indebtedness the Company may incur to finance the acquisition of VSATs and other equipment. However, the Indentures will prohibit the Company from using Orion 1, Orion 2 or Orion 3 as collateral for indebtedness for money borrowed. In the event of a default on the Notes or a bankruptcy, liquidation or reorganization of the Company, the assets pledged to secured indebtedness will be available to satisfy obligations of the secured debt before such assets could be used to make any payment on the Notes. Accordingly, there may only be a limited amount of assets available to satisfy any claims of the holders of the Notes upon an acceleration of the Notes. In addition, to the extent that the value of such collateral is insufficient to satisfy such secured indebtedness, holders of such secured indebtedness would be entitled to share pari passu with the Notes with respect to any other assets of the Company. As of September 30, 1996 after giving pro forma effect to the Transactions, the Company would have had $7.2 million of secured indebtedness on a consolidated basis (secured by the Company's satellite control facility). The level of the Company's indebtedness could have important consequences to holders of Units, Notes or Warrants including the following: (i) the ability of the Company to obtain any necessary financing in the future for capital expenditures, working capital, debt service requirements or other purposes may be limited; (ii) a substantial portion of the Company's cash flow from operations, if any, must be dedicated to the payment of principal of and interest on its indebtedness and other obligations and will not be available for use in the Company's business; (iii) the Company's level of indebtedness could limit its flexibility in planning for, or reacting to changes in, its business; (iv) the Company will be more highly leveraged than some of its competitors, which may place it at a competitive disadvantage; and (v) the Company's high degree of indebtedness will make it more vulnerable to a default and the consequences thereof (such as bankruptcy workout) in the event of a downturn in its business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources -- Current Funding Requirements" and "Description of Certain Indebtedness." RISKS OF SATELLITE LOSS OR REDUCED PERFORMANCE Satellite Loss or Reduced Performance. Satellites are subject to significant risks, including launch failure, damage that impairs commercial performance, failure to achieve correct orbital placement during launch, loss of fuel that reduces satellite life, and satellite in-orbit risks. Although Orion 1 has been successfully launched and is in commercial operation, and although Orion maintains satellite in-orbit insurance on Orion 1, any loss in orbit or reduced performance of Orion 1 would have a material adverse effect on Orion. In addition, no assurance can be given that the launch of Orion 2 or Orion 3 will be successful. Although various sources of data permit differing conclusions, Orion is aware of sources indicating that the historical loss rate for all commercial geosynchronous satellite launches may be as high as 15%. Launch risks vary based upon the launch vehicle used. The Delta III launcher to be used for Orion 3 is new and has no significant launch history. Even though the Delta III is based upon earlier Delta launch vehicles, the new technology used in Delta III could affect its launch success rate. Orion may have to change launch vehicles if, for example, one of its selected vehicles experiences a launch failure with respect to another satellite. Orion intends to order certain long lead time parts in order to reduce the amount of time needed to obtain one replacement satellite. However, an unsuccessful launch of Orion 2 or Orion 3 would involve a delay in revenues for at least one year, and perhaps substantially longer. Any loss or delay of revenue from any of the Company's satellites would have a material adverse effect on its ability to service its indebtedness, including the Notes, and the value of the Warrants and the Common Stock. In November 1995, one of Orion 1's components supporting nine transponders of dedicated capacity serving the European portion of the Orion 1 footprint experienced an anomaly that resulted in a temporary service interruption, lasting approximately two hours. Full service to all affected customers was restored using redundant equipment on the satellite. These transponders currently generate a majority of Orion's revenues. Orion believes, based on the data received to date by Orion from its own investigations and from the manufacturer, and based upon advice from Orion's independent engineering consultant, Telesat Canada, that because the redundant component is functioning fully in accordance with specifications and the performance record of similar components is strong, the anomalous behavior is unlikely to affect the expected performance of the satellite over its useful life. Furthermore, there has been no further effect on Orion's ability to provide services to customers. However, in the event that the currently operating component fails, Orion 1 would experience a significant loss of usable capacity. In such event, while Orion would be entitled to insurance proceeds of approximately $47 million and could lease replacement capacity and function as a reseller with respect to such capacity (at substantially reduced gross margins), the loss of capacity would have a material adverse effect on the Company, on its ability to service its indebtedness, including the Notes, and the value of the Warrants and Common Stock. See "Business -- Implementation of the Orion Satellite System -- Orion 1." At the time of Orion's 1 delivery from its manufacturer, one of the six 36 MHz transponders covering the United States was not performing in accordance with contract specifications based on then-available data. To date, Orion has not used such transponder to provide services under any commercial contract, and there can be no assurance that such transponder will ever be used. Although Orion settled the matter with the manufacturer for a one-time refund of approximately $2.75 million and monthly payments of $7,000, there can be no assurance that such payments adequately compensated Orion for the loss of such transponder. Limited Insurance for Satellite Launch and Operation. The in-orbit insurance of Orion 1 and the launch and in-orbit insurance for Orion 2 and Orion 3 will not protect the Company against business interruption, loss or delay of revenues and similar losses and may not fully reimburse the Company for its expenditures. In addition, such insurance includes or can be expected to include certain contract terms, exclusions, deductibles and material change conditions that are customary in the industry. Accordingly, an unsuccessful launch of Orion 2 or Orion 3 or any significant loss of performance with respect to any of its satellites would have a material adverse effect on Orion, its ability to make payments on its indebtedness and the value of the Warrants and Common Stock. Although Orion intends to procure insurance for the construction, launch and insurance costs of Orion 2 and Orion 3, Orion has not obtained any commitment from insurance underwriters to provide launch insurance for Orion 2 or Orion 3. There can be no assurance that such insurance will be available or that the price of such insurance or the terms and exclusions in the actual insurance policy will be favorable to the Company. A failure of one of the launch vehicles selected by Orion prior to the launch of Orion 2 or Orion 3 could substantially increase the cost of launch insurance for Orion. See "Business -- Insurance." Limited Life of Satellites. While Orion 1 is expected to have an orbital life of approximately 10.7 years (through October 2005), and Orion 2 and Orion 3 are expected to have orbital lives of approximately 13 years and 15 years, respectively, there can be no assurance as to the actual longevity of the satellites. A number of factors will affect the useful life of each satellite, including the rate of fuel consumption in achieving correct orbital placement during launch, the quality of its construction and the durability of its component parts. There is a significant possibility that one or more transponders on a satellite may cease to function in accordance with specifications during its estimated useful life and there is no assurance that service could be restored through redundant transponders. In addition, while Orion plans to replace each satellite at the end of its useful life, there can be no assurance that the required financing and regulatory approvals to do so will be available. LAUNCH OF ORION 2 AND ORION 3 SUBJECT TO SIGNIFICANT UNCERTAINTIES Cost Uncertainties. Based on the current designs of and current construction schedules for Orion 2 and Orion 3, the total costs of Orion 2 and Orion 3, including construction, launch, launch insurance, financing costs and start-up expenses, are presently estimated to be approximately $265 million and $275 million, respectively. These costs may increase as a result of changes that may occur during the construction of the satellites or if the cost of insurance exceeds the Company's expectations. See "Business -- Implementation of the Orion Satellite System." There can be no assurance that the actual costs of these satellites will not be materially greater than these estimates. Substantial Financing Requirements. Completion of Orion 2 and Orion 3 will require substantial additional financing beyond the funds expected to be raised in this Offering and the British Aerospace Investment. Failure to raise such financing would have a material adverse effect on Orion, its ability to make payments on its indebtedness, including the Notes, and the value of the Warrants and the Common Stock, as discussed in more detail above under the caption "Need for Substantial Additional Capital." Timing Uncertainties. Orion presently plans to launch Orion 2 in the second quarter of 1999 and plans to launch Orion 3 in the fourth quarter of 1998, based upon the construction and launch schedules set forth in the satellite contracts. To meet these schedules, Orion must raise the financing needed for payments to the satellite manufacturers, receive certain regulatory approvals, finalize the satellite designs and take other necessary steps. Failure to meet the construction and launch schedules could increase the cost of Orion 2 or Orion 3, requiring additional financing, as described above under the caption "Need for Substantial Additional Capital." Although the Orion 2 Satellite Contract and the Orion 3 Satellite Contract are fixed-price contracts with firm schedules for construction, delivery and launch, there can be no assurance that increases in costs due to change orders or delay will not occur. See "Business -- Implementation of the Orion Satellite System." There can be no assurance that the launch of Orion 2 or Orion 3 will take place as scheduled. Delays in launching satellites are quite common, and a significant delay in the delivery or launch of Orion 2 or Orion 3 would have a material adverse effect on Orion's marketing plan for such satellites, its ability to generate revenue and service its indebtedness, including the Notes, and on the value of the Warrants and the Common Stock. Risks of Proceeding With Construction Prior to Obtaining all Regulatory Approvals for Orion 2 and Orion 3. Orion has commenced construction of Orion 3 and will commence construction of Orion 2 prior to completion of the required consultation with INTELSAT and EUTELSAT (as defined), receipt of final authority from the FCC (in the case of Orion 2) and completion of the International Telecommunication Union ("ITU") coordination process. Failure to obtain one more necessary approvals in a timely manner would likely have a material adverse effect on the Company. See "Approvals Needed; Regulation of Industry" below. RISKS RELATING TO POTENTIAL LACK OF MARKET ACCEPTANCE AND DEMAND; GROUND OPERATIONS Orion's success will depend in part on the continued growth in demand for international private network services, which to date have not been a primary focus of satellite companies, and on Orion's ability to market such services effectively. Marketing will be critical to Orion's success. However, Orion has limited experience in marketing, having commenced full commercial operations only in 1995. Orion's marketing program until recently consisted of direct sales using a U.S.-based sales force, and indirect sales channels, including Limited Partner sales representatives, for sales in Europe. During 1996, certain of Orion's indirect sales channels in Europe did not meet expectations, and Orion is seeking to supplement its sales in Europe by significantly increasing its direct sales capabilities in Europe, particularly with respect to sales of private network services. However, there can be no assurance that this effort will be successful. Sales of Orion's services generally involve a long-term, complex sales process, and new contract bookings will vary from quarter to quarter. In addition, as an early provider of international network services using VSATs, Orion is subject to the uncertainties associated with the development of new services, including uncertainties regarding customer interest in and acceptance of higher data speed communications, the need to develop and convince customers of the attractiveness of new applications, and customer acceptance of the ability of Orion (as a new market entrant) to provide service. In addition, Orion's operations will continue to depend significantly on Orion's ability to provide ground operations for private network services using ground operators throughout the footprint of Orion's satellites. In the event that its network of ground operators is not maintained and expanded or fails to perform as expected, Orion's ability to offer private network services will be impaired. See "Business -- Network Operations; Local Ground Operators." RISKS CONCERNING ABILITY TO MANAGE GROWTH The Company's future performance will depend, in part, upon its ability to manage its growth effectively, which will require it to continue to implement and improve its marketing, operating, financial and accounting systems and to expand, train and manage its employee base and manage its relationships with its local ground operators. For example, Orion is in the process of seeking to integrate a significant number of newly hired direct sales personnel, and expects the process to continue as it seeks to increase its sales force during 1997. Furthermore, the Company may from time to time enter into joint ventures and acquire complementary businesses and is often engaged in discussions or negotiations with regard to such potential joint ventures and acquisitions. Such joint ventures and acquired businesses would need to be integrated with the Company, which would place an additional burden on the Company's internal systems and its ability to manage its employees and its relationships with its local ground operators. In addition, the Company's ability to attract new orders is subject to substantial variations from quarter to quarter. If the Company fails either to expand in accordance with its plans or to manage its growth effectively there could be a material adverse effect on its business, growth, financial condition and results of operations, its ability to service its indebtedness, including the Notes, and the value of the Warrants and Common Stock. POTENTIAL ADVERSE EFFECTS OF COMPETITION The international telecommunications industry is highly competitive. In providing international telecommunications services, Orion competes with established satellite and other transmission facilities providers, including INTELSAT, EUTELSAT, PanAmSat and consortia of major telephone carriers operating undersea fiber optic cables. In addition, Orion competes with certain established telephone carriers, such as AT&T, MCI, Sprint, British Telecom, Cable & Wireless, Deutsche Telekom, France Telecom and Kokusai Denshin Denwa, as well as resellers of satellite capacity, such as companies similar to Impsat, in providing private network communications services. Many of these competitors have significant competitive advantages, including long-standing customer relationships, close ties with regulatory authorities, control over connections to local telephone lines and the ability to subsidize competitive services with revenues from services they provide as a dominant or monopoly carrier, and are substantially larger than Orion and have financial resources, experience, marketing capabilities and name recognition that are substantially greater than those of Orion. The Company believes that competition in emerging markets, particularly with respect to private network services, will intensify as dominant and monopoly long distance providers adapt to a competitive environment and large carriers increase their presence in these markets. The Company also believes that competition in more developed markets will intensify as large carriers consolidate, enhance their international alliances and increase their focus on private network services. For example, the recently announced merger involving MCI and British Telecom may substantially increase the ability of the resulting businesses to provide trans-Atlantic private network services. The ability of Orion to compete with these organizations will depend in part on Orion's ability to price its services at a significant discount to terrestrial service providers, its level of customer support and service, and the technical advantages of its systems. The services provided by the Company have been subject to decreasing prices over recent years and this pricing pressure is expected to continue (and may accelerate) for the foreseeable future. Orion will need to increase its volume of sales in order to compensate for such price reductions. Orion believes that customers will increase the data speeds in their communications networks to support new applications, and that such upgrading of customer networks will lead to increased revenues that will mitigate the effect of price reductions. However, there can be no assurance that this will occur. In addition, a large portion of satellite capacity globally is currently used for video distribution. As an increasing portion of satellite capacity is used for providing private network services, prices for these services may decline. Compressed digital video ("CDV"), which substantially increases transmission capacity per channel, is beginning to be used for video distribution. As CDV becomes more prevalent, the supply of effective video capacity could increase significantly, which could result in lower prices. The Company is aware of a substantial number of new satellites that are in construction or in the planning stages. Most of these satellites will cover areas within the footprint of Orion 1 and/or the proposed footprints of Orion 2 and Orion 3. As these new satellites (other than replacement satellites not significantly larger than the ones they replace) commence operations, they will substantially increase the capacity available for the provision of services that compete with the Company's services. After a satellite has been successfully delivered in orbit, the variable cost of transmitting additional data via the satellite is limited. Accordingly, absent a corresponding increase in demand, this new capacity can be expected to result in significant additional price reductions. Continued price reductions could have a material adverse effect on Orion's ability to service its indebtedness, including the Notes, and on the value of the Warrants and the Common Stock. See "Business -- Competition." APPROVALS NEEDED; REGULATION OF INDUSTRY Telecommunications Regulatory Policy. Orion is subject to the U.S. Communications Act of 1934, as amended (the "Communications Act"), and regulation by the FCC (and, to a limited extent, by the U.S. Department of Commerce) and by the national and local governments of other countries. The FCC regulates terms and conditions of communications services, including among other things changes in control or assignment of licenses. The business prospects of Orion could be adversely affected by the adoption of new laws, policies or regulations, or changes in the interpretation or application of existing laws, policies or regulations, that modify the present regulatory environment or conditions of the licenses granted by the FCC to Orion. Additional Regulatory Approvals Needed. The launch and operation of Orion 2 and Orion 3 will require a number of additional regulatory approvals, including the following: (i) approvals of the FCC (in the case of Orion 2); (ii) completion of successful consultations with INTELSAT and, in the case of Orion 2, with EUTELSAT; (iii) satellite "landing" rights in countries that are not INTELSAT signatories or that require additional approvals to provide satellite or VSAT services; and (iv) other regulatory approvals. Obtaining the necessary licenses and approvals involves significant time and expense, and receipt of such licenses and approvals cannot be assured. Although the FCC has conditionally authorized the construction, launch and operation of Orion 2 (subject to completion of an INTELSAT consultation and required showing of ability to finance the construction, launch and operation for one year of the satellite, which requirements generally must be satisfied for final FCC authorization of all FCC satellite licenses), and Orion will apply for certain other approvals for Orion 2 and Orion 3, the FCC authorization for Orion 2 has not become final (since Orion has not yet satisfied the conditions) and most of the other requisite approvals have not yet been obtained. Failure to obtain such approvals would have a material adverse effect on Orion and on its ability to service its indebtedness, including the Notes, and the value of the Warrants and Common Stock. In addition, Orion is required to obtain approvals from numerous national and local authorities in the ordinary course of its business in connection with most arrangements for the provision of services. Within Orion 1's footprint, such approvals generally have not been difficult for Orion to obtain in a timely manner, but the failure to obtain particular approvals has delayed, and in the future may delay, the provision of services by Orion. The Orion 1 license from the FCC expires in January 2005. Although Orion has no reason to believe that its licenses will not be renewed (or new licenses obtained) at the expiration of the license term, there can be no assurance of renewal. In addition, Orion will need to comply with the national laws of each country in which it provides services. Laws with respect to satellite services are currently unclear in certain jurisdictions, particularly within the Orion 3 footprint. In certain of these jurisdictions, satellite services may only be provided via domestic satellites. The Company believes that certain of these restrictions may change and that it can structure its operations to comply with the remaining restrictions. However, there can be no assurance in this regard. See "Business -- Regulation." ITU Coordination Process. An international treaty to which the U.S. and the Republic of the Marshall Islands (through which the Company has applied for the Orion 3 orbital slot) are parties requires ITU coordination of satellite orbital slots. Various non-U.S. governments or telecommunications authorities have commenced coordination procedures pursuant to ITU regulations for proposed satellites at orbital locations and in frequency bands that are in close proximity to those proposed for Orion 2 and Orion 3. Existing satellites and any proposed satellites that are launched prior to Orion 2 and Orion 3 will effectively have priority over Orion's satellites. Orion's proposed use for Orion 2 and Orion 3 conflicts to some extent with the use or proposed use of certain existing or proposed satellites. While Orion believes that it can successfully coordinate the use of the orbital locations and frequency bands proposed for Orion 2 and Orion 3, there can be no assurance that coordination will be achieved. The Company has commenced construction of Orion 3 and will commence construction of Orion 2 promptly following completion of the Offering, which will be prior to completion of ITU coordination. There can be no assurance that ITU coordination will be completed. In the event that successful coordination cannot be achieved, Orion may have to modify the satellite design for Orion 2 or Orion 3 in order to minimize the extent of any potential interference with other proposed satellites using those orbital locations or frequency bands. Any such modifications could increase the cost or delay the launch of the satellites (if significant changes to the satellite are required) and may result in limitations on the use of one or more transponders on Orion 2 or Orion 3, which could affect the amount of revenue realized from such transponders. If interference occurs with satellites that are in close proximity to Orion 2 or Orion 3, or with satellites that are subsequently launched into locations in close proximity before completion of ITU coordination procedures, such interference would have an adverse effect on the proposed use of the satellites and on Orion's business and financial performance. Orion cannot predict the extent of any adverse effect on Orion from any such occurrences. See "Business - -- Orbital Slots." UNCERTAINTIES RELATING TO BACKLOG The Company's current backlog consists of a mix of large and small contracts for private communications networks and transmission capacity for video and other satellite transmission services with a variety of customers. Although many of the Company's customers, especially customers under large and long-term contracts, are large corporations with substantial financial resources, other contracts are with companies that may be subject to business or financial risks affecting their credit worthiness. If customers are unable or unwilling to make required payments, the Company may be required to reduce its backlog figures (which would result in a reduction in future revenues of the Company), and such reductions could be substantial. In the second quarter of 1996, the Company determined that one large customer under a long-term contract (accounting for backlog of approximately $19.9 million) was not likely to raise the financing to commence its service in the near future, and accordingly the Company no longer considers such contract part of its backlog. Also in the second quarter of 1996, the Company removed from its backlog a contract with a customer (accounting for backlog of approximately $4.5 million) which had ceased paying for the Company's services. In the fourth quarter of 1996, the Company removed $10.4 million from its backlog related to contracts under which customers failed to use the contracted service or failed to make timely payment. Orion presently anticipates that at least $86.4 million of its $123 million in backlog (as of September 30, 1996 after pro forma adjustments for the Exchange) will be realized after 1997. The Company's contracts commence and terminate on fixed dates. If the Company is delayed in commencing service or does not provide the required service under any particular contract, as it has occasionally done in the past, it may not be able to recognize all the revenue it initially includes in backlog under that contract. In addition, the current backlog contains some contracts for the useful life of Orion 1; if the useful life of Orion 1 is shorter than expected, some portion of backlog may not be realized unless services satisfactory to the customer can be provided over another satellite. TECHNOLOGICAL CHANGES Although Orion believes that Orion 1 does employ, and Orion 2 and Orion 3 will employ, advanced technologies, the telecommunications industry continues to experience substantial technological changes. The Company believes that there are numerous telecommunications companies that are seeking ways to improve the data transmission capacity of the existing terrestrial infrastructure. Any significant improvement of such capacity, particularly with respect to copper wire, would have a material adverse effect on Orion. There can be no assurance that other changes will not adversely affect the prospects or proposed operations or expenses of Orion. RISKS OF CONDUCTING INTERNATIONAL BUSINESS The Company's international service contracts are generally denominated in U.S. dollars, but it is possible that the portion of contracts denominated in non-U.S. currencies will increase over time. The vast majority of the Company's costs (including interest and principal of the Notes, other indebtedness and the costs for VSATs, Orion 2 and Orion 3) are denominated in U.S. dollars. Accordingly, an increase in the value of U.S. dollars relative to other currencies could have an adverse effect on the Company. International operations are also subject to certain risks such as changes in domestic and foreign government regulations and telecommunication standards, licensing requirements, tariffs or taxes and other trade barriers and political and economic instability. DEPENDENCE OF ORION ON KEY PERSONNEL Orion's business is dependent on its executive and other officers and other key personnel. Orion presently does not have employment contracts with, or key man life insurance covering, such key officers or other personnel. The loss of key officers or personnel could have an adverse effect on Orion. See "Management." CONTROL OF ORION BY PRINCIPAL STOCKHOLDERS Executive officers, directors and their affiliates are expected to own beneficially approximately 8.1 million shares or approximately 40% of the Orion voting stock that will be outstanding after the Transactions (12.0 million shares or approximately 46% of the voting stock that will be outstanding after the Transactions on a fully diluted basis), assuming the closing of the Transactions as of January 30, 1997. As a result of their stock ownership and, in the case of stockholders with representation on the Board of Directors, the incumbency of directors affiliated with them, such stockholders are and will continue to be in a position to elect the Board of Directors and thereby control the affairs and management of Orion. RISKS RELATING TO SENIOR PREFERRED STOCK The Company has outstanding approximately $15.8 million (including accrued dividends) of Orion Series A 8% Cumulative Redeemable Convertible Preferred Stock (the "Series A Preferred Stock") and approximately $4.7 million (including accrued dividends) of Orion Series B 8% Cumulative Redeemable Convertible Preferred Stock (the "Series B Preferred Stock," and together with the Series A Preferred Stock, the "Senior Preferred Stock"). Although Orion expects the holders of the Senior Preferred Stock to agree not to exercise any such mandatory redemption or repurchase rights while the Notes or the Junior Subordinated Debentures are outstanding, such holders have the right to require Orion to repurchase the shares of Common Stock received as a result of conversion of the Senior Preferred Stock upon, among other things, certain mergers, changes of control or sales of substantially all the assets of Orion at the pro rata interest of the holders of such stock in the consideration received or, in the case of certain fundamental changes, fair market value; and, beginning in June 1999 such holders have the right to require Orion to repurchase Senior Preferred Stock (and any Common Stock received upon the conversion thereof) at the fair market value (in the case of Common Stock) or liquidation value, including accrued and unpaid dividends (in the case of Senior Preferred Stock). In addition, the documents relating to the Senior Preferred Stock impose certain covenants on Orion, and failure to comply with those covenants could have an adverse effect on Orion. See "Description of Capital Stock -- Preferred Stock" and "Description of Notes -- Certain Covenants -- Limitation on Restricted Payments." CONSEQUENCES OF ORIGINAL ISSUE DISCOUNT ON SENIOR DISCOUNT NOTES The Senior Discount Notes will be issued at a substantial discount from their principal amount. Consequently, purchasers of the Senior Discount Notes generally will be required to include amounts in gross income for federal income tax purposes in advance of receipt of the cash payments to which the income is attributable and no cash payments of interest will be made until , 2002. Moreover, the Senior Discount Notes will constitute "applicable high yield discount obligations" ("AHYDOs") if the yield to maturity of the Senior Discount Notes exceeds the relevant applicable federal rate (the "AFR") at the time of issue by more than 5 percentage points. If the Senior Discount Notes constitute AHYDOs then the Company will not be entitled to deduct original issue discount ("OID") accruing with respect thereto until such amounts are actually paid. In addition, if the yield to maturity of the Senior Discount Notes exceeds the AFR by more than 6 percentage points, then such excess (i) will not be deductible by the Company at any time and (ii) may be eligible for the dividends received deduction available to corporate holders in certain circumstances. See "Certain United States Federal Income Tax Consequences" for a more detailed discussion of the federal income tax consequences to purchasers of the Senior Discount Notes. If a bankruptcy proceeding is commenced by or against the Company under the United States Bankruptcy Code after the issuance of the Senior Discount Notes, the claim of a holder of Senior Discount Notes with respect of the principal amount thereof may be limited to an amount equal to the sum of (i) the initial public offering price for the Senior Discount Notes and (ii) that portion of the original issue discount that is not deemed to constitute "unmatured interest" for purposes of the United States Bankruptcy Code. Any original issue discount that was not amortized as of the commencement of any such bankruptcy proceeding would constitute "unmatured interest." NO PRIOR PUBLIC MARKET There is no existing market for the Units, Notes or Warrants, and there can be no assurance as to the liquidity of any market that may develop for the Units, Notes or Warrants; the ability of holders of the Units, Notes or Warrants to sell such securities, and the price at which such holders would be able to sell such securities cannot be predicted. If such a market were to develop, such securities could trade at prices that might be lower than the initial offering price thereof depending upon many factors, including prevailing interest rates, the Company's operating results and prospects and the market for similar securities. The Underwriters have advised the Company that they currently intend to make a market in the Units, Notes and Warrants; however, they are not obligated to do so and any market making may be discontinued at any time without notice. The Company does not intend to apply for listing for the Units, Notes or Warrants on any securities exchange. LIMITATIONS ON PAYING DIVIDENDS ON COMMON STOCK Orion has never paid any cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. Orion is not permitted to pay dividends on the Common Stock as long as the Preferred Stock is outstanding, subject to certain limited exceptions. The Indentures will effectively prohibit the payment of cash dividends on the Common Stock for the foreseeable future. See "Market Prices for Orion Common Stock and Dividend Policy." POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Transactions, there will be approximately 25.9 million shares of Common Stock outstanding on a fully diluted basis, assuming a closing of the Transactions as of January 30, 1997. Orion's current stockholders will hold approximately 14.5 million of these shares, all of which will be freely transferable without restriction or further registration under the Securities Act, other than the 5.5 million shares held by "affiliates" of the Company, as that term is defined under the Securities Act. The shares held by affiliates are expected to be eligible for sale pursuant to Rule 144 under the Securities Act. The Limited Partners, as owners of the Series C Preferred Stock, and British Aerospace and Matra Marconi Space, as owners of the Junior Subordinated Debentures, will own the remaining 11.4 million of such shares of Common Stock, which will be issuable upon conversion of such securities. All of such remaining shares will be deemed to be "restricted securities" as that term is defined in Rule 144. However, the Limited Partners, British Aerospace and Matra Marconi Space will be granted certain shelf, demand and "piggy-back" registration rights with respect to the Common Stock issuable to them upon conversion, pursuant to which (in the case of the Limited Partners) the Company will be required to prepare and cause to be filed, as soon as practicable after 180 days following consummation of the Merger, a "shelf" registration statement which will cover the registration of certain Eligible Registrable Securities (as defined to include approximately 25% of the Common Stock issuable to the Limited Partners upon conversion). The Company will also be required to file certain additional shelf registration statements for the Limited Partners so that they will be able to sell, each quarter, up to 25% of the Common Stock issuable to them upon conversion, on a non-cumulative basis, and certain additional shelf registration statements for the holders of the Junior Subordinated Debentures. No predictions can be made as to the effect, if any, that sales of Common Stock or the availability of additional shares of Common Stock for sale would have on the market price of such securities. Nevertheless, the foregoing could adversely affect the market prices of the Warrants and Common Stock and the ability of the Company to raise equity financing. See "Shares Eligible for Future Sale." ANTI-TAKEOVER AND OTHER PROVISIONS OF THE CERTIFICATE OF INCORPORATION Orion's Certificate of Incorporation includes provisions that may discourage or prevent certain types of transactions involving an actual or potential change in control of Orion, including transactions in which the stockholders might otherwise receive a premium for their shares over then current market prices. In addition, the Board of Directors has the authority to fix the rights and preferences of and issue shares of preferred stock, which may have the effect of delaying or preventing a change in control of Orion without action by the stockholders. The staggered terms of the Company's Board of Directors could also discourage any potential acquirer. Orion's Certificate of Incorporation also permits the redemption of Common Stock from stockholders where necessary to protect Orion's regulatory licenses. See "Description of Capital Stock -- Certain Anti-takeover Effects." In addition, any change of control of Orion is subject to the prior approval of the FCC. See "Business -- Regulation -- Unauthorized Transfer of Control."

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+ RISK FACTORS The following principal risk factors should be considered carefully in addition to the other information contained in this Prospectus before purchasing the Common Stock offered hereby. This Prospectus contains forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). Because such statements include risks and uncertainties, actual results could differ materially from those expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as those discussed elsewhere in this Prospectus. FLUCTUATIONS IN RESPONSE RATES; RELIANCE ON COLORFUL IMAGES(R) CATALOG The Company's net sales and net income depend on its catalog operations. Response rates to the Company's mailings have fluctuated and can be affected by many factors, including consumer preferences, economic conditions, the timing of catalog mailings, the catalog's merchandise mix, mailing lists utilized and the Company's ability to respond to and process orders in a timely manner, some of which are outside the Company's control. Any inability of the Company to target accurately the appropriate prospects and customers, to achieve adequate response rates or to process orders effectively could result in lower sales, markdowns or write-offs of inventory, increased merchandise returns and lower margins, and thus could adversely affect the Company's net sales and net income. Catalog mailings also entail substantial costs for postage, paper, and printing, virtually all of which costs are incurred prior to the mailing of each catalog. Costs to stock a portion of the merchandise inventory needed to fulfill orders are also incurred before actual orders from a mailing are known. Thus, the Company has limited ability to adjust the costs for a particular mailing to reflect the performance of that mailing. If, for any reason, the Company were to experience a significant shortfall in revenue from a particular mailing, the Company's financial condition and results of operations would be adversely affected. The Company's first catalog, Colorful Images(R), is the only catalog among the Company's offerings that has been successful over a sustained period of time. It accounted for over 90% of Company sales in 1996. The newer Company catalog titles, Linda Anderson(R) and Impressions, are at earlier stages of development. There can be no assurance that they or any planned catalogs or other marketing or distribution strategies the Company may develop will be successful. RISKS ASSOCIATED WITH GROWTH STRATEGY The Company's growth strategy involves various risks, including a high degree of reliance on prospect mailings, which typically have less favorable response rates than customer mailings. In addition, there can be no assurance that the Company will be able to continue to identify and offer new merchandise that appeals to its customer base and prospects, or that the introduction of new marketing or distribution strategies, such as new catalog titles or other offers, will achieve acceptance in the marketplace. The failure of the Company to sustain the growth of catalog sales, to increase its proprietary database, to maintain its customer or prospect response rates or to successfully introduce new catalog titles and merchandise lines could adversely affect the Company's financial condition and results of operations. The Company's ability to pursue its growth strategy also depends on its ability to manage a larger business. Managing growth will require the Company to continue to implement and improve its operations and financial and management information systems and to continue to expand, motivate and effectively manage its workforce. As the Company's sales increase, the Company will be required to maintain higher inventories to provide satisfactory order fulfillment to its customers. This increase in inventory levels may expose the Company to greater risk of excess inventory. The Company's ability to pursue its growth strategy depends on its ability to successfully increase the size of its operation by relocating to a larger facility. Any difficulty in such relocation could adversely affect the Company's business. See "-- Relocation of Company's Operations; Risk of Disaster." In addition, there can be no assurance that improvements or expansions in the Company's information systems, telephone systems, order fulfillment functions or related facilities or operations will increase the productivity of the Company or that such changes will meet the future needs of the Company. Continued growth could strain the Company's management, financial, merchandising, marketing, order fulfillment, distribution and other resources. The Company may experience operating difficulties, including difficulties in training and managing an increasing number of employees (many of whom have historically been temporary or part time), in sourcing and managing inventory, in obtaining sufficient materials and manufacturing capacity to produce its merchandise and in upgrading its management information systems. The Company may also experience difficulties related to loss of business if it fails to respond to customer inquiries or process customer orders in an efficient and timely manner, or experiences delays in operations, production or shipment. Failure to manage growth effectively could adversely affect the Company's financial condition and results of operations. See "Reliance on Information Systems -- Potential Disruptions" and "Business -- Growth Strategy." DEPENDENCE ON PRIMARY PRODUCT LINES The Company initially sold only personalized self-adhesive labels but has added new product lines during the past several years, including other paper products, such as note pads, calling cards, memo cubes and Christmas cards, and a selection of non-paper merchandise, including collectibles, gift items, home decorative items and casual apparel (primarily t-shirts and caps). While the percentages of total sales derived from personalized paper products has declined in 1994, 1995 and 1996 to 74%, 65% and 59%, paper products, of which labels remain the principal sales contributor, continue to be the Company's primary product line. Margins achieved by the Company on paper products, particularly its labels, are typically substantially higher than the margins achieved on its other products and overall margins may decline with changes in the merchandise mix. There can be no assurance that the Company will continue to be able to identify and offer new merchandise that appeals to its customers and prospects. Any decrease in sales or margins on paper products, or the rate of growth of such sales, may have a disproportionately adverse effect on the Company's financial condition and results of operations. RELIANCE ON USE OF RENTED AND EXCHANGED LISTS The Company mails catalogs to names from its proprietary database and to prospects whose names are obtained from exchanged and rented lists. Approximately half of the catalogs mailed by the Company in 1996 were sent to names from exchanged or rented lists, and the Company anticipates continuing the use of such lists, possibly in larger proportion to total mail volume than was the case in 1996. Mailings to exchanged or rented lists usually generate lower response rates than mailings to recent Company customers. The Company anticipates that overall response rates may decline if it increases its use of exchanged and rented lists relative to its use of names from its proprietary database. The Company's growth strategy necessitates the expansion of its proprietary database and is dependent on prospecting for new customers through the use of exchanged and rented lists. If the Company is not successful in prospecting, its response rates from mailings to names from its proprietary database could decrease, which may have an adverse effect on the Company's financial condition and results of operations. No assurances can be given that the Company will continue to have access to rented and exchanged lists, or that such lists will be available on terms that are acceptable to the Company. POSTAGE, PAPER AND PRINTING COSTS ASSOCIATED WITH THE DISTRIBUTION OF CATALOGS AND MERCHANDISE Postage, paper and printing costs typically represent more than 75% of the total cost of producing and distributing the Company's catalogs. In addition, the Company ships its merchandise to customers via the United States Postal Service and other carriers. Postage and carrier prices increase periodically and can be expected to increase in the future. The last major U.S. postage rate increase became effective January 1, 1995 and increased standard class postage rates for mailing the Company's catalogs approximately 14%. Based on trade reports, the Company believes that a standard class rate increase within the next 12 to 18 months is likely. Any increase in postage or shipping rates may adversely affect the Company's financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Paper costs associated with production of Company catalogs have fluctuated significantly as market prices for such paper have been volatile, and the Company has not always been able to predict future paper prices or negotiate fixed rates for specified periods of time. In addition, the paper used to produce the Company's paper products is obtained from several sources, and the rates on this paper are also sometimes volatile. No long term price agreements exist. Printing costs on a unit basis may increase in the future. Any future increases in paper or printing costs for the Company's catalogs or paper products may adversely affect the Company's financial condition and results of operations. Higher postage, paper or printing expenses would increase the Company's cost of doing business. The Company may not be able to pass such increased costs on to its customers through increased prices for its products. In addition, to the extent that the Company attempts to offset such increases through reductions in the circulation of one or more catalog titles either by reducing the number of editions distributed per year or the number of pages, or both, or reducing the number of catalogs mailed, the Company's growth strategy would be adversely affected. See "Business -- Growth Strategy." RELIANCE ON KEY VENDORS The Company relies on a limited number of vendors to produce its label stock and print its catalogs and paper products. Any significant cost increase or inability to obtain raw materials or merchandise could adversely affect the Company's financial condition and results of operations. RELOCATION OF COMPANY'S OPERATIONS; RISK OF DISASTER The Company's success depends, to a large degree, on efficient and uninterrupted operation of its facilities. The Company needs additional space to handle anticipated sales volume increases. The Company is currently constructing a new, substantially larger facility in Longmont, Colorado and plans to move all of its production, administrative and operations functions into this facility by September 1997. If the Company is not able to relocate by the end of August 1997, the Company will need to either extend the lease of its existing headquarters and lease temporary space or make alternative arrangements in order to accommodate anticipated fourth quarter volume. The landlord of the current facility has verbally indicated that it will cooperate if a suitable replacement tenant has not been located and the Company needs to extend its current lease. The landlord, to date, has not been willing to sign an extension option. If construction of the new facility is late and the current landlord will not agree to a lease extension, a significant dispute or business disruption may occur. Any such event or decrease in the Company's efficiency, especially at a time of year when it historically has received a significant portion of its orders and related annual net sales, could adversely affect the Company's business. See "Business -- Properties." If a natural or other disaster were to destroy or significantly damage the Company's one major facility, the Company would need to obtain alternative facilities and additional inventory to conduct its operations, significantly increasing costs and resulting in delays in the fulfillment of customer orders. The Company's business interruption insurance may not be adequate to cover such damage to the Company, including lost goodwill with its customers. RELIANCE ON INFORMATION SYSTEMS; POTENTIAL DISRUPTIONS The Company processes a large volume of relatively small orders. The Company's business depends on the effective operation of its management information and telecommunications systems. Any material disruption or slowdown in the Company's order processing or fulfillment systems resulting from the relocation of the Company's operations, strikes or labor disputes, telephone down times, electrical outages, mechanical problems, human error or accidents, fire, natural disasters, adverse weather conditions or other events could cause delays in the Company's ability to receive and distribute orders and may cause orders to be lost or to be shipped or delivered late. In the event the Company is unable to provide prompt, accurate and complete service to its customers on a competitive basis, the Company may lose repeat orders, and customers may cancel orders or return goods which could result in a reduction of net sales and increased administrative and shipping costs. In August 1995, the Company installed a new, internally-developed software system and began retraining most employees to operate the new system. This retraining, in conjunction with certain problems with the new software, led to a low telephone answer rate and other service problems during the third and fourth quarters of 1995 which in turn negatively affected the Company's financial performance. Difficulty in implementing the operations software systems resulted in delayed shipments and correspondingly high backlog during the last half of 1995. During the fourth quarter of 1996, as a result of Company sales exceeding projections, the Company had a shortage of personnel to process orders, leading temporarily to high backlogs. There can be no assurance similar problems will not occur in the future. As the Company's strategies depend in part on maintaining a reputation for good customer service, any impairment of its customer service reputation could result in lost orders and adversely affect the Company's business. The Company attempts to deliver its catalogs to its customers at timely intervals and in appropriate seasons and relies heavily on the United States Postal Service and others to do so. Failure to deliver Company mailings at scheduled times, whether due to postal delays, printing delays, disruptions in the mailing of catalogs or other factors, could affect demand for the Company's products and could adversely affect its business. See "Business -- Customer Service." COMPETITION The markets for the Company's merchandise are highly competitive. The opportunities in these markets have encouraged the entry of new competitors as well as increased competition from established companies. The Company competes with direct marketers, catalog retailers, direct mailers, retail stores and others. Sales of apparel, gift items and home decorative items through home television shopping networks or other electronic media, such as the Internet, could provide additional sources of competition for the Company in the future. Within each merchandise category the Company has significant competitors and may face new competition from new entrants or existing competitors who focus on market segments currently served by the Company. Many competitors are larger and have significantly greater financial, marketing and other resources than the Company. Increased catalog mailings by the Company's competitors may adversely affect response rates to the Company's own catalog mailings. Because the Company currently sources most of its paper products and other merchandise from suppliers, distributors and manufacturers located in the United States, where labor and production costs may be higher than in some foreign countries, there can be no assurance that the Company's merchandise can be competitively priced with merchandise offered by competitors whose sourcing is primarily from abroad. There can be no assurance that the Company will be able to maintain or increase its market share in the future. The failure of the Company to compete successfully could adversely affect the Company's business. See "Business -- Competition." DEPENDENCE ON SIGNIFICANT LICENSE RIGHTS AND BRANDED MERCHANDISE The Company has purchased or licensed rights to certain artwork used in its products. In addition, the Company purchases brand name merchandise and has licensed certain rights on a royalty basis from leading companies. Trademarked merchandise currently appearing in the Company's catalogs include PEANUTS(R), Boyd's Bears(R), Dreamsicles(R), Coca-Cola(R), Looney Tunes(R), Warner Bros(R)and others. There can be no assurance that these products will continue to be available to the Company. Licensed rights are generally short-term, and the potential for renewals is beyond the Company's control. Brand name merchandise may or may not continue to be available to the Company. If the Company were unable to offer a significant portion of such products and merchandise, the Company's business could be adversely affected. See "Business -- Licensing and Service Marks." In the past, third parties have asserted that the Company has offered products in violation of the intellectual property rights of others. In certain instances, the Company ceased selling those products as a result of such assertions. To date, the Company has not agreed to pay, nor been required to pay, any damages as a result of such claims. The Company's procedures for determining whether third parties have rights with respect to any particular product are limited and may not always reveal all rights of others. No assurance can be given that the Company will not be required to cease selling products that have been profitable for the Company, or that the Company will not be obligated to make payments to third parties as a result of the Company infringing the rights of others. DEPENDENCE ON KEY PERSONNEL The success of the Company's business is dependant, to a large extent, upon the efforts and abilities of its key employees, particularly Phillip A. Wiland (Chairman and Chief Executive Officer), J. Michael Wolfe (President and Chief Operating Officer) and several other senior staff members of the Company. The loss of one or more of its key employees could adversely affect the Company. The Company's future success will also depend on its ability to employ additional qualified senior management. In addition, the low unemployment rate in the area where the Company is located may make it difficult to hire the employees required to support the Company's further growth. There can be no assurance that the Company will be successful in attracting or retaining additional qualified personnel. See "Management" and "Business." POSSIBLE INCREASE IN MERCHANDISE RETURNS AND REFUNDS The Company emphasizes customer service and has a return policy intended to assure customer satisfaction. The retail value of refunds and merchandise replacements issued under the return policy in 1996 and 1995 was approximately 5.8% and 5.5% of net sales. The Company makes allowances in its financial statements for anticipated merchandise returns and refunds based on historical return rates. There can be no assurance that actual merchandise returns or refunds will not exceed the Company's allowances. In addition, because the Company's allowances are based on historical rates, there can be no assurance that the introduction of new merchandise in existing catalogs or the introduction of new catalogs, changes in the merchandise mix or other factors will not cause actual returns or refunds to exceed return allowances. The Company's growth strategy contemplates the introduction of new catalogs which will offer primarily non-paper merchandise. The Company's historical return and refund rates for apparel, gifts, collectibles and home furnishings products have been higher than its return and refund rates for its personalized labels and other paper products. Consequently, as the Company expands its merchandising efforts, it anticipates that its overall return and refund rate may also increase. Any significant increase in merchandise returns or merchandise refunds that exceed the Company's historic allowances could adversely affect the Company's business. See "Business -- Growth Strategy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." QUARTERLY AND SEASONAL FLUCTUATIONS The Company's results of operations have fluctuated and can be expected to continue to fluctuate as a result of a number of factors including, among other things, seasonal fluctuations in response rates, fluctuations in postage, paper, printing and production costs, the timing of new merchandise and catalog offerings, merchandise returns, adverse weather conditions that affect distribution or shipping and shifts in the timing of certain holidays. In addition, the Company recognizes costs of catalog development and production as sales are realized (such recognition not to exceed twelve months with most costs amortized in the first three months after a catalog is distributed). Consequently, quarter to quarter revenue and expense comparisons will be impacted by the timing of the mailing of the Company's catalogs. Catalog mailing dates may occur in different quarters from year to year depending on the performance of third party couriers, the date of certain holidays and the Company's assessment of market opportunities. A portion of the revenue from any catalog mailing is recognized in quarters after the quarter in which the catalog was mailed and, depending on the exact time a particular catalog offering is mailed in a given year, the revenue from such catalog offering may be recognized in a quarter different from when revenue was recognized in the previous year from an otherwise comparable catalog offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." The Company's business is seasonal. Historically, a substantial portion of the Company's net sales and net income have been realized during its fourth quarter. If, for any reason, the Company's net sales are substantially below those normally expected during this quarter, the Company's annual results would be adversely affected. In anticipation of increased sales activity during the fourth quarter, the Company incurs significant additional expenses, including costs associated with increasing inventory and the hiring of a substantial number of employees to supplement its staff. If the Company underestimates or overestimates orders, particularly in the fourth quarter, it may incur inventory shortages or write-offs that are higher than historical rates. No assurances can be given that an adequate supply of employees will be available to satisfy the Company's seasonal needs, or that the Company will be able to accurately predict its seasonal personnel needs. In the event the Company overestimates its personnel needs, the Company would incur unnecessary costs and an erosion in its net income. If for any reason the Company is unable to respond and process orders, the Company could not only lose orders but could lose goodwill with customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CHANGING CONSUMER PREFERENCES; GENERAL ECONOMIC CONDITIONS The Company's future success depends in part on its ability to anticipate and respond to changes in consumer preferences. No assurance can be given that the Company will respond in a timely or commercially appropriate manner to such changes. Failure to anticipate and respond to changing consumer preferences could lead to, among other things, lower sales of the Company's products, significant markdowns or write-offs of inventory, increased merchandise returns, and lower margins. The Company's business is sensitive to changes in customers' spending and discretionary income patterns which, in turn, are controlled in part by economic conditions. Adverse economic conditions in any area of the United States could have a material adverse effect on the Company's financial condition and results of operations. LIMITED HISTORICAL TRADING VOLUME; POSSIBLE VOLATILITY The Common Stock has experienced low trading volumes due, in part, to the substantial holdings by executive officers, members of the Board of Directors and greater than 5% stockholders who collectively have held a significant portion of the outstanding shares. Following the Offering, approximately 36.5% of the shares (34.7% assuming exercise of the overallotment option) will be held by the Company's executive officers and members of the Board of Directors. The spread between the bid and asked prices for the Common Stock on the Nasdaq SmallCap Market has been quite significant, generally greater than 10%. As of June 12, 1997, the bid was $19.75 and the asked was $24.00. No assurance can be given that an active trading market will develop or continue following the Offering. In addition, even if a more active trading market does develop, no assurance can be given that the market price for the Company's Common Stock will not be volatile. The market price for the Common Stock may be significantly affected by a variety of factors, including a relatively high price to earnings ratio, the Company's operating results, changes in any earnings estimates publicly announced by the Company or by securities analysts, announcements of new merchandise offerings by the Company or its competitors and seasonal effects on sales. In addition, the Nasdaq Stock Market and the Common Stock have historically experienced a high level of price and volume volatility. Wide price fluctuations may not necessarily be related to the operating performance of the Company. Future sales of Common Stock by the Company's existing stockholders following the completion of the Offering and the expiration of the one year lock-up period referred to in "Shares Eligible For Future Sales; Possible Reduction of Stock Price" below could also have an adverse effect on the market price of the Common Stock. For these and other reasons, there can be no assurance the market price of the Common Stock will not decline below the public offering price. See "Shares Eligible for Future Sale; Possible Reduction of Stock Price" and "Underwriting." The market price of the Common Stock is currently at or near an all-time high. Although the market price for the Common Stock has increased significantly over the past few years, there can be no assurance the market price of the Common Stock will continue to increase in the future. See "Price Range of Common Stock."

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+ RISK FACTORS LIMITED LIQUIDITY There is currently no market for the Offered Certificates. The Underwriters intend to make a market in each class of the Offered Certificates purchased by them from the Transferor, but are not obligated to do so. There is no assurance that a secondary market will develop or, if it does develop, that it will provide Offered Certificate Owners with liquidity of investment or that it will continue until the Offered Certificates are paid in full. TRANSFER OF THE RECEIVABLES; INSOLVENCY RISK CONSIDERATIONS The Purchase Agreement provides that the Originators transfer all of their respective right, title, and interest in and to the Receivables owned by each of them from time to time to the Transferor. However, a court could treat such transactions as an assignment of collateral as security for the benefit of the Transferor. Accordingly, each of the Originators has granted a security interest in the Receivables to the Transferor pursuant to the Purchase Agreement and has taken certain actions required to perfect the Transferor's security interest in the Receivables. In addition, each of the Originators has warranted that if the transfer to the Transferor is deemed to be a grant of a security interest in the Receivables, the Transferor will have a perfected security interest therein, subject only to Permitted Liens. If the transfer of the Receivables to the Transferor is deemed to create a security interest therein under the UCC, a tax or government lien on the property of any of the Originators arising before the subject Receivables came into existence may have priority over the Transferor's interest in the Receivables. In the event of the insolvency of any of the Originators, certain administrative expenses may also have priority over the Transferor's interest in such Receivables. Although the Transferor has transferred and will transfer interests in the Receivables to the Trust, a court could treat such transactions as an assignment of collateral as security for the benefit of holders of certificates issued by the Trust. It is possible that the risk of such treatment may be increased by the retention by the Transferor of the Exchangeable Transferor Certificate and any class of certificates of any Series that the Transferor may hold from time to time. The Transferor has represented and warranted in the Pooling and Servicing Agreement that the transfer of the Receivables to the Trust is either a valid transfer and assignment of the Receivables to the Trust or the grant to the Trust of a security interest in the Receivables. The Transferor has taken certain actions required to perfect the Trust's security interest in the Receivables, and has warranted that if the transfer to the Trust is deemed to be a grant to the Trust of a security interest in the Receivables, the Trustee will have a perfected security interest therein, subject only to Permitted Liens. If the transfer of the Receivables to the Trust is deemed to create a security interest therein under the UCC, a tax or government lien on property of the Transferor arising before Receivables come into existence may have priority over the Trust's interest in such Receivables. In the event of the insolvency of the Transferor, certain administrative expenses may also have priority over the Trust's interest in such Receivables. See "Certain Legal Aspects of the Receivables--Transfer of Receivables." To the extent that the Originators and the Transferor have granted security interests in the Receivables to the Transferor and the Trust, respectively, and such security interests were validly perfected before any bankruptcy, insolvency, receivership, or conservatorship of the Originators or the Transferor and were not granted or taken in contemplation of bankruptcy, insolvency, receivership, or conservatorship or with the intent to hinder, delay, or defraud the Originators or the Transferor or their respective creditors, such security interests should not be subject to avoidance in the event of bankruptcy, insolvency, receivership, or conservatorship of the Originators or the Transferor, and payments to the Trust with respect to the Receivables should not be subject to recovery by a bankruptcy trustee, conservator, or receiver for the Transferor. If, however, such a bankruptcy trustee, conservator, or receiver were to assert a contrary position (or, in the case of a conservator or receiver for FDS, were to require the Trustee to establish its right to those payments by submitting to and completing the administrative claims procedure established under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), or were to request a stay of proceedings with respect to FDS as provided under FIRREA), delays in payments on the Offered Certificates and possible reductions in the amount of those payments could occur. In Octagon Gas System, Inc. v. Rimmer, 995 F.2d 948 (10th Cir.), cert. denied, 114 S. Ct. 554 (1993), the court determined that the interest acquired by a purchaser of "accounts," which as defined under the UCC would likely include the Receivables, is treated as a security interest under the UCC. As described above, the treatment of the transfers of the Receivables to the Transferor or the Trust as grants of security interests could have consequences to the Offered Certificate Owners that would be less advantageous than the treatment of such transfers as outright sales. The circumstances under which the Octagon ruling would apply are not fully known and the extent to which the Octagon decision will be followed in other courts or outside of the Tenth Circuit is not certain. Although most of the Originators' and the Transferor's respective business activities are conducted outside the geographic area subject to the jurisdiction of the Tenth Circuit, a portion of such business activities are conducted within such geographic area. See "Certain Legal Aspects of the Receivables--Certain Matters Relating to Bankruptcy or Insolvency." If a conservator or receiver were appointed for the Servicer, and no Servicer Default other than such receivership or insolvency of the Servicer exists, the conservator or receiver may have the power to prevent either the Trustee or the majority of the Certificateholders from effecting a transfer of servicing to a successor Servicer. If a bankruptcy trustee or receiver were appointed for the Transferor, causing a Pay Out Event with respect to all Series then outstanding, new Principal Receivables would not be transferred to the Trust pursuant to the Pooling and Servicing Agreement and the Trustee would sell the portion of the Receivables allocable in accordance with the Pooling and Servicing Agreement to each Series (unless holders of more than 50% of the principal amount of each class of each Series instruct otherwise), thereby causing early termination of the Trust and a loss to the Certificateholders if the net proceeds allocable to the Certificateholders from such sale, if any, were insufficient to pay the Certificateholders in full. The net proceeds of any such sale of the portion of the Receivables allocated in accordance with the Pooling and Servicing Agreement to each Series will first be used to pay amounts due to the Class A Certificateholders, will thereafter be used to pay amounts due to the Class B Certificateholders, and will thereafter be used to pay amounts due to the Class C Certificateholders. If the only Pay Out Event to occur is either the insolvency of the Transferor or the appointment of a bankruptcy trustee or receiver for the Transferor, the bankruptcy trustee or receiver may have the power to continue to require the Transferor to transfer new Receivables to the Trust and to prevent the early sale, liquidation, or disposition of the Receivables and the commencement of the Early Amortization Period. In addition, a bankruptcy trustee or receiver for the Transferor may have the power to cause early payment of the Certificates. See "Certain Legal Aspects of the Receivables--Certain Matters Relating to Bankruptcy or Insolvency." EFFECTS OF CERTAIN TRANSACTIONS Subsequent to its acquisition of Broadway Stores, Inc. ("Broadway") in October 1995, Federated integrated Broadway's businesses with the businesses of Federated's other subsidiaries, converting most of the department stores operated by Broadway at the time of such acquisition under the names "Broadway," "Emporium," and "Weinstocks" into Bloomingdale's and Macy's stores, operating several such stores as clearance centers, and selling or attempting to sell or otherwise dispose of the remaining stores. Consequently, as described in "The Accounts," in February 1996, FDS began establishing and continues to establish new credit card accounts (the "FDS/Broadway Accounts") for qualified applicants who were or become customers of the department stores operated by Broadway following the conversion of such stores to Federated nameplates, and all of the credit card accounts owned by Broadway (the "Broadway Accounts"), which historically had its own proprietary credit card program, have been closed to further purchasing activity. In May 1996, the receivables then outstanding under the FDS/Broadway Accounts and the Broadway Accounts were transferred to the Transferor for inclusion in the Trust. As a result of the foregoing matters and various other factors, the historical performance of the Federated Portfolio may not be comparable to or indicative of the current or future performance of the Federated Portfolio. Subsequent to its acquisition of R.H. Macy & Co., Inc. ("Macy's") in December 1994, Federated consolidated its Abraham & Straus/Jordan Marsh division with its Macy's East division. Consequently, as described in "The Accounts," accounts bearing the "Abraham & Straus" and "Jordan Marsh" tradenames have been closed or converted into accounts bearing the "Macy's" tradename. As a result of the foregoing matters and various other factors, the historical performance of the Federated Portfolio may not be comparable to or indicative of the current or future performance of the Federated Portfolio. DEPENDENCE ON CERTAIN AFFILIATES OF THE TRANSFEROR The Federated Cards currently can be used to purchase merchandise and services only from department stores and a mail-order catalog business operated by the Federated Subsidiaries. The Federated Subsidiaries, including Broadway, currently operate such stores and catalog business under the names "Bloomingdale's," "Bloomingdale's By Mail," "Burdines," "Goldsmith's," "Lazarus," "Rich's," "Stern's," "The Bon Marche," and, in the case of certain stores formerly operated under other nameplates, "Macy's." See "Federated's Credit Card Business" and "The Accounts." Accordingly, although cards issued by FDS under the "Macy's" name are accepted by all Macy's stores (including Macy's stores that are not Federated Stores), the Trust is almost entirely dependent upon the Federated Stores and Bloomingdale's By Mail for the generation of Receivables. The retailing industry, in general, and the department store business, in particular, are and will continue to be intensely competitive. The Federated Stores and Bloomingdale's By Mail will face increasing competition not only with other department stores in the geographic areas in which they operate, but also with numerous other types of retail formats, including specialty stores, general merchandise stores, off-price and discount stores, new and established forms of home shopping (including mail order catalogs, television, and computer services), and manufacturer outlets. Moreover, the Pooling and Servicing Agreement does not prohibit Federated from transferring all or any portion of the business or assets of the Federated Subsidiaries. Accordingly, there can be no assurance that the Federated Subsidiaries will continue to generate Receivables at the same rate as in prior years. The competitors of the Federated Stores and Bloomingdale's By Mail include department stores operated by subsidiaries of Federated under the name "Macy's" and specialty stores operated by subsidiaries of Federated under the names "Aeropostale" and "Charter Club." Pursuant to a proprietary credit card program established prior to Federated's acquisition of Macy's in December 1994, a third-party financial institution owns and establishes most of the revolving credit card accounts of customers of such stores. To the extent that Federated may from time to time deem it desirable to cause the stores or businesses included in or conducted through the Federated Stores and Bloomingdale's By Mail to be operated under such other names, the receivables generated in the revolving credit card accounts of the customers of such stores or businesses may no longer be available for purchase by the Transferor and transfer to the Trust. Similar consequences could result from such stores or businesses being sold to third parties. The Transferor has been advised by Federated that decisions with respect to the foregoing and other aspects of Federated's business operations will be based upon the best interests of Federated and its stockholders from time to time, which interests may differ from those of the Offered Certificate Owners. USE OF OTHER CREDIT CARDS The Federated Stores and Bloomingdale's By Mail accept, in addition to the Federated Cards, other cards, including American Express charge cards, MasterCard and Visa credit cards, and, in the case of former Broadway, Emporium, Weinstocks, Abraham & Straus, and Jordan Marsh stores currently operated under the "Macy's" nameplate, Macy's cards issued by a third-party financial institution. Accordingly, not all credit sales of merchandise and services by the Federated Stores and Bloomingdale's By Mail generate Receivables. See "Federated's Credit Card Business--Creation of Account Balances" and "The Accounts." There can be no assurance that the Federated Cards will continue to maintain their historic percentage of retail sales against competition from such other credit and charge cards. SOCIAL, LEGAL, AND ECONOMIC FACTORS Changes in card use and payment patterns by cardholders may result from a variety of social, legal, and economic factors. The Transferor, however, is unable to determine and has no basis to predict whether, or to what extent, social, legal, or economic factors will affect future card use or repayment patterns. POSSIBLE CHANGES TO THE TERMS OF THE RECEIVABLES Pursuant to the Purchase Agreement, the Originators do not transfer the Accounts to the Transferor, but only the Receivables arising in the Accounts. Pursuant to the Pooling and Servicing Agreement, the Transferor does not transfer the Accounts to the Trust, but only such Receivables. The Originators have the right to determine the monthly periodic finance charges and other fees that will be applicable from time to time to the Accounts, to alter the minimum monthly payment required on the Accounts, and to change various other terms with respect to the Accounts. Among other factors, competitive conditions in the retailing and consumer credit card industries could cause the Originators to consider from time to time reducing periodic finance charges and other fees or changing other terms with respect to the Accounts. A decrease in the monthly periodic finance charge and other fees would decrease the effective yield on the Accounts and could result in the occurrence of a Pay Out Event and the commencement of the Early Amortization Period. Under the Purchase Agreement, any Originator may change the terms of the contracts relating to the Accounts or its policies and procedures with respect to the servicing thereof (including without limitation the reduction of the required minimum monthly payment and the calculation of the amount or the timing of finance charges, fees and charge-offs), if such change would not, in the reasonable belief of such Originator, cause a Pay Out Event to occur and (i) if such Originator owns a comparable segment of credit card accounts, such change is made applicable to the comparable segment of the revolving credit card accounts owned by such Originator, if any, which have characteristics the same as, or substantially similar to, the Accounts that are the subject of such change and (ii) if such Originator does not own such a comparable segment, it will not make any such change with the intent to materially benefit such Originator over the Certificateholders, except as otherwise restricted by an endorsement, sponsorship, or other agreement between such Originator and an unrelated third party or by the terms of the Charge Account Agreements. There can be no assurance that changes in applicable law, changes in the marketplace, or prudent business practice might not result in a determination by any Originator to take actions which would change the terms of the Accounts. CHANGES IN DISCOUNT FACTOR During the continuance of a Discount Trigger Event (which will not occur without the consent of the Rating Agencies) with respect to Series 1997-1, certain collections allocable to Series 1997-1 which would otherwise have been treated as Principal Collections will be subtracted from Principal Collections to determine Net Principal Collections and will be added to Finance Charge Collections to determine Total Finance Charge Collections. Any increase in the Discount Factor would result in the allocation to Series 1997-1 of a higher yield on the Receivables originated under the Accounts and a slower payment rate of Net Principal Collections than otherwise would occur. Conversely, any decrease in the Discount Factor would result in the allocation to Series 1997-1 of a lower yield on such Receivables and a faster payment rate of Net Principal Collections than otherwise would occur. The Discount Factor will change from month to month as a result of changes in the Base Rate for any Series, the Net Finance Charge Portfolio Yield for any Series, or the Annual Portfolio Turnover Rate. CONSUMER AND DEBTOR PROTECTION LAWS The Accounts and the Receivables are subject to numerous federal and state consumer protection laws which impose requirements on the making and collection of consumer loans. Such laws, as well as any new laws or rulings which may be adopted, may adversely affect the Servicer's ability to collect on the Receivables or maintain previous levels of finance charges, late fees, and other fees. Any failure by the Servicer to comply with such legal requirements also could adversely affect the Servicer's ability to collect on the Receivables. Although the Transferor has made certain representations and warranties relating to the validity and enforceability of the Accounts and the Receivables, the Trustee has not made and will not make any examination of the Receivables or the records relating thereto for the purpose of establishing the presence or absence of defects or compliance with such representations and warranties, or for any other purpose. In the event of a breach of certain representations and warranties, the Transferor may be obligated to accept the reassignment and transfer of all Receivables in the Accounts. See "Description of the Offered Certificates--Representations and Warranties" and "Certain Legal Aspects of the Receivables--Consumer and Debtor Protection Laws." Application of federal and state bankruptcy and debtor relief laws to the obligations represented by the Receivables could adversely affect the interests of the Class A Certificateholders and Class B Certificateholders in the Receivables, if such laws result in any Receivables being written off as uncollectible. See "Description of the Offered Certificates--Defaulted Receivables; Rebates and Fraudulent Charges." Congress and state legislatures from time to time consider legislation that would limit the finance charges and fees that may be charged on credit card accounts or that would otherwise further regulate the credit card industry. The potential effect of any legislation which limits the amount of finance charges or fees that may be charged on credit card balances could be to reduce the Portfolio Yield on the Accounts. If the Portfolio Yield were reduced, a Pay Out Event with respect to a Series could occur. See "Description of the Offered Certificates -- Pay Out Events." There can be no assurance as to whether any federal or state legislation will be enacted that would impose additional limitations on the monthly periodic finance charges or fees relating to the Accounts. REINVESTMENT RISK; PAYMENTS AND MATURITY The Receivables may be paid at any time and there is no assurance that there will be additional Receivables created in the Accounts (or that new Accounts will be created) or that any particular pattern of cardholder repayments will occur. The commencement and continuation of the Accumulation Period and the collection of the Controlled Amortization Amount with respect to the Class A Certificates, and the occurrence of the Class B Principal Payment Commencement Date, will be dependent upon the continued generation of new Receivables to be conveyed to the Trust. A significant decline in the amount of Receivables generated could result in the occurrence of a Pay Out Event and the commencement of the Early Amortization Period. In addition, changes in periodic finance charges can alter cardholder monthly payment rates. A significant decrease in the cardholder monthly payment rate could slow the return of principal during the Early Amortization Period, the collection of the Controlled Amortization Amount with respect to the Class A Certificates during the Accumulation Period, or the occurrence of the Class B Principal Payment Commencement Date. See "Maturity Assumptions." See "Description of the Offered Certificates--Pay Out Events" for a discussion of other Pay Out Events. If a Pay Out Event occurs, the Early Amortization Period will commence and the average life and maturity of the Offered Certificates may be significantly reduced. There can be no assurance in that event that the Class A Certificateholders and the Class B Certificateholders would be able to reinvest any accelerated distributions on account of such Offered Certificates in other suitable investments having a comparable yield. EFFECT OF SUBORDINATION OF CLASS B CERTIFICATES; PRINCIPAL PAYMENTS The Class B Certificates will be subordinated in right of payment of principal to the Class A Certificates. Payments of principal in respect of the Class B Certificates will not commence until after the final principal payment with respect to the Class A Certificates has been made and the Class A Invested Amount has been paid in full. Moreover, the Class B Invested Amount is subject to reduction on any Determination Date if (i) the Class A Required Amount or the Class B Required Amount, if any, cannot be fully funded through Reallocated Principal Collections assessed solely against the Class C Invested Amount or (ii) the aggregate Investor Default Amount, if any, for each business day in the preceding Monthly Period exceeds the aggregate Available Series Finance Charge Collections applied to the payment thereof and is not funded from Excess Finance Charge Collections, Transferor Finance Charge Collections, or Reallocated Principal Collections and is not assessed solely against the Class C Invested Amount or, on and after the Class B Principal Payment Commencement Date, the Transferor Interest to the extent of the Transferor Subordination Amount. If the Class B Invested Amount suffers such a reduction, collections of Finance Charge Receivables allocable to the Class B Certificateholders' Interest in future Monthly Periods will be reduced. Moreover, to the extent the amount of such reduction in the Class B Invested Amount is not reimbursed, the amount of principal distributable to the Class B Certificateholders will be reduced. See "Description of the Offered Certificates--Subordination of the Class B Certificates," "--Allocation Percentages," "--Reallocated Principal Collections," "--Application of Collections," and "--Investor Charge-Offs." CONTROL Subject to certain exceptions, the investor certificateholders of each Series may take certain actions, or direct certain actions to be taken, under the Pooling and Servicing Agreement or the related Supplement. In determining whether the required percentage of certificateholders have given their approval or consent, except as otherwise specified, the Class A Certificateholders and the Class B Certificateholders will be treated as a single Series. So long as the Class C Certificates are retained by the Transferor or an affiliate of the Transferor, the interest represented by the Class C Certificates will be disregarded in the giving of any request, demand, authorization, direction, notice, consent, or waiver under the Pooling and Servicing Agreement. As a result of the greater aggregate principal amount of the Class A Certificates, the Class A Certificateholders will have the power to determine whether any such action is taken without regard to the position or interests of the Class B Certificateholders relating to such action. The Class B Certificateholders will not have similar power. In order to make such determinations, the Class B Certificateholders will need the approval or consent of Class A Certificateholders owning a substantial portion of the Class A Certificateholders' Interest. However, under certain circumstances the consent or approval of a specified percentage of the aggregate invested amount of all Series outstanding or of the invested amount of each class of each Series will be required to direct certain actions, including requiring the appointment of a successor Servicer following a Servicer Default, amending the Pooling and Servicing Agreement in certain circumstances, and directing a repurchase of all outstanding Series upon the breach of certain representations and warranties by the Transferor. MASTER TRUST CONSIDERATIONS The Trust, as a master trust, in addition to Series 1997-1, has issued other Series (see "Annex I: Other Series") and may issue additional Series from time to time in the future. While the Principal Terms of any additional Series will be specified in a Supplement, the provisions of such Supplement and, therefore, the terms of any additional Series, are not subject to the prior review or consent of holders of the certificates of any previously issued Series. Such Principal Terms may include methods for determining applicable investor percentages and allocating collections, whether such new Series will be paired with an existing Series, provisions creating security or Enhancements, different classes of certificates (including subordinated classes of certificates), provisions subordinating such Series to another Series (if the Supplement relating to such Series so permits) or another Series to such Series (if the Supplement for such other Series so permits), and any other amendment or supplement to the Pooling and Servicing Agreement which is made applicable only to such Series. See "Description of the Offered Certificates--Exchanges" and "--Paired Series." In addition, the provisions of any Supplement may give the holders of the certificates issued pursuant thereto consent, approval, or other rights that could result in such holders having the power to cause the Transferor, the Servicer, or the Trustee to take or refrain from taking certain actions, including without limitation actions with respect to the exercise of certain rights and remedies under the Pooling and Servicing Agreement, without regard to the position or interest of the certificateholders of any other Series. Similar rights may also be given to the provider of any Enhancement for any Series. It is a condition precedent to issuance of any additional Series that each Rating Agency that has rated any outstanding Series deliver written confirmation to the Trustee that the Exchange will not result in such Rating Agency reducing or withdrawing its rating on any outstanding Series. There can be no assurance, however, that the Principal Terms of any other Series, including any Series previously issued or issued from time to time hereafter, might not have an adverse impact on the timing and amount of payments received by a Certificateholder or the value of Certificates even if there is no change in the rating of any outstanding Series. See "Description of the Offered Certificates--Exchanges" and "Annex I: Other Series." CERTIFICATE RATING It is a condition to the issuance of the Class A Certificates that they have an initial rating of "AAA" or its equivalent from each Rating Agency. It is a condition to the issuance of the Class B Certificates that they have an initial rating of "A" or its equivalent from each Rating Agency. The Rating Agencies do not evaluate, and the ratings of the Offered Certificates do not address, the likelihood that the principal of the Class A Certificates will be paid by the Class A Expected Final Payment Date or that the principal of the Class B Certificates will be paid by the Class B Expected Final Payment Date. The Class C Certificates initially will not be rated. The ratings are not a recommendation to purchase, hold, or sell the Class A Certificates or the Class B Certificates, inasmuch as such ratings do not comment as to the market price or suitability for a particular investor. There can be no assurance that the ratings will remain in effect for any given period of time or that either rating will not be lowered or withdrawn by either Rating Agency if in its judgment circumstances so warrant. BOOK-ENTRY REGISTRATION The Offered Certificates initially will be represented by one or more Certificates registered in the name of Cede, the nominee for DTC, and will not be registered in the names of the Class A Certificate Owners or the Class B Certificate Owners or their nominees. Unless and until Definitive Certificates are issued, Class A Certificate Owners and Class B Certificate Owners will not be recognized by the Trustee as Certificateholders, as that term is used in the Pooling and Servicing Agreement. Hence, until such time, Class A Certificate Owners and Class B Certificate Owners will be able to exercise the rights of Certificateholders only indirectly through DTC and its participating organizations. In addition, the holders of beneficial interests in the Class A Certificates and the Class B Certificates may experience delays between distributions of interest and principal to the record holder of such Certificates and the redistribution of such amounts to the holders of such beneficial interests. See "Description of the Offered Certificates--Book-Entry Registration" and "--Definitive Certificates." REPORTS TO CERTIFICATEHOLDERS Unless and until Definitive Certificates are issued, monthly and annual reports, containing information concerning the Trust and prepared by the Servicer, will be sent on behalf of the Trust to Cede, as nominee for DTC and the registered holder of the Offered Certificates. Such reports will not constitute financial statements prepared in accordance with generally accepted accounting principles and will not be sent by the Servicer or the Trustee to the Class A Certificate Owners and Class B Certificate Owners. See "Description of the Offered Certificates--Book-Entry Registration," "--Definitive Certificates," and "--Reports to Certificateholders." PRE-FUNDING ACCOUNT AND THE FUNDING PERIOD During the Funding Period, Series 1997-1 will be paired with Series 1992-1. As principal is paid or deposited in the Series 1992-1 Principal Funding Account, an equal amount of funds on deposit in the Pre-Funding Account will be released (which funds will be distributed to the Transferor) and the Invested Amount of Series 1997-1 will increase by a corresponding amount. It is anticipated that principal of the Series 1992-1 Certificates will be accumulated commencing with the September 1997 Monthly Period in an amount sufficient to increase the Invested Amount of Series 1997-1 to the Full Invested Amount prior to the end of December 1997 Monthly Period; however, there can be no assurance that a sufficient amount of Principal Collections will be available for such purpose. Should a Pay Out Event occur during the Funding Period, the amounts remaining on deposit in the Pre-Funding Account will be payable as principal first to the Class A Certificateholders until the sum of the Class A Invested Amount and the Class A Pre-Funded Amount is paid in full and then to the Class B Certificateholders until the sum of the Class B Invested Amount and the Class B Pre-Funded Amount is paid in full. In the absence of a Pay Out Event, the amount remaining on deposit in the Pre-Funding Account at the end of the Funding Period will be withdrawn and distributed on the next succeeding Distribution Date to the Class A Certificateholders and the Class B Certificateholders pro rata based on the Class A Invested Amount and the Class B Invested Amount. See "Description of the Offered Certificates--Paired Series" and "--Pre-Funding Account."

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+ RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the Shares of Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results and the timing of events could differ materially from those contemplated by such forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in Risk Factors and elsewhere in this Prospectus. CONTINUING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY The Company has incurred cumulative losses of $33.4 million from its inception in 1985 through December 31, 1996. In February 1996, the Company acquired BioTek, which had sustained cumulative losses of $18.2 million since its inception in October 1990. The Company's ability to achieve and sustain profitability is dependent on a variety of factors including the extent to which its instrument and reagent systems continue to achieve market acceptance, the Company's ability to sell reagents to its customers, the Company's ability to compete successfully, the Company's ability to develop, introduce, market and distribute existing and new diagnostic systems, the level of expenditures incurred by the Company in investing in product development and sales and marketing, the Company's ability to expand manufacturing capacity as required and the receipt of required regulatory approvals for products developed by the Company. There can be no assurance that the Company will be successful in these efforts. Moreover, although the Company achieved an operating profit in the fourth quarter of 1996, the level of future profitability, if any, cannot be accurately predicted and there can be no assurance that profitability will be sustained on a quarterly or annual basis, or at all, or that the Company will not incur operating losses in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." FUTURE FLUCTUATIONS IN OPERATING RESULTS The Company derives revenues from the sale of reagents and instruments. The initial placement of an instrument is subject to a longer, less consistent sales cycle than the sale of reagents, which begin and are typically recurring once an instrument is placed. The Company's future operating results are likely to fluctuate substantially from period to period because instrument sales are likely to remain an important part of revenues in the near future. The degree of fluctuation will depend on the timing, level and mix of instruments placed through direct sales and instruments placed through RPs. The Company anticipates that the percentage of instruments placed through RPs, in particular RP placements without formal reagent purchase commitments, will increase in the future which is likely to result in a decrease in instrument sales both in absolute dollars and as a percentage of total revenues. In addition, average daily reagent use by customers may fluctuate from period to period, which may contribute to future fluctuations in revenues. In particular, customers who have received instruments under RP arrangements that do not provide for specified reagent purchase commitments are not contractually obligated to purchase reagents from the Company, and there can be no assurance as to the timing or volume of reagent purchases by such customers, if any. Furthermore, customers that have entered into contractual RP agreements may also attempt to cancel all or a portion of their reagent purchase commitments. Accordingly, there can be no assurance as to the level of revenues that will be generated by customers procuring instruments through RP arrangements, particularly from those customers who obtain instruments without reagent purchase commitments. In the event that RP customers do not purchase anticipated quantities of reagents, the Company will have incurred substantial costs in supplying instruments to RP customers without receipt of an adequate reagent revenue stream and the Company's business, financial condition and results of operations would be materially and adversely affected. Sales of instruments may fluctuate from period to period because sales to the Company's international distributors typically provide such distributors with several months of instrument inventory, which the distributors will subsequently seek to place with end-users. The Company's instrument installed base includes instruments shipped to DAKO A/S ("DAKO") and recognized as sales. Furthermore, due both to the Company's increased sales focus on smaller hospitals and laboratories and the relatively high reagent sales growth rates in recent fiscal periods, the rate of growth in reagent sales in future periods is likely to be below that experienced during the past several fiscal periods. Other factors that may result in fluctuations in operating results include the timing of new product announcements and the introduction of new products and new technologies by the Company and its competitors, market acceptance of the Company's current or new products, developments with respect to regulatory matters, availability and cost of raw materials from its suppliers, competitive pricing pressures, increased research and development expenses, and increased marketing and sales expenses associated with the implementation of the Company's market expansion strategies for its instrument and reagent products. Future instrument and reagent sales could also be adversely affected by the configuration of the Company's patient priority systems, which require the use of the Company's detection chemistries, particularly if and to the extent that competitors are successful in developing and introducing new IHC instruments or if competitors offer reagent supply arrangements having pricing or other terms more favorable than those offered by the Company. Such increased competition in reagent supply could also adversely affect sales of reagents to batch processing instrument customers since those instruments do not require the use of the Company's reagents. In connection with future introductions of new products, the Company may be required to incur charges for inventory obsolescence in connection with unsold inventory of older generations of products. To date, however, the Company has not incurred material charges or expenses associated with inventory obsolescence in connection with new product introductions. In addition, a significant portion of the Company's expense levels is based on its expectation of a higher level of revenues in the future and are relatively fixed in nature. Therefore, if revenue levels are below expectations, operating results in a given period are likely to be adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RATE OF MARKET ACCEPTANCE AND TECHNOLOGICAL CHANGE Use of automated systems to perform diagnostic tests is relatively new. Historically, the diagnostic tests performed by the Company's systems have been performed manually by laboratory personnel. The rate of market acceptance of the Company's products will be largely dependent on the Company's ability to persuade the medical community of the benefits of automated diagnostic testing using the Company's products. Market acceptance and sales of the Company's products may also be affected by the price and quality of the Company's and its competitors' products. The Company's products could also be rendered obsolete or noncompetitive by virtue of technological innovations in the fields of cellular or molecular diagnostics. Failure of the Company's products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business." RISKS ASSOCIATED WITH DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS The Company's future growth and profitability will be dependent, in large part, on its ability to develop, introduce and market new instruments and reagents used in diagnosing and selecting appropriate treatment for cancer and additional disease states. In particular, the Company must successfully introduce the NexES on a timely basis and continue the commercialization of the TechMate 250. These instruments are smaller capacity, lower cost instruments than the Company's current instruments and are necessary to expand the market opportunity at smaller hospitals and reference laboratories in the United States and Europe. The Company depends in part on the success of medical research in developing new antibodies, nucleic acid probes and clinical diagnostic procedures that can be adapted for use in the Company's systems. In addition, the Company will need to obtain licenses on satisfactory terms to certain of these technologies, for which there can be no assurance. Certain of the Company's products are currently under development, initial testing or preclinical or clinical evaluation by the Company. Other products are scheduled for future development. Products under development or scheduled for future development may prove to be unreliable from a diagnostic standpoint, may be difficult to manufacture in an efficient manner, may fail to receive necessary regulatory clearances, may not achieve market acceptance or may encounter other unanticipated difficulties. The failure of the Company to develop, introduce and market new products on a timely basis or at all could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Research and Development." COMPETITION Competition in the diagnostic industry is intense and is expected to increase. Competition in the diagnostic industry is based on, among other things, product quality, performance, price and the breadth of a company's product offerings. The Company's systems compete both with products manufactured by competitors and with traditional manual diagnostic procedures. The Company's competitors may succeed in developing products that are more reliable or effective or less costly than those developed by the Company and may be more successful than the Company in manufacturing and marketing their products. There are other companies engaged in research and development of diagnostic devices or reagents, and, notwithstanding the Company's product development efforts, the introduction of such devices or alternative methods for diagnostic testing could hinder the Company's ability to compete effectively and could have a material adverse effect on the Company's business, financial condition and results of operations. In the instrument market, several companies offer instruments that perform IHC tests and can be used with any supplier's reagents, which may be attractive to certain customers. In addition, any future growth in the market for automated IHC instruments may result in additional market entrants and increased competition, including more aggressive price competition. For example, DAKO recently introduced a lower-priced semi-automated IHC instrument in the United States. Many of the companies selling or developing diagnostic devices and instruments and many potential entrants in the automated IHC market have financial, manufacturing, marketing and distribution resources significantly greater than those of Ventana. In addition, many of these current and potential competitors have long-term supplier relationships with Ventana's existing and potential customers. These competitors may be able to leverage existing customer relationships to enhance their ability to place new IHC instruments. Competition in the market for automated IHC instruments, including the advent of new market entrants and increasing price competition, could have a material adverse effect on the Company's business, financial condition and results of operations. In the market for reagents, the Company encounters competition from suppliers of primary antibodies and detection chemistries, which are the two principal types of reagents used in IHC tests. The Company's patient priority instruments require the use of the Company's detection chemistries but can be used with primary antibodies supplied by third parties, and the Company's batch processing instruments can be used with both detection chemistries and primary antibodies supplied by third parties. Accordingly, the Company encounters significant competition in the sale of reagents for use on those of its instruments that can be used with reagents supplied by third parties. Lower prices for reagents used in manual IHC tests could also limit the growth of automation. Certain of the Company's current and potential competitors in the reagent market have financial, manufacturing, marketing and distribution resources greater than those of the Company. Competition in the market for reagents could also increase as a result of new market entrants providing more favorable reagent supply arrangements than the Company, including lower reagent prices. In particular, DAKO has recently introduced a lower priced semi-automated IHC instrument in the United States and is offering reagent supply arrangements that have resulted in increased competition for both instruments and reagents. In addition, other new entrants in the instrument market may seek to enhance their competitive position through reduced reagent pricing or more favorable supply arrangements; the Company's current instrument customers may find it attractive to purchase primary antibodies for patient priority instruments and primary antibodies and detection chemistries for batch processing instruments from such competitors. Increased competition in the reagent market could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Competition." MANUFACTURING RISKS The Company has only manufactured patient priority instruments and reagents for commercial sale since late 1991, and manufacturing of the Company's batch processing instruments is performed by third parties. As the Company continues to increase production of such instruments and reagents and develops and introduces new products, it may from time to time experience difficulties in manufacturing. The Company must continue to increase production volumes of instruments and reagents in a cost-effective manner in order to be profitable. To increase production levels, the Company will need to scale-up its manufacturing facilities, increase its automated manufacturing capabilities and continue to comply with the current good manufacturing practices ("GMPs") prescribed by the United States Food and Drug Administration ("FDA") and other standards prescribed by various federal, state and local regulatory agencies in the United States and other countries, including the International Standards Organization ("ISO") 9000 Series certifications. There can be no assurance that manufacturing and quality problems will not arise as the Company increases its manufacturing operations or that such scale-up can be achieved in a timely manner or at a commercially reasonable cost. Manufacturing or quality problems or difficulties or delays in manufacturing scale-up could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." DEPENDENCE UPON KEY SUPPLIERS The Company's reagent products are formulated from both chemical and biological materials utilizing proprietary Ventana technology as well as standard processing techniques. Certain components and raw materials, primarily antibodies, used in the manufacturing of the Company's reagent products are currently provided by single-source vendors. There can be no assurance that the materials or reagents needed by the Company will be available in commercial quantities or at acceptable prices. Any supply interruption or yield problems encountered in the use of materials from these vendors could have a material adverse effect on the Company's ability to manufacture its products until a new source of supply is obtained. The use of alternative or additional suppliers could be time consuming and expensive. In addition, a number of the components used to manufacture the ES and gen II instruments are fabricated on a custom basis to the Company's specifications and are currently available from a limited number of sources. Consequently, in the event the supply of materials or components from any of these vendors were delayed or interrupted for any reason or in the event of quality or reliability problems with such components or suppliers, the Company's ability to supply such instruments could be impaired, which could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." DEPENDENCE UPON THIRD-PARTY MANUFACTURERS FOR BATCH PROCESSING INSTRUMENTS The Company relies on two outside parties to manufacture its batch processing instruments. Kollsman Manufacturing Company, Inc. ("Kollsman") currently manufactures the TechMate 500 instrument under a contractual relationship with the Company. The Company has entered into a contract manufacturing agreement with LJL BioSystems, Inc. ("LJL") for the manufacture of the TechMate 250 instrument. There can be no assurance that these manufacturers will be able to meet the Company's product needs in a satisfactory, cost effective or timely manner. The Company's reliance on third-party manufacturers involves a number of additional risks, including the absence of guaranteed capacity and reduced control over delivery schedules, quality assurance and costs. The amount and timing of resources to be devoted to these activities by such manufacturers are not within the control of the Company, and there can be no assurance that manufacturing problems will not occur in the future. Any such manufacturing or supply problems could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." RISKS ASSOCIATED WITH UNITED STATES DISTRIBUTION RELATIONSHIP The Company's batch processing instruments and reagents are sold under distribution agreements entered into by BioTek. In the United States, batch processing instruments and reagents are sold through Curtin Matheson Scientific, Inc., a subsidiary of Fisher Scientific, Inc. ("CMS"), under an exclusive agreement that expires in April 1998. United States sales through CMS are subject to several operating conditions and risks. In particular, it has historically been necessary for BioTek to support, and the Company anticipates that it will need to continue to support, the efforts of CMS with direct field sales and support personnel. As a result, the Company generates lower gross margins on sales through CMS than it would generate were it to sell directly to end-users and incurs higher selling expenses than typically associated with third-party distribution arrangements. In addition, the Company has notified CMS that CMS has not fulfilled its obligations under the agreement, both with respect to purchases of units and support and promotion of batch processing instruments in the United States. CMS has responded to the Company's notice, denied breach of the agreement, suggested that certain activities undertaken by the Company may constitute a breach of the agreement by the Company or may otherwise be actionable, and suggested that the Company and CMS attempt to reach a negotiated settlement. There can be no assurance that the Company and CMS will be able to reach a negotiated settlement or that the Company will not become involved in litigation or other disputes with CMS which could involve substantial costs and diversion of management time. As a result of these factors and due to the presence of the Company's direct sales force in the United States, the Company does not intend to renew the agreement with CMS upon its April 1998 expiration. In the event that CMS does not adequately promote and market batch processing instruments and reagents or manage customer relationships during the remaining term of the agreement or in the event that difficulties continue in the relationship between the Company and CMS, the Company's sales of batch processing instruments and reagents in the United States could be adversely affected and the Company could also experience disruptions in the supply of batch processing instruments and reagents to customers in the United States. These developments could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH EUROPEAN DISTRIBUTION RELATIONSHIP In Europe, batch processing instruments are sold through DAKO which also pays BioTek a fixed dollar royalty for each instrument in service in exchange for the right to sell its own reagents for use with such systems. The agreement with DAKO provides DAKO with exclusive distribution rights for batch processing instruments in Europe and other territories, subject to certain performance requirements. The agreement expires in December 1999. Accordingly, the Company is likely to be dependent upon DAKO for international sales of batch processing instruments through this date. In connection with BioTek's agreement with DAKO, DAKO made two loans secured by a pledge of substantially all of BioTek's assets. DAKO also made prepayments on future instrument sales and reagent royalties to BioTek. These loans and prepayments were used to fund TechMate 250 instrument development and working capital requirements. On September 25, 1996, BioTek and DAKO entered into an amendment to their existing agreement (the "Amendment Agreement") for the purpose of addressing several matters, including repayment of these secured loans and prepayments. The aggregate balance of the secured loans and prepayments was $1.4 million and $0.9 million, respectively, at the time of the Amendment Agreement. Of these secured loans, $0.3 million bears interest at 5% per annum and the remaining $1.1 million does not bear interest. The prepayments do not bear interest. In connection with the Amendment Agreement, DAKO paid the Company a royalty of $0.5 million and the Company paid DAKO $0.5 million as a reduction of the balance of the prepayments. Under the Amendment Agreement, the remaining $2.0 million of secured loans and prepayments will be repaid through discounts on DAKO purchases of TechMate instruments from BioTek at recoupment rates specified in the Amendment Agreement. The Amendment Agreement also establishes certain minimum purchase and delivery commitments for TechMate 250 and TechMate 500 instruments, as well as pricing for certain quantities of TechMate 250 instruments. Pricing for additional quantities of TechMate 250 instruments was not resolved in the Amendment Agreement and the parties are currently in disagreement as to such pricing. Currently, DAKO is purchasing such instruments at the price levels established by the Company. However, the parties may, pursuant to the distribution agreement, initiate binding arbitration proceedings to resolve such pricing. In the event such arbitration proceedings are initiated and are determined adversely to the Company, the pricing of TechMate 250 instruments to DAKO would be on terms less favorable to the Company than the current pricing terms and the amount of secured loans and prepayments recouped per instrument sale would also be reduced. In connection with the negotiations for the Amendment Agreement, DAKO and the Company have agreed to enter into negotiations regarding a possible broader marketing arrangement for international sales of both batch processing instruments and patient priority instruments. These negotiations are currently ongoing. There can be no assurance that negotiations for this arrangement will be successfully concluded and that the Company will enter into a broader marketing arrangement with DAKO. Furthermore, during the course of ongoing discussions with DAKO since the acquisition of BioTek, DAKO has, among other things, asserted that BioTek has not fulfilled its obligations with respect to the development and commercial introduction of the TechMate 250 instrument. The Company denies this assertion and believes that it is in substantial compliance with its obligations under these development milestones and has asserted that DAKO has not met certain obligations under such agreement. In particular, the Company believes that its contract manufacturing agreement with LJL will enable it to satisfy DAKO's requirements for TechMate 250 instruments. Nevertheless, the negotiations with DAKO could result in an attempt by DAKO to exercise contractual remedies available to it under the distribution agreement and the terms of the secured loans, which remedies include (i) requiring repayment of the secured loans in 12 equal quarterly installments commencing upon a default by BioTek and (ii) an irrevocable license to manufacture TechMate instruments for resale internationally and a related reduction in the fixed dollar royalty rate paid by DAKO to BioTek for each instrument included in the royalty base. The Company could also experience an interruption in the distribution of batch processing instruments outside the United States or become involved in litigation with DAKO with respect to the current distribution agreement, which would involve significant costs as well as diversion of management time. There can be no assurance that the Company would prevail in any litigation involving the agreement. Furthermore, there can be no assurance as to the future course or outcome of the Company's negotiations with DAKO or as to the Company's future relationship with DAKO. If DAKO were successful in obtaining a manufacturing license for TechMate instruments, the Company could experience a loss of instrument revenue which could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH PAST AND FUTURE ACQUISITIONS In February 1996 the Company acquired BioTek. Although the Company has no pending agreements or commitments, the Company may make additional acquisitions of complementary businesses, products or technologies in the future. Acquisitions of companies, divisions of companies, or products entail numerous risks, including (i) the potential inability to successfully integrate acquired operations and products or to realize anticipated synergies, economies of scale or other value, (ii) diversion of management's attention and (iii) loss of key employees of acquired operations. No assurance can be given that the Company will not incur problems in completing the integration of the BioTek operations or with respect to any future acquisitions, and there can be no assurance that the acquisition of BioTek or any future acquisitions will result in the Company becoming profitable or, if the Company achieves profitability, that such acquisition will increase the Company's profitability. Furthermore, there can be no assurance that the Company will realize value from any such acquisition which equals or exceeds the consideration paid. Any such problems could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, any future acquisitions by the Company may result in dilutive issuances of equity securities, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in amortization expense. These factors could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." RISKS RELATING TO PATENTS AND PROPRIETARY RIGHTS The Company's success depends, in part, on its ability to obtain patents, maintain trade secret protection and operate without infringing the proprietary rights of others. There can be no assurance that the Company's patent applications will result in patents being issued or that any issued patents will provide adequate protection against competitive technologies or will be held valid if challenged. Others may independently develop products similar to those of the Company or design around or otherwise circumvent patents issued to the Company. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of each of such patents or to redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. If the Company does not obtain necessary licenses, it could be subject to litigation and encounter delays in product introductions while it attempts to design around such patents. Alternatively, the Company's development, manufacture or sale of such products could be prevented by the patent holder. Litigation would result in significant cost to the Company as well as diversion of management time. Adverse determinations in any such proceedings could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Patents and Proprietary Rights." Ventana also relies upon trade secret protection for its confidential and proprietary information. There can be no assurance that others will not independently develop substantially equivalent proprietary information or techniques, gain access to Ventana's trade secrets or disclose such technology, or that Ventana can effectively protect its trade secrets. Litigation to protect Ventana's trade secrets would result in significant cost to the Company as well as diversion of management time. Adverse determinations in any such proceedings or unauthorized disclosure of Ventana trade secrets could have a material adverse effect on Ventana's business, financial condition and results of operations. BioTek is a party to litigation initiated by BioGenex Laboratories, Inc. ("BioGenex") relating to certain alleged past infringements of patent rights of BioGenex. The Company believes that the resolution of this matter will not have a material adverse effect on the Company's business, financial condition and results of operations. For additional detail regarding this litigation, see "Business -- Legal Proceedings." UNCERTAINTY OF FUTURE FUNDING OF CAPITAL REQUIREMENTS The Company anticipates that its existing capital resources, including the net proceeds of this Offering and interest earned thereon, and available borrowing capacity under the Company's revolving credit line will be adequate to satisfy its capital requirements for at least the next 18 months. The Company's future capital requirements will depend on many factors, including the extent to which the Company's products gain market acceptance, the mix of instruments placed through direct sales or through RPs, progress of the Company's product development programs, competing technological and market developments, expansion of the Company's sales and marketing activities, the cost of manufacturing scale-up activities, possible acquisitions of complementary businesses, products or technologies, the extent and duration of operating losses, the Company's ability to sustain profitability and timing of regulatory approvals. The Company may require additional capital resources and there is no assurance such capital will be available to the extent required, on terms acceptable to the Company or at all. Any such future capital requirements could result in the issuance of equity securities which would be dilutive to existing stockholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY PERSONNEL The Company is dependent upon the retention of principal members of its management, Board of Directors, scientific, technical, marketing and sales staff and the recruitment of additional personnel. With the exception of one individual, the Company does not have an employment agreement with any of its executive officers. The Company does not maintain "key person" life insurance on any of its personnel. The Company competes with other companies, academic institutions, government entities and other organizations for qualified personnel in the areas of the Company's activities. The inability to hire or retain qualified personnel could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, in November 1996, R. James Danehy, the Company's President and Chief Executive Officer, notified the Company that he would not be able to relocate permanently to Tucson for family and personal reasons and, as a result, the Company has initiated a search for a new Chief Executive Officer. It is expected that Mr. Danehy will remain as President and Chief Executive Officer until his replacement joins the Company and that he will continue to serve as a member of the Company's Board of Directors. See "Management." UNCERTAINTIES RELATED TO GOVERNMENT FUNDING A portion of the Company's products are sold to universities, research laboratories, private foundations and other institutions where funding is dependent upon grants from government agencies, such as the National Institutes of Health. Research funding by the government, however, may be significantly reduced under several budget proposals being discussed by the United States Congress or for other reasons. Any such reduction may materially affect the ability of many of the Company's research customers to purchase the Company's products. FDA AND OTHER GOVERNMENT REGULATION The manufacturing, marketing and sale of the Company's products are subject to extensive and rigorous government regulation in the United States and in other countries. In the United States and certain other countries, the process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. In the United States, the FDA regulates, as medical devices, clinical diagnostic tests and reagents, as well as instruments used in the diagnosis of adverse conditions. The Federal Food, Drug, and Cosmetic Act governs the design, testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. There are two principal FDA regulatory review paths for medical devices: the 510(k) pre-market notification ("510(k)") process and the pre-market approval ("PMA") process. The PMA process typically requires the submission of more extensive clinical data and is costlier and more time-consuming to complete than the 510(k) process. For a detailed description of this regulatory framework, see "Business -- Government Regulation." The FDA regulates, as medical devices, instruments, diagnostic tests and reagents that are traditionally manufactured and commercially marketed as finished test kits or equipment. Some clinical laboratories, however, choose to purchase individual reagents intended for specific analyses and develop and prepare their own finished diagnostic tests. Although neither the individual reagents nor the finished tests prepared from them by the clinical laboratories have traditionally been regulated by the FDA, the FDA has recently proposed a rule that, if adopted, would regulate the reagents sold to clinical laboratories as medical devices. The proposed rule would also restrict sales of these reagents to clinical laboratories certified under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") as high complexity testing laboratories. The Company intends to market some diagnostic products as finished test kits or equipment and others as individual reagents; consequently, some or all of these products may be regulated as medical devices. Medical devices generally require FDA approval or clearance prior to being marketed in the United States. The process of obtaining FDA clearances or approvals necessary to market medical devices can be time-consuming, expensive and uncertain, and there can be no assurance that any clearance or approval sought by the Company will be granted or that FDA review will not involve delays adversely affecting the marketing and sale of the Company's products. Further, clearances or approvals may place substantial restrictions on the indications for which the product may be marketed or to whom it may be marketed. Additionally, there can be no assurance that the FDA will not require additional data, require that the Company conduct further clinical studies or obtain a PMA causing the Company to incur further cost and delay. With respect to automated IHC testing functions, the Company's instruments have been categorized by the FDA as automated cell staining devices and have been exempted from the 510(k) notification process. To date, ISH tests have not received FDA approval or clearance and, therefore, use of the gen II for ISH tests will be restricted to research applications. New instrument products that the Company may introduce could require future 510(k) clearances. Certain antibodies that the Company may wish to market with labeling indicating that they can be used in the diagnosis of particular diseases may require PMA approval. In addition, the FDA has proposed that some of the antibody products that Ventana may wish to market be subjected to a pre-filing certification process. Certain of the Company's products are currently sold for research use and are labeled as such. Failure to comply with applicable regulatory requirements can, among other consequences, result in fines, injunctions, civil penalties, suspensions or loss of regulatory approvals, recalls or seizures of products, operating restrictions and criminal prosecutions. In particular, the FDA enforces regulations prohibiting the marketing of products for nonindicated uses. In addition, governmental regulations may be established that could prevent or delay regulatory approval of the Company's products. Delays in or failure to receive approval of products the Company plans to introduce, loss of or additional restrictions or limitations relating to previously received approvals, other regulatory action against the Company or changes in the applicable regulatory climate could individually or in the aggregate have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also required to register as a medical device manufacturer with the FDA and is inspected on a routine basis by the FDA for compliance with its regulations. The Company's clinical laboratory customers are subject to CLIA, which is intended to ensure the quality and reliability of medical testing. In addition to these regulations, the Company is subject to numerous federal, state and local laws and regulations relating to such matters as safe working conditions and environmental matters. There can be no assurance that such laws or regulations will not in the future have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Environmental Matters" and "Business -- Government Regulation." RISKS RELATING TO AVAILABILITY OF THIRD-PARTY REIMBURSEMENT AND POTENTIAL ADVERSE EFFECTS OF HEALTH CARE REFORM The Company's ability to sustain revenue growth and profitability may depend on the ability of the Company's customers to obtain adequate levels of third-party reimbursement for use of certain diagnostic tests in the United States, Europe and other countries. Currently, the availability of third-party reimbursement is limited and uncertain for some IHC tests. In the United States, the Company's products are purchased primarily by medical institutions and laboratories which bill various third-party payors, such as Medicare, Medicaid, other government programs and private insurance plans, for the health care services provided to their patients. Third-party payors may deny reimbursement to the Company's customers if they determine that a prescribed device or diagnostic test has not received appropriate FDA or other governmental regulatory clearances or approvals, is not used in accordance with cost-effective treatment methods as determined by the payor, or is experimental, unnecessary or inappropriate. The success of the Company's products may depend on the extent to which appropriate reimbursement levels for the costs of such products and related treatment are obtained by the Company's customers from government authorities, private health insurers and other organizations, such as health maintenance organizations ("HMOs"). Third-party payors are increasingly challenging the prices charged for medical products and services. The trend towards managed health care in the United States and the concurrent growth of organizations such as HMOs could significantly influence the purchase of health care services and products. In addition, the federal government and certain members of Congress have proposed, and various state governments have adopted or are considering, programs to reform the health care system. These proposals are focused, in large part, on controlling the escalation of health care expenditures. The cost containment measures that health care payors are instituting and the impact of any health care reform could have a material adverse effect on the levels of reimbursement the Company's customers receive from third-party payors and the Company's ability to market and sell its products and consequently could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Third-Party Reimbursement." PRODUCT LIABILITY AND RECALLS; PRODUCT LIABILITY INSURANCE The marketing and sale of the Company's diagnostic instruments and reagents entails risk of product liability claims. The Company has product liability insurance coverage with a per occurrence maximum of $2.0 million and an aggregate annual maximum of $5.0 million. There can be no assurance that this level of insurance coverage will be adequate or that insurance coverage will continue to be available on acceptable terms or at all. A product liability claim or recall could have a material adverse effect on the Company's business, reputation, financial condition and results of operations. ENVIRONMENTAL MATTERS Certain of the Company's manufacturing processes, primarily processes involved in manufacturing certain of the Company's reagent products, require the use of potentially hazardous and carcinogenic chemicals. The Company is required to comply with applicable federal, state and local laws regarding the use, storage and disposal of such materials. The Company currently uses third-party disposal services to remove and dispose of the hazardous materials used in its processes. The Company could in the future encounter claims from individuals, governmental authorities or other persons or entities in connection with exposure to or disposal or handling of such hazardous materials or violations of environmental laws by the Company or its contractors and could also be required to incur additional expenditures for hazardous materials management or environmental compliance. Costs associated with environmental claims, violations of environmental laws or regulations, hazardous materials management and compliance with environmental laws could have a material adverse effect on the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH LEVERAGE The Company currently has outstanding $10.3 million in principal amount of indebtedness incurred in connection with the acquisition of BioTek (the "Acquisition Debt"). The Company may use a portion of the net proceeds of this Offering to repay all or a portion of the Acquisition Debt. However, the Company's management will have broad discretion to allocate the net proceeds of this Offering and may elect to defer repayment of the Acquisition Debt until its maturity in February 1998. The Acquisition Debt bears interest at 7% per annum; however, accrued interest will be forgiven if the entire remaining principal balance is repaid prior to February 26, 1997. In the event the Company does not repay the Acquisition Debt with the proceeds of this Offering, the Company will continue to be subject to the risks associated with leverage, which risks include (i) principal and interest repayment obligations which require the expenditure of substantial amounts of cash, the availability of which will be dependent on the Company's future performance, (ii) inability to repay principal at maturity, which could result in default on the Acquisition Debt and legal action against the Company by the holders of the Acquisition Debt and (iii) adverse effects of interest expense on the Company's results of operations. Leverage could also limit the Company's ability to obtain additional financing in the future, to withstand competitive pressure and adverse economic conditions (including a downturn in its business) or to take advantage of significant business opportunities, such as opportunities to acquire complementary businesses, products and technologies. BROAD DISCRETION OF MANAGEMENT TO ALLOCATE OFFERING PROCEEDS The Company anticipates that the net proceeds of this Offering will be used for general corporate purposes, which may include expansion of sales and marketing activities, research and development, clinical trials, capital expenditures, repayment of all or a portion of the remaining outstanding Acquisition Debt and working capital. Accordingly, the amounts actually expended for each such purpose and the timing of such expenditures may vary depending upon numerous factors. The Company's management will have broad discretion in determining the amount and timing of expenditures and in allocating the net proceeds of this Offering. See "Use of Proceeds." CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS After this Offering, the Company's officers, directors and principal stockholders will beneficially own approximately 47.3% of the Company's outstanding Common Stock. These stockholders will be able to exercise significant influence over the election of members of the Company's Board of Directors and corporate actions requiring stockholder approval. Such concentration of ownership may have the effect of delaying or preventing a change in control of the Company. In addition, the Board of Directors has the authority, without action by the stockholders, to fix the rights and preferences of, and issue shares of, one or more series of preferred stock, which may have the effect of delaying or preventing a change in control of the Company, and to issue additional Common Stock which would be dilutive to existing stockholders. In addition, provisions in the Company's Certificate of Incorporation and Bylaws (i) prohibit the stockholders from acting by written consent without a meeting or calling a special meeting of stockholders, (ii) require advance notice of business proposed to be brought before an annual or special meeting of stockholders and (iii) provide for a classified Board of Directors. The amendment or modification of these provisions will require the affirmative vote of the holders of 66 2/3% of the outstanding shares of Common Stock. See "Principal and Selling Stockholders," "Management" and "Description of Capital Stock." VOLATILITY OF STOCK PRICE The Company's Common Stock, like the securities of other medical device and life sciences companies, has exhibited price volatility, and such volatility may occur in the future. In addition, the stock market has from time to time experienced extreme price and volume fluctuations that have affected the market price of many companies and have often been unrelated to the operating performance of particular companies. Factors such as fluctuations in the Company's operating results, announcements of technological innovations or new products by the Company or its competitors, FDA and other government regulation, developments with respect to patents or proprietary rights, public concern as to the safety of products developed by the Company or others, changes in financial analysts' estimates or recommendations regarding the Company and general market conditions may have a material adverse effect on the market price of the Company's Common Stock. The Company's results of operations may, in future periods, fall below the expectations of public market analysts and investors and, in such event, the market price of the Company's Common Stock could be materially adversely affected. SHARES ELIGIBLE FOR FUTURE SALE Sales of Common Stock (including shares issued upon the exercise of outstanding options) in the public market after this Offering could impair the Company's ability to raise capital through an offering of securities and could materially adversely affect the market price of the Common Stock. Such sales also might make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that the Company deems appropriate or at all. Upon consummation of this Offering, the Company will have 12,828,238 shares of Common Stock outstanding, of which 5,172,440 shares will be freely tradable (unless held by affiliates of the Company) and the remaining 7,655,798 shares will be restricted securities within the meaning of the Securities Act of 1933, as amended (the "Securities Act"). Approximately 1,252,537 of the restricted securities will be available for immediate public resale on the date of this Offering. An additional 54 shares of Common Stock will be saleable between the date of this Offering and 120 days after this Offering. The Selling Stockholders, the Company's directors and executive officers and certain other stockholders, who will in the aggregate hold 6,120,871 shares of Common Stock of the Company upon the completion of this Offering, have entered into lock-up agreements under which they have agreed not to sell, directly or indirectly, any shares owned by them for a period of 120 days after the date of this Prospectus without the prior written consent of Dillon, Read & Co. Inc. Upon expiration of the 120-day lock-up agreements, approximately 6,383,612 shares of Common Stock (including approximately 262,741 shares subject to outstanding vested options) will become eligible for immediate public resale, subject in some cases to vesting provisions and volume limitations pursuant to Rule 144. The remaining approximately 282,336 shares held by existing stockholders will become eligible for public resale at various times over a period of less than two years following the completion of this Offering, subject in some cases to vesting provisions and volume limitations. Approximately 4,044,177 of the shares outstanding immediately following the completion of this Offering, excluding all of the Company's outstanding warrants which may be converted on a cash basis into 784,613 shares of the Company's Common Stock, will be entitled to registration rights with respect to such shares upon termination of lock-up agreements, if applicable. The number of shares sold in the public market could increase if registration rights are exercised. See "Description of Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale." LEGAL DISPUTE In January 1997, four individuals who are former BioTek noteholders who held in the aggregate approximately $1.1 million in principal amount of BioTek notes filed an action, Tse, et al. v. Ventana Medical Systems, Inc. et al. No. 97-37, against the Company and certain of its directors and stockholders in the United States District Court for the District of Delaware. The complaint alleges, among other things, that the Company violated federal and California securities laws and engaged in common law fraud in connection with the BioTek shareholders' consent to the February 1996 merger of BioTek into Ventana and the related conversion of BioTek notes into Ventana notes. Plaintiffs seek substantial compensatory damages several times in excess of the principal amount of their BioTek notes, as well as substantial punitive damages, and fees and costs. Should plaintiffs prevail on such claims, the Company's business, financial condition and results of operations could be materially adversely affected. However, after consideration of the nature of the claims and the facts relating to the merger and the BioTek note exchange, the Company believes that it has meritorious defenses to the claims and that resolution of this matter will not have a material adverse effect on the Company's business, financial condition and results of operations; however, the results of the proceedings are uncertain and there can be no assurance to that effect. See "Business -- Legal Proceedings." DILUTION The public offering price is substantially higher than the net tangible book value per share of Common Stock. Investors purchasing shares of Common Stock in this Offering will therefore incur immediate and substantial dilution. See "Dilution." ABSENCE OF DIVIDENDS The Company has not declared or paid any cash dividends since its inception and does not anticipate paying any dividends in the foreseeable future. In addition, the Company's bank credit agreement currently prohibits the Company from paying dividends. See "Price Range of Common Stock and Dividend Policy."

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+ RISK FACTORS THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK, INCLUDING THE RISKS DESCRIBED BELOW. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE SPECIFIC FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE DECIDING TO INVEST IN THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" WHICH REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONCERNING INDUSTRY PERFORMANCE AND THE COMPANY'S OPERATIONS, PERFORMANCE, FINANCIAL CONDITION, GROWTH AND STRATEGIES. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING THOSE DESCRIBED BELOW IN THIS "RISK FACTORS" SECTION AND ELSEWHERE IN THIS PROSPECTUS. REGIONAL ECONOMIC CONDITIONS. During the 1980s, many of the countries in the Region experienced severe economic difficulties, including periods of slow or negative growth, large government budget deficits, high inflation, currency devaluations, government influence over the private sector, nationalization and expropriation of assets, vulnerability to weakness in world prices for commodity exports (particularly in smaller countries), large foreign indebtedness on the part of their governments, and exchange controls and unavailability of foreign exchange, including United States dollars. As a result, many governments and public and private institutions in the Region were unable to make interest and principal payments on their external debt. Much of this external debt of the Region has now been restructured to provide for extensions of repayment schedules, grace periods during which payments of principal are suspended and, in certain cases, reduced rates of interest. In recent years there have been significant improvements in the economies of many countries in the Region. However, there have been periodic, serious economic downturns for countries in the Region, and there can be no assurance that widespread economic difficulties will not be experienced by countries in the Region at some time in the future. Any such downturn could adversely affect business in the Region and could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. See "Business--Economic Conditions in the Region." POTENTIAL POLITICAL INSTABILITY. Democracy has largely prevailed in the Region since the early 1990s, and was endorsed as a key, shared principle at the Presidential Summit of the Americas celebrated in Miami, Florida in December 1994 among 37 Presidents representing nations in the Region. Nevertheless, most countries in the Region have a history of political instability involving periodic, non-democratic forms of government. A number of these countries have also experienced or are experiencing popular unrest, internal insurgencies, terrorist activities, hostilities with neighboring countries, drug trafficking and authoritarian military governments. A return to such non-democratic forms of government or expansion of such destabilizing activities in one or more of the key countries in the Region could affect investors' confidence not only in these countries, but in the Region as a whole, reducing trade with the Region. This could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. CREDIT RISKS AND COLLATERAL. The financial difficulty or failure of customers of the Company or of correspondent banks may adversely affect the Company's ability to recover funds due to it. In addition, most of the Company's trade financing activities involve collateral or guarantees. The Company, in its trade financing, also runs the risk that such collateral or guarantees will be inadequate, largely due to rapidly changing market conditions, deteriorating financial condition of guarantors, or fraud in the underlying trade transaction, which may leave either the Company or its customer holding documents of title to non-existent or defective goods. Accordingly, the Company maintains an allowance for credit losses. The allowance for credit losses is determined after evaluating historic loan loss experience adjusted for current conditions and circumstances, ratio analyses of credit quality classifications and their trend in light of current portfolio trends and economic conditions, as well as other pertinent considerations, all of which involve significant estimation and judgment and are subject to rapid changes which may not be foreseeable. As a result, ultimate losses could vary significantly from current estimates and may be either greater or less than the Company's allowance for credit losses. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CONCENTRATION OF CROSS-BORDER LENDING ACTIVITIES. At December 31, 1996, approximately 73.0% in principal amount of the Company's total loans were outstanding to borrowers in over 25 countries outside the United States, including Guatemala (14.8%), Panama (9.4%), Argentina (6.6%), Ecuador (5.6%), El Salvador (5.3%) and Brazil (5.1%). A significant deterioration of economic or political conditions or the imposition of currency exchange or similar controls in one or more of these countries could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. POTENTIAL IMPACT OF CHANGES IN INTEREST RATES. The Company's profitability is primarily dependent on its net interest income, which is the difference between its interest income on interest-earning assets, such as loans, and its interest expense on interest-bearing liabilities, such as deposits. Financial institutions, including the Bank, are affected by changes in general interest rate levels and by other economic factors. A sharp increase in interest rates could impact economic activity in the Region and the demand for the Company's loans. Fluctuations in interest rates are not predictable or controllable and may vary from country to country. Interest rate risk arises from mismatches between repricing or maturity characteristics of assets and liabilities. Although the Company has structured its assets and liabilities in an effort to mitigate the impact of changes in interest rates, changes in interest rates on retail deposits typically lag behind changes in interest rates on loans. There can be no assurance that the Company will not experience a material adverse effect on its net interest income in a changing rate environment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ABILITY OF THE COMPANY TO CONTINUE ITS GROWTH STRATEGY. The Company has historically achieved growth in its trade financing activities by attracting new customers, expanding its services to existing customers and increasing its deposit base. In 1995 and 1996, the Company's net loans, including discounted acceptances, increased approximately 34.3% and 26.8% in the aggregate, respectively, to approximately $416.0 million and $527.3 million, and deposits increased by approximately 35.3% and 26.5% in the aggregate, respectively, to approximately $505.1 million and $638.6 million, in each case, when compared to the prior year. These growth rates were higher in 1995 than in 1996 as a result of an infusion of capital from the sale of preferred stock in 1994. There can be no assurance that the Company will be able to continue to grow at these rates in the future. Historical growth rates are not necessarily indicative of future results, and it becomes more difficult to maintain historical rates of growth as a company increases in size. The Company's ability to further implement its strategy for continued growth of its trade financing activities is largely dependent upon the Company's ability to attract and retain quality customers for the Company's services in a competitive market, on the business growth of those customers, on the Company's ability to maintain, expand and develop relationships with correspondent banks, and on the Company's ability to increase deposit growth, all of which may be affected by a number of factors not within the Company's control. As most of the Company's loans and deposits are short-term in nature and thereby turn over rapidly, any decline or reversal of the growth rate could occur more quickly than it would for most other financial institutions. Moreover, as part of its growth strategy, the Company expects to increase its exposure to certain customers and to attract larger customers. A significant loss on these larger exposures could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. CONCENTRATION OF DEPOSITS. A significant portion of the Company's deposits are comprised of certificates of deposit and other time deposits in amounts in excess of $100,000. A majority of these deposits relate to existing lending relationships. At December 31, 1996, approximately 26% and 12% of the Company's total deposits were comprised of certificates of deposit and other time deposits in amounts in excess of $100,000, respectively. Most of the Company's deposits closely match the maturity of its assets. Notwithstanding the short-term nature of its loan portfolio, in the event that all or substantially all of such deposits were withdrawn at or prior to their respective maturities, the Company could be required to satisfy such deposit amounts through the (i) use of available interbank funding, (ii) sale of bankers' acceptances, (iii) interbank certificate of deposit network or (iv) liquidation of certain assets. Although management believes that it has historically been successful in matching the maturity dates of these deposits against its loan portfolio, there can be no assurance that the Company will continue to be successful or that it would not ultimately be required to liquidate assets in order to satisfy such deposit amounts. DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL. The Company's success depends to a significant degree upon the continued contributions of members of its senior management, particularly Eduardo A. Masferrer, the Company's President and Chief Executive Officer, Maura A. Acosta, an Executive Vice President, and J. Carlos Bernace, an Executive Vice President, as well as other officers and key personnel, many of whom would be difficult to replace. The future success of the Company also depends on its ability to identify, attract and retain additional qualified personnel, particularly managerial personnel with experience in international trade financing. No employees or executive officers have employment agreements with the Company. The loss of Mr. Masferrer, Ms. Acosta and Mr. Bernace or other officers and key personnel could have a material adverse effect on the Company's business, prospects, financial condition and results of operations. The Company does not maintain key person life insurance with respect to any of its officers. See "Management." COMPETITION. International trade financing is a highly competitive industry that is dominated by large, multinational financial institutions such as Citibank, N.A., Swiss Bank Corporation and Barclays, among others. With respect to trade finance in or relating to larger countries in the Region, primarily in South America, these larger institutions are the Company's primary competition. The Company has less competition from these multinational financial institutions providing trade finance services with or in smaller countries in the Region, primarily in Central America and the Caribbean, because the volume of trade financing in such smaller countries has not been as attractive to these larger institutions. With respect to Central American and Caribbean countries, as well as United States domestic customers, the Company also competes with regional United States and smaller local financial institutions engaged in trade finance. Many of the Company's competitors, particularly multinational financial institutions, have substantially greater financial and other resources than the Company. Although to date the Company has competed successfully, on a limited basis, in those countries in the Region which have high trade volumes, such as Brazil and Argentina, there can be no assurance that the Company will be able to continue competing successfully in those countries with either large, multinational financial institutions or regional United States or local financial institutions. Any significant decrease in the Company's trade volume in such large-volume countries could adversely affect the Company's results of operations. Although the Company faces less competition from multinational financial institutions in those countries in the Region, particularly countries in Central America and the Caribbean, where the trading volume has not been large enough to be meaningful for multinational financial institutions, there can be no assurance that such financial institutions will not seek to finance greater volumes of trade in those countries or that the Company would be able to successfully compete with those financial institutions in the event of increased competition. In addition, there is no assurance that the Company will be able to continue to compete successfully in smaller countries with the regional United States financial institutions and smaller local financial institutions engaged in trade finance in such countries. Continued political stability and improvement in economic conditions in such countries is likely to result in increased competition. See "Business--Competition." SUPERVISION AND REGULATION. Bank holding companies and national banks operate in a highly regulated environment and are subject to supervision and examination by federal regulatory agencies. Bancorp is subject to the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and to regulation and supervision by the Board of Governors of the Federal Reserve System (the "FRB"). The Bank, as a national bank that is a member of the Federal Reserve System and insured by the Federal Deposit Insurance Corporation (the "FDIC"), is subject to the primary regulation and supervision of the Office of the Comptroller of the Currency (the "OCC"), and secondarily, of the FDIC. Federal laws and regulations govern numerous matters including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits, and restrictions on dividend payments. The OCC and the FDIC possess cease and desist powers to prevent or remedy unsafe or unsound practices or violations of law by national banks, and the FRB possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which Bancorp and the Bank may conduct business and obtain financing. Furthermore, the commercial banking business is affected not only by general economic conditions, but also by the monetary policies of the FRB. Changes in monetary or legislative policies may affect the interest rates the Bank must offer to attract deposits and the interest rates it must charge on its loans, as well as the manner in which it offers deposits and makes loans. These monetary policies have had, and are expected to continue to have, significant effects on the operating results of commercial banks, including the Bank. See "Business--Regulation." SEASONALITY AND VARIABILITY OF QUARTERLY RESULTS. The Company, as well as the trade financing industry, has historically experienced and expects to continue to experience slight seasonal fluctuations in its trade financing, which generally has been slightly more active from July to December. A principal reason for the slight fluctuation in the Company's trade financing is the seasonality in the manufacture and/or sale of goods by many of the Company's customers, as well as many of the customers of its correspondent banks, who generally need more financing for the production and shipping of goods in anticipation of various periods of the year such as the holiday season, the Regional tourist season, the dry season and agricultural cycles in certain portions of the Region. The Company realized approximately 55.0% of its annual letter of credit and acceptance fees in each of 1995 and 1996 during the second half of the fiscal year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." NO DIVIDENDS. Bancorp has not paid any cash dividends on its Common Stock to date and does not intend to pay such cash dividends in the foreseeable future. Bancorp intends to retain earnings to finance the development and expansion of its business. In addition, Bancorp's ability to pay dividends in the future is dependent upon its receipt of dividends paid to it by the Bank. The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. See "Dividend Policy." DILUTION. Purchasers of the Common Stock offered hereby will experience immediate and significant dilution of $7.62 per share ($7.41 per share if the over-allotment option granted to the Underwriters is exercised in full) in the net tangible book value of their shares assuming an initial public offering price of $15.00 per share. See "Dilution." ABSENCE OF PUBLIC MARKET; POSSIBLE FLUCTUATIONS OF STOCK PRICE. Prior to this Offering, there has been no public market for Bancorp's Common Stock. There can be no assurance that an active trading market for the Common Stock will develop or that, if developed, it will be sustained after this Offering, or that it will be possible to resell the shares of Common Stock at or above the initial public offering price. The market price of the Common Stock could be subject to significant fluctuations in response to the Company's operating results and other factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. Such fluctuations, and general economic and market conditions, may adversely affect the market price of the Common Stock. See "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Underwriting." BROAD DISCRETION IN USE OF PROCEEDS. The Company intends to contribute substantially all of the net proceeds of the Offering to the capital of the Bank to support future growth in the Bank's trade finance business. Accordingly, the Company will have broad discretion as to the application of such proceeds. An investor will not have the opportunity to evaluate the economic, financial and other relevant information which will be utilized by the Company in determining the application of such proceeds. See "Use of Proceeds." SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of this Offering, Bancorp will have 9,067,949 shares of Common Stock outstanding (9,367,949 if the over-allotment option granted to the Underwriters is exercised in full). Of these shares, 6,430,643 shares (6,730,643 shares if the over-allotment option granted to the Underwriters is exercised in full) will be freely tradeable without restriction or registration under the Act, unless purchased by persons deemed to be "affiliates" of the Company (as that term is defined under the Act). All of the remaining 2,637,306 shares of Common Stock held by the current shareholders of Bancorp will be "restricted securities" as that term is defined in Rule 144 promulgated under the Act. Substantially all of the current shareholders are agreeing not to sell any shares of Common Stock for 180 days from the date of this Prospectus without the prior written consent of Oppenheimer & Co., Inc. See "Underwriting." Additionally, upon consummation of this Offering, 877,500 shares of Common Stock will have been reserved for issuance under the Company's 1993 Plan and options to purchase 585,000 shares of Common Stock, which are not exercisable until February 1998, have been issued under the 1993 Plan at an exercise price of $9.23 per share, the fair market value on the date of grant as determined by the Company's Board of Directors. The Company intends to register under the Act all eligible shares reserved for issuance under the 1993 Plan. Shares covered by such registration will be eligible for resale in the public market, subject to Rule 144 limitations applicable to affiliates. See "Management--Company Stock Option Plan." Future sales of substantial amounts of Common Stock in the public market, or the availability of such shares for future sale, could impair the Company's ability to raise capital through an offering of securities and may adversely affect the then-prevailing market prices. See "Shares Eligible for Future Sale." CERTAIN POTENTIAL ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Amended and Restated Articles of Incorporation and Bylaws could delay or frustrate the removal of incumbent directors and could make a merger, tender offer or proxy contest involving the Company more difficult, even if such events were perceived by shareholders as beneficial to their interests. In addition, certain provisions of state and federal law may also have the effect of discouraging or prohibiting a future takeover attempt in which shareholders of the Company might otherwise receive a substantial premium for their shares over then-current market prices. In addition, the Company's Amended and Restated Articles of Incorporation authorize the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval (unless otherwise required by the rules of any stock exchange on which the Common Stock is then traded), to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the Company's Common Stock. In the event of such issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although the Company has no present intention to issue any shares of its preferred stock, there can be no assurance that the Company will not do so in the future. CONTINUING INSIDER INFLUENCE OVER THE COMPANY. Eduardo A. Masferrer, Chairman of the Board, President and Chief Executive Officer of the Company, will hold approximately 11.8% of the total voting power of the Company's outstanding voting stock upon the consummation of this Offering, or 11.4% if the Underwriters' over-allotment option is exercised in full and as such, will continue to be the single largest shareholder of the Company following this Offering. Current directors, executive officers and other holders of 5% or more of the Company's equity securities will hold approximately 28.1% of the total voting power of the Company's outstanding voting stock upon the consummation of this Offering, or 27.2% if the Underwriters' over-allotment option is exercised in full. See "Description of Capital Stock" and "Principal Shareholders."