AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1997MARCH 26, 1998

REGISTRATION NO. 333-29073333-47635

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 31

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

SCM MICROSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 3577 77-0444317
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYEREMPLOYEE
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)

SCM MICROSYSTEMS, INC.
131 ALBRIGHT WAY
LOS GATOS, CA 95032
(408) 370-4888
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

STEVEN HUMPHREYS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SCM MICROSYSTEMS, INC.
131 ALBRIGHT WAY
LOS GATOS, CA 95032
(408) 370-4888
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------

COPIES TO:

JEFFREY D. SAPER, ESQ. MICHAEL S. IMMORDINO, ESQ.
KENNETH M. SIEGEL, ESQ. KARL A. ROESSNER, ESQ.
N. ANTHONY JEFFRIES, ESQ. DAVID M. DETWEILER, ESQ.
JAN-MARC VAN DER SCHEE, ESQ. JOHN CAFIERO, ESQ.
WILSON SONSINI GOODRICH & ROSATI ROGERS & WELLS
PROFESSIONAL CORPORATION CITY TOWER
650 PAGE MILL ROAD 40 BASINGHALL STREET
PALO ALTO, CA 94304 LONDON, EC2V 5DE
(415)(650) 493-9300 ENGLAND
44-171-628-0101

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

- ---------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

- ---------

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

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2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

PROSPECTUS (Subject to Completion)

March 25, 1998

3,000,000 SHARES

LOGO

COMMON STOCK
---------------------------

Of the 3,000,000 shares of Common Stock offered, 1,500,000 shares are being
offered hereby in the United States and Canada (the "U.S. Offering") and
1,500,000 shares are being offered in a concurrent international offering
outside the United States and Canada (the "International Offering"), subject to
transfers of shares between the U.S. Underwriters and International Underwriters
(collectively, the "Underwriters"). The public offering price and the aggregate
underwriting discount per share are identical for both offerings. The closing of
the U.S. Offering and International Offering are conditioned upon each other.
See "Underwriting."

Of the 3,000,000 shares of Common Stock offered, 1,000,000 shares are being
sold by SCM Microsystems, Inc. (the "Company") and 2,000,000 shares are being
sold by certain selling stockholders the ("Selling Stockholders"). See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of the shares being sold by the Selling Stockholders.

The Common Stock is listed on the Nasdaq National Market under the symbol
"SCMM" and on the Neuer Markt of the Frankfurt Stock Exchange under the symbol
"SMY." On March 24, 1998, the last reported sales prices of shares of the Common
Stock on the Nasdaq National Market and the Neuer Markt of the Frankfurt Stock
Exchange were $67.25 and DM127.50 per share, respectively.

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

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
---------------------------

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

PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------------------

Per share......................... $ $ $ $
Total(3).......................... $ $ $ $

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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, estimated at $750,000, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 450,000
additional shares of Common Stock at the Price to Public less the
Underwriting Discount to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discount, Proceeds to Company, and Proceeds to Selling Stockholders will be
$ , , , and , respectively. See
"Underwriting."
---------------------------

The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected that
delivery of certificates for such shares will be made at the offices of Cowen &
Company, New York, New York, on or about April , 1998.
---------------------------

COWEN & COMPANY
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
, 1998
3

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (ii) the other to be used in connection with a concurrent
offering outside of the United States and Canada (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are identical
in all respects except for the front cover page and back cover page of the
International Prospectus, both of which are included herein after the final page
of the U.S. Prospectus and are labeled "Alternate Page for International
Prospectus." Final forms of each of the Prospectuses will be filed with the
Securities and Exchange Commission under Rule 424(b).

i
4

[GRAPHICS]

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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK
IN THE OPEN MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME. SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND CERTAIN SELLING
GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IMMEDIATELY PRIOR TO THE COMMENCEMENT OF
SALES IN THE OFFERING IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
5

PROSPECTUS SUMMARY

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 under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Except as set forth in the Consolidated Financial Statements
or as otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised.

THE COMPANY

SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
objective is to leverage its expertise in smart card technologies, digital
platforms and its extensible, upgradeable smart card interface architecture to
meet the growing demand for secure access to digital information and networks.
The Company sells security and access products which include SwapBox PC Card
adapters, SwapSmart smart card readers, SwapAccess DVB-CAM modules, its SmartOS
universal smart card interface architecture and its CIMax DVB-CI interface chip.
The Company sells security and access products to original equipment
manufacturers ("OEMs") such as computer, telecommunication and digital video
broadcasting ("DVB") component and system manufacturers. The Company markets,
sells and licenses its products through a direct sales and marketing
organization primarily to OEMs and also through distributors, value-added
resellers ("VARs"), system integrators and resellers worldwide. OEM customers
include Dell, Hughes, Kirch Group (BetaDigital), Micron, Packard Bell,
Siemens/Nixdorf, Sysorex and Telenor.

The Company addresses the needs of the enterprise data security and
electronic commerce market by: (i) securing data before it is transmitted across
LANs, public switched networks or the Internet; (ii) providing a range of
products that enable smart cards to be read through standard PCMCIA slots thus
bridging the gap between smart cards and PCs, network computers ("NCs")and other
devices; and (iii) employing an open systems, remotely upgradeable architecture
that provides compatibility across a range of hardware platforms and software
environments. The Company addresses the needs of the conditional access market
by providing smart card-based Digital Video Broadcast -- Conditional Access
Module ("DVB-CAM") products that: (i) adhere to the European DVB-Common
Interface ("DVB-CI") standard, the United States "NRSS-B" standard promulgated
by the National Renewable Security Standards Committee of the Society of Cable
and Telecommunication Engineers and the OpenCable standard proposed by
CableLabs, a consortium of cable system operators; (ii) include real time,
high-bandwidth video decryption capabilities within the reader which can be
unlocked by smart card tokens, which by themselves are not capable of decrypting
digital video data at the rate required for DVB; and (iii) incorporate
read/write capabilities that permit DVB content and service providers to perform
a virtually no-cost upgrade of users' access rights as new products and services
are developed and introduced and as users' subscription desires change. The
Company has formed strategic relationships, including technology sharing
agreements, with a number of key industry players such as Gemplus, Intel and
Telenor.

With the increasing proliferation and reliance upon digital data, data
security has become a paramount concern of businesses, government, educational
institutions and consumers. Whether the issue is controlling access to
proprietary or confidential information such as business data or health records,
or attempting to limit access to digital video broadcasts to paying subscribers,
content providers, network and data managers and users of digital data are
concerned with controlling access to data and maintaining data security.

The Company was originally formed in 1990 as a German corporation, and in
1993 the Company merged with two affiliated companies. The Company
reincorporated in Delaware in December 1996. The Company maintains headquarters
in Los Gatos, California and Pfaffenhofen, Germany. The address of the Company's
principal United States office is 131 Albright Way, Los Gatos, California 95032
and the Company's telephone number is (408) 370-4888. Unless otherwise indicated
or the context otherwise requires, references to "SCM Microsystems" or the
"Company" should be deemed to be references to SCM Microsystems, Inc., its
German predecessor and its consolidated subsidiaries.

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6

RECENT DEVELOPMENTS

The Company has recently entered into a non-binding letter of intent to
acquire Intermart Systems K.K., a Japanese corporation, and its subsidiaries
("Intermart"). Intermart sells PC-based devices that provide access to a broad
range of small form factor digital media, including PCMCIA, Compact Flash and
Smart Media. In addition, Intermart has OEM relationships with Nikon, Fuji Film
and other major Japanese companies and has sales, marketing and engineering
operations in Japan and the United States. The Company believes that this
acquisition, if completed, would significantly enhance the Company's sales and
marketing presence in the Japanese market. Intermart generated approximately $3
million in revenues and a loss of approximately $400,000 for the nine month
period ended December 31, 1997. Pursuant to the letter of intent, the Company
would pay the sellers approximately $8 million in a combination of cash and
shares of Company Common Stock. In addition, the sellers may be paid up to an
additional $4 million in Company Common Stock based upon the acquired company
achieving certain performance criteria in the first year of post-acquisition
operations. The acquisition would be accounted for under the "purchase" method.

The Company has also entered into a non-binding letter of intent to acquire
Intellicard Systems, Pte Ltd, a Singapore corporation ("ICS"). ICS manufactures
certain of the Company's products, as well as certain third-party product lines
which require similar manufacturing capabilities. ICS is the Company's
distribution partner in Southeast Asia, and has business relationships and OEM
customers throughout the region. The Company believes ICS's engineering
resources in Singapore, its familiarity with the Company's product lines and its
experience in marketing smart card solutions in Southeast Asia, are
complementary to the Company's business. The Company also believes that
acquiring ICS will lower the cost of the Company's products and hence enhance
its competitiveness and improve gross margins. ICS generated approximately $6
million in revenues and $200,000 in net income for the year ended December 31,
1997. Pursuant to the letter of intent, the Company would pay the sellers
approximately $7 million in a combination of cash and shares of Company Common
Stock. The acquisition would be accounted for under the "purchase" method. See
"Certain Transactions."

Neither of the letters of intent discussed above is binding upon the
Company or the counter party. While the Company believes that the acquisitions
described above will be completed on the terms described above, there can be no
assurance that such transactions will be completed on such terms or at all.
These acquisitions will result in the write-off of purchased in-process research
and development and the amortization of goodwill and other assets. Moreover,
acquisitions entail a number of risks, and, even if completed, there can be no
assurance that the Company will receive the intended benefits from any
acquisition. See "Risk Factors -- Risk Associated With Acquisitions."

THE OFFERING

Common Stock offered by the Company.................. 1,000,000 shares
Common Stock offered by Selling Stockholders......... 2,000,000 shares
Total...................................... 3,000,000 shares(1)
Common Stock to be outstanding after the offering.... 12,244,062 shares(2)
Use of proceeds...................................... For general corporate purposes, including
working capital and capital expenditures.
See "Use of Proceeds."
Nasdaq National Market symbol........................ SCMM
Neuer Markt symbol................................... SMY

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

(1) Includes 1,500,000 shares to be offered in the U.S. Offering and 1,500,000
shares to be offered in the International Offering.

(2) Includes options to purchase an aggregate of 60,000 shares of Common Stock
which options will be exercised prior to completion of, and the underlying
shares being sold in, this offering. Excludes 1,027,101 shares of Common
Stock issuable upon exercise of stock options outstanding as of March 24,
1998 at a weighted average exercise price of $6.82 per share and 51,191
shares of Common Stock subject to warrants outstanding as of such date at an
exercise price of $5.72 per share. See "Management -- Employee Stock Plans"
and Notes 4, 5 and 11 of Notes to Consolidated Financial Statements.

"SwapBox" and "SwapSmart" are registered trademarks of the Company and
"SwapAccess," "SmartOS," "Smart Transporter" and "CIMax" are trademarks of the
Company. This Prospectus also contains trademarks of other companies.

4
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales(1):
Security and access products................ $ -- $ 1,426 $12,520 $16,628 $27,606
PCMCIA peripheral products.................. 2,379 5,020 5,546 4,892 163
------- ------- ------- ------- -------
Total net sales........................ 2,379 6,446 18,066 21,520 27,769
------- ------- ------- ------- -------
Gross profit................................... 600 1,359 2,295 6,640 10,245
Operating expenses............................. 1,601 2,966 4,895 7,620 10,170
------- ------- ------- ------- -------
Income (loss) from operations.................. (1,001) (1,607) (2,600) (980) 75
------- ------- ------- ------- -------
Net income (loss).............................. (1,096) (1,868) (2,926) (1,110) 1,103
Accretion on redeemable convertible preferred
stock....................................... -- -- (139) (287) (802)
------- ------- ------- ------- -------
Net income (loss) applicable to common
stockholders................................ $(1,096) $(1,868) $(3,065) $(1,397) $ 301
======= ======= ======= ======= =======
Basic net income (loss) per share.............. $ (0.86) $ (1.46) $ (2.39) $ (1.09) $ 0.08
======= ======= ======= ======= =======
Diluted net income (loss) per share............ $ (0.86) $ (1.46) $ (2.39) $ (1.09) $ 0.06
======= ======= ======= ======= =======
Shares used in computations:
Basic net income (loss) per share(2)........ 1,280 1,280 1,280 1,280 3,819
======= ======= ======= ======= =======
Diluted net income (loss) per share(2)...... 1,280 1,280 1,280 1,280 5,015
======= ======= ======= ======= =======
Pro forma information:
Net income applicable to common
stockholders.............................. $ 1,103
=======
Pro forma diluted net income per share(3)... $ 0.14
=======
Shares used to compute pro forma diluted net
income per share.......................... 7,649
=======

DECEMBER 31, 1997
------------------------
AS
ACTUAL ADJUSTED(4)
--------- -----------

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 55,888 $ 119,093
Working capital............................................. 60,296 123,501
Total assets................................................ 67,365 130,570
Total stockholders' equity.................................. 61,472 124,677

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(1) Through 1994, the Company focused on PCMCIA peripheral products, including
flash memory and fax/modem devices. In 1994, the Company began to shift its
focus away from these products toward security and controlled access
products. The Company made the final shipment of PCMCIA peripheral products
in the quarter ended March 31, 1997, completing its exit from this business.

(2) See Notes 1 of Notes to Consolidated Financial Statements for a discussion
of the number of shares used in per share calculations.

(3) Pro forma diluted net income per share gives effect to the conversion of the
redeemable convertible preferred stock into Common Stock on January 1, 1997,
or their respective dates of issuance if later. All redeemable convertible
preferred stock was converted into Common Stock on a one-for-one basis on
October 7, 1997, the date of the Company's initial public offering.

(4) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
the Company (after deducting the underwriting discounts and estimated
offering expenses payable by the Company) and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."

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8

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 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"). All
forward-looking statements in this Prospectus are based on information available
to the Company on the date hereof and assumptions which the Company believes are
reasonable, and the Company assumes no obligation to update any such
forward-looking statements. These forward-looking statements 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.

HISTORY OF OPERATING LOSSES; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS;
SEASONALITY

Although the Company was profitable for the year ended December 31, 1997,
the Company incurred net operating losses on an annual basis since its inception
in 1993 through 1996. In view of the Company's loss history, there can be no
assurance that the Company will be able to sustain profitability on an annual or
quarterly basis in the future.

The Company's quarterly operating results have in the past varied and may
in the future vary significantly. Factors affecting operating results include:
the level of competition; the size, timing, cancellation or rescheduling of
significant orders; market acceptance of new products and product enhancements;
new product announcements or introductions by the Company or its competitors;
adoption of new technologies and standards; changes in pricing by the Company or
its competitors; the ability of the Company to develop, introduce and market new
products and product enhancements on a timely basis, if at all; hardware
component costs and availability, particularly with respect to hardware
components obtained from sole or limited source suppliers; the timing and
success of the Company's acquisitions and any related write-offs; the Company's
success in expanding its sales and marketing organization and programs;
technological changes in the market for digital information security products;
levels of expenditures on research and development; foreign currency exchange
rates; key personnel changes, anticipated or otherwise; and general economic
trends. In addition, because a high percentage of the Company's operating
expenses are fixed, a small variation in revenue can cause significant
variations in operating results from quarter to quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

The Company has experienced significant seasonality in its business, and
the Company's business and operating results are likely to be affected by
seasonality in the future. The Company has typically experienced higher net
sales in the third quarter and fourth quarter of each calendar year followed by
lower net sales and operating income in the first quarter and second quarter of
the following year. The Company believes that this trend has been principally
due to budgeting requirements of the U.S. government which influence the
purchasing patterns of OEMs which supply PCs and workstations incorporating the
Company's data security products to the U.S. government. The Company expects
that as sales of its DVB products, which are currently sold to OEMs mainly in
Europe for the consumer market, begin to represent a larger percentage of net
sales, the seasonality that the Company experiences may be further exacerbated
as these sales are likely to be strongest in the fourth quarter of the year.

Initial sales of the Company's products to a new customer typically involve
a sales cycle which can range from six to nine months during which the Company
may expend substantial financial resources and management time and effort with
no assurance that a sale will ultimately result. The length of the sales cycle
may vary depending on a number of factors over which the Company may have little
or no control, including product and technical requirements, and the level of
competition which the Company encounters in its selling
activities. Any delays in the sales cycle for new customers could have a
material adverse effect on the Company's business and operating results.

6
9

Based upon the factors enumerated above, the Company believes that its
operating results may vary significantly in future periods and that historical
results are not reliable indicators of future performance. It is likely that, in
some future quarter or quarters, the Company's operating results will be below
the expectations of stock market analysts and investors. In such event, the
market price of the Company's Common Stock could decline significantly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."

DEPENDENCE ON EMERGING PRODUCT MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE OF THE
COMPANY'S PRODUCTS

From the Company's inception through 1994, the Company focused on PCMCIA
peripheral products, including flash memory and fax/modem devices. In 1994, the
Company began emphasizing security and access products. The Company made the
final shipment of PCMCIA peripheral products in the quarter ended March 31,
1997, completing its exit from this business. As a result of the Company's
strategic shift in product focus, the proportion of security and access product
sales increased from 22.1% of total net sales in 1994 to 99.4% of total net
sales in 1997. The Company's net sales are now and will continue to be dependent
upon the success of its security and access products.

The Company's future growth and operating results will depend to a large
extent on the successful marketing and commercial viability of the Company's
security and access product families. Each of these product families addresses
needs in different emerging markets. Smart card token-based security
applications are able to provide protection from unauthorized access to digital
information. The Company believes that smart cards are ideally suited to serve
as tokens for network and electronic commerce security. Accordingly, the
Company's SwapBox and SwapSmart product families are designed to provide smart
card token-based security for PCs. However, there can be no assurance that the
smart card will become the industry standard for network and electronic commerce
security applications. The Company's DVB product family provides a means of
controlling access to digital television broadcasts. The Company's SwapAccess
DVB-CAM product implements the DVB-CI and OpenCable standards. To date, the
Company's DVB-CAM product has been implemented in a relatively limited number of
DVB set-top boxes in Europe. Although the Company believes that the DVB-CI
standard will eventually become the European standard for DVB conditional access
applications, there can be no assurance that the standard will be adopted, that
the European DVB market will further develop or that even if such standard is
adopted and the market further develops, the Company's DVB-CAM products will be
widely adopted. Furthermore, the market for DVB products in the United States
has only recently begun to develop. While the OpenCable standard has been
proposed for use in the United States, there can be no assurance that this
standard will be adopted as currently proposed or at all. Moreover, even if this
or other standards are adopted, there can be no assurance whether, or to what
extent, the United States DVB market will grow. In addition, the substantial
installed base of analog set-top boxes in the United States may cause the market
for DVB products in general, and the Company's SwapAccess products in
particular, to grow slower than expected, if at all.

If the market for the products described above or any of the Company's
other products fails to develop or develops more slowly than expected or if any
of the standards supported by the Company do not achieve or sustain market
acceptance, the Company's business and operating results would suffer a material
adverse effect. See "-- Competition."

DEPENDENCE ON SALES TO OEMS

A substantial majority of the Company's products are intended for use as
components or subsystems in systems manufactured and sold by third party OEMs.
In 1997, almost all of the Company's sales were to OEMs and the Company expects
this dependence on OEM sales to continue. In 1997, sales to BetaDigital (a
division of the Kirch Group) accounted for 45% of total net sales and sales to
the Company's top 10 customers (all of which are OEMs) accounted for 80% of
total net sales. In order for an OEM to incorporate the Company's products into
its systems, the Company must demonstrate that its products provide significant
commercial advantages to OEMs over competing products. There can be no assurance
that the Company can successfully demonstrate such advantages or that the
Company's products will continue to provide any advantages. Moreover, even if
the Company is able to demonstrate such advantages, there can be no assurance
7
10

that OEMs will elect to incorporate the Company's products into their current or
future systems. Further, the business strategies and manufacturing practices of
the Company's OEM customers are subject to change and any such change may result
in decisions by the customers to decrease their purchases of the Company's
products, seek other sources for products currently manufactured by the Company
or manufacture these products internally. The Company's OEM customers may also
seek price concessions from the Company. Failure of OEMs to incorporate the
Company's products into their systems, the failure of such OEMs' systems to
achieve market acceptance or any other event causing a decline in the Company's
sales to OEMs would have a material adverse effect on the Company's business and
operating results. See "Business -- Customers and Applications."

DEPENDENCE ON SALES TO GOVERNMENT CONTRACTORS

Approximately 50.6%, 39.2% and 27.5% of the Company's net sales during
1995, 1996 and 1997, respectively, were derived from sales of the Company's
SwapBox product for use by the U.S. government, all of which were made under
contracts between the Company and major OEMs that sell PCs to the United States
Department of Defense (the "DoD"). The Company believes that indirect sales to
the DoD are subject to a number of significant uncertainties, including timing
and availability of funding, unforeseen changes in the timing and quantity of
government orders and the competitive nature of government contracting
generally. Furthermore, the DoD has been reducing total expenditures over the
past few years in a number of areas and there can be no assurance that such
funding will not be reduced in the future. In addition, there is no assurance
that the Company will be able to modify existing products or develop new
products that will continue to meet the specifications of OEM suppliers to the
DoD. A significant loss of indirect sales to the U.S. government would have a
material adverse effect on the Company's business and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPENDENCE ON DEVELOPMENT OF INDUSTRY RELATIONSHIPS

The Company is party to collaborative arrangements with a number of
corporations and is a member of key industry consortia. The Company has formed
strategic relationships, including technology sharing agreements, with a number
of key industry players such as Intel, Gemplus and Telenor. The Company
evaluates, on an ongoing basis, potential strategic alliances and intends to
continue to pursue such relationships. The Company's future success will depend
significantly on the success of its current arrangements and its ability to
establish additional arrangements. There can be no assurance that these
arrangements will result in commercially successful products. See
"Business -- Collaborative Industry Relationships."

COMPETITION

The market for digital data security and access control products is
intensely competitive and characterized by rapidly changing technology. The
Company believes that competition in this market is likely to intensify as a
result of increasing demand for security products. The Company currently
experiences competition from a number of sources, including: (i) ActionTec,
Carry Computer Engineering, Greystone and Litronics in PC Card adapters; (ii)
Gemplus, SmartDisk Corporation, Philips and Tritheim in smart card readers and
universal smart card reader interfaces; and (iii) Gemplus in DVB-CAM modules.
The Company also experiences indirect competition from certain of its customers
which currently offer alternative products or are expected to introduce
competitive products in the future. The Company may in the future face
competition from these and other parties including new entrants that develop
digital information security products based upon approaches similar to or
different from those employed by the Company. In addition, there can be no
assurance that the market for digital data security and access control products
will not ultimately be dominated by approaches other than the approach marketed
by the Company.

products at a lower end user price. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties 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 competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on the Company's business and operating
results.

The Company believes that the principal competitive factors affecting the
market for digital data security products include: the extent to which products
support industry standards and provide interoperability; technical features;
ease of use; quality/reliability; level of security; strength of distribution
channels; and price. There can be no assurance that the Company will be able to
compete as to these or other factors or that competitive pressures faced by the
Company will not have a material adverse effect on its business and operating
results.

MANAGEMENT OF GROWTH

The Company's business has grown substantially in recent periods, with net
sales increasing from $6.4 million in 1994 to $27.8 million in 1997. The growth
of the Company's business has placed a significant strain on the Company's
management and operations. In addition, a number of key members of the Company's
management, including its President and Chief Executive Officer, Chief Financial
Officer, Vice President-Operations have joined the Company within the past 20
months. Furthermore, in 1993 the Company commenced operations in North America
which included the establishment of a U.S. management team. As a result, the
Company has a limited operating history under its current U.S. management. In
addition, the number of employees has grown from 50 at December 31, 1995 to 78
as of December 31, 1997. If the Company is successful in achieving its growth
plans, such growth is likely to place a significant burden on the Company's
operating and financial systems, resulting in increased responsibility for
senior management and other personnel within the Company. There can be no
assurance that the Company's existing management or any new members of
management will be able to augment or improve existing systems and controls or
implement new systems and controls in response to anticipated future growth. The
Company's failure to do so could have a material adverse effect on the Company's
business and operating results. See "--Risks Associated With Acquisitions,"
"-- Dependence on Key Personnel; Ability to Recruit Personnel," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

RISK ASSOCIATED WITH ACQUISITIONS

The Company has recently entered into non-binding letters of intent with
two companies regarding the acquisition of such companies by the Company (see
"Prospectus Summary -- Recent Developments"), and the Company's strategy is to
pursue additional acquisitions and similar opportunities in the future. There
can be no assurance that the two pending acquisitions will be completed on a
timely basis or at all, nor that the Company will be able to identify additional
acquisition opportunities or complete any future acquisition transactions.
Future acquisitions by the Company may result in potentially dilutive issuances
of equity securities, the incurrence of debt, write-off of purchased in-process
research and development and amortization of goodwill and other intangible
assets, which could materially adversely affect the Company's operating results.
In addition, completed acquisitions present a number of significant risks and
uncertainties, including: the risks that the Company will not be able to retain
the employees or business relationships of the acquired company or otherwise
effectively integrate the operations of the acquired company with those of the
Company; the risk that the Company will fail to realize any synergies or other
cost reduction objectives expected from the acquisition; the risks that pursuing
acquisition opportunities and integrating acquired products, technologies or
companies may distract management from performing their regular
responsibilities; difficulties in the assimilation of the operations, products
and personnel of the acquired company; risks of entering markets in which the
Company has no direct prior experience; and, with respect to the acquisition of
operations located at any significant distance from the Company's primary
facilities, the risks and additional costs associated with managing
geographically disparate operations. There can be no assurance that the

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12

Company will ever successfully complete an acquisition or that any such
acquisition will result in benefits to the Company. See "-- Integration of
Global Locations."

INTEGRATION OF GLOBAL LOCATIONS

The Company's U.S. headquarters are located in Los Gatos, California, its
European headquarters are located in Pfaffenhofen, Germany, and its research and
development facilities are located in Erfurt, Germany and La Ciotat, France. In
addition, a significant portion of the Company's contract manufacturing occurs
in Singapore. Operating in diverse geographic locations imposes a number of
risks and burdens on the Company, including the need to manage employees and
contractors from diverse cultural backgrounds and who speak different languages,
and difficulties associated with operating in a number of time zones. Although
the Company seeks to mitigate the difficulties associated with operating in
diverse geographic locations through the extensive use of electronic mail and
teleconferencing, there can be no assurance that it will not encounter
unforeseen difficulties or logistical barriers in operating in diverse
locations. Furthermore, operations in widespread geographic locations require
the Company to implement and operate complex information systems that are
capable of providing timely information which can readily be consolidated.
Although the Company believes that its information systems are adequate, the
Company may in the future have to implement new information systems.
Implementation of such new information systems may be costly and may require
training of personnel. Any failure or delay in implementing these systems,
procedures and controls on a timely basis, if necessary, or in expanding these
areas in an efficient manner at a pace consistent with the Company's business
could have a material adverse effect on the Company's business and operating
results.

PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY

The Company's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality agreements 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 generally
enters into confidentiality and non-disclosure agreements with its employees and
with key vendors and suppliers. The Company's SwapBox and SwapSmart trademarks
are registered in the United States and certain other countries and the Company
has other trademark applications allowed and pending in various countries. The
Company will continue to evaluate the registration of additional trademarks as
appropriate. The Company currently has four U.S. and one Japanese, one German,
one British, and one French patents issued, and various U.S., German and other
patent applications pending, and exclusive licenses under various other U.S. and
foreign patents associated with its products. Furthermore, the Company has an
option to obtain an exclusive license from one of its employees to five other
patents relating to its products. There can be no assurance that any new patents
will be issued, that the Company will develop proprietary products or
technologies that are patentable, that any issued patent will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the Company's business and operating results.

There has also been substantial litigation in the technology industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing upon third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
patents, trademarks or other proprietary rights. In addition, a third party has
alleged that the Company has infringed the third party's trademarks and engaged
in unfair competition. See "Business -- Legal Proceedings." The Company expects
that companies in the computer and digital information security market will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's target markets grows. Any such claims or litigation
may be time-consuming and costly, cause product shipment delays, require the
Company to redesign its products or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect on the
Company's business and operating results. 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 and software that the

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13

Company regards as proprietary. In addition, the laws of some foreign countries
do not protect proprietary and intellectual property rights to as great an
extent as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary and intellectual property rights
will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company.

DEPENDENCE ON CONTRACT AND OFFSHORE MANUFACTURING; LIMITED NUMBER OF SUPPLIERS
OF KEY COMPONENTS

The Company has implemented a global sourcing strategy that it believes
will enable it to achieve greater economies of scale, improve gross margins and
maintain uniform quality standards for its products. The Company currently
sources its products through three contract manufacturers in Europe and Asia. In
the event any of the Company's contract manufacturers are unable or unwilling to
continue to manufacture the Company's products, the Company may have to rely on
other current manufacturing sources or identify and qualify new contract
manufacturers. In this regard, one of the Company's contract manufacturers has
recently been involved in bankruptcy proceedings and may be unable to continue
manufacturing the Company's products. In the event that such manufacturer (or
any other key supplier) were unable to meet the Company's requirements, there
can be no assurance that the Company would be able to identify or qualify new
contract manufacturers in a timely manner or that such manufacturers would
allocate sufficient capacity to the Company in order to meet its requirements.
Any significant delay in the Company's ability to obtain adequate supplies of
its products from its current or alternative sources would have a material
adverse effect on the Company's business and operating results.

In an effort to reduce manufacturing costs, the Company has shifted volume
production of many components of its products to ICS in Singapore. The Company
has recently entered into a non-binding letter of intent to acquire ICS. See
"Prospectus Summary -- Recent Developments." The Company is currently
considering shifting the production of other components of its products to other
suppliers in Europe or Asia. Difficulties encountered in transferring production
may have a disruptive effect on the Company's manufacturing process and increase
overall production costs. Due to the substantial concentration of the Company's
manufacturing operations in Singapore, a disruption of operations at ICS's
facilities in Singapore could have a material adverse effect on the Company's
business and operating results. Foreign manufacturing is subject to a number of
risks, including currency fluctuations, transportation delays and interruptions,
difficulties in staffing, potentially adverse tax consequences and unexpected
changes in regulatory requirements, tariffs and other trade barriers, and
political and economic instability.

The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. For example, the
Company purchases many of the components for use in its SwapSmart and SwapBox
products from ICS and mechanical components for use in its smart card reader
product exclusively from Stocko, a German-based supplier. The Company's reliance
on sole source suppliers involves several risks, including a potential inability
to obtain an adequate supply of required components, price increases, late
deliveries and poor component quality. Although to date the Company has been
able to purchase its requirements of such components, there can be no assurance
that the Company will be able to obtain its full requirements of such components
in the future or that prices of such components will not increase. In addition,
there can be no assurance that problems with respect to yield and quality of
such components and timeliness of deliveries will not occur. Disruption or
termination of the supply of these components could delay shipments of the
Company's products and could have a material adverse effect on the Company's
business and operating results. Such delays could also damage relationships with
current and prospective customers. See "Business -- Manufacturing."

DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE

The markets for the Company's products are characterized by rapid
technological change, changing customer needs, frequent new product introduction
and evolving industry standards and short product lifecycles. The introduction
by the Company or its competitors of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
obsolete and unmarketable. Therefore, the Company's future success will depend
upon its ability to successfully develop
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14

and to introduce on a timely and continuous basis new and enhanced products that
keep pace with technological developments and emerging industry standards and
address the increasingly sophisticated needs of its customers. The timing and
success of product development is unpredictable due to the inherent uncertainty
in anticipating technological developments, the need for coordinated efforts of
numerous technical personnel and the difficulties in identifying and eliminating
design flaws prior to product release. Any significant delay in releasing new
products could have a material adverse effect on the ultimate success of a
product and other related products and could impede continued sales of
predecessor products, any of which could have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to introduce new products on a timely basis, that new
products introduced by the Company will achieve any significant degree of market
acceptance or that any such acceptance will be sustained for any significant
period. Failure of new products to achieve or sustain market acceptance could
have a material adverse effect on the Company's business and operating results.
See "Business -- Research and Development."

RISKS OF INTERNATIONAL SALES; CURRENCY FLUCTUATIONS

The Company was originally a German corporation and continues to conduct a
substantial portion of its business in Europe. Approximately 49.0%, 52.5% and
68.7% of the Company's revenues in 1995, 1996 and 1997, respectively, were
derived from customers located outside the United States. Because a significant
number of the Company's principal customers are located in other countries, the
Company anticipates that international sales will continue to account for a
significant portion of its revenues. As a result, a significant portion of the
Company's sales and operations may continue to be subject to certain risks,
including tariffs and other trade barriers, difficulties in staffing and
managing disparate branch operations, currency exchange risks and exchange
controls and potential adverse tax consequences. These factors could have a
material adverse effect on the Company's business and operating results.

As a result of the Company's multinational operations and sales, the
Company's operating results are subject to significant fluctuations based upon
changes in the exchange rates of certain currencies, particularly the German
mark, in relation to the U.S. dollar. The Company does not currently engage in
hedging activities with respect to its foreign currency exposure. Although
management will continue to monitor the Company's exposure to currency
fluctuations, and, when appropriate, may use financial hedging techniques in the
future to minimize the effect of these fluctuations, there can be no assurance
that exchange rate fluctuations would have a material adverse effect on the
Company's business and operating results. In the future, the Company could be
required to denominate its product sales in other currencies, which would make
the management of currency fluctuations more difficult and expose the Company to
greater risks in this regard. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

PRODUCT LIABILITY RISKS

Customers rely on the Company's token-based security products to prevent
unauthorized access to their digital content. A malfunction of or design defect
in the Company's products could result in tort or warranty claims. Although the
Company attempts to reduce the risk of exposure from such claims through
warranty disclaimers and liability limitation clauses in its sales agreements
and by maintaining product liability insurance, there can be no assurance that
such measures will be effective in limiting the Company's liability for any such
damages. Any liability for damages resulting from security breaches could be
substantial and could have a material adverse effect on the Company's business
and operating results. In addition, a well-publicized actual or perceived
security breach involving token-based security systems could adversely affect
the market's perception of token-based security products in general, or the
Company's products in particular, regardless of whether such breach is
attributable to the Company's products. This could result in a decline in demand
for the Company's products, which would have a material adverse effect on the
Company's business and operating results.

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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, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. Although the Company believes that its products and systems are
Year 2000 compliant, the Company utilizes third-party equipment and software
that may not be Year 2000 compliant. Failure of such third-party equipment or
software to operate properly with regard to the Year 2000 and thereafter could
require the Company to incur unanticipated expenses to remedy any problems,
which could have a material adverse effect on the Company's business and
operating results. Furthermore, the purchasing patterns of customers or
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
and services such as those offered by the Company, which could have a material
adverse effect on the Company's business and operating results.

DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL

The Company's future performance depends in significant part upon the
continued service of Robert Schneider, the Company's Chairman of the Board,
Steven Humphreys, the Company's President and Chief Executive Officer, and Bernd
Meier, the Company's Chief Operations Officer, as well as its other key
technical and senior management personnel. The Company provides compensation
incentives such as bonuses, benefits and option grants (which are typically
subject to vesting over four years) to attract and retain qualified employees.
In addition, the Company's German subsidiary has entered into substantially
similar employment agreements with each of Messrs. Schneider and Meier pursuant
to which each serves as a Managing Director of the subsidiary. Each of the
respective agreements has no set termination date, may be terminated by the
subsidiary or the officer with six months notice, and provides that the officer
is bound by a non-compete provision during the one-year period following his
termination. Non-compete agreements are, however, generally difficult to enforce
and therefore these provisions may not provide significant protection to the
Company. The Company also has an employment agreement with Jean-Yves Le Roux,
its Vice President, Engineering, that is terminable by either party at will. The
Company does not have employment agreements with any of its other key employees
and does not maintain key man life insurance on any of its employees. The loss
of the services of one or more of the Company's officers or other key employees
could have a material adverse effect on the Company's business and operating
results. The Company believes that its future success will depend in large part
on its continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain its key technical and management
employees or that it can attract, assimilate or retain other highly qualified
technical and management personnel in the future. See "Business -- Employees"
and "Management."

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Common Stock has experienced significant
fluctuations since the Company's initial public offering in October 1997 and may
continue to fluctuate significantly. The market price of the Common Stock may be
significantly affected by factors such as the announcement of new products or
product enhancements by the Company or its competitors, technological innovation
by the Company or its competitors, quarterly variations in the Company's results
of operation, changes in earnings estimates by market analysts, and general
market conditions or market conditions specific to particular industries. In
particular, the stock prices for many companies in the technology and emerging
growth sector have experienced wide fluctuations which have often been unrelated
to the operating performance of such companies. Such fluctuations may adversely
affect the market price of the Common Stock. See "Price of Common Stock."

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BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS

The Company currently has no specific use planned for the net proceeds from
this offering. As a consequence, the Company's management will have broad
discretion to allocate a large percentage of these proceeds to uses which the
stockholders may not deem desirable, and there can be no assurance that the
proceeds can or will yield a return. The Company may use a portion of these
funds for the acquisition of complementary businesses, products and
technologies. See "Use of Proceeds."

CONCENTRATION OF STOCK OWNERSHIP; ANTI-TAKEOVER PROVISIONS

Upon completion of this offering, the Company's executive officers and
directors, together with their affiliates, will beneficially own approximately
19.8% of the Company's outstanding shares of Common Stock. Accordingly, these
stockholders, acting together, will continue to be able to exert significant
influence over matters requiring stockholder approval, including the election of
the Company's directors and the approval of mergers and other change in control
transactions involving the Company. See "Management," "Principal and Selling
Stockholders" and "Description of Capital Stock."

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, amended Bylaws, Delaware law and the Company's indemnification
agreements with its officers and directors may be deemed to have an
anti-takeover effect. Such provisions may delay, deter or prevent a tender offer
or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.

The Company's Board of Directors may issue additional shares of Common
Stock or establish one or more classes or series of Preferred Stock, having the
number of shares (up to 10,000,000), designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations as
determined by the Board of Directors without stockholder approval. The foregoing
provisions give the Board of Directors, acting without stockholder approval, the
ability to prevent, or render more difficult or costly, the completion of a
takeover transaction that stockholders might view as being in their best
interests. The Company's Amended and Restated Certificate of Incorporation and
Bylaws, as amended, also contain a number of provisions that could impede a
takeover or change in control of the Company, including but not limited to the
elimination of stockholders' ability to take action by written consent without a
meeting and the elimination of cumulative voting in the election of directors.

The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. In general, the 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 the
business combination is approved in a prescribed manner.

In addition, in connection with its listing on the Neuer Markt of the
Frankfurt Stock Exchange, the Company is required to comply with the German
Takeover Code (the "German Code"). The German Code regulates mergers,
consolidations and tender offers ("Public Offers"), and requires companies
seeking to make a Public Offer to inform the German regulatory authorities and
the public of the offer, to provide certain disclosure to the target company's
stockholders, to generally treat stockholders equally in an offer, and to comply
with certain other procedural requirements. In addition, the German Code gives
broad authority to the German regulatory authorities to interpret the German
Code and to review and regulate specific Public Offers. Compliance with the
German Code could have the effect of delaying, deterring or preventing a tender
offer or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.

The Company licenses certain technology from a third party pursuant to a
license that is not transferable by the Company without the prior written
consent of the third party. This provision may prohibit the transfer of such
technology in a merger or consolidation of the Company with another company. As
a result, this provision may have the effect of discouraging or preventing an
acquisition of the Company.

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SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public
market after this offering could adversely affect the market price of the
Company's Common Stock and could impair the Company's ability to raise capital
through the sale of equity or equity-related securities. Upon completion of this
offering, the Company will have 12,244,062 shares outstanding (12,694,062 shares
if the Underwriters' over-allotment option is exercised in full) assuming no
further exercise of options or warrants outstanding as of March 25, 1998. Of
these shares, the 3,000,000 shares offered hereby (3,450,000 shares if the
Underwriters' over-allotment option is exercised in full), together with an
aggregate of 6,320,451 shares (comprising (i) shares sold in the Company's
initial public offering, (ii) shares sold into the public market subsequent to
the Company's public offering, and (iii) shares issued prior to the Company's
initial public offering that are eligible for unrestricted sale in the public
market) will be freely tradeable without restriction after the offering. Of the
remaining 2,923,610 shares (the "Restricted Shares"), 225,691 will be eligible
for sale immediately following the offering subject to compliance with the
volume and other restrictions of Rule 144 under the Securities Act of 1933, as
amended ("Rule 144"). Holders of the remaining 2,928,863 Restricted Shares have
signed lock-up agreements with the underwriters and therefore may not sell such
shares until expiration of the lock-up agreements 90 days after the date of this
prospectus. These locked-up shares will become eligible for sale into the public
market upon expiration of the lock-up agreements, subject in certain cases to
compliance with the volume and other restrictions of Rule 144. Upon the
completion of this offering, the holders of approximately 2.9 million shares of
Common Stock will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock being offered by the Company (after deducting the underwriting
discount and estimated offering expenses payable by the Company) are estimated
to be approximately $63,204,750 ($91,984,388 if the Underwriters' over-allotment
option is exercised in full). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company intends to use the net proceeds for general corporate
purposes, including working capital and capital expenditures. A portion of the
net proceeds may also be used to acquire or invest in complementary businesses
or products or to obtain the right to use complementary technologies. The
Company has entered into non-binding letters of intent to acquire two separate
companies. See "Prospectus Summary -- Recent Developments." Pending use of the
net proceeds for the above purposes, the Company intends to invest such funds in
short-term, interest-bearing, investment grade obligations. The Company will not
receive any of the proceeds from the sale of Common Stock by the Selling
Stockholders.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its Common Stock
or other securities. The Company's U.S. line of credit requires the Company to
obtain the bank's prior written consent in order to declare or pay any cash
dividends. The Company currently anticipates that it will retain all of its
future earnings for use in the expansion and operation of its business and does
not anticipate paying any cash dividends in the foreseeable future.

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PRICE RANGE OF COMMON STOCK

The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "SCMM" and on the Neuer Markt of the Frankfurt Stock Exchange under
the symbol "SMY." The following table lists the high and low closing prices
since the Company's Common Stock began trading on the Nasdaq National Market on
October 7, 1997.

NASDAQ
NATIONAL MARKET NEUER MARKT
---------------- ----------------------
HIGH LOW HIGH LOW
------ ------ --------- ---------

FISCAL 1997:
Fourth Quarter (From October 7, 1997).......... $31.50 $19.13 DM51.20 DM38.00

FISCAL 1998:
First Quarter (Through March 23, 1998)......... $88.00 $23.59 DM167.00 DM42.10

On March 24, 1998, the closing prices of the Company's Common Stock were
$67.25 per share as reported by the Nasdaq National Market and DM127.50 per
share as reported by the Neuer Markt of the Frankfurt Stock Exchange.

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CAPITALIZATION

The following table sets forth the total capitalization of the Company at
December 31, 1997 and such capitalization adjusted to give effect to the sale of
the 1,000,000 shares of Common Stock offered by the Company (after deducting the
underwriting discount and estimated offering expenses). See "Principal and
Selling Stockholders." This table should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus.

DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)

Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 10,000,000 shares
authorized................................................ -- --
Common Stock, $0.001 par value; 40,000,000 authorized
shares; 10,714,978 shares issued and outstanding; and
11,714,978 shares as adjusted(1)....................... 11 12
Additional paid-in capital................................ 69,902 133,106
Deferred stock compensation............................... (125) (125)
Accumulated deficit....................................... (7,714) (7,714)
Cumulative translation adjustment......................... (602) (602)
------- --------
Total stockholders' equity............................. 61,472 124,677
------- --------
Total capitalization.............................. $61,472 $124,677
======= ========

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

(1) Excludes: 1,156,185 shares of Common Stock issuable upon exercise of stock
options outstanding as of December 31, 1997 at a weighted average exercise
price of $6.78 per share and 451,191 shares of Common Stock subject to
warrants outstanding as of December 31, 1997 at a weighted average exercise
price of $12.62 per share. See "Management -- Employee Stock Plans" and
Notes 4, 5 and 11 of Notes to Consolidated Financial Statements.

17
20

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data at December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
are derived from consolidated financial statements of the Company that have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, and
are included elsewhere in this Prospectus. The consolidated balance sheet data
at December 31, 1994 and 1995 is derived from the audited Consolidated Financial
Statements of the Company that are not included herein. The consolidated
statement of operations data for the year ended December 31, 1993 are derived
from unaudited Consolidated Financial Statements of the Company that are not
included herein. The historical results are not necessarily indicative of the
operating results to be expected in the future. 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 Consolidated Financial Statements and Notes thereto included elsewhere in
this Prospectus.

YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)

Net sales(1)
Security and access products..................... $ -- $ 1,426 $12,520 $16,628 $27,606
PCMCIA peripheral products....................... 2,379 5,020 5,546 4,892 163
------- ------- ------- ------- -------
Total net sales.......................... 2,379 6,446 18,066 21,520 27,769
Cost of sales...................................... 1,779 5,087 15,771 14,880 17,524
------- ------- ------- ------- -------
Gross profit....................................... 600 1,359 2,295 6,640 10,245
------- ------- ------- ------- -------
Operating Expenses:
Research and development......................... 691 1,162 1,399 2,386 2,940
Sales and marketing.............................. 564 1,224 2,057 3,230 4,221
General and administrative....................... 346 580 1,439 2,004 2,494
Settlement of patent claim....................... -- -- -- -- 515
------- ------- ------- ------- -------
Total operating expenses................. 1,601 2,966 4,895 7,620 10,170
------- ------- ------- ------- -------
Income (loss) from operations...................... (1,001) (1,607) (2,600) (980) 75
Interest income (expense), net................... (95) (261) (337) (304) 866
Foreign currency transaction gains............... -- -- 11 174 467
------- ------- ------- ------- -------
Income (loss) before income taxes.................. (1,096) (1,868) (2,926) (1,110) 1,408
Provision for income taxes....................... -- -- -- -- 305
------- ------- ------- ------- -------
Net income (loss).................................. (1,096) (1,868) (2,926) (1,110) 1,103
Accretion on redeemable convertible preferred
stock............................................ -- -- (139) (287) (802)
------- ------- ------- ------- -------
Net income (loss) applicable to common
stockholders..................................... $(1,096) $(1,868) $(3,065) $(1,397) $ 301
======= ======= ======= ======= =======
Basic net income (loss) per share.................. $ (0.86) $ (1.46) $ (2.39) $ (1.09) $ 0.08
======= ======= ======= ======= =======
Diluted net income (loss) per share................ $ (0.86) $ (1.46) $ (2.39) $ (1.09) $ 0.06
======= ======= ======= ======= =======
Shares used in computations:
Basic net income (loss) per share(2)............. 1,280 1,280 1,280 1,280 3,819
======= ======= ======= ======= =======
Diluted net income (loss) per share(2)........... 1,280 1,280 1,280 1,280 5,015
======= ======= ======= ======= =======
Pro forma information:
Net income applicable to common stockholders..... $ 1,103
=======
Pro forma diluted net income per share(3)........ $ 0.14
=======
Shared used to compute pro forma diluted net
income per share.............................. 7,649
=======

YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $ 115 $ 70 $ 739 $ 2,593 $55,888
Working capital (deficit)........................ 454 823 1,620 (1,787) 60,296
Total assets..................................... 1,829 3,452 8,143 11,459 67,365
Long-term debt, less current portion............. 503 3,027 2,147 -- --
Redeemable convertible preferred stock........... -- -- 4,781 5,068 --
Total stockholders' equity (deficit)............. 19 (2,027) (4,760) (6,024) 61,472

- ---------------
(1) Through 1994, the Company focused on PCMCIA peripheral products, including
flash memory and fax/modem devices. In 1994, the Company began emphasizing
security and access products. The Company made the final shipment of PCMCIA
peripheral products in the quarter ended March 31, 1997, completing its exit
from this business.

(2) See Notes 1 of Notes to Consolidated Financial Statements for a discussion
of the number of shares used in per share calculations.

18
21

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 this section as well as those discussed
under the caption "Risk Factors" and elsewhere in this Prospectus.

OVERVIEW

SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
objective is to leverage its expertise in smart card technologies, digital
platforms, and its extensible, upgradeable smart card interface architecture, to
meet the growing demand for secure access to digital information and networks.
The Company sells security and access products which include SwapBox PC Card
adapters, SwapSmart smart card readers, SwapAccess DVB-CAM modules, its SmartOS
universal smart card interface architecture and its CIMax DVB-CI interface chip.
The Company sells security and access products to OEMs such as computer,
telecommunication and DVB component and system manufacturers. The Company
markets, sells and licenses its products through a direct sales and marketing
organization primarily to OEMs and also through distributors, VARs, system
integrators and resellers worldwide. OEM customers include Dell, Hughes, Kirch
Group (BetaDigital), Micron, Packard Bell, Siemens/Nixdorf, Sysorex and Telenor.

The Company focuses on security and access products that provide secure
access to digital data. The Company's security and access products are targeted
at OEM computer, telecommunication and DVB component and system manufacturers.
From the Company's inception through 1994, the Company focused primarily on
PCMCIA peripheral products, including flash memory and fax/modem devices, which
carried a significantly lower gross margin than the Company's current products.
In 1994, the Company began emphasizing security and access products. The Company
made the final shipment of PCMCIA peripheral products in the quarter ended March
31, 1997, completing its exit from this business. As a result of the Company's
strategic shift in product focus, the proportion of security and access product
sales increased from 22.1% of total net sales in 1994 to 99.4% of total net
sales in 1997. The Company's net sales are now, and will continue to be,
dependent upon the sales of the Company's security and access products.

A substantial majority of the Company's security and access products are
intended for use as components or subsystems in systems manufactured and sold by
third party OEMs. In 1997, sales to BetaDigital, a division of the Kirch Group,
accounted for 45% of total net sales and sales to the Company's top 10 customers
accounted for 80% of total net sales. In addition, sales of the Company's
SwapBox product accounted for 54% and 34% of total net sales in 1996 and 1997,
respectively. A substantial majority of the SwapBox products sold by the Company
are sold to a number of major OEMs, including IBM, Dell and Packard Bell, each
of which in turn supplies products, such as desktop PCs, to the DoD. The Company
expects its business to continue to be substantially dependent upon sales of
SwapBox products to OEMs that are supplying the DoD, although such dependence
may decline as the Company expands its product lines and customer base. The
Company frequently enters into contracts with OEMs which provide for shipment of
certain quantities of products at specified future dates. Revenue from these
contracts, as well as from other sales, is recognized upon shipment of products.
The Company's dependence upon a limited number of significant customers imposes
certain risks on the Company. See "Risk Factors -- Dependence on Sales to OEMs,"
"-- Dependence on Sales to Government Contractors" and "-- Dependence on
Development of Industry Relationships."

19
22

Company sources its products from contract manufacturers located in Europe and
Asia. As a result, a substantial portion of the Company's costs and expenses are
denominated in currencies other than the U.S. dollar. For the years ended
December 31, 1996 and 1997, the Company's sales denominated in U.S. dollars
represented 55% and 39% of the Company's total net sales, respectively. The
Company does not currently engage in risk management activities with respect to
its foreign currency exposure. Although management will continue to monitor the
Company's exposure to currency fluctuations, there can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's business and operating results.

The Company experiences substantial seasonality in its business, with
approximately one-third of annual net sales being realized in the first half of
the year and the remaining two-thirds being realized in the second half of the
year. In recent periods, this seasonality has been primarily the result of the
Company's reliance on sales of its SwapBox products to OEMs that in turn are
selling to U.S. government agencies. The buying pattern of U.S. government
agencies tend to be substantially weighted to the third quarter and, to a
somewhat lesser extent, the fourth quarter of the calendar year. The strength in
net sales in the third quarter which results from the U.S. government buying
patterns is somewhat offset by relatively weaker sales in Europe in the same
quarter as a result of the traditional European summer vacation patterns. The
Company expects that as sales of its DVB products, which are sold to OEMs mainly
in Europe for the consumer market, begin to represent a larger percentage of net
sales, the seasonality that the Company experiences may be further exacerbated
as such sales are likely to be strongest in the fourth quarter of the year. In
contrast to net sales, operating expenses tend to be spread relatively evenly
across the year. As a result, the Company's operating results have tended to be
weakest in first and second quarter of the year. See "-- Quarterly Results of
Operations."

The Company has recently entered into a non-binding letter of intent to
acquire Intermart for approximately $8 million in a combination of cash and
shares of Company Common Stock. In addition, the sellers of Intermart may be
paid up to an additional $4 million in Company Common Stock based upon Intermart
achieving certain performance criteria in the first year of post-acquisition
operations. Intermart sells PC-based devices that provide access to a broad
range of small form factor digital media, including PCMCIA, Compact Flash and
Smart Media. Intermart generated approximately $3 million in revenues and a loss
of approximately $400,000 for the nine month period ended December 31, 1997. The
Company has also entered into a non-binding letter of intent to acquire ICS for
approximately $7 million in a combination of cash and shares of Company Common
Stock. ICS manufactures certain of the Company's products, as well as certain
third-party product lines which require similar manufacturing capabilities. ICS
generated approximately $6 million in revenues and $200,000 in net income for
the year ended December 31, 1997. These acquisitions would be accounted for
under the "purchase" method.

Neither of the letters of intent discussed above is binding upon the
Company or the counter party. While the Company believes that the acquisitions
described above will be completed on the terms described above, there can be no
assurance that such transactions will be completed on such terms or at all.
These acquisitions will result in the write-off of purchased in-process research
and development and the amortization of goodwill and other intangible assets.
Moreover, acquisitions entail a number of risks, and, even if completed, there
can be no assurance that the Company will receive the intended benefits. See
"Risk Factors -- Risk Associated With Acquisitions."

20
23

RESULTS OF OPERATIONS

The following table sets forth certain items from the Company's
consolidated statement of operations as a percentage of total revenues for the
periods indicated:

YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----

Net sales:
Security and access products.............................. 69.3% 77.3% 99.4%
PCMCIA peripheral products................................ 30.7 22.7 0.6
----- ----- -----
Total net sales........................................ 100.0 100.0 100.0
Cost of sales............................................... 87.3 69.1 63.1
----- ----- -----
Gross profit................................................ 12.7 30.9 36.9
----- ----- -----
Operating expenses:
Research and development.................................. 7.7 11.1 10.6
Sales and marketing....................................... 11.4 15.0 15.2
General and administrative................................ 8.0 9.3 9.0
Settlement of patent claim................................ -- -- 1.8
----- ----- -----
Total operating expenses............................... 27.1 35.4 36.6
----- ----- -----
Income (loss) from operations............................... (14.4) (4.6) 0.3
Interest income (expense), net.............................. (1.9) (1.4) 3.1
Foreign currency transaction gain........................... 0.1 0.8 1.7
----- ----- -----
Income (loss) before income taxes........................... (16.2) (5.2) 5.1
Provision for income taxes.................................. -- -- 1.1
----- ----- -----
Net income (loss)........................................... (16.2) (5.2) 4.0
Accretion on redeemable convertible preferred stock......... (0.8) (1.3) (2.9)
----- ----- -----
Net income (loss) applicable to common stockholders....... (17.0)% (6.5)% 1.1%
===== ===== =====

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

Net Sales. Net sales reflect the invoiced amount for goods shipped less
estimated returns. Revenue is recognized upon product shipment. Net sales were
$27.8 million in 1997, compared to $21.5 million in 1996, an increase of 29%.
Sales of security and access products were $27.6 million in 1997, compared to
$16.6 million in 1996, an increase of 66%. The substantial increase in security
and access products sales in 1997 was primarily related to sales of the
Company's DVB-CAM products, which products were first shipped in the fourth
quarter of 1996. Security and access products became the sole strategic product
focus following the Company's final shipment of PCMCIA peripheral products in
the quarter ended March 31, 1997, completing its exit from that business. One
customer accounted for 45% of the Company's net sales in 1997. Accounts
receivable from this customer totalled approximately $3.2 million at December
31, 1997.

Gross Profit. Gross profit was $10.2 million, or 36.9% of net sales, in
1997, compared to $6.6 million, or 30.9% of net sales, in 1996. The increase in
gross profit, both in absolute amount and as a percentage of net sales, was
primarily due to the introduction of DVB-CAM products and the concurrent shift
away from lower margin PCMCIA peripheral products. In addition, the Company's
transition from the PCMCIA peripheral products business resulted in reduced
labor requirements. The Company's gross profit has been and will continue to be
affected by a variety of factors, including competition, product configuration
and mix, the availability of new products and product enhancements which tend to
carry higher gross profit than older products and the cost and availability of
components. Accordingly, gross profits are expected to fluctuate from period to
period.

Research and Development. Research and development expenses consist
primarily of employee compensation and prototype expenses. To date, the period
between achieving technological feasibility and completion of software has been
short, and software development costs qualifying for capitalization have been

21
24

insignificant. Accordingly, to date the Company has not capitalized any software
development costs. Research and development expenses were $2.9 million, or 10.6%
of net sales, in 1997, compared to $2.4 million, or 11.1% of net sales, in 1996.
The increase in research and development spending in absolute amount was due
primarily to higher headcount in the Company's French facility and a rise in
prototype and related expenses for the Company's DVB-CAM products. The Company
believes that research and development expenses during 1998 will be higher than
in 1997 in absolute amount due to a higher number of personnel to support the
Company's new product development and customer projects.

Sales and Marketing. Sales and marketing expenses consist primarily of
employee compensation and trade show and other marketing costs. Sales and
marketing expenses were $4.2 million, or 15.2% of net sales, in 1997, compared
to $3.2 million, or 15.0% of net sales, in 1996. This increase in absolute
amount and as a percentage of net sales was due primarily to growth of the
Company's sales and marketing headcount and promotional efforts in the U.S. and
initial promotional efforts in the Asia-Pacific region. Sales and marketing
expenses in 1998 are expected to increase in absolute amount as the Company
continues to aggressively promote and identify business opportunities for the
Company's products on a worldwide basis.

General and Administrative. General and administrative expenses consist
primarily of compensation expenses for administrative employees. General and
administrative expenses were $2.5 million, or 9.0% of net sales, in 1997,
compared to $2.0 million, or 9.3% of net sales in 1996. General and
administrative expenses increased in absolute amount in 1997 primarily as a
result of increases in administrative headcount in the Company's U.S. and German
offices in support of higher levels of business activities, as well costs
associated with being a publicly-held company. The Company believes general and
administrative expenses in 1998 will increase in absolute amount as a result of
operating as a public company for a full year and normal wage and cost
increases.

Settlement of Patent Claim. In September 1997, the Company settled a patent
infringement claim with a third party. In connection therewith, the Company
incurred a one-time charge of $515,000, of which $453,000 represented a non-cash
charge equal to the estimated fair value of the common stock warrants issued to
the third party and $62,000 of legal costs.

Interest Income (Expense), Net. Interest income (expense), net consists of
interest earned on invested cash, offset by interest paid or accrued on
outstanding debt. Net interest income was $866,000 in 1997, compared to a net
expense of $304,000 in 1996. During 1997, the Company raised $11.4 million
through the sale of preferred stock, and converted $4.3 million of convertible
debt into preferred stock. In October 1997, the Company completed the sale of
3.8 million shares of Common Stock in an initial public offering, resulting in
net proceeds of $43.7 million. These transactions resulted in both a reduction
of outstanding debt and corresponding interest expense and an increase in
short-term investments and cash balances.

Foreign Currency Transaction Gains. In 1997 substantially all of the
foreign currency transaction gains of $467,000 relate to intercompany sales from
the German subsidiary to its US affiliates.

Income Taxes. Tax expense of $305,000 for the year ended December 31, 1997
resulted principally from tax liabilities associated with foreign operations of
the Company and minimum state income taxes. The Company incurred operating
losses in 1995 and 1996, and therefore did not incur income tax obligations in
such periods. As of December 31, 1997, the Company had German net operating loss
carry forwards of approximately $1.4 million available to offset income from the
Company's German operations for an indefinite period. In addition, the Company
had net operating loss carry forwards of approximately $3.3 million and $1.6
million for U.S. federal and California income tax purposes, respectively. The
Company's utilization of a portion of the U.S. federal net operating loss carry
forwards is limited to approximately $340,000 per year. The Company had a
deferred tax asset as of December 31, 1997 of approximately $2.2 million and
recorded a full valuation allowance to offset these deferred tax assets as
management has concluded that it is more likely than not that the deferred tax
assets would not be realized in the future due to recent operating losses. A
future change in the Company's assessment of the likelihood of future
realization of deferred tax assets could result in a reduction of the valuation
allowance, a corresponding reduction in the Company's income tax expense
recorded for financial statement purposes and a corresponding increase in net
income. This would not, however, result in a change in actual income taxes
payable by the Company in any future period. See Note 7 to the Consolidated
Financial Statements.

22
25

1996 COMPARED TO 1995

Net Sales. Net sales were $21.5 million in 1996, compared to $18.1 million
in 1995, an increase of 19.1%. This increase was due primarily to increased unit
sales of certain previously existing products as well as sales of products first
introduced in 1996. Sales of security and access products represented 77.3% of
total net sales in 1996 compared to 69.3% in 1995, reflecting the continued
shift in the Company's product strategy toward security and access products.
Security and access product sales were $16.6 million in 1996 compared to $12.5
million in 1995, an increase of 32.8%. This increase resulted primarily from
increased sales of SwapBox products which began shipping in 1995, as well as
sales of security and access products introduced during 1996, including
SwapSmart and the Company's DVB products. One customer accounted for 11% of the
Company's net sales in 1996, resulting from the initial shipments of the
Company's DVB-CAM products which were introduced in the fourth quarter of 1996.
Accounts receivable from this customer represented 25% of the Company's total
receivables as of December 31, 1996 due to the timing of shipments in the fourth
quarter. All such receivables were collected during the first quarter of 1997.
Consistent with the Company's shift away from PCMCIA peripheral products, sales
of such products were $4.9 million in 1996, compared to $5.5 million in 1995, a
decrease of 11.8%.

Gross Profit. Gross profit was $6.6 million, or 30.9% of net sales, in
1996, compared to $2.3 million, or 12.7% of net sales, in 1995. The substantial
increase in gross profit as a percentage of net sales in 1996 was primarily
attributable to three factors: (i) during 1996, the Company benefited from
manufacturing cost efficiencies associated with the increased sales of security
and access products; (ii) as part of the continued shift in 1996 from PCMCIA
peripheral products to security and access products, the Company introduced
certain new security and access products during 1996 that carried higher gross
margins than other products in the security and access product family; and (iii)
during 1996, the Company received approximately $1.6 million in nonrecurring
engineering revenues with relatively minimal cost of sales.

Research and Development. Research and development expenses totaled $2.4
million, or 11.1% of net sales, in 1996, compared to $1.4 million, or 7.7% of
net sales, in 1995. The increase in research and development spending during
1996 was primarily a result of increased headcount and development activity
associated with new product introductions and the opening of the Company's
research and development facility in France.

Sales and Marketing. Sales and marketing expenses totaled $3.2 million, or
15.0% of net sales, in 1996, compared to $2.1 million, or 11.4% of net sales, in
1995. Sales and marketing expenses in 1996 in absolute amount increased
primarily as a result of the costs associated with introducing several
significant new products during 1996 and the higher headcount costs associated
with supporting a broader base of customers and expanded line of products.

General and Administrative. General and administrative expenses totaled
$2.0 million, or 9.3% of net sales, in 1996, compared to $1.4 million, or 8.0%
of net sales, in 1995. General and administrative expenses increased in absolute
amount in 1996 and as a percentage of net sales primarily as a result of
increasing headcount and expanded facilities associated with the overall growth
in the business.

Interest Income (Expense), Net. Interest expense was immaterial as a
percentage of sales in both 1996 and 1995.

Income Taxes. The Company incurred losses in 1995 and 1996 and therefore
did not incur income tax obligations in these periods. As of December 31, 1996,
the Company had deferred tax assets of approximately $2.2 million, resulting
primarily from the net operating loss carryforwards, which is fully offset by a
valuation allowance.

23
26

QUARTERLY RESULTS OF OPERATIONS

The following tables present certain unaudited consolidated statement of
operations data for each of the eight quarters in the two-year period ended
December 31, 1997, as well as such data expressed as a percentage of the
Company's total net sales for the periods indicated. This data has been derived
from unaudited consolidated financial statements and has been prepared on the
same basis as the Company's audited Consolidated Financial Statements which
appear elsewhere in this Prospectus. In the opinion of the Company's management,
this data includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such data.

THREE MONTHS ENDED
------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------

STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS):
Net sales:
Security and access
products................... $2,811 $2,978 $4,927 $5,912 $4,202 $5,618 $7,952 $9,834
PCMCIA peripheral products... 1,446 1,278 1,073 1,095 163 -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total net sales............ 4,257 4,256 6,000 7,007 4,365 5,618 7,952 9,834
Cost of sales.................. 3,068 3,103 3,903 4,806 2,804 3,322 5,108 6,290
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... 1,189 1,153 2,097 2,201 1,561 2,296 2,844 3,544
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development..... 624 556 598 608 628 790 713 809
Sales and marketing.......... 631 777 889 933 975 1,038 928 1,280
General and administrative... 441 467 605 491 548 585 597 764
Settlement of patent claim... -- -- -- -- -- -- 515 --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses... 1,696 1,800 2,092 2,032 2,151 2,413 2,753 2,853
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations................... (507) (647) 5 169 (590) (117) 91 691
Interest income (expense),
net.......................... (25) (123) (70) (86) (28) 86 111 697
Foreign currency transaction
gain......................... 35 21 92 26 64 175 162 66
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes........................ (497) (749) 27 109 (554) 144 364 1,454
Provision for income taxes..... -- -- -- -- -- -- 30 275
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).............. (497) (749) 27 109 (554) 144 334 1,179
Accretion on redeemable
convertible preferred
stock........................ (71) (72) (72) (72) (160) (318) (324) --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) applicable to
common stockholders.......... $ (568) $ (821) $ (45) $ 37 $ (714) $ (174) $ 10 $1,179
====== ====== ====== ====== ====== ====== ====== ======
AS A PERCENTAGE OF TOTAL NET
SALES:
Net sales:
Security and access
products................... 66.0% 70.0% 82.1% 84.4% 96.3% 100.0% 100.0% 100.0%
PCMCIA peripheral products... 34.0 30.0 17.9 15.6 3.7 -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total net sales............ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales.................. 72.1 72.9 65.1 68.6 64.2 59.1 64.2 64.0
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... 27.9 27.1 35.0 31.4 35.8 40.9 35.8 36.0
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development..... 14.7 13.1 10.0 8.7 14.4 14.1 9.0 8.2
Sales and marketing.......... 14.8 18.2 14.8 13.3 22.3 18.5 11.7 13.0
General and administrative... 10.3 11.0 10.1 7.0 12.6 10.4 7.5 7.8
Settlement of patent claim... -- -- -- -- -- -- 6.4 --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses... 39.8 42.3 34.9 29.0 49.3 43.0 34.6 29.0
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations................... (11.9) (15.2) 0.1 2.4 (13.5) (2.1) 1.2 7.0
Interest income (expense),
net.......................... (0.6) (2.9) (1.2) (1.2) (0.6) 1.5 1.4 7.1
Foreign currency transaction
gain......................... 0.8 0.5 1.5 0.4 1.5 3.1 2.0 0.7
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes........................ (11.7) (17.6) 0.5 1.6 (12.6) 2.5 4.6 14.8
Provision for income taxes..... -- -- -- -- -- -- 0.4 2.8
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).............. (11.7) (17.6) 0.5 1.6 (12.6) 2.5 4.2 12.0
Accretion on redeemable
convertible preferred
stock........................ (1.7) (1.7) (1.2) (1.0) (3.7) (5.6) (4.1) --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) applicable to
common stockholders.......... (13.4)% (19.3)% (0.7)% 0.6% (16.3)% (3.1)% 0.1% 12.0%
====== ====== ====== ====== ====== ====== ====== ======

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The Company experiences substantial seasonality in its business, with
approximately one-third of annual net sales being realized in the first half of
the year and the remaining two-thirds being realized in the second half of the
year. In recent periods, this seasonality has been primarily the result of the
Company's reliance on sales of its SwapBox products to OEMs that in turn sell to
U.S. government agencies. The buying pattern of U.S. government agencies tend to
be substantially weighted to the third quarter and, to a somewhat lesser extent,
the fourth quarter of the calendar year. The strength in net sales in the third
quarter which results from the U.S. government buying patterns is somewhat
offset by relatively weaker sales in Europe in the same quarter as a result of
the traditional European summer vacation patterns. The Company expects that as
sales of its DVB products, which are sold to OEMs mainly in Europe for the
consumer market, begin to represent a larger percentage of net sales, the
seasonality that the Company experiences may be further exacerbated as these
sales are likely to be strongest in the fourth quarter of the year. In contrast
to net sales, operating expenses tend to be spread relatively evenly across the
year. As a result, the Company's operating results have tended to be weakest in
first and second quarter of the year. This revenue seasonality is evident in the
table above, in which the Company's net sales in 1996 increased each quarter,
then declined in the first quarter of 1997.

Gross margin generally improved in the second half of 1996 due primarily to
the shift in focus away from lower margin PCMCIA peripheral products. Gross
margin in the third quarter of 1996 was higher than other quarters in the year
due primarily to favorable product mix shift driven by higher sales to OEMs
supplying the DoD, combined with volume purchasing which lowered certain
component costs. Gross margin increased in the first quarter of 1997 due
primarily to less than 4% of the Company's sales in the quarter resulting from
PCMCIA peripheral products. Gross margin increased in the second quarter of 1997
due to a sales mix favoring higher margin software and engineering project
revenues. Gross margins declined somewhat in the second half of 1997 as software
and engineering project revenues declined as a percentage of total sales,
combined with unit price declines experienced on the Company's SwapBox products.

Research and development expenses have generally increased each quarter,
due primarily to increased headcount and related expenses in the Company's
development centers in France and Germany. Unusually high research and
development expenses were incurred in the first quarter of 1996 and the second
quarter of 1997 due primarily to substantial prototype manufacturing and test
expenses related to accelerated project timetables on key development projects.
Sales and marketing expenses have generally increased each quarter, except for a
sequential decline in the third quarter of 1997 due primarily to a drop in
marketing promotion and trade show costs and lower business travel expenses. In
addition, certain sales compensation costs typically fluctuate based on the
levels of revenue bookings and shipments. General and administrative expenses
have generally increased each quarter to support the increase in business
activity. In the third quarter of 1996, general and administrative expenses were
impacted by costs associated with the recruitment of the Company's President and
CEO. In the third quarter of 1997, the Company settled a patent infringement
claim and incurred a one-time expense of $515,000, consisting of $453,000 for
the estimated fair value of common stock warrants issued and legal expenses of
$62,000.

The Company's quarterly operating results have in the past varied and may
in the future vary significantly. In addition to seasonality, factors affecting
operating results include: level of competition; size, timing, cancellation or
rescheduling of significant orders; product configuration and mix; market
acceptance of new products and product enhancements; new product announcements
or introductions by the Company or its competitors; adoption of new technologies
and standards; deferrals of customer orders in anticipation of new products or
product enhancements; changes in pricing by the Company or its competitors; the
ability of the Company to develop, introduce and market new products and product
enhancements on a timely basis; hardware component costs and availability,
particularly with respect to hardware components obtained from sole sources; the
Company's success in expanding its sales and marketing programs; technological
changes in the market for digital information security products; levels of
expenditures on research and development; foreign currency exchange rates;
general economic trends and other factors. Because a high percentage of the
Company's operating expenses are fixed, a small variation in revenue can cause
significant variations in operating results from quarter to quarter. See
"-- Overview."

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LIQUIDITY AND CAPITAL RESOURCES

Prior to the Company's initial public stock offering, the Company had
financed its operations principally through private placements of debt and
equity securities and, to a lesser extent, borrowings under bank lines of
credit. In October 1997, the Company completed the sale of 3.8 million shares of
Common Stock in an initial public offering ("IPO"), resulting in net proceeds of
$43.7 million. As of December 31, 1997, the Company's working capital was $60.3
million. Working capital increased during 1997 due primarily to the net proceeds
received from the IPO and $11.4 million from the private placement of redeemable
convertible preferred stock and the conversion of approximately $4.3 million of
notes payable into redeemable convertible preferred stock. These notes payable
were classified as current liabilities as of December 31, 1996 due to certain
demand features in the notes, resulting in a working capital deficit as of that
date.

During 1997, cash and cash equivalents increased by $22.9 million due
primarily to financing activities discussed previously, partially offset by
repayments of short-term debt of $3.7 million. Investing activities in 1997
consisted of $802,000 in capital equipment expenditures and purchases of
short-term investments of $30.3 million. Operating activities in the year
provided $1.2 million of cash, including net income of $1.1 million, non-cash
expenses for depreciation, amortization and stock warrants of $1.1 million and
increases in accounts payable and accrued expenses of $1.3 million and $574,000,
respectively, offset by an increase in receivables of $1.8 million, due
primarily to higher revenue levels, and an increase in inventory of $1.3 million
relating to an increase in backlog at December 31, 1997 compared to 1996.

In 1996, cash and cash equivalents increased by $1.9 million due primarily
to financing activities which included issuance of convertible notes payable
totaling $5.0 million and line of credit borrowings of $1.0 million, partially
offset by repayments of short term debt of $1.5 million. Investing activities
consisted of $643,000 in capital equipment expenditures. Operating activities
used $1.7 million of cash, including an increase in receivables of $1.0 million
due primarily to higher revenue levels, and an increase in prepaid expenses of
$582,000, consisting primarily of financing costs relating to the convertible
debt and preferred stock placements which closed in the first quarter of 1997.

In 1995, cash and cash equivalents increased $669,000 due primarily to
financing activities which included issuance of $2.4 million of redeemable
convertible preferred stock, issuance of convertible notes payable totaling $1.5
million, and issuance of non-convertible notes payable of $1.2 million.
Investing activities consisted of $524,000 in capital equipment expenditures.
Operating activities used $3.9 million of cash, including an increase in
receivables of $2.8 million due to the large revenue increase over 1994, an
increase in inventories of $800,000 due to the increase in business levels, and
an increase in accounts payable and accrued expenses of $2.3 million related to
higher purchasing and employment levels in support of the Company's sales
growth.

The Company has revolving lines of credit with three banks in Germany
providing total borrowings of up to 4.5 million DM (approximately $2.5 million
at December 31, 1997). One of these lines expires on March 31, 1998 and the
remaining two expire on September 30, 1998. The German lines of credit bear
interest at rates ranging from 7.0% to 8.75%. Borrowings under the German lines
of credit are unsecured. The Company also has a $3.0 million line of credit with
a U.S. bank which is secured by all assets of the Company, bears interest at the
bank's prime rate (8.5% at December 31, 1997), and expires in May 1999. At
December 31, 1997, no amounts were outstanding under any of the Company's lines
of credit. At December 31, 1997, the Company had no material commitments for
capital expenditures.

The Company expects to pay an aggregate of approximately $7.0 million in
cash in connection with its acquisitions of Intermart and ICS. The Company
presently expects that the proceeds of this offering, together with its current
capital resources and available borrowings should be sufficient to meet its
operating and capital requirements through at least the end of 1999. The Company
may, however, seek additional debt or equity financing prior to that time. There
can be no assurance that additional capital will be available to the Company on
favorable terms or at all. The sale of additional debt or equity securities may
cause dilution to existing stockholders.

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BUSINESS

SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
objective is to leverage its expertise in smart card technologies, digital
platforms, and its extensible, upgradeable smart card interface architecture to
meet the growing demand for secure access to digital information and networks.
The Company sells security and access products which include SwapBox PC Card
adapters, SwapSmart smart card readers, SwapAccess DVB-CAM modules, its SmartOS
universal smart card interface architecture and its CIMax DVB-CI interface chip.
The Company sells security and access products to OEMs such as computer,
telecommunication and DVB component and system manufacturers. The Company
markets, sells and licenses its products through a direct sales and marketing
organization primarily to OEMs and also through distributors, VARs, system
integrators and resellers worldwide. OEM customers include Dell, Hughes, Kirch
Group (BetaDigital), Micron, Packard Bell, Siemens/Nixdorf, Sysorex and Telenor.

INDUSTRY BACKGROUND

Individuals and corporations increasingly rely upon computer networks, the
Internet, intranets and direct broadcast systems to access information,
entertainment and data in a digital form from their homes and workplaces. This
increasing proliferation and reliance upon digital data has caused data security
to become a paramount concern of businesses, government, educational
institutions and consumers. Regardless of whether the issue is controlling
access to proprietary or confidential information such as business data or
health records, or whether it is attempting to limit access to digital video
broadcasts to paying subscribers, content providers, network and data managers
and users of digital data are concerned with controlling access to data and
maintaining data security. The enterprise data security market, including
electronic commerce applications, and the market for DVB conditional access
require a range of products to address their needs.

ENTERPRISE DATA SECURITY AND ELECTRONIC COMMERCE

Enterprise Data Security

Enterprise computing has evolved from highly centralized mainframe
computers to widely distributed client/server network-based solutions. Modern
enterprises frequently employ one or more local area networks to connect
computer users located in a single facility, wide area networks and intranets to
connect users in disparate facilities, and the Internet or direct electronic
links to provide internal users access to third party information and to provide
customers, vendors and other interested third parties with access to an
enterprise's computing resources or information. Internet usage is expected to
increase from approximately 50 million Web users worldwide in 1997 to
approximately 175 million users worldwide by 2002 according to International
Data Corporation ("IDC"). This shift towards distributed computing is being
fueled in part by the growing number of mobile computer users and telecommuters
that perform some or all of their work from home or other remote locations.

Data has become increasingly vulnerable to unauthorized access as
enterprises move toward distributed computing and make data more accessible to
internal and external users. According to the Computer Security Institute
("CSI"), 65% of respondents to its 1997 CSI/FBI Computer Crime and Security
Survey acknowledged that they had experienced unauthorized use of their computer
systems within the last 12 months. Unauthorized access can range from users who
are authorized to access portions of an enterprise's computing resources
accessing unauthorized portions, to hackers who have no legitimate access
breaking into a network and stealing or corrupting data. The consequences of
unauthorized access, which can often go undetected, can range from theft of
proprietary information or other assets to the alteration or destruction of
stored data. Approximately 78% of respondents to the Fourth Annual Information
Week/Ernst & Young Information Security Survey reported that their company
suffered a loss related to information security and disaster recovery in the
past two years. Some companies reported losses of up to $1 million due to
security breaches. As a result of the consequences of unauthorized access, many
enterprises have been reluctant to make their computing resources as open as may
be otherwise desirable, and those that allow access are

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adopting various security measures to guard against unauthorized access. The
Company believes that enterprises seek solutions which will allow them to expand
access to data while maintaining adequate security.

Electronic Commerce

The proliferation of PCs in both the home and office combined with
widespread access to the Internet have created significant opportunities for
online shopping and other electronic commerce. IDC estimates that the total
value of goods and services purchased over the Web will grow from $10 billion in
1997 to $223 billion in 2001. The Company believes that a key factor
constraining the growth in online purchasing has been the lack of adequate data
security. As a result of the anonymity of the Internet, merchants and consumers
need assurances that customers are correctly identified and that the
confidentiality of information such as credit card numbers is maintained.
Accordingly, the Company believes that successful expansion of electronic
commerce will require the implementation of improved security measures which
accurately identify and authenticate users and reliably encrypt data
transmissions over the Internet.

Common Solutions to Secure Enterprise Data and Electronic Commerce

Data security and secure electronic commerce generally involve implementing
a patchwork of hardware and software solutions operating at a variety of points
in a data environment, including router, gateway and server-based hardware
solutions, and operating system and applications-level software solutions.

GRAPHIC
Currently, the most common security solution is the installation of one or
more firewalls that control the flow of data between segments of an internal
network or between an internal network and the Internet or other remote access
paths. A firewall essentially acts as a funnel, analyzing whether a particular
communication passing through the funnel is authorized. With the increasing
volumes of network traffic, firewalls may no longer be capable of providing
adequate levels of protection without impairing the speed of communications.
Moreover, Internet technologies such as Sun Microsystems' Java and Microsoft's
ActiveX, which involve the transfer of active programs (applets), and broadcast
applications such as PointCast and Marimba, present security risks that are not
readily addressed by firewalls.

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The key to any security system is the ability to reliably identify users in
order to prevent unauthorized access to information and resources.
Authentication of a user's identification is generally accomplished by one of
two approaches: passwords, which are codes known only by specific users; and
tokens, which are user-specific physical devices that only authorized users
possess. Passwords, while easier to use, are also the least secure because they
tend to be short and static, and are often transmitted without encryption. As a
result, passwords are vulnerable to decoding or observation and subsequent use
by unauthorized persons. Tokens are small devices ranging from simple credit
card-like devices to more complex devices capable of generating
time-synchronized or challenge-response access codes. Certain token-based
systems require both possession of the token itself and a personal
identification number ("PIN") to indicate that the token is being used by an
authorized user. Such an approach, referred to as two-factor authentication,
provides much greater security than single factor systems such as passwords or
the simple possession of a token.

Early implementation of tokens include magnetic strip cards, which are
plastic cards with data encoded on a magnetic strip on the card. These cards are
typically used in automated teller machine ("ATM") and credit card transactions.
ATM cards are an example of a two-factor authentication system. ATM cards
require the user to possess the ATM card and to know the PIN associated with the
card before engaging in any transaction. While suitable for certain
applications, the magnetic strip card is subject to counterfeiting, tampering
and inadvertent data deletion, and can hold only a very limited amount of
information.

PC Cards represent a more advanced form of token, although their use in
security applications has been limited to date. PC Cards are computer
peripherals similar in width and length to, but substantially thicker than, a
credit card. The standards for PC Cards and the corresponding slots were
developed by the PCMCIA. With an installed base of approximately 28 million
PCMCIA slots in 1997 according to IDC, PC Card products have been developed for
a variety of functions including modems and memory devices. While virtually all
portable PCs being sold today contain at least one, and in many cases two,
PCMCIA slots as a standard feature, the PCMCIA standard has generally not been
widely adopted for desktop computers. The use of PC Cards as security tokens has
been endorsed by the DoD as part of its Defense Messaging System ("DMS"). The
DMS uses a PC Card known as "Fortezza" as its standard security token. In
connection with the DMS, the DoD has mandated that desktop computers supplied to
the DoD and its affiliated agencies must incorporate PCMCIA slots in order to
accept the Fortezza PC Card identification/authentication token.

A further advancement in token implementation is the smart card. Smart
cards are credit card-sized plastic cards that contain an embedded
microprocessor, memory and a secure operating system. Smart cards have
significant advantages over PC Cards, including lower cost, portability and
greater durability. Smart cards have been used in applications such as stored
value cards, either for making general purchases or for specific applications
such as prepaid telephone calling cards, and as health care cards, which are
used to store patient and provider information and records. Smart cards are
useful as health care cards because they identify the holder for insurance or
government payment purposes and store health records that can be accessed and
updated by health care providers.

Smart card use for these applications has become widespread in Europe,
where the existence of multiple languages and currencies has created a demand
for common solutions that enable businesses and consumers to conduct their
affairs effectively and efficiently while moving from country to country.
According to Frost & Sullivan, the European market for smart cards has far
outpaced that of the United States. Frost & Sullivan estimates that in 1997 the
U.S. accounted for approximately 20 million units (2%) of the 795 million unit
worldwide smart card market, and projects that the worldwide market will grow to
2.2 billion units by 2001. By the year 2001, Frost & Sullivan estimates that
Europe, Asia/Pacific and the Americas will account for 63%, 19% and 16%,
respectively, of this market.

In addition to providing a common record-keeping and stored value solution
across multiple languages and currencies, the Company believes that smart cards
are ideally suited to serve as tokens for network and electronic commerce
security. Microsoft and Netscape have both endorsed smart cards as key
components of their respective data security architectures, have released
application program interfaces ("APIs") for smart cards and have incorporated
smart card access or smart card security features into Microsoft Windows NT 5.0
and Netscape Communicator 5.0, respectively. Sun Microsystems has released a
Java API for smart cards and

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has integrated the Company's SmartOS smart card interface architecture and Smart
Transporter chip into the next generation of its Java Station, which is expected
to begin shipping in the summer of 1998. The Company believes that these
companies, together with other enterprises with a financial stake in securing
access to digital data and enabling secure electronic commerce such as VeriSign,
Security Dynamics and Intel will drive the adoption of smart card technology for
security applications in the United States. The Company also believes that as
smart card-based security systems become accepted in the United States, users
outside the United States will adopt similar systems.

There are several reasons for these endorsements of smart card-based data
security solutions. Key end-user benefits include ease-of-use, low cost,
convenience and durability. Even more compelling is the architectural simplicity
of these systems. E-mail messages, purchase orders, credit card numbers, video
clips, data inquiries and other confidential transmissions are secured as they
are sent. Therefore, these secure transmissions can be opened only by the
intended recipient, thus eliminating many of the security weakpoints of the
communications infrastructure between the parties. Other solutions such as
firewalls, secure modems and SSL software may continue to be used or added
without interfering with the smart-card based security. The Company believes
that smart cards provide the easiest, most flexible, most cost-effective way to
achieve the key benefits of a secure, authenticated transaction between two or
more parties regardless of the specific infrastructure between them. The
smartcard initiatives launched by the companies discussed in the preceding
paragraph indicate that this view is shared by some other significant companies
in the PC, LAN, WAN, Internet and digital content industries.

To date, a number of factors have limited broad adoption of smart cards as
security tokens. These factors include the requirement for special purpose
readers which have been expensive and therefore not widely deployed and the lack
of standards governing the operating systems, communication protocols, APIs and
similar features of the tokens. These factors have resulted in the deployment of
proprietary, closed, smart card reader systems that are not compatible with
other systems. In addition, smart cards are relatively low speed serial
interface devices which, although capable of providing encryption of passwords
or other limited data, are not capable of providing the real-time bulk
encryption/decryption required for many secured access applications.

DIGITAL VIDEO BROADCASTING

DVB involves the transmission of video signals in a digital format. In
contrast to the traditional analog approach, digital signals allow content
providers ranging from broadcast television stations and cable carriers to
specialty programming producers to deliver very high resolution, high quality
video images. DVB may take the form of currently available direct satellite
broadcast services, or alternative services that are expected to be introduced
in the near future such as digital cable services and direct broadcast digital
television. DVB makes it possible to provide a broader range of private content
and nontraditional services than previously available. Businesses, educational
institutions and other enterprises could broadcast private content such as
product information updates and training or educational content to users in
disparate locations, or could provide various interactive products and services
via the DVB medium. The Company believes that a primary challenge for
broadcasters will be to limit access to their content to the intended users such
as those who have purchased appropriate subscriptions or event-by-event
pay-per-view privileges.

The traditional approach to controlling access has been to sell or lease
proprietary set-top boxes (and, in the case of satellite direct broadcast, a
satellite dish receiver) to subscribers. These set-top boxes descramble digital
signals and then convert them into analog signals in order to be compatible with
the viewer's analog television. While this approach provides the controlled
access desired by broadcasters, it limits the range of content available to the
consumer. Consumers wishing to obtain content or services from more than one
provider would be required to purchase multiple proprietary set-top boxes.
Similarly, the use of proprietary set-top boxes may limit broadcasters' ability
to upgrade systems that have already been installed in their customers' homes
without a costly replacement process.

To address the limitations of the closed-system set-top box in Europe, the
DVB Project, an international consortium of over 170 enterprises involved in
varying aspects of DVB including France Telecom, Deutsche

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Telekom, Nokia, Sony and Philips, has developed the DVB-CI standard. This
standard makes it possible to deliver a universal set-top box capable of
receiving content from a variety of providers. The universal set-top box
requires use of a smart card token that "unlocks" the specific services to which
a consumer has subscribed. With this approach, multiple service providers can
deliver digital content to the same "open" set-top box and consumers, using the
appropriate conditional access module, can access the content to which they have
subscribed. When consumers subscribe to different or additional content services
or parents seek to limit the viewing privileges of their children, the service
providers need only provide the appropriate smart card to allow access to the
new or additional services. The DVB-CI standard addresses the limitations of the
closed-system set-top box by making it possible: (i) for broadcasters to upgrade
systems installed in their customers' homes by downloading new operating system
software onto the universal set-top box; (ii) for customers to use one universal
set-top box to access digital content from various service providers by
inserting the appropriate conditional access module for each particular service
provider; and (iii) for service providers to secure access to new or additional
services by issuing new tokens coded for access to such services.

GRAPHIC

The Company believes that the members of the DVB Project and other
interested enterprises will continue to drive the adoption of DVB-CI as the
European standard for conditional access to digital content. Moreover,
legislation has been enacted in Spain (and may be enacted elsewhere in the
future) mandating that set-top boxes comply with the DVB-CI standard in order to
assure broad access to digital content without requiring consumers to purchase
multiple set-top boxes. In addition, in the United Kingdom, the BDB Consortium
has defined a reference design for set-top boxes for the British digital
television market that is compliant with the DVB-CI standard. In the United
States, the NRSS Committee has proposed the NRSS-B standard for a conditional
access system which is substantially similar to the DVB-CI standard. In February
1998, CableLabs, a research and development consortium of cable television
system operators including most of the largest multi-system operators ("MSOs")
in the United States, adopted a standard for a point of development module as
part of the OpenCable specification. The point of development module is a PCMCIA
Type II extended device which incorporates a smart card reader and conditional
access software to provide flexible security for digital set-top boxes. This
OpenCable standard is an extension of the NRSS-B

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standard. The Company believes that similar standards may be adopted in certain
Asian countries in the future.

The Company believes that successful implementation of the DVB-CI,
OpenCable and similar standards will require the development of hardware that is
capable of real time, high bandwidth decryption of the video signal and is
remotely updatable to permit providers to offer new content and services without
the need to replace equipment. While the current implementations of these
standards use set-top boxes, the Company believes that as the standards evolve
and as flexible hardware solutions become available, the DVB-CI and OpenCable
capability will be built directly into televisions, PCs and network computers.
These devices would then contain the appropriate DVB token slot and reader
capabilities, thereby eliminating the need for the separate set-top box while
providing the same smart card-based conditional access of current systems.

THE SCM MICROSYSTEMS SOLUTION

SCM Microsystems provides OEMs with key standards-compliant enabling
hardware, firmware and software products and technologies used in smart card and
other token-based network security systems and conditional access to DVB content
and services. Through the use of its extensible core technologies, the Company
is able to offer products that address the specific needs of diverse market
applications such as enterprise data security, electronic commerce and DVB
conditional access.

Enterprise Data Security and Electronic Commerce. The Company's products
address the needs of the enterprise data security and electronic commerce
markets as described below.

PCMCIA BRIDGES FOR SMART CARDS. The Company offers a range of products
which enable smart cards to be read and written through standard PCMCIA ports.
This eliminates the requirement for special purpose smart card readers and
provides interoperability between smart cards and PCs, network computers and
other devices equipped with standard PCMCIA ports.

STANDARDS-BASED, INTEROPERABLE PRODUCTS. The Company's products employ
an open-systems architecture that provides compatibility across a range of
hardware platforms and software environments. The Company's products are
remotely upgradeable so that compatibility can be maintained as the security
infrastructure evolves.

SPEED AND PERFORMANCE. Certain of the Company's smart card reader
products transparently extend the speed and performance capabilities of smart
cards used as security tokens by including encryption/decryption capabilities.
By this approach, smart cards are used as keys to activate the
encryption/decryption capabilities of the reader thus eliminating the speed and
performance limitations inherent in smart cards.

Digital Video Broadcasting. The Company's products address the needs of the
DVB market as described below.

INEXPENSIVE, EASY TO DELIVER CONDITIONAL ACCESS MODULES. The Company
provides smart card-based conditional access readers and modules that adhere to
the DVB-CI and OpenCable standards. These products enable digital content and
service providers to control and meter access to content and services through
the use of inexpensive smart cards.

REAL TIME, HIGH-BANDWIDTH DESCRAMBLING CAPABILITIES. The Company's
products are structured to use smart cards as keys to activate the
high-bandwidth capabilities of PC Cards. By this approach, smart card-based
tokens, which by themselves are not capable of descrambling digital video data
at the rate required for digital video broadcast, can still be used to control
and meter access to DVB content and services.

REMOTE UPGRADE CAPABILITIES. The Company's DVB products incorporate
read/write capabilities that permit content and service providers to perform a
virtually no-cost upgrade of users' access rights as new products and services
are developed and introduced and as users' subscriptions change.

STRATEGY

The Company's objective is to utilize its expertise in smart card
technologies, digital platforms, and its extensible, updatable smart card
interface architecture to meet the growing demand for secure access to digital
information and networks. The Company believes it is well positioned to
capitalize on the significant growth

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projected for smart card-based security and controlled access systems. Key
elements of the Company's strategy include the following:

Leverage Technology Base; Support Open Systems and Interoperability. The
Company has developed extensive expertise and intellectual property in both
PCMCIA and smart card technologies. The Company intends to continue to leverage
this technology base to provide smart card products that can operate across a
variety of hardware platforms and software environments. This technology
incorporates upgradeable, firmware-based features which enable smart card
readers to be upgraded as new smart card operating systems and communication
protocols are adopted. In addition to enabling the Company to respond quickly to
industry developments with properly tailored products, this upgradeable
architecture protects the investments in smart card hardware.

Expand Range of Product Applications. Most of the Company's current
products are designed to provide flexible interoperability between smart cards
and PCs or set-top boxes. The Company intends to expand the range of its product
offerings to address specialized applications such as health care records and
identification, televisions and television set-top boxes, customer loyalty
programs, personal identification and Internet and intranet access. In addition,
the Company has developed chip-level versions of certain of its products in
order to reduce their cost and facilitate their easy integration into future
generations of televisions, PCs, NCs and other digital platforms. These include
the Company's SmartTransporter chip for smart card readers and CIMax DVB-CI chip
for the DVB-CAM market. The Company intends to continue to develop silicon-level
versions of, and to pursue silicon-level integration of, its products in an
effort to increase the effectiveness of its products and reduce their cost.

Increase Penetration of Major OEM Customers; Expand Customer Base. The
Company currently sells its products to a number of OEM customers including
Dell, Hughes, Kirch Group (BetaDigital), Micron, Packard Bell, Siemens/Nixdorf,
Sysorex and Telenor. The Company intends to pursue additional opportunities with
its existing customers by leveraging its relationships to increase sales. For
example, the Company's relationships with its existing customers provide the
Company with insight into the current and future needs of these customers,
enabling the Company to design specific products to meet the additional product
needs of each customer. In addition, the Company attempts to locate its
technical, sales and marketing resources close to its OEM customers in order to
provide the highest level of service to its customers. Moreover, the Company
believes that as the needs for data security increase and smart cards gain wider
market acceptance, a significant number of additional participants will enter
the market. The Company intends to expand its customer base by pursuing
opportunities with these new market entrants.

Expand Strategic Industry Relationships. The Company has formed strategic
relationships with a number of key industry players such as Gemplus, Intel and
Telenor. These relationships provide the Company with access to leading edge
technology, marketing and sales leverage and access to key customers and
accounts. The Company intends to continue to leverage these relationships and to
identify additional key industry players with which to form strategic
relationships. See "-- Collaborative Industry Relationships."

Support Standards Setting Organizations. The Company intends to continue to
participate in the standards setting activities for the industries it serves.
The Company is a founding member of the PCMCIA and the DVB Project and supports
the Common Data Security Access standard developed by Intel and adopted by
Netscape. The Company's products are compliant with the RSA public key
cryptographic system number 11 ("PKCS #11") standard. Through its participation
in standards setting organizations, the Company contributed to the adoption of
the DVB-CI specification as the standard by the PCMCIA. In addition, the Company
was instrumental in proposing and developing the conditional access module
adopted as part of the OpenCable specification for the U.S. cable television
market. The Company intends to maintain an active role in these and other
standards setting groups in order to continue to have its technologies adopted
as standards where appropriate and to keep apprised of technological
advancements as they are developed.

Acquire Complementary Technologies, Products and Companies. The Company
believes that opportunities exist to expand the range of conditional access and
data security products, and to expand its sales and marketing operations in key
markets by acquiring or licensing complementary technologies and products and by
acquiring companies engaged in complementary businesses. The Company has entered
into non-
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binding letters of intent with two companies regarding the acquisition of such
companies by the Company (see "Prospectus Summary -- Recent Developments"), and
intends to pursue additional acquisitions and similar opportunities in the
future.

TECHNOLOGY

The Company believes that smart cards are ideally suited to serve as tokens
for digital information security. A smart card is a credit card-sized plastic
card which contains a microprocessor, memory and a secure operating system. The
card is inserted into a device that reads the information contained on the card
and performs an appropriate function. The Company has used its extensible smart
card interface architecture to develop open and standard products that support
many different smart cards regardless of the manufacturer, are accessible
through a variety of operating systems and platforms and enable a wide range of
secure applications. The Company's extensible smart card interface architecture
consists of certain core technologies which provide this interoperability as
described below.

Chip-Level Integration. The Company has implemented a number of its core
products and technologies into custom silicon devices. These include the
SmartTransporter chip, the CIMax DVB-CI chip and a custom PCMCIA controller
based on technology licensed from Intel and optimized by the Company.

Silicon and Firmware for Smart Card Readers. SCM Microsystems has developed
physical interface technology which provides interoperability between PCs and
smart cards from many different smart card manufacturers. The Company's
interoperable architecture includes an ISO compliant layer as well as an
additional layer for supporting non-ISO compliant smart cards. Through its
proprietary integrated circuits and firmware, the Company's smart card readers
can be updated electronically to accommodate new types of smart cards without
the need to change the reader's hardware. Intel Corporation has become the first
company to license the Company's smart card interface.

Proprietary PC Card Cases. Each of the Company's proprietary PC Card cases
ensures that the smart card is positioned correctly into the PC Card reader.
This hardware technology solves the problem presented by the fact that smart
cards and PC Cards have the same width and length. In addition, the Company has
entered into technology licensing agreements with Gemplus and, more recently,
Schlumberger, two of the largest smart card manufacturers in the world, in order
to provide the Company with broader intellectual property rights in this area.

Proprietary Software. The Company has developed a flexible proprietary
software architecture for real-time downloading of firmware for new smart card
protocol handling requirements into a flash memory chip which resides on the
smart card reader. This software, combined with the Company's proprietary
integrated circuits and firmware described above, allows the reader to
accommodate new types of smart cards without the need to change the reader's
hardware. Additionally, the Company has developed "flash filing" software, which
enables PCMCIA flash memory to function as a flash disk. The Company has filed
patent applications with respect to both software applications.

Hardware for PC Card Adapters. The Company has developed the interface
technology to accommodate multiple PCMCIA slots for ISA, SBus (Sun Microsystems)
and PCI bus structures, thus enabling desktop PCs and workstations to be
equipped with PCMCIA slots. In particular, the Company has developed a patented
dual cable solution with special grounding and termination methods which
prevents signal interference between the PCI/ISA bus slots and a large variety
of PC Cards.

PRODUCTS

By bridging smart cards and other secure devices with PCs, workstations and
set-top boxes, the Company's products provide cost-effective solutions for
conditional access to mobile and desktop computers, workstations, DVB, virtual
private networks, electronic files, e-mail, the Internet and secure electronic
commerce. The Company's products have been developed utilizing the Company's
core competencies in smart card and PC interoperability, PC Card expertise and
flash memory chip experience, and all are compliant with the PKCS #11 standard.
SCM Microsystems provides high quality, easy-to-use solutions in the following
product categories:

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

- --------------------------------------------------------------------------------
PRODUCT CATEGORY FEATURES
- --------------------------------------------------------------------------------

SWAPBOX PC CARD ADAPTERS - A peripheral with a PC Card slot that enables desktop PCs
(introduced in 1993) and workstations to accept all sizes of PC Cards (Types I,
II and III)
- Supports a wide variety of PC Card peripherals, including
Ethernet, fax/data modems, SCSI, ATA hard drives, flash
memory, GPS and Fortezza cards
- Available in wide variety of configurations (single and
dual slots, front and rear access, floppy/PC combination)
- Supports a wide variety of platforms (Win 3.X, 95, NT,
OS/2, DOS, Solaris, Unix) and architectures (ISA, PCI, SBus,
USB, EPP, SCSI)
- Compliant with the PCMCIA standard
- --------------------------------------------------------------------------------------------------
SWAPSMART SMART - A smart card reader that fits in a PC Card slot
CARD READERS - Supports all ISO 7816 smart card protocols as well as
(introduced in 1995) asynchronous and synchronous smart cards, and supports dual
or single card applications
- Incorporates an upgradeable firmware-based chip set so
that the reader can be automatically updated with additional
smart card operating systems, protocols and emerging
industry standards
- Supports a wide variety of platforms (Win 3.X, 95, NT,
OS/2, DOS, Solaris, Unix) and architectures (ISA, PCI)
- Compliant with the PCMCIA standard
- --------------------------------------------------------------------------------------------------
SWAPACCESS DVB-CAM - A multi-function PC Card that can include smart card
MODULES read/write capabilities, MPEG2 descrambling, DVB
(introduced in 1996) descrambling and pay- per-view functions
- Utilizes a smart card to control access to digital content
- Enables "open" set-top boxes
- Compliant with the DVB-CI and OpenCable standards
- --------------------------------------------------------------------------------------------------
SMARTOS UNIVERSAL SMART CARD - A chip and accompanying software which provides a
INTERFACE ARCHITECTURE WITH cost-effective universal smart card reader interface easily
SMARTTRANSPORTER CHIP (introduced integrated into a wide range of devices
in 1997) - Supports all ISO 7816 smart card protocols, as well as
synchronous and asynchronous smart cards
- Software upgradeable to support new smart card protocols,
functions and industry standards
- Includes dual smart card support, serial and parallel
interfaces, LCD and keypad controls
- --------------------------------------------------------------------------------------------------
CIMAX DVB-CI COMMON INTERFACE - The hardware extension of the Company's second generation
CHIP HARDWARE CONTROLLER common interface integration package (CI Pack+) that
(introduced in 1998) enables common interface driver software to directly
address two complete independent common interface modules
- Includes the necessary I/Os to interface the MPEG
Transport stream generated by the receiver demodulator and
to daisy chain it through two modules and back to the
demultiplexer
- Interfaces with major digital television microprocessors
- Includes a memory mode that allows the use of any of the
two common interface slots to read/write an 8-bit PC Card
memory card

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

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SWAPBOX PC CARD ADAPTERS

Desktop PCs and workstations, in contrast to laptop and notebook PCs,
generally do not come equipped with PC Card slots. The Company's SwapBox
products are devices with PC Card slots designed to be installed by OEMs into
desktop computers, workstations and servers. Coupled with PC Card security
tokens, cards or smart card readers such as SCM Microsystems' SwapSmart reader,
SwapBoxes allow enterprises to effectively provide authentication, integrity and
confidentiality services. Flash memory cards are widely used with SwapBoxes and
SCM Microsystems' proprietary SwapFTL software for data collection applications.
SwapBoxes accept any PC Card compliant cards including readers for small form
factor memory devices such as Compact Flash, SSFDC, Multimedia and Miniature
Cards, allowing flash memory cards to be connected to PCs for quick and easy
exchange of electronic images, digital audio recordings and text files.

SWAPSMART SMART CARD READERS

The SwapSmart reader is a device in a PC Card form factor that provides a
portable, universal, secure and cost effective bridge between smart cards and
the mobile PC or other products which have PC Card slots. The SwapSmart reader
supports all ISO 7816 smart card protocols as well as asynchronous and
synchronous smart cards. Furthermore, because the SwapSmart reader incorporates
an upgradeable firmware-based chip set, the functionality of SwapSmart products
can be remotely updated as additional smart card operating systems and protocols
come into use. In addition to broad smart card support, the SwapSmart reader is
easily accessible from a wide variety of operating systems and platforms. The
SwapSmart reader enables easy access to the growing number of smart card
applications such as network, VPN and firewall security as well as local and
remote computer access control. Additionally, the SwapSmart reader makes it
possible to use smart cards for user authorization and authentication, for
e-mail and for secure transactions required for electronic commerce. Because of
its encryption capabilities, the reader is well suited for security
applications, particularly mobile computing security.

Currently, the Company is working with Microsoft's PC/SC Workgroup,
Netscape's Security Infrastructure group and Sun Microsystems to ensure that all
of the Company's smart card interface products support the new open
specifications for integrating smart cards with PCs, NCs and workstations. By
supporting a wide range of smart cards and complying with the open standards set
by the PC/SC Workgroup, the Company's smart card interface products provide
maximum interoperability among smart cards and easy access to smart card
applications for mobile or desktop PCs. For example, the SwapSmart reader is
compliant with the B1 specification for smart card readers developed by Deutsche
Telekom, as well as the Common Data Security Access specification developed by
Intel and adopted by Netscape for use in Netscape Communicator.

SWAPACCESS DVB-CAM MODULES

By combining SCM Microsystems' smart card interface technology with the
proprietary descrambling code of a digital content provider, the Company's
SwapAccess DVB-CAM provides a cost-effective means of controlling access to
digital broadcasts through the use of a PC Card. SwapAccess is an all-in-one PC
Card that utilizes a smart card to determine if a viewer has access to a given
content provider's service. If the viewer is authorized, SwapAccess descrambles
the signal for viewing.

SwapAccess is the world's first implementation of the DVB-CI standard. The
Company's DVB-CAM technology enables a variety of critical functions including
video-on-demand, pay-per-view, interactive video, home shopping, home banking
and games. Since SwapAccess can be used in any DVB-CI or NRSS-B compliant "open"
set-top box, it allows acceptance of a single solution for different set-top box
systems. The Company believes that the use of smart card technology combined
with the DVB-CI or NRSS-B standard will eliminate the need for multiple set-top
boxes in order for users to access a broad range of desired broadcast data.
SwapAccess has already been selected, directly and indirectly, by many companies
in Europe, including major content providers such as France Telecom, Telenor
(Norway Telecom) and The Kirch Group (BetaDigital); consumer electronics
companies such as Nokia, Panasonic, Galaxis, Philips and Toshiba; and
broadcasters such as BBC, ITV (UK), Channel 4 (UK), Granada (UK), Carlton (UK),
Telefonica (Spain) and SVT (Sweden). In February 1998, CableLabs, a research and
development consortium of cable television

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system operators including most of the largest MSOs in the United States,
adopted a standard for a point of deployment module as part of the OpenCable
specification. The OpenCable standard is an extension of the NRSS-B standard.
SwapAccess is fully compliant with the NRSS-B and OpenCable standards as
currently proposed. The Company has been and remains active in the definition
and adoption of the NRSS-B and OpenCable standards, and intends to keep
SwapAccess compliant with such standards as they evolve. The Company believes
that similar standards may be adopted in certain Asian countries in the future.

SMARTOS SMART CARD INTERFACE ARCHITECTURE; SMARTTRANSPORTER CHIP

SmartOS utilizes the SmartTransporter chip and a unique firmware technology
to make it possible to easily integrate smart cards with a wide variety of PC
and stand-alone devices, thus allowing companies to integrate smart card support
cost-effectively within desktop, notebook or network computers, USB or serial
devices and keyboards as well as point of sale (POS) terminals and vending
machines. The SmartOS solution allows integrators to utilize only essential
components to control cost and maximize design flexibility. Many hardware
designs, such as a keyboard or network computer, may already incorporate a
controller chip but lack an interface unit and firmware for the completion of a
smart card reader solution. Instead of being forced to purchase all components,
the SmartOS solution offers just those components an integrator needs and those
tools necessary for the quick implementation of smart card readers at a minimum
cost.

Additionally, the Company has demonstrated the flexibility, portability and
modularity of SmartOS by successfully porting it to a variety of platforms. For
example, the Company has ported SmartOS to the OS9 operating system. This has
permitted Motorola, which uses OS9 on several of its platforms, to implement
SmartOS in its Network Computer (NC) and set-top box reference designs.
Similarly, the Company is porting SmartOS to run fully native under Java. This
implementation is expected to be used on the Espresso JavaStations from SUN
Microsystems, as well as on other Java-based NC's from other vendors.

CIMAX

The CIMax controller is the hardware extension of the Company's second
generation common interface integration package (CI Pack+) that enables CI
Driver software to directly address two complete independent common interface
modules. The Company believes that CIMax offers a solution for digital
television manufacturers that want to quickly implement common interface. CIMax
includes the necessary I/Os to interface the MPEG Transport stream generated by
the receiver demodulator and to daisy chain it through two modules and back to
the demultiplexer. CIMax interfaces with major digital television
microprocessors and includes a memory mode that allows to use any of the two
common interface slots to read/write at 8-bit and PC Card memory card. This
features gives the receiver memory extension capability for software upgrades
and better performance.

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CUSTOMERS AND APPLICATIONS

The Company's security and access products are targeted at OEM computer,
telecommunication and DVB component and system manufacturers. The following list
sets forth certain customers that purchased in excess of $300,000 of the
Company's security and access products during the year ended December 31, 1997.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
OEM PRODUCTS
PURCHASED
- --------------------------------------------------------------------------------

Dell PC Card Adapters
Hughes PC Card Adapters
Kirch Group (BetaDigital) DVB Modules
Micron PC Card Adapters
Packard Bell PC Card Adapters
Siemens/Nixdorf PC Card Adapters; Smart Card Readers
Sysorex PC Card Adapters
Telenor DVB-CAM Modules

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

In addition, the Company has recently entered into a development, supply
and marketing agreement with Hitachi for advanced dual and single slot PCMCIA
smart card readers. Sales to a relatively small number of customers historically
have accounted for a significant percentage of the Company's total sales. In
1997, sales to BetaDigital, a division of the Kirch Group, accounted for 45% of
total net sales and sales to the Company's top 10 customers accounted for 80% of
total net sales. The Company expects that sales of its products to a limited
number of customers will continue to account for a high percentage of the
Company's total sales for the foreseeable future. The loss or reduction of
orders from a significant customer, including losses or reductions due to
manufacturing, reliability or other difficulties associated with the Company's
products, changes in customer buying patterns, or market, economic or
competitive conditions in the digital information security business, could
adversely affect the Company's business and operating results. See "Risk
Factors -- Dependence on Sales to OEMs."

Examples of applications of the Company's products include the following:

The Kirch Group. SCM Microsystems has developed and provides DVB-CI
compliant and proprietary DVB-CAM modules under contract to BetaDigital, the
technology arm of the Kirch Group. These modules are installed in DVB compliant
set-top boxes which Kirch distributes to consumers to allow them to access the
Kirch digital entertainment services. These set-top boxes include a smart card,
the Company's smart card readers and a generic receiver/tuner unit to provide
secure access to its entertainment content and services. Customers can easily
add and change the services they receive, and Kirch can easily enable and
disable services. Also, individual customers can have different smart cards
which permit different services. Although used in the same set-top box, a
child's smart card could permit different programming from a parent's smart
card. Kirch also can download completely new services to the modules, permitting
new capabilities, such as pay-per-view and other electronic transaction-based
services, to be added with no additional hardware cost. SwapAccess is the
world's first implementation of the DVB-CI standard established by the DVB
Project. The principal reason for Kirch's selection of the Company's products
was their ability to provide Kirch's customers with an open system that could be
upgraded for new functions.

ADI. ADI is a leading provider of Microsoft PC/SC-compliant security and
banking software for the German home banking market. As a result of the
Company's ability to support both market specific standards such as the German
Home Banking Computer Interface (HBIC) as well as open standards such as PC/SC,
the Company has been selected to work with, among others, ADI and Giesecke &
Devrient (a major German smart card vendor) to produce a complete, smart
card-based security solution for the German home banking market. The combined
solution, which the Company believes is the first major PC-based consumer
application for smart card readers, will be demonstrated at CeBIT in March 1998
and at a Microsoft-

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sponsored event in April for the U.S. banking industry. Volume shipments in
Germany are anticipated to begin in late spring 1998.

Philips. The Company has developed a DVB-CI compliant conditional access
module ("CAM") incorporating Philips' CryptoWorks conditional access system
("CAS"). This enables Philips to provide their own CAS to open markets. As one
of the leading consumer electronics companies worldwide, Philips is making
available DVB-CI compliant set top boxes and CAMs, both through digital
entertainment providers and retail consumer electronics outlets.

Hitachi. The Company and Hitachi have entered into a development, supply
and marketing agreement for smart card readers. The Company will develop
advanced versions of its dual- and single-slot PCMCIA smart card readers.
Hitachi will distribute these products in Japan and the Company will distribute
them worldwide outside of Japan. Both companies have agreed to collaborate to
ensure that all key standards for security and electronic commerce are supported
in the initial and subsequent versions of the product.

Hughes Network Systems (HNS) has implemented the Company's DVB-CI host
controller chip, CIMaX, onto the motherboard of certain of its digital TV
set-top boxes. This permits HNS to provide a DVB-CI compliant slot in their
set-top boxes, making them suitable for deployment in Europe and the U.S.
Utilizing the CIMaX, HNS expects to be able to bring products to market quickly
and with assurance that they will be DVB-CI compliant.

SALES AND MARKETING

The Company markets, sells and licenses its products primarily to OEMs, and
also through distributors, VARs, system integrators and resellers, worldwide
through a direct sales and marketing organization. As of December 31, 1997, the
Company had 22 full-time employees and consultants engaged in sales and
marketing activities. The Company's direct sales staff solicits prospective
customers, provides technical advice and support with respect to the Company's
products and works closely with customers, distributors and OEMs.

In connection with the Company's proposed acquisitions of Intermart and
ICS, the Company expects to strengthen its sales and marketing presence in Japan
and Singapore. Intermart has OEM relationships with Nikon, Fuji Film and other
major Japanese companies and has sales, marketing and engineering operations in
Japan and the United States. In addition, ICS is the Company's distribution
partner in Southeast Asia, and has business relationships and OEM customers
throughout the region. Thus, the Company believes that the acquisitions of
Intermart and ICS, if completed, would significantly enhance the Company's sales
and marketing presence in the Japanese and Southeast Asian markets. See
"Prospectus Summary -- Recent Developments" and "Risk Factors -- Risk Associated
with Potential Acquisitions."

In support of its sales efforts, the Company conducts sales training
courses, comprehensive targeted marketing programs, including public relations,
advertising, seminars, trade shows and ongoing customer and third-party
communications programs. The Company also seeks to stimulate interest in digital
information security through its public relations program, speaking engagements,
white papers, technical notes and other publications.

At December 31, 1997, the Company's backlog was approximately $9.7 million,
as compared to approximately $6.1 million at December 31, 1996. The Company's
backlog consists of all written purchase orders for products which have a
scheduled shipment date within the next six months. Orders for the Company's
products are usually placed by customers on an as-needed basis and the Company
has typically been able to ship products within 30 days after the customer
submits a firm purchase order. The Company's contracts with its customers
generally do not require fixed long-term purchase commitments. In view of the
Company's order and shipment patterns and because of the possibility of customer
changes in delivery schedules or cancellation of orders, the Company's backlog
as of any particular date may not be indicative of sales in any future period.

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COLLABORATIVE INDUSTRY RELATIONSHIPS

SCM Microsystems is party to collaborative arrangements with a number of
corporations and is a member of key industry consortia. The Company evaluates,
on an ongoing basis, potential strategic alliances and intends to continue to
pursue such relationships. The Company's future success will depend
significantly on the success of its current arrangements and its ability to
establish additional arrangements. There can be no assurance that these
arrangements will result in commercially successful products.

Gemplus. In March 1998, the Company and Gemplus, a leading smart card
manufacturer, reached an agreement to cooperate in several areas. The agreement
includes development by the Company of a USB-based, PC/SC compliant smart card
reader. Built on the Company's architecture, this reader will be interoperable
across multiple platforms, compatible with major standards and upgradeable to
support new standards as they emerge. The product will be targeted at broad
markets including home banking, electronic commerce and, more generally, secure
transactions on the Internet. The agreement also includes development by the
Company of a "B1/CT-API compatible," transparent serial smart card reader, based
on the Company's existing technology, to meet the needs of markets such as
health care and banking in Germany. The B1/CT-API is a leading security standard
in Germany. The companies have also entered into a manufacturing supply
agreement whereby the Company will manufacture and supply to Gemplus smart card
reader products including the PCMCIA Type II reader targeted at the mobile PC
market.

Intel Corporation. In March 1997, the Company and Intel entered into a
development and license agreement for cryptographic PC Card-based secure access
modules for the PC platform. The Company has granted Intel a non-exclusive
license to certain Company designs and other intellectual property. Intel has
agreed to support the Company's programs to design a PC Card token. Intel and
the Company have agreed to jointly promote various industry standards applicable
to security products.

Telenor. In May 1997, the Company and Telenor entered into a development
and supply agreement pursuant to which the Company will design, manufacture,
test and supply next generation DVB-CAM modules to Telenor. Pursuant to this
agreement, Telenor may pay up to an aggregate of $1.2 million to the Company for
development costs as the Company achieves certain development milestones. Once
the prototype has been approved by Telenor, the Company will supply these
modules pursuant to the terms of the agreement. As part of this arrangement,
each party will retain rights to its preexisting intellectual property, and it
is expected that any intellectual property that is jointly developed under the
agreement will be jointly owned.

PCMCIA. SCM Microsystems is an executive and founding member of PCMCIA, an
international standards body and trade association with over 500 member
companies that was founded in 1989 to establish standards for integrated circuit
cards and to promote interchangeability among mobile PCs. Other executive
members include Advanced Micro Devices, Apple Computer, Compaq, IBM, Intel,
Motorola, Texas Instruments and U.S. Robotics. Since 1990, the Company has been
a member of PCMCIA in Europe and currently holds the European Chair position. In
1996, the Company introduced to PCMCIA the DVB-CI standard which was adopted as
an extension to its PC Card standard Release 2.0.

DVB Project. The Company is a member of the DVB Project, an international
standards body with over 200 members that was founded in 1993 to define
platforms for the digital television industry. Other key members include France
Telecom, Deutsche Telekom, Telenor, Nokia, Sony and Philips. In 1994, the
Company was instrumental in the DVB Project's adoption of the PC Card standard
as the common interface for digital set-top boxes. As the DVB Project's
Compatibility Chair, the Company advances and oversees proposals to provide
optimum interoperability between PC Cards and digital set-top boxes.

Teletrust. The Company is a member of Teletrust, a German organization
whose goal is to provide a legally accepted means to adopt digital signatures.
Digital signatures are encrypted personal identifiers, typically stored on a
secure smart card, which allow for a high level of security through
internationally accepted authentication methods. The Company is actively working
on the smart card terminal committee which defines the standards for connecting
smart cards to computers for applications such as secure electronic commerce
over the Internet.

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RESEARCH AND DEVELOPMENT

To date, the Company has made substantial investments in research and
development, particularly in the areas of physical, token-based access devices.
The Company's engineering design teams work cross-functionally with marketing
managers, applications engineers and customers to develop products and product
enhancements. The Company also strives to develop and maintain close
relationships with key suppliers of components and technologies in order to
enable the Company to quickly introduce new products that incorporate the latest
technological advances. The Company's future success will depend upon its
ability to develop and to introduce new products on a timely basis that keep
pace with technological developments and emerging industry standards and address
the increasingly sophisticated needs of its customers. See "Risk
Factors -- Dependence on New Products; Rapid Technological Change."

The Company's expenses for research and development were approximately $1.4
million, $2.4 million and $2.9 million for the years ended December 31, 1995,
1996 and 1997, respectively. As of December 31, 1997, the Company had 32
full-time employees engaged in research and development activities, including
software and hardware engineering, testing and quality assurance and technical
documentation. All of the Company's research and development activities occur in
France and Germany. The Company has in the past funded a portion of its research
and development activities with technology development revenues received from
OEM customers in connection with design and development of specific products.
The Company recognized $543,000, $1.6 million and $1.4 million in technology
development revenues in 1995, 1996 and 1997, respectively.

MANUFACTURING AND SOURCES OF SUPPLY

The Company sources its products through three contract manufacturers in
Europe and Asia. The Company has implemented a global sourcing strategy that it
believes will enable it to achieve greater economies of scale, improve gross
margins and maintain uniform quality standards for its products. In the event
any of the Company's contract manufacturers were unable or unwilling to continue
to manufacture the Company's products, the Company may have to rely on other
current manufacturing sources or identify and qualify new contract
manufacturers. Any significant delay in the Company's ability to obtain adequate
supplies of its products from its current or alternative sources would
materially and adversely affect the Company's business and operating results.

The Company believes that its success will depend in large part on its
ability to provide quality products and services. As of December 31, 1997, the
Company had 10 full-time employees engaged in manufacturing activities. The
Company has a formal quality control program to satisfy its customers'
requirements for high quality and reliable products. To ensure that products
manufactured by others are consistent with its standards, the Company manages
all key aspects of the production process, including establishing product
specifications, selecting the components to be used to produce its products and
the suppliers of such components and negotiating the prices for such components.
In addition, the Company works with its suppliers to improve process control and
product design. The Company's quality control specialists conduct on-site
inspections of its suppliers, and the Company's products are tested by the
Company's contract manufacturers prior to shipment.

In connection with the Company's proposed acquisition of ICS, the Company
will acquire all of ICS's manufacturing facilities in Singapore. The Company
believes that ICS's engineering resources in Singapore, its familiarity with the
Company's product lines and its experience in marketing smart card solutions in
Southeast Asia are complementary to the Company's business. The Company also
believes that acquiring ICS will lower the cost of the Company's products and
hence enhance its competitiveness and improve gross margins. See "Prospectus
Summary -- Recent Developments" and "Risk Factors -- Risk Associated with
Acquisitions."

The Company relies upon a limited number of suppliers of several key
components of the Company's products. For example, the Company currently
purchases ASICs for its DVB modules exclusively from TEMIC, PCBs for SwapBoxes
exclusively from Vertek in Taiwan and Degussa in Singapore, smart card
connectors exclusively from ITT Canon, SwapBox boards and completed products
exclusively from ICS and
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SwapSmart mechanical components exclusively from Stocko. The Company's reliance
on sole source suppliers involves several risks, including a potential inability
to obtain an adequate supply of required components, price increases, timely
delivery and component quality. Although to date the Company has been able to
purchase its requirements of such components, there can be no assurance that the
Company will be able to obtain its full requirements of such components in the
future or that prices of such components will not increase. In addition, there
can be no assurance that problems with respect to yield and quality of such
components and timeliness of deliveries will not occur. Disruption or
termination of the supply of these components could delay shipments of the
Company's products and could have a material adverse effect on the Company's
business and operating results. Such delays could also damage relationships with
current and prospective customers. In the past, due to the Company's quality
requirements, the Company has experienced delays in the shipments of its new
products principally due to an inability to qualify component parts from
third-party manufacturers and other suppliers, resulting in delay or loss of
product sales. These delays have not had a material adverse effect upon the
Company's business and operating results. However, there can be no assurance
that in the future any such delays would not have a material adverse effect upon
the Company's business and operating results.

COMPETITION

The market for digital data security and access control products is
intensely competitive and characterized by rapidly changing technology. The
Company believes that competition in this market is likely to intensify as a
result of increasing demand for security products. The Company currently
experiences competition from a number of sources, including: (i) ActionTec,
Carry Computer Engineering, Greystone and Litronic in PC Card adapters; (ii)
Gemplus, SmartDisk Corporation, Philips and Tritheim in smart card readers and
universal smart card reader interfaces; and (iii) Gemplus in DVB-CAM modules.
The Company also experiences indirect competition from certain of its customers
which currently offer alternative products or are expected to introduce
competitive products in the future. The Company may in the future face
competition from these and other parties that develop digital data security
products based upon approaches similar to or different from those employed by
the Company. In addition, there can be no assurance that the market for digital
information security and access control products will not ultimately be
dominated by approaches other than the approach marketed by the Company.

Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies or standards and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of products, or to
deliver competitive products at a lower end user price. Current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties 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 competitors may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced operating margins and loss of market share,
any of which could have a material adverse effect on the Company's business and
operating results.

The Company believes that the principal competitive factors affecting the
market for digital data security products include: the extent to which products
support industry standards and provide interoperability; technical features;
ease of use; quality/reliability; level of security; strength of distribution
channels, and price. While the Company believes that it competes favorably with
respect to these factors, there can be no assurance that the Company will be
able to successfully compete as to these or other factors or that competitive
pressures faced by the Company will not materially and adversely affect its
business and operating results.

PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY

documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company generally enters into
confidentiality and non-disclosure agreements with its employees and with key
vendors and suppliers. The Company's SwapBox and SwapSmart trademarks are
registered in the United States and certain other countries and the Company has
other trademark applications allowed and pending in various countries. The
Company will continue to evaluate the registration of additional trademarks as
appropriate. The Company currently has four U.S. and one Japanese, one German,
one British and one French patents issued, and various U.S., German and other
patent applications pending, and exclusive licenses under various other U.S. and
foreign patents associated with its products. Furthermore, the Company has an
option to obtain an exclusive license from one of its employees to five other
patents relating to its products. There can be no assurance that any new patents
will be issued, that the Company will develop proprietary products or
technologies that are patentable, that any issued patent will provide the
Company with any competitive advantages or will not be challenged by third
parties, or that the patents of others will not have a material adverse effect
on the Company's business and operating results.

EMPLOYEES

As of December 31, 1997, SCM Microsystems had a total of 78 full-time
employees, of which 32 were engaged in engineering, research and development; 22
in sales and marketing; 10 in manufacturing; and 14 in general management and
administration. In addition, the Company had a total of 3 part-time employees as
of December 31, 1997. None of the Company's employees is represented by a labor
union. The Company has experienced no work stoppages and believes that its
employee relations are good.

FACILITIES

The Company leases approximately 5,300 square feet in Los Gatos, California
pursuant to a lease agreement dated September 29, 1994 (the "Los Gatos Lease")
and approximately 2,900 additional square feet pursuant to a sublease agreement,
dated July 6, 1996 (the "Los Gatos Sublease"). In 1997, the Company paid
approximately $67,000 and $50,000 for rent pursuant to the Los Gatos Lease and
Los Gatos Sublease, respectively. The Los Gatos Lease and the Los Gatos Sublease
terminate on October 31, 1998 and July 31, 1999, respectively. In addition, the
Company has the option to extend the Los Gatos Lease for two one-year periods.
The Company leases approximately 6,000 square feet in Pfaffenhofen pursuant to a
lease agreement dated September 30, 1994 (the "Pfaffenhofen Lease"). In 1997,
the Company paid approximately $62,000 for rent pursuant to the Pfaffenhofen
Lease. The Pfaffenhofen Lease ends on June 30, 2000. The Company also leases its
research and development facilities in La Ciotat, France and Erfurt, Germany.
The Company believes that its existing facilities are adequate for its current
needs.

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LEGAL PROCEEDINGS

The Company has been notified by Smith Corona Corporation ("Smith Corona")
that Smith Corona believes that the "SCM" in the Company's name, logo and a
certain product name infringe a trademark held by Smith Corona and that the
Company has engaged in unfair competition. The Company believes that it has
defenses to Smith Corona's claim and has so notified Smith Corona. In the event
that Smith Corona were to initiate legal proceedings against the Company with
respect to this matter, the Company would vigorously defend the action.
Defending any action can be costly and time consuming regardless of the outcome
and, as with any litigation matter, there can be no assurance that the outcome
of any such dispute would be favorable to the Company. An unfavorable outcome in
the matter could subject the Company to monetary damages and may result in the
Company having to change its name and logo, which would require the Company to
incur costs related thereto and may result in a loss of the goodwill associated
with its name and logo.

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MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company, and their ages as of
December 31, 1997, are as follows:

NAME AGE POSITION
---- --- --------

Robert Schneider.................. 48 Chairman of the Board
Steven Humphreys.................. 36 President, Chief Executive Officer and
Director
Bernd Meier....................... 47 Chief Operations Officer and Director
Nicholas Efthymiou................ 34 Vice President, Worldwide Business Development
David Hale........................ 32 Vice President, Operations
Jean-Yves Le Roux................. 38 Vice President, Engineering
John Niedermaier.................. 41 Vice President, Finance and Chief Financial
Officer
Friedrich Bornikoel(1)............ 47 Director
Bruce Graham...................... 37 Director
Randall Lunn(2)................... 47 Director
Poh Chuan Ng(2)................... 36 Director
Andrew Vought(1)(2)............... 43 Director

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

(1) Member of Compensation Committee.

(2) Member of Audit Committee

Robert Schneider founded the Company in May 1990 as President, Chief
Executive Officer, General Manager and Chairman of the Board. Mr. Schneider is
currently Chairman of the Board. Mr. Schneider is a Managing Director of the
Company's German subsidiary. Mr. Schneider holds a degree in engineering from
HTBL Salzburg and a B.A. degree from the Akademie for Business Administration in
Uberlinger.

Steven Humphreys joined the Company in August 1996 as President and
Chairman of the Board. Mr. Humphreys currently is President, Chief Executive
Officer and a Director of the Company. From April 1994 until February 1996, Mr.
Humphreys was President of Caere Corporation, an optical character recognition
software and systems company. From November 1990 until March 1994, he was Vice
President of General Electric Information Services, an electronic commerce
services provider. Mr. Humphreys holds a B.S. degree from Yale University and a
M.S. degree and a M.B.A. degree from Stanford University.

Bernd Meier joined the Company in January 1992 as General Manager and as a
Director of the Company. Mr. Meier is currently the Chief Operations Officer, a
Director of the Company and a Managing Director of the Company's German
subsidiary. Mr. Meier holds a degree in engineering from Fachhochschule Dieburg.

Nicholas Efthymiou has held various sales and marketing positions since
joining the Company as Vice President, Marketing in February 1992. Mr. Efthymiou
is currently Vice President, Worldwide Business Development. Mr. Efthymiou holds
a B.S.E.E. degree from S.U.N.Y. at Buffalo and a M.B.A. degree from the
University of Texas.

David Hale has served as Vice President, Operations since October 1996.
From October 1991 until September 1996, Mr. Hale held various management
positions at a subsidiary of Solectron, an electronics manufacturing company,
where he most recently served as operations manager. Mr. Hale holds a B.S.I.E.
degree and a M.A. degree and a M.B.A. degree from Stanford University.

Jean-Yves Le Roux joined the Company in May 1995 as Manager, Research and
Development. Mr. Le Roux is currently Vice President, Engineering. From
September 1991 until March 1995, Mr. Le Roux was Manager, PCMCIA Research and
Development of Gemplus, a smart card products supplier. Mr. Le Roux holds an
engineering degree from E.O.E.S. Angers France.

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48

John Niedermaier joined the Company in April 1997 as Vice President,
Finance and Chief Financial Officer. From November 1995 until March 1997, Mr.
Niedermaier was Vice President, Finance and Chief Financial Officer of Voysys
Corporation, a provider of telecommunications systems for small businesses, and
from April 1994 until November 1995, he was Director, Business Planning at Octel
Communications Corporation, a voice messaging company. From November 1989 until
March 1994, Mr. Niedermaier was Vice President, Corporate Controller of VMX,
Inc., a voice processing company, which merged with Octel in March 1994. Mr.
Niedermaier is a Certified Public Accountant and holds a B.S. degree from Wayne
State University.

Friedrich Bornikoel has served as a Director of the Company since September
1993. Mr. Bornikoel joined TVM Techno Venture Management GmbH, a venture capital
firm, in July 1987 and has been a Partner since 1990. Mr. Bornikoel is a
director of several privately held companies. Mr. Bornikoel holds a Masters
degree in Physics from the Technical University of Munich.

Bruce Graham has served as a Director of the Company since July 1995. Mr.
Graham has been a Partner of Bessemer Venture Partners, a venture capital firm,
since December 1996. From 1991 until December 1996, Mr. Graham was an Associate
and Vice President at Vertex Management, a venture capital firm. Mr. Graham is a
director of several privately held companies. Mr. Graham holds a B.S. degree in
Chemical Engineering from Princeton University and a M.B.A. degree from Stanford
University.

Randall Lunn has served as a Director of the Company since November 1993.
Mr. Lunn has been a Partner of TVM Techno Venture Management, L.P., a venture
capital firm, since May 1990. Mr. Lunn is a director of several privately held
companies. Mr. Lunn holds a B.A. degree, a B.S. degree in Engineering and a
M.B.A. degree from Dartmouth College.

Poh Chuan Ng has served as a Director of the Company since June 1995. Mr.
Ng is currently a Managing Director and Chairman of the Board of Global Team
Technology Pte. Ltd., a manufacturer's representative for computer products.
From September 1994 through May 1997, Mr. Ng served as Director, Business
Development at ICS, a contract manufacturing company and developer of
communications products. Prior to joining ICS, Mr. Ng was a product engineering
manager for Compaq Computer Corp. Mr. Ng is a director of several privately held
companies. Mr. Ng holds a B.S.E. degree from the National University of
Singapore.

Andrew Vought has served as a Director of the Company since March 1996. Mr.
Vought is currently a Senior Vice President and Chief Financial Officer of
Virata Corporation, an ATM networking equipment company. From January 1995
through May 1996, Mr. Vought was a partner of Cheyenne Capital Corporation.
Prior to joining Cheyenne Capital Corporation, Mr. Vought was Vice President,
Chief Financial Officer and Secretary of MicroPower Systems, Inc., an analog and
mixed signal semiconductor company, from May 1990 until April 1994. Mr. Vought
is a director of several privately held companies. Mr. Vought holds a B.S.
degree and a B.A. degree from the University of Pennsylvania and a M.B.A. degree
from Harvard University.

TERM OF OFFICE OF DIRECTORS AND OFFICERS

The Company's Bylaws and Certificate of Incorporation provide that
effective as of the date of the first regularly scheduled meeting of the
stockholders following the date on which the Company becomes subject to the
periodic requirements of the Securities Exchange Act of 1934, as amended, the
directors of the Company will be divided into three classes equal in size with
each class elected to a staggered three-year term. Each director will hold
office until the expiration of the term of his or her respective class and until
his or her respective successor has been duly elected and qualified.

BOARD COMMITTEES

In March 1997, the Board established an Audit Committee and a Compensation
Committee. The Audit Committee, currently comprised of directors Randall Lunn,
Poh Chuan Ng and Andrew Vought, recommends to the Board of Directors the
engagement of the Company's independent accountants and reviews with the
accountants the plan, scope and results of their examination of the consolidated
financial statements. The

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Compensation Committee, currently comprised of directors Friedrich Bornikoel and
Andrew Vought, reviews and makes recommendations to the Board of Directors
regarding all forms of compensation to be provided to the executive officers,
directors and consultants to the Company.

DIRECTOR COMPENSATION

Beginning April 1, 1997, nonemployee members of the Company's Board of
Directors ("Outside Directors") receive an annual fee of $10,000 plus $1,000 for
each board meeting attended in person for their services as directors. Prior to
that time, directors did not receive compensation for services as directors.

The Company's 1997 Director Option Plan (the "Director Plan") was adopted
by the Board of Directors in March 1997. A total of 50,000 shares of Common
Stock has been reserved for issuance under the Director Plan. However, an annual
increase will be made to the Director Plan on each anniversary date of adoption
of the Director Plan, in an amount equal to the number of shares underlying
options granted in the immediately preceding year or a lesser amount determined
by the Board. Each Outside Director of the Company was granted an initial option
to purchase 5,000 shares of Common Stock upon the effective date of the Director
Plan and each person who becomes an Outside Director after that date will
automatically be granted an initial option to purchase 10,000 shares of Common
Stock. Each Outside Director will automatically be granted subsequent annual
options to purchase 5,000 additional shares of Common Stock under the Director
Plan on the date of each annual meeting of stockholders. All such options have
an exercise price equal to the fair market value of the Common Stock at the date
of grant, have a term of ten years and vest monthly over one year from the date
of grant. Options granted under the Director Plan are not transferable unless
approved by the Board. The Company's Director Plan will terminate in 2007.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No interlocking relationship exists between the Company's Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation, as amended and restated, limits
the liability of directors to the maximum extent permitted by Delaware law.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors
except for liability arising out of: (i) a breach of their duty of loyalty to
the corporation or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law; or (iv) any
transaction from which the director derived an improper personal benefit.

The Company's charter documents provide that the Company shall indemnify
its officers, directors and agents to the fullest extent permitted by law,
including those circumstances where indemnification would otherwise be
discretionary. The Company believes that indemnification under its charter
documents covers at least negligence and gross negligence on the part of
indemnified parties. The Company has entered into indemnification agreements
with each of its directors and officers which may, in some cases, be broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require the Company, among
other things, to indemnify each director and officer against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities arising from willful misconduct of a culpable nature)
and to advance such persons' expenses incurred as a result of any proceeding
against him or her as to which such person could be indemnified.

At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding that could result in a claim for such
indemnification.

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EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth all compensation
awarded to, earned by, or paid for services rendered to the Company in all
capacities during the years ended December 31, 1996 and 1997 for the Company's
Chief Executive Officer and the Company's most highly compensated other
executive officers whose salary and bonus for 1997 exceeded $100,000
(collectively, the "Named Executive Officers").

LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
-------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)
--------------------------- ---- --------- -------- ------------ ------------

Robert Schneider............................. 1997 190,000 75,000 120,000 1,935(1)
Managing Director of German subsidiary 1996 154,800 84,415 50,577 1,935(1)
Steven Humphreys(3).......................... 1997 190,000 75,000 -- --
President and Chief Executive Officer 1996 76,064 17,258 276,570 30(1)
Bernd Meier.................................. 1997 190,000 75,000 120,000 1,935(1)
Chief Operations Officer and Managing 1996 154,800 125,807 201,026 1,935(1)
Director of German subsidiary
Nicholas Efthymiou........................... 1997 118,333 25,344 50,000 4,737(2)
Vice President, U.S. Sales and 1996 100,000 30,458 75,544 11,357(2)
Business Development
John Niedermaier(4).......................... 1997 108,750 20,164 80,000 --
Vice President, Finance and Chief Financial 1996 -- -- -- --
Officer

- ---------------
(1) Represents payments of life insurance premiums.

(2) Represents payments of a housing and auto allowance of $4,707 and $11,327
for 1997 and 1996, respectively, and life insurance premiums of $30 for both
1997 and 1996.

(3) Mr. Humphreys began working at the Company in August 1996.

(4) Mr. Niedermaier began working at the Company in April, 1997.

Option Grants During 1997. The following table sets forth for each of the
Named Executive Officers certain information concerning stock options granted
during 1997.

INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE OPTION TERM(2)
OPTIONS IN PER EXPIRATION ----------------------
NAME GRANTED 1997 SHARE($) DATE(1) 5%($) 10%($)
---- ---------- ---------- -------- ---------- ------- ---------

Robert Schneider........ 35,000 4.35 8.10 6/10/2007 178,500 450,450
85,000 10.57 9.50 8/11/2007 508,300 1,283,500
Steven Humphreys........ -- -- -- -- -- --
Bernd Meier............. 35,000 4.35 8.10 6/10/2007 178,500 450,450
85,000 10.57 9.50 8/11/2007 508,300 1,283,500
Nicholas Efthymiou...... 50,000 6.22 9.50 8/11/2007 299,000 755,000
John Niedermaier........ 80,000 9.94 5.72 4/4/2007 288,000 727,200

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

(1) Options generally vest as to 25% of the shares one year from the date of
grant and monthly thereafter for the succeeding 36 months. Options may
generally be exercised ahead of vesting, subject to a right of the Company
to repurchase the unvested portion of the shares if the optionee's status as
an employee or consultant is terminated or upon the optionee's death or
disability prior to the shares vesting.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices. The actual value realized may be greater or less than
the potential realizable values set forth in the table.

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Year-End Option Values. The following table sets forth, for each of the
Named Executive Officers, the year-end value of unexercised options as of
December 31, 1997:

NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE(1) OF UNEXERCISED IN-THE-
OPTIONS AT YEAR-END(#): MONEY OPTIONS AT YEAR-END($):
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
---- ---------------------------- -------------------------------

Robert Schneider................... 0/120,000 0/1,789,000
Steven Humphreys................... 97,952/178,618 2,341,052/4,268,970
Bernd Meier........................ 0/120,000 0/1,789,000
Nicholas Efthymiou................. 0/50,000 0/725,000
John Niedermaier................... 0/80,000 0/1,462,400

- ---------------
(1) Options are generally exercisable by the optionee ahead of vesting. Unvested
shares purchased on exercise of an option are subject to a repurchase right
of the Company, and may not be sold by an optionee until the shares vest.
Options indicated as "Exercisable" are those options which were both vested
and exercisable as of December 31, 1997. All other options are indicated as
"Unexercisable."

(2) Market value of underlying securities at year-end minus the exercise price.

EMPLOYMENT CONTRACTS

The Company's German subsidiary has entered into substantially similar
employment agreements with each of Messrs. Schneider and Meier pursuant to which
each serves as a Managing Director of the subsidiary. Each agreement continues
for an indefinite term and each party may terminate the agreement at any time
with six months notice. Each executive receives an annual base salary of
$190,000 and an annual bonus of up to $75,000. Furthermore, each executive is
subject to a non-compete provision for a period of one year after the
termination of employment.

In addition, the Company has entered into an employment agreement, dated
June 2, 1995, with Mr. LeRoux. The initial salary under the agreement is FF
475,000 (approximately $82,000) per year, including a bonus of FF 70,000
(approximately $12,000). Either party may terminate the agreement at any time.

EMPLOYEE STOCK PLANS

1997 Stock Plan

The Company's 1997 Stock Plan (the "1997 Plan") provides for the granting
to employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and for
the granting to employees and consultants of nonstatutory stock options and
stock purchase rights ("SPRs"). The 1997 Plan was approved by the Board of
Directors in March 1997, and by the stockholders in April 1997. Unless
terminated sooner, the 1997 Plan will terminate automatically in March 2007. A
total of 1,000,000 shares of Common Stock are currently reserved for issuance
and options to purchase 804,500 shares have been issued pursuant to the 1997
Plan. An annual increase will be made to the 1997 Plan on each anniversary date
of the adoption of the 1997 Plan, in an amount equal to the lesser of 500,000
shares, three percent of the outstanding shares on such date, or a lesser amount
determined by the Board.

The 1997 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code.
The Committee has the power to amend, suspend or terminate the 1997 Plan
(provided that no such action may affect any share of Common Stock previously
issued and sold or any option or SPR previously granted under the 1997 Plan), to
determine the terms of the options and SPRs granted, including the exercise
price, the number of shares subject to each or SPR option, the exercisability
thereof, and the form of consideration payable upon such exercise. In addition,
the Committee has the authority to prescribe, amend and rescind rules and
regulations relating to the 1997 Plan. Pursuant to this authority, the Committee
has approved the 1997 Stock Option Plan for French Employees (the "French Plan")
in April 1997, pursuant to which stock options that qualify for

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preferential tax treatment under French tax law may be granted. The French Plan
will be submitted to the Company's stockholders for their approval.

Options and SPRs granted under the 1997 Plan are not generally transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months of the end of optionee's status as an
employee or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. In case of SPRs, unless the Committee
determines otherwise, the Restricted Stock Purchase Agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). The purchase price for Shares repurchased
pursuant to the Restricted Stock Purchase Agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate determined
by the Committee. The exercise price of options granted under the 1997 Plan is
determined by the Committee, but with respect to incentive stock options, and
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue Code,
the exercise price must at least be equal to the fair market value of the Common
Stock on the date of grant. The term of options granted under the 1997 Plan
generally may not exceed ten years.

The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets or
a like transaction involving the Company, each option shall be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options are not assumed or substituted for as described in the preceding
sentence, the Optionee shall fully vest in and have the right to exercise the
option or SPR as to all of the optioned stock, including shares as to which it
would not otherwise be vested or exercisable. If the Administrator makes an
option or SPR fully vested and exercisable in the event of a merger or sale of
assets, the Administrator shall notify the optionee that the option or SPR shall
be fully vested and exercisable for a specified period from the date of such
notice, and the option or SPR will terminate upon the expiration of such period.

1997 Employee Stock Purchase Plan

The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in March 1997 and by the stockholders in April
1997. A total of 175,000 shares of Common Stock has been reserved for issuance
under the Purchase Plan. However, an annual increase will be made to the
Purchase Plan on each anniversary date of the adoption of the Purchase Plan, in
an amount equal to the lesser of 150,000 shares, one percent of the outstanding
shares on such date, or a lesser amount determined by the Board. The Purchase
Plan, which is intended to qualify under Section 423 of the Internal Revenue
Code, is implemented by consecutive overlapping twenty-four month offering
periods beginning on the first trading day on or after May 1 and November 1 each
year, except for the first such offering period which commenced on February 1,
1998 and ends on the last trading day on or after April 30, 1999. Each offering
period contains four purchase periods of approximately six months duration
during which a participant may accumulate payroll deductions and purchase Common
Stock. The Purchase Plan is administered by the Board of Directors or by a
committee appointed by the Board. Employees are eligible to participate if they
are customarily employed by the Company or any participating subsidiary for at
least 20 hours per week and more than five months in any calendar year. The
Purchase Plan permits eligible employees to purchase Common Stock through
payroll deductions of up to 10% of an employee's compensation (including
commissions, overtime and other bonuses and incentive compensation), up to a
maximum of $5,000 for each purchase period. The price of stock purchased under
the Purchase Plan is 85% of the lower of the fair market value of the Common
Stock at the beginning of the offering period or the end of the applicable
purchase period. Employees may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.

Rights granted under the Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the Purchase Plan. The Purchase Plan provides that, in
the event of a merger of the Company with or into another corporation or a sale
of all or substantially
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all of the Company's assets, each participant's right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor corporation.
If the successor corporation refuses to undertake such an assumption or
substitution, the Board of Directors shall shorten the offering period then in
progress (so that employees' rights to purchase stock under the Purchase Plan
are exercised prior to the merger or sale of assets). The Purchase Plan will
terminate in 2007. The Board of Directors has the authority to amend or
terminate the Purchase Plan, except that no such action may adversely affect any
outstanding rights to purchase stock under the Purchase Plan.

1997 Employee Stock Purchase Plan for Non-U.S. Employees

The 1997 Employee Stock Purchase Plan for Non-U.S. Employees (the
"International Purchase Plan") was adopted by the Board of Directors in April
1997. The number of shares reserved for issuance under the International
Purchase Plan equals the number of shares reserved for issuance under the
Purchase Plan, but not yet issued. The terms of the International Purchase Plan
are substantially similar to those of the Purchase Plan, except that employees
need not be customarily employed by the Company or a participating subsidiary
for at least 20 hours per week and more than five months per calendar year to
participate. The International Purchase Plan is not intended to qualify under
Section 423 of the Code.

CERTAIN TRANSACTIONS

From time to time, Robert Schneider loaned to the Company various amounts
up to approximately DM 240,000 (approximately $145,000). These loans accrued
interest at 8.5% per annum and were due on demand. As of December 31, 1996, the
amount outstanding under these loans was approximately DM 100,000 (approximately
$69,000) and, as of December 31, 1997, all such loans had been repaid.

In March 1997, the Company and Intel entered into a three-year development
and license agreement. As part of this arrangement, Intel made an equity
investment of $2.0 million in the Company and, as of December 31, 1997,
beneficially owned approximately 3.5% of the Company's Common Stock.

In May 1997, the Company and Telenor entered into a development and supply
agreement. As part of this agreement, Telenor purchased 640,000 shares of
Preferred Stock for approximately $5.5 million, received 34,965 additional
shares of Preferred Stock in exchange for certain technology rights and received
a warrant to purchase an additional 194,930 shares of Preferred Stock for $8.58
per share. See "Business -- Collaborative Industry Relationships" and "Principal
and Selling Stockholders."

During 1995, 1996 and 1997, the Company purchased contract manufacturing
services totaling $3.5 million, $3.3 million and $3.4 million, respectively,
from ICS. Poh Chuan Ng, a director of the Company, served as Director, Business
Development for ICS from September 1994 through May 1997. The Company recently
entered into a non-binding letter of intent to acquire ICS. See "Prospectus
Summary -- Recent Developments."

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54

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 23, 1998 and as
adjusted to reflect the sale of the Common Stock offered hereby for: (i) each
person or entity who is known by the Company to beneficially own five percent or
more of the outstanding Common Stock of the Company prior to this offering; (ii)
each of the Company's directors; (iii) each of the Named Executive Officers;
(iv) all directors and executive officers of the Company as a group; and (v)
each Selling Stockholder.

SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ --------- ------- --------- --------- -------

(APM) AlpinvestInternational B.V.(2)... 784,128 7.0 400,000 384,128 3.1
Gooimeer 3
P.O. Box 5073
1410 AB Naarden, The Netherlands
Telenor Venture AS(3).................. 724,965 6.4 362,000 362,965 3.0
P.O. Box 6701, St. Olavs plass
N-0130 Oslo, Norway
TVM Techno Venture Management
GmbH(4).............................. 667,857 5.9 198,000 469,857 3.8
c/o Friedrich Bornikoel
Tolzerstrasse 12A
82031 Grunwald Germany
Robert Schneider(5).................... 615,944 5.5 100,000 515,944 4.2
c/o SCM Microsystems GmbH
Luitpoldstrasse 6
D-85276 Pfaffenhofen Germany
Gemplus................................ 600,000 5.3 250,000 350,000 2.9
Z.I. Athelia III-Voie Antiope
13705 La Ciotat Cedex 8, France
Bernd Meier(6)......................... 677,730 6.0 100,000 577,730 4.7
c/o SCM Microsystems GmbH
Luitpoldstrasse 6
D-85276 Pfaffenhofen Germany
Vertex Investment (II) Ltd.(7)......... 580,187 5.2 290,000 290,187 2.4
83, Science Park Drive
#01-01/02
Singapore 0511
Steven Humphreys(8).................... 276,570 2.5 50,000 226,570 1.9
John Niedermaier(9).................... 23,333 * 15,000 8,333 *
Nicholas Efthymiou(10)................. 204,591 1.8 50,000 154,591 1.3
Friedrich Bornikoel(11)................ 717,857 6.4 10,300 509,557 4.2
Bruce Graham(12)....................... 5,000 * -- 5,000 *
Randall Lunn(13)....................... 672,857 5.9 -- 474,857 3.9
Poh Chuan Ng(14)....................... 5,000 * -- 5,000 *
Andrew Vought(15)...................... 5,000 * -- 5,000 *
Other Selling Stockholders............. 174,700
All directors and executive officers as
a group (12 persons)(16)............. 2,473,191 22.0% 325,300 2,152,891 17.6

- ------------------
* Less than one percent.

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55

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable but not necessarily vested within 60
days of April 30, 1998 are deemed outstanding. Such shares, however, are
not deemed outstanding for the purpose of computing the percentage
ownership of each other person. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, each
stockholder named in the table has sole voting and investment power with
respect to the shares set forth opposite such stockholder's name.

(2) Includes warrants to purchase 5,537 shares of Common Stock.

(3) Includes warrants to purchase 50,000 shares of Common Stock.

(4) Includes: (i) warrants to purchase 2,872 shares of Common Stock, (ii)
259,315 shares held by TVM Eurotech Ltd. and (iii) warrants to purchase
1,845 shares of Common Stock exercisable before April 15, 2003 held by TVM
Eurotech Ltd. TVM Techno Venture Management provides certain advisory
services to (APM) Alpinvest International B.V. but disclaims beneficial
ownership of shares held by such entity.

(5) Includes (i) 32,010 shares held by Robert Schneider's wife, Ursula
Schneider, and (ii) options to purchase 8,750 shares and 250 shares of
Common Stock exercisable within 60 days of April 30, 1998 held by Robert
Schneider and Ursula Schneider, respectively.

(6) Includes: (i) 16,005 shares held by Bernd Meier's wife, Sonja Meier, (ii)
131,243 shares held in trust for Nicholas Efthymiou, and (iii) options to
purchase 8,750 shares and 250 shares of Common Stock exercisable within 60
days of April 30, 1998 held by Bernd Meier and Sonja Meier, respectively.

(7) Includes warrants to purchase 8,017 shares of Common Stock.

(8) Includes options to purchase 276,570 shares of Common Stock exercisable
within 60 days of April 30, 1998, 132,523 of which will be vested as of
such date and the remainder of which will be subject to repurchase by the
Company until vested.

(9) Includes options to purchase 23,333 shares of Common Stock exercisable
within 60 days of April 30, 1998.

(10) Includes 131,243 shares held by Bernd Meier in trust for the benefit of Mr.
Efthymiou.

(11) Includes: (i) 667,857 shares held by TVM Techno Venture Management GmbH.
Mr. Bornikoel is a partner of TVM Techno Venture Management GmbH. Mr.
Bornikoel disclaims beneficial ownership of shares beneficially owned by
such entity except to the extent of his pecuniary interest therein and (ii)
options to purchase 20,000 shares of Common Stock exercisable within 60
days of April 30, 1998. TVM Techno Venture Management provides certain
advisory services to (APM) AlpinvestInternational B.V. but disclaims
beneficial ownership of shares held by such entity.

(12) Includes options to purchase 5,000 shares of Common Stock exercisable
within 60 days of April 30, 1998.

(13) Includes: (i) 667,857 shares held by TVM Techno Venture Management GmbH.
Mr. Lunn is a partner of TVM Techno Venture Management L.P. Mr. Lunn
disclaims beneficial ownership of shares beneficially owned by such entity
except to the extent of his pecuniary interest therein and (ii) options to
purchase 5,000 shares of Common Stock exercisable within 60 days of April
30, 1998. TVM Techno Venture Management provides certain advisory services
to (APM) AlpinvestInternational B.V. but disclaims beneficial ownership of
shares held by such entity.

(14) Includes options to purchase 5,000 shares of Common Stock exercisable
within 60 days of April 30, 1998.

(15) Includes: options to purchase 5,000 shares of Common Stock exercisable
within 60 days of April 30, 1998.

(16) Includes shares and exercisable options and warrants which may be deemed to
be beneficially owned by certain directors and executive officers. See
Notes 5, 6, 8, 9, 10, 11, 12, 13, 14 and 15 above.

53
56

DESCRIPTION OF CAPITAL STOCK

At the consummation of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.001 par value, and
10,000,000 shares of Preferred Stock, $0.001 par value.

COMMON STOCK

As of December 31, 1997, there were 10,714,978 shares of Common Stock
outstanding held of record by approximately 120 stockholders. Holders of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. The holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable, and the shares of Common Stock to be outstanding upon
consummation of the offering will be fully paid and non-assessable.

PREFERRED STOCK

10,000,000 shares of undesignated Preferred Stock are authorized, and no
shares are outstanding. The Board of Directors has the authority to issue the
shares of Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any unissued
shares of Preferred Stock and to fix the number of shares constituting any
series and the designations of such series, without any further vote or action
by the stockholders. Although it presently has no intention to do so, the Board
of Directors, without stockholder approval, can issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock. The issuance of Preferred Stock may have the effect
of delaying, deterring or preventing a change in control of the Company.

WARRANTS

As of December 31, 1997, the Company had outstanding warrants to purchase
an aggregate of 451,191 shares of Common Stock at a weighted average exercise
price of $12.62 per share.

ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, amended Bylaws, Delaware law and the Company's indemnification
agreements with certain officers and directors of the Company may be deemed to
have an anti-takeover effect. Such provisions may delay, deter or prevent a
tender offer or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.

The Company's Board of Directors may issue additional shares of Common
Stock or establish one or more classes or series of Preferred Stock, having the
number of shares (up to 10,000,000), designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations as
determined by the Board of Directors without stockholder approval. The Company's
Amended and Restated Certificate of Incorporation and Bylaws, as amended, also
contain a number of provisions that could impede a takeover or change in control
of the Company, including but not limited to the elimination of stockholders'
ability to take action by written consent without a meeting and the elimination
of cumulative voting in the election of directors.

In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. In general, the 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

54
57

date of the transaction in which the person became an interested stockholder,
unless the business combination is approved in a prescribed manner.

In addition, in connection with its listing on the Neuer Markt of the
Frankfurt Stock Exchange, the Company is required to comply with the German
Code. The German Code regulates Public Offers, and requires companies seeking to
make a Public Offer to inform the German regulatory authorities and the public
of the offer, to provide certain disclosure to the target Company's
stockholders, to generally treat stockholders equally in an offer, and to comply
with certain other regulatory requirements. In addition, the German Code gives
broad authority to the German regulatory authorities to interpret the German
Code and to review and regulate specific Public Offers. Compliance with the
German Code could have the effect of delaying, deferring or preventing a tender
offer or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.

Each of the foregoing may have the effect of preventing or rendering more
difficult or costly, the completion of a takeover transaction that stockholders
might view as being in their best interests.

REGISTRATION RIGHTS

Upon completion of this offering, the holders or their permitted
transferees ("Holders") of approximately 2.9 million shares of Common Stock are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. If the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of other
security holders, the holders are entitled to notice of the registration and are
entitled to include, at the Company's expense, shares therein. In addition,
certain of the Holders may require the Company at its own expense, on not more
than two occasions, to file a registration statement under the Securities Act,
with respect to their shares of Common Stock, and the Company is required to use
its best efforts to effect such registration, subject to certain conditions and
limitations. Further, the Holders may require the Company, at its expense, to
register shares of Common Stock on a Registration Statement on Form S-3, when
such form becomes available to the Company, subject to certain conditions and
limitations. See "Shares Eligible For Future Sale."

LISTING

The Common Stock is listed on the Nasdaq National Market under the symbol
"SCMM" and is listed on the Neuer Markt of the Frankfurt Stock Exchange under
the symbol "SMY".

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.

55
58

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public
market after this offering could adversely affect the market price of the
Company's Common Stock and could impair the Company's ability to raise capital
through the sale of equity or equity-related securities. Upon completion of this
offering, the Company will have 12,244,062 shares outstanding (12,694,062 shares
if the Underwriters' over-allotment option is exercised in full) assuming no
further exercise of options or warrants outstanding as of March 25, 1998. Of
these shares, the 3,000,000 shares offered hereby (3,450,000 shares if the
Underwriters' over-allotment option is exercised in full), together with an
aggregate of 6,320,451 shares (comprising (i) shares sold in the Company's
initial public offering, (ii) shares sold into the public market subsequent to
the Company's public offering, and (iii) shares issued prior to the Company's
initial public offering that are eligible for unrestricted sale in the public
market) will be freely tradeable without restriction after the offering. Of the
remaining 2,923,610 shares (the "Restricted Shares"), 225,691 will be eligible
for sale immediately following the offering subject to compliance with the
volume and other restrictions of Rule 144 under the Securities Act of 1933, as
amended ("Rule 144"). Holders of the remaining 2,928,863 Restricted Shares have
signed lock-up agreements with the underwriters and therefore may not sell such
shares until expiration of the lock-up agreements 90 days after the date of this
prospectus. These locked-up shares will become eligible for sale into the public
market upon expiration of the lock-up agreements, subject in certain cases to
compliance with the volume and other restrictions of Rule 144. Upon completion
of this offering, the holders of approximately 2.9 million shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights."

56
59

UNDERWRITING

Subject to the terms and conditions of an underwriting agreement (the "U.S.
Underwriting Agreement"), the Company and the Selling Stockholders have agreed
to sell to each of the underwriters named below (the "U.S. Underwriters"), and
each of the U.S. Underwriters, for whom Cowen & Company and Hambrecht & Quist
LLC and Wessels, Arnold & Henderson, L.L.C. are acting as representatives (the
"U.S. Representatives"), has severally agreed to purchase from the Company and
the Selling Stockholders, the respective number of shares of Common Stock set
forth opposite the name of such U.S. Underwriter below:

NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- -----------

Cowen & Company.............................................
Hambrecht & Quist LLC.......................................
Wessels, Arnold & Henderson, L.L.C..........................

Total.............................................
===========

Subject to the terms and conditions of an underwriting agreement (the
"International Underwriting Agreement"), the Company and the Selling
Stockholders have agreed to sell to the international managers named below (the
"International Managers"), and each of the International Managers, for whom
Cowen International L.P., Westdeutsche Landesbank Girozentrale and Hambrecht &
Quist LLC are acting as lead managers (the "Lead Managers"), has severally
agreed to purchase from the Company and the Selling Stockholders, the respective
number of shares of Common Stock set forth opposite the name of such
International Manager below:

NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- -----------

Cowen International L.P.....................................
Westdeutsche Landesbank Girozentrale........................
Hambrecht & Quist LLC.......................................

Total.............................................
===========

The U.S. Underwriters and the International Managers, and the U.S.
Representatives and Lead Managers, are collectively referred to as the
"Underwriters" and "Representatives," respectively. The U.S. Underwriting
Agreement and the International Underwriting Agreement are collectively referred
to as the "Underwriting Agreements." The offering price and aggregate
underwriting discounts and commissions per share for the U.S. Offering and the
International Offering are identical. The completion of each offering is
contingent upon the completion of the other.

The Underwriting Agreements provide that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.

The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain brokers and dealers. After the shares of Common Stock are released
for sale to the public, the offering price and other selling terms may from time
to time be varied by the Representatives.

57
60

Pursuant to the Agreement among U.S. Underwriters and International
Managers (the "Agreement Among"), each U.S. Underwriter has represented and
agreed that, with certain exceptions: (i) it is not purchasing any Shares (as
defined herein) for the account of anyone other than a United States or Canadian
Person (as defined herein) and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares outside the United States or Canada or to anyone other
than a United States or Canadian Person. Pursuant to the Agreement Among, each
International Manager has represented and agreed that, with certain exceptions:
(i) it is not purchasing any Shares for the account of any United States or
Canadian Person and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any Shares or distribute any prospectus relating to the
Shares in the United States or Canada or to any United States or Canadian
Person. With respect to any Underwriter that is both a U.S. Underwriter and an
International Manager, the foregoing representations and agreements (i) made by
it in its capacity as a U.S. Underwriter apply only to it in its capacity as a
U.S. Underwriter and (ii) made by it in its capacity as an International Manager
apply only to it in its capacity as an International Manager. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions specified in the Agreement Among. As used herein, "United States or
Canadian Person" means any national or resident of the United States or Canada,
or any corporation, pension, profit-sharing or other trust or other entity
organized under the laws of the United States or Canada or of any political
subdivision thereof (other than a branch located outside the United States and
Canada of any United States or Canadian Person), and includes any United States
or Canadian branch of a person who is otherwise not a United States or Canadian
Person. All shares of Common Stock to be purchased by the Underwriters under the
Underwriting Agreements are referred to herein as the "Shares."

Pursuant to the Agreement Among, sales may be made between the U.S.
Underwriters and the International Managers of such number of shares of Common
Stock as may be mutually agreed. The price of any shares so sold shall be the
public offering price, less an amount not greater than the selling concession.

The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 450,000
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown above, bears to the total number of shares of Common Stock
offered in the Offering. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby.

The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute to payments the Underwriters may be required to make in respect
thereof.

The Company, the Company's officers and directors, the Selling Stockholders
and certain of the Company's other stockholders have agreed subject to certain
limited exceptions, not, directly or indirectly, to offer, sell, contract to
sell, or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or any right to
acquire Common Stock for a period of 90 days after the date of this Prospectus
without the prior written consent (which consent may be given without notice to
the Company's stockholders or other public announcement) of Cowen & Company.
Cowen & Company has advised the Company that it has no present intention of
releasing any of the Company's stockholders from such lock-up agreements until
the expiration of such 90-day period.

The Representatives have advised the Company that, pursuant to rules
promulgated by the Commission, certain persons participating in this offering
may engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the

58
61

Underwriters to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Underwriters in syndicate covering transactions, in stabilization
transactions or otherwise. The Underwriters have advised the Company that such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales in excess of 5% of the shares offered hereby to any
account over which they exercise discretionary authority.

Hambrecht & Quist California ("H&Q California"), an affiliate of Hambrecht
& Quist LLC ("H&Q LLC"), Daniel H. Case III, the President and Chief Executive
Officer of H&Q LLC, and Joshua M. Rafner, a managing director of H&Q LLC
purchased 69,930, 8,741 and 8,741 shares of the Company's Series E Preferred
Stock, respectively, in a March 1997 financing. Each of H&Q California and
Messrs. Case and Rafner has agreed not to sell, transfer, assign, pledge or
hypothecate such shares for a period of one year from the date of the initial
public offering.

This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
International Offering, to persons located in the United States.

LEGAL MATTERS

Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Rogers & Wells, London, England. Members of
the firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation, own an
aggregate of 26,223 shares of Common Stock.

EXPERTS

The consolidated financial statements and schedule of the Company at
December 31, 1996 and 1997 and for each of the years in the three-year period
ended December 31, 1997 have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.

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62

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Certain items are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed therewith. Statements contained in this Prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. A copy of the
Registration Statement, and the exhibits and schedules thereto, may be inspected
without charge at the public reference facilities maintained by the Commission
in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048, and copies of all or any part of
the Registration Statement may be obtained from such offices upon the payment of
the fees prescribed by the Commission. The Commission maintains a World Wide Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.

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63

SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Independent Auditor's Report................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7

F-1
64

INDEPENDENT AUDITORS' REPORT

The Board of Directors
SCM Microsystems, Inc.:

We have audited the accompanying consolidated balance sheets of SCM
Microsystems, Inc. and subsidiaries (the Company) as of December 31, 1996 and
1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SCM
Microsystems, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.

/s/ KPMG PEAT MARWICK LLP

Palo Alto, California
February 13, 1998

F-2
65

SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ASSETS

DECEMBER 31,
------------------
1996 1997
------- -------

Current assets:
Cash and cash equivalents................................. $ 2,593 $25,552
Short-term investments.................................... -- 30,336
Accounts receivable, less allowance of $210 and $188 in
1996 and 1997, respectively............................ 5,237 6,607
Inventories............................................... 2,279 3,392
Prepaid expenses.......................................... 519 302
------- -------
Total current assets.............................. 10,628 66,189
Property and equipment, net................................. 818 1,162
Other assets, net........................................... 13 14
------- -------
$11,459 $67,365
======= =======

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Notes payable............................................. $ 5,896 $ 9
Related party debt........................................ 2,350 --
Accounts payable.......................................... 3,351 4,308
Accrued payroll and related expenses...................... 458 660
Other accrued expenses.................................... 360 611
Income taxes payable...................................... -- 305
------- -------
Total current liabilities......................... 12,415 5,893
------- -------
Commitments and contingencies
Redeemable convertible preferred stock; $0.001 par value;
6,000,000 and 10,000,000 shares authorized at December 31,
1996 and 1997, respectively; 1,211,914 and no shares
issued outstanding at December 31, 1996 and 1997,
respectively; (liquidation preference of $4,642 at
December 31, 1996)........................................ 5,068 --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value; 854,038 and
no shares issued and outstanding at December 31, 1996 and
1997, respectively........................................ 1 --
Common stock, $0.001 par value; 19,000,000 and 40,000,000
shares authorized at December 31, 1996 and 1997,
respectively; 1,280,414 and 10,714,978 shares issued and
outstanding at December 31, 1996 and 1997, respectively... 1 11
Additional paid-in capital.................................. 2,387 69,902
Deferred stock compensation................................. (224) (125)
Accumulated deficit......................................... (8,015) (7,714)
Cumulative translation adjustment........................... (174) (602)
------- -------
Total stockholders' equity (deficit).............. (6,024) 61,472
------- -------
$11,459 $67,365
======= =======

See accompanying notes to consolidated financial statements.
F-3
66

SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------

Net sales................................................... $18,066 $21,520 $27,769
Cost of sales............................................... 15,771 14,880 17,524
------- ------- -------
Gross profit........................................... 2,295 6,640 10,245
------- ------- -------
Operating expenses:
Research and development.................................. 1,399 2,386 2,940
Sales and marketing....................................... 2,057 3,230 4,221
General and administrative................................ 1,439 2,004 2,494
Settlement of patent claim................................ -- -- 515
------- ------- -------
Total operating expenses............................... 4,895 7,620 10,170
------- ------- -------
Income (loss) from operations.......................... (2,600) (980) 75
Interest income (expense), net.............................. (337) (304) 866
Foreign currency transaction gains.......................... 11 174 467
------- ------- -------
Income (loss) before income taxes...................... (2,926) (1,110) 1,408
Provision for income taxes.................................. -- -- 305
------- ------- -------
Net income (loss)...................................... (2,926) (1,110) 1,103
Accretion on redeemable convertible preferred stock......... (139) (287) (802)
------- ------- -------
Net income (loss) applicable to common stockholders.... $(3,065) $(1,397) $ 301
======= ======= =======
Earnings (loss) per share information:
Basic net income (loss) per share...................... $ (2.39) $ (1.09) $ 0.08
======= ======= =======
Diluted net income (loss) per share.................... $ (2.39) $ (1.09) $ 0.06
======= ======= =======
Shares used to compute basic net income (loss) per
share................................................ 1,280 1,280 3,819
======= ======= =======
Shares used to compute diluted net income (loss) per
share................................................ 1,280 1,280 5,015
======= ======= =======
Pro forma information:
Net income applicable to common stockholders...... $ 1,103
=======
Pro forma diluted net income per share............ $ 0.14
=======
Shares used to compute pro forma diluted net
income per share................................ 7,649
=======

See accompanying notes to consolidated financial statements.
F-4
67

SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)

CONVERTIBLE
PREFERRED
STOCK -- SERIES A COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE
----------------- ------------------ PAID-IN STOCK ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ADJUSTMENT
-------- ------ ---------- ------ ---------- ------------ ----------- -----------

Balances as of December 31,
1994......................... 854,038 $ 1 1,280,414 $ 1 $ 1,761 $ -- $(3,553) $(238)
Redeemable convertible
preferred stock, Series B
additional paid-in
capital.................... -- -- -- -- 249 -- -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- -- 84
Net loss..................... -- -- -- -- -- -- (2,926) --
Accretion on redeemable
convertible preferred
stock, Series B............ -- -- -- -- -- -- (139) --
-------- --- ---------- --- ------- ----- ------- -----
Balances as of December 31,
1995......................... 854,038 1 1,280,414 1 2,010 -- (6,618) (154)
Deferred compensation related
to grants of stock
options.................... -- -- -- -- 377 (377) -- --
Amortization of deferred
stock compensation......... -- -- -- -- -- 153 -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- -- (20)
Net loss..................... -- -- -- -- -- -- (1,110) --
Accretion on redeemable
convertible preferred
stock, Series B............ -- -- -- -- -- -- (287) --
-------- --- ---------- --- ------- ----- ------- -----
Balances as of December 31,
1996......................... 854,038 1 1,280,414 1 2,387 (224) (8,015) (174)
Issuance of common stock upon
exercise of options and
warrants................... -- -- 680,531 1 58 -- -- --
Common stock warrants issued
in settlement of patent
claim...................... -- -- -- -- 453 -- -- --
Sale of common stock, net of
issuance costs............. -- -- 3,955,500 4 45,361 -- -- --
Accretion on redeemable
convertible preferred
stock, prior to
conversion................. -- -- -- -- -- -- (802) --
Conversion of convertible
preferred stock, Series A,
to common stock............ (854,038) (1) 854,038 1 -- -- -- --
Conversion of redeemable
convertible preferred
stock, Series B through F,
to common stock............ -- -- 3,944,495 4 21,643 -- -- --
Amortization of deferred
stock compensation......... -- -- -- -- -- 99 -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- -- (428)
Net income................... -- -- -- -- -- -- 1,103 --
-------- --- ---------- --- ------- ----- ------- -----
Balances as of December 31,
1997......................... -- $-- 10,714,978 $11 $69,902 $(125) $(7,714) $(602)
======== === ========== === ======= ===== ======= =====

TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------

Balances as of December 31,
1994......................... $(2,028)
Redeemable convertible
preferred stock, Series B
additional paid-in
capital.................... 249
Foreign currency translation
adjustment................. 84
Net loss..................... (2,926)
Accretion on redeemable
convertible preferred
stock, Series B............ (139)
-------
Balances as of December 31,
1995......................... (4,760)
Deferred compensation related
to grants of stock
options.................... --
Amortization of deferred
stock compensation......... 153
Foreign currency translation
adjustment................. (20)
Net loss..................... (1,110)
Accretion on redeemable
convertible preferred
stock, Series B............ (287)
-------
Balances as of December 31,
1996......................... (6,024)
Issuance of common stock upon
exercise of options and
warrants................... 59
Common stock warrants issued
in settlement of patent
claim...................... 453
Sale of common stock, net of
issuance costs............. 45,365
Accretion on redeemable
convertible preferred
stock, prior to
conversion................. (802)
Conversion of convertible
preferred stock, Series A,
to common stock............ --
Conversion of redeemable
convertible preferred
stock, Series B through F,
to common stock............ 21,647
Amortization of deferred
stock compensation......... 99
Foreign currency translation
adjustment................. (428)
Net income................... 1,103
-------
Balances as of December 31,
1997......................... $61,472
=======

See accompanying notes to consolidated financial statements.
F-5
68

SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)

YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- ------- --------

Cash flows from operating activities:
Net income (loss)......................................... $(2,926) $(1,110) $ 1,103
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 135 445 563
Interest on subordinated stockholder loans converted to
equity............................................... 242 -- --
Amortization of deferred stock compensation............ -- 153 99
Non-cash charges from issuance of warrants............. -- -- 453
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,816) (991) (1,798)
Inventories.......................................... (800) (75) (1,341)
Prepaid expenses..................................... (99) (582) (54)
Accounts payable..................................... 1,983 370 1,279
Accrued expenses..................................... 390 116 574
Income taxes payable................................. -- -- 305
------- ------- --------
Net cash provided by (used in) operating
activities...................................... (3,891) (1,674) 1,183
------- ------- --------
Cash flows used in investing activities:
Capital expenditures...................................... (524) (643) (802)
Purchases of short-term investments....................... -- -- (30,336)
------- ------- --------
Net cash used in investing activities............. (524) (643) (31,138)
------- ------- --------
Cash flows from financing activities:
Proceeds from notes payable............................... 1,253 5,011 380
Payments on notes payable and long-term debt.............. (59) (1,531) (3,664)
Proceeds from long-term debt.............................. 1,509 -- --
Proceeds from issuance of redeemable preferred stock...... -- -- 11,437
Proceeds from issuance of equity, net..................... 2,441 -- 45,424
Proceeds from line of credit.............................. -- 1,000 --
------- ------- --------
Net cash provided by financing activities......... 5,144 4,480 53,577
------- ------- --------
Effect of exchange rates on cash............................ (60) (309) (663)
------- ------- --------
Net increase in cash........................................ 669 1,854 22,959
Cash and cash equivalents at beginning of period............ 70 739 2,593
------- ------- --------
Cash and cash equivalents at end of period.................. $ 739 $ 2,593 $ 25,552
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period -- interest................... $ 191 $ 313 $ 105
======= ======= ========
Noncash financing activities:
Interest accretion on redeemable convertible preferred
stock................................................ $ -- $ 287 $ 802
======= ======= ========
Conversion of related party and non-related party debt
into redeemable convertible preferred stock.......... $ 2,301 $ -- $ 4,330
======= ======= ========
Conversion of redeemable convertible preferred stock
into common stock.................................... $ -- $ -- $ 21,647
======= ======= ========
Conversion of convertible preferred stock into common
stock................................................ $ -- $ -- $ 1,622
======= ======= ========

See accompanying notes to consolidated financial statements.
F-6
69

SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company
currently sells its products to a number of OEM customers. The Company maintains
its U.S. headquarters in California and maintains its international headquarters
in Germany.

During 1994, the Company began emphasizing security and access products.
The Company made the final shipment of PCMCIA peripheral products in the quarter
ended March 31, 1997, completing its exit from this business.

Reincorporation

From inception in 1990 until December 1996, the Company was incorporated in
Germany. During 1993, the Company formed a U.S. subsidiary which is incorporated
in Delaware.

In December 1996, the Company incorporated a holding company in the state
of Delaware and entered into a stock exchange agreement with the stockholders of
the German corporation. The Board of Directors approved an exchange of one share
in the German corporation for 6.4021 shares in the new Delaware corporation
which effected a 6.4021 for 1 stock split of common and preferred stock. The
Certificate of Incorporation of the Delaware corporation authorizes 19,000,000
shares of common stock at $0.001 par value per share and 6,000,000 shares of
preferred stock at $0.001 par value per share. The accompanying consolidated
financial statements have been retroactively restated to give effect to the
reincorporation and stock split.

Initial Public Offering of Common Stock

In October 1997, the Company completed an offering of its capital stock
pursuant to a Registration Statement on Form S-1 ("IPO"), whereby the Company
sold 3,755,500 shares of Common Stock to the public at a price of $13.00 per
share. The net proceeds to the Company from the IPO were $43,722,000.

Principles of Consolidation

The accompanying consolidated financial statements include those of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.

Use of Estimates

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

Cash Equivalents and Short-term Investments

The Company considers all highly liquid debt securities with a remaining
maturity of three months or less at the date of acquisition to be cash
equivalents. Short-term investments are stated at amortized cost which
approximates fair market value.

F-7
70
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Financial Instruments and Concentration of Credit Risk

The carrying value of the Company's financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable and accounts
payable, approximates their fair market value due to the short maturities of
these instruments. Financial instruments that potentially expose the Company to
a concentration of credit risk principally consist of cash and cash equivalents,
short-term investments and accounts receivable.

The Company sells its products to a diversified group of customers which
are typically large OEM computer manufacturers located mainly in the United
States and Europe. The Company extends credit based on an evaluation of each
customer's financial condition and generally requires no collateral from its
customers. Credit losses, if any, have been provided for in the consolidated
financial statements and have been within management's expectation.

Inventories

Inventories are stated at the lower of cost or market, using the first-in,
first-out method.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the useful lives of the respective assets or
the lease term, generally three to seven years.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
an asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.

Revenue Recognition

Revenue from product sales is recognized upon product shipment. Provisions
for estimated warranty repairs and returns and allowances are provided for at
the time products are shipped.

Nonrecurring engineering contract revenue is recognized using the
percentage of completion method.

Stock-Based Compensation

The Company uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans.

Income Taxes

Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-8
71
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Foreign Currency Translation

The functional currency of the Company's foreign subsidiary is the local
foreign currency. The Company translates the assets and liabilities of its
foreign subsidiary to U.S. dollars at the rates of exchange in effect at the end
of the year. Net sales and expenses are translated at the average rates of
exchange for the year. Translation gains and losses are included in
stockholders' equity (deficit) in the consolidated balance sheets. Gains and
losses resulting from foreign currency transactions denominated in a currency
other than the functional currency are included in income except for exchange
gains and losses stemming from intercompany transactions that are not expected
to be settled in the foreseeable future. In 1997 substantially all of the
foreign currency transaction gains of $467,000 relate to intercompany sales from
the German subsidiary to its U.S. affiliates. Included in the cumulative
translation adjustment account as of December 31, 1997 is approximately $310,000
of exchange losses on an intercompany loan from the U.S. parent company to the
German subsidiary that is not intended to be settled in the foreseeable future.

Earnings Per Share

On October 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share (EPS). In accordance with SFAS No.
128, basic EPS is computed using the weighted average number of common shares
outstanding during the period. Diluted EPS is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of common stock
issuable upon exercise of stock options and warrants using the treasury stock
method. The following is a reconciliation of the shares used in the computation
of basic and diluted EPS for the year ended December 31, 1997 (in thousands
except for per share amounts):

Basic EPS -- weighted average number of common shares
outstanding............................................... 3,819
Effect of dilutive common equivalent shares:
Series A convertible preferred stock prior to conversion
into common stock...................................... 655
Stock options outstanding................................. 400
Stock warrants outstanding................................ 141
-----
Diluted EPS -- weighted average number of common shares and
common equivalent shares outstanding...................... 5,015
=====

Excluded from the computation of diluted EPS for the year ended December
31, 1997 are the common equivalent shares resulting from the assumed conversion
of the redeemable convertible preferred stock, because their effects were
antidilutive prior to their conversion into common stock on October 7, 1997. Had
the redeemable convertible preferred stock, converted into common stock on
January 1, 1997, or their respective dates of issuance if later, the diluted EPS
for the year ended December 31, 1997 would have been $0.14 per share based on
net income of $1,103,000 and a weighted-average number of common shares and
common equivalent shares outstanding of 7,649,000.

Recent Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and displaying
comprehensive income and its components in the consolidated financial
statements. It does not, however, require a specific format for the statement,
but requires the Company to display an amount representing total comprehensive
income for the period in that financial statement. The Company is in the process
of determining its preferred format. This statement is effective for fiscal
years beginning after December 15, 1997.

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." The Statement establishes standards for
the way public business enterprises are to
F-9
72
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

report information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. This Statement is
effective for financial statements for periods beginning after December 31,
1997. The Company has not yet determined whether it has any separately
reportable business segments.

2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The fair value of investments included in cash equivalents and short-term
investments as of December 31, 1997 is as follows (in thousands):

Commercial Paper........................................... $31,244
Certificates of Deposit.................................... 8,699
Corporate Bonds............................................ 4,002
Corporate Notes............................................ 2,611
Treasury Notes............................................. 900
Municipal Obligations...................................... 2,899
-------
$50,355
=======
Amounts included in:
Cash and cash equivalents................................ $20,019
Short-term investments................................... 30,336
-------
$50,355
=======

The contractual maturities of available-for-sale debt securities included
in short term investments as of December 31, 1997, is as follows (in thousands):

Due within one year........................................ $28,937
Due after one year through two years....................... 1,399
-------
$30,336
=======

3. BALANCE SHEET COMPONENTS

A summary of balance sheet components is as follows (in thousands):

DECEMBER 31,
----------------
1996 1997
------ ------

Inventories:
Raw materials.................................... $1,615 $1,704
Finished goods................................... 664 1,688
------ ------
$2,279 $3,392
====== ======
Property and equipment:
Furniture, fixtures, and office equipment........ $1,070 $1,541
Purchased software............................... 204 366
------ ------
1,274 1,907
Less accumulated depreciation.................... 456 745
------ ------
$ 818 $1,162
====== ======

F-10
73
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. NOTES PAYABLE AND RELATED PARTY DEBT

Notes payable consisted of the following (in thousands):

DECEMBER 31,
--------------
1996 1997
------ ----

Nonconvertible loans................................. $2,580 $--
Convertible notes payable, Series C.................. 1,959 --
Line of credit....................................... 1,000 --
Notes payable to banks............................... 357 9
------ ---
$5,896 $ 9
====== ===

Related party debt consisted of the following (in thousands):

DECEMBER 31,
--------------
1996 1997
------ ----

Convertible notes payable Series C -- related
party.............................................. $ 627 $--
Convertible notes payable Series D -- related
party.............................................. 1,654 --
Stockholder loans.................................... 69 --
------ ---
$2,350 $--
====== ===

Nonconvertible Loans

In October 1993, the Company's German subsidiary entered into a Deutsche
Mark (DM) 1,000,000 loan agreement, bearing interest at 5% per annum, expiring
on December 31, 2003. In June 1995, the Company entered into an additional DM
3,000,000 loan agreement with the same party, bearing interest at 6% per annum,
expiring on December 31, 2005. DM 2,000,000 was drawn under this second
agreement in June 1995, and the remaining DM 1,000,000 was drawn on April 2,
1996. The terms of these agreements also provided the lender with the option to
request an additional compensation of 25% of the then outstanding loan amount
after the fifth year of each of the respective agreements or upon early
termination of the loans by the Company. The outstanding balance on these loans
was $2,580,000 as of December 31, 1996.

In May 1997, the Company and the lender resolved the additional
compensation arrangement in exchange for a warrant to purchase 138,000 shares of
the Company's Common Stock at a price of $5.72 per share. The fair value of
these warrants was not significant. In November 1997, the Company repaid the
outstanding balance of these loans and, in December 1997, the lender exercised
the warrant.

Lines of Credit

The Company has revolving lines of credit with three banks in Germany
providing total borrowings of up to DM 4.5 million (approximately U.S. $2.5
million at December 31, 1997). One of these lines for DM 1.5 million expires on
March 31, 1998 and the remaining two expire on September 30, 1998. The German
lines of credit bear interest at rates ranging from 7.0% to 8.75%. Borrowings
under the German lines of credit are unsecured. The Company also has a U.S. $3.0
million line of credit which is secured by all assets of the Company, bears
interest at the bank's prime rate (8.5% as of December 31, 1997), and expires in
May 1999. At December 31, 1997, no amounts were outstanding under any of the
Company's lines of credit.

Convertible Notes Payable, Series B

In August 1994, certain stockholders advanced the Company loans totaling
$2,059,000. In June 1995, these loans and accrued interest of approximately
$242,000 were converted into Series B preferred stock. Under terms of the Series
B preferred stock agreement, all outstanding shares of Series B preferred stock
were converted into common stock on a one-for-one basis at the time of the
Company's IPO.

F-11
74
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Convertible Notes Payable, Series C

In February 1996, the Company's German subsidiary entered into a loan
agreement for DM 4,009,000. The loan required interest of 4% per annum and was
convertible into 653,642 shares of Series C preferred stock. The outstanding
balance of this loan as of December 31, 1996, was $1,959,000 payable to third
parties and $627,000 payable to stockholders. In accordance with the provisions
of the loan agreement, the loan was converted into 653,642 shares of Series C
preferred stock in March 1997. Under terms of the Series C preferred stock
agreement, all outstanding shares of Series C preferred stock were converted
into common stock on a one-for-one basis at the time of the Company's IPO.

Convertible Notes Payable, Series D

In December 1996, the Company's German subsidiary entered into a loan
agreement with stockholders for a total of DM 3,179,000 of which DM 2,564,000
was tendered at December 31, 1996. Under the agreement, the debt automatically
converts to common stock in the event of certain events including an IPO of
equity securities. The loan required no interest and was convertible into
377,580 shares of Series D preferred stock. The outstanding balance of this loan
as of December 31, 1996, was $1,654,000. In March 1997, the loan was converted
into 377,580 shares of Series D preferred stock. Under terms of the Series D
preferred stock agreement, all outstanding shares of Series D preferred stock
were converted into common stock on a one-for-one basis at the time of the
Company's IPO.

In connection with this loan agreement, the Company issued 22,652 warrants
to purchase Series D preferred stock at $5.72 per share. The fair value of these
warrants was not significant. These warrants remain outstanding as of December
31, 1997.

5. STOCKHOLDERS' EQUITY (DEFICIT)

Convertible Preferred Stock

As of December 31, 1996, the Company was authorized to issue 6,000,000
shares of convertible preferred stock, with a par value of $0.001. The Company
had designated 854,038 shares as convertible Series A and 1,211,914 shares as
convertible Series B.

In March 1997, the Company issued 388,284 shares of Series D redeemable
convertible preferred stock for gross proceeds of $2,221,000 and 463,285 shares
of Series E redeemable convertible preferred stock for gross proceeds of
$2,650,000. In April 1997, the Company issued 849,790 shares of Series F
redeemable convertible preferred stock for gross proceeds of $6,991,000.

In conjunction with the designation of Series F preferred stock, the
Company approved an increase to the authorized number of shares of common stock
and preferred stock to 40,000,000 shares and 10,000,000 shares, respectively.

Each share of Series A, B, C, D, E and F Convertible Preferred Stock
outstanding was converted into one share of Common Stock upon the completion of
the Company's IPO. The holders of Series A, B, C, D, E and F Convertible
Preferred Stock had voting rights equal to Common Stock on an if-converted
basis.

In connection with the issuance of Series D redeemable convertible
preferred stock, the Company issued 28,539 warrants to purchase Series D
preferred stock at $5.72 per share to a stockholder. The fair value of these
warrants was not significant. These warrants remain outstanding as of December
31, 1997.

F-12
75
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

EMPLOYEE STOCK PLANS

1997 Employee Stock Purchase Plan

In April 1997, the Company's stockholders approved the 1997 Employee Stock
Purchase Plan which authorizes the issuance of up to 175,000 shares of the
Company's common stock. The plan permits eligible employees to purchase common
stock through payroll deductions at a purchase price of 85% of the lower of fair
market value of the common stock at the beginning or end of each 24 month
offering period. As of December 31, 1997 no shares were issued under this plan.

Stock Options

In October 1995, the Company authorized the issuance of options to acquire
376,443 shares of Common Stock. The options generally vest over a 4-year period,
25% vesting on the first anniversary date of the employees' date of employment
and 1/48th vesting each additional full month thereafter, and are exercisable
for a term of 10 years after issuance. During July 1996, the number of shares
authorized to be issued was increased to 1,030,097 shares.

1997 Stock Plan

In April 1997, the Company's stockholders approved the 1997 Stock Plan (the
1997 Plan) under which employees and consultants may be granted incentive or
nonqualified stock options for the purchase of the Company's common stock and
stock purchase rights. Options granted under the 1997 Plan generally vest over a
four-year period, 25% vesting on the first anniversary date of the date of grant
and 1/48th vesting each additional month thereafter, and are generally
exercisable for a term of 10 years after issuance. Unless terminated sooner, the
1997 Plan will terminate automatically in 2007. A total of 1,000,000 shares of
common stock are currently reserved for issuance pursuant to the 1997 Plan.

1997 Director Option Plan

In April 1997, the Company's stockholders approved the 1997 Director Option
Plan (the Director Plan). A total of 50,000 shares of common stock has been
reserved for issuance under the Director Plan. Each outside director of the
Company will automatically be granted an option to purchase up to 10,000 shares
of common stock upon their initial election as a Director, and will
automatically be granted annual subsequent options to purchase additional shares
of common stock under the Director Plan. The price of stock purchased under the
Director Plan is 100% of the fair market value of the common stock as of the
grant date.

F-13
76
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Stock option activity during the periods indicated is as follows:

OUTSTANDING OPTIONS
----------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE
FOR GRANT SHARES PER SHARE
--------- --------- ---------

Balance as of January 1, 1995....................... -- -- $ --
Shares reserved................................... 376,443 -- --
Options granted................................... (281,686) 281,686 0.10
-------- ---------
Balance as of December 31, 1995..................... 94,757 281,686 0.10
Shares reserved................................... 653,654 -- --
Options granted................................... (733,657) 733,657 0.10
Options canceled.................................. 81,626 (81,626) 0.10
-------- ---------
Balance as of December 31, 1996..................... 96,380 933,717 0.10
Shares assumed under 1997 stock plans............. (96,380) -- --
Shares reserved under 1997 stock plans............ 1,050,000 -- --
Options granted................................... (839,500) 839,500 9.29
Options canceled.................................. -- (3,125) 0.10
Options exercised................................. -- (613,907) 0.10
-------- ---------
Balance as of December 31, 1997..................... 210,500 1,156,185 $6.78
======== =========

As of December 31, 1996 and 1997, 480,414 and 149,566, respectively,
options were fully vested and exercisable, respectively. All such options have
an exercise price of $0.10 per share.

The Company uses the intrinsic value-based method to account for its
employee stock-based compensation plans. Accordingly, no compensation cost has
been recognized for its stock options in the accompanying consolidated financial
statements because the fair value of the underlying common stock equals or
exceeds the exercise price of the stock options at the date of grant, except
with respect to the options and restricted stock granted in July and October
1996. The Company has recorded deferred stock compensation of $377,000 for the
difference at the grant date between the exercise price and the fair value, as
determined by an independent valuation, of the restricted stock and the common
stock underlying the options. This amount is being amortized on the
straight-line basis over the vesting period of the individual options and
restricted stock, generally four years. For the years ended December 31, 1996
and 1997, the Company amortized approximately $153,000 and $99,000,
respectively, of the deferred stock compensation reflecting the commencement of
vesting from the date of employment.

F-14
77
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net income
(loss), and net income (loss) per share would have been changed to the pro forma
amounts indicated below (in thousands, except per share amounts):

1995 1996 1997
------- ------- -----

Net income (loss):
As reported........................................... $(3,065) $(1,397) $ 301
Pro forma............................................. (3,065) (1,397) (299)
Earnings (loss) per share:
As reported:
Basic net income (loss) per share.................. $ (2.39) $ (1.09) $0.08
Diluted net income (loss) per share................ (2.39) (1.09) 0.06
Pro forma diluted net income per share............. 0.14
Pro forma:
Basic net loss per share........................... $ (2.39) $ (1.09) $(0.08)
Diluted net loss per share......................... (2.39) (1.09) (0.08)
Pro forma diluted net income per share............. 0.07

The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $0.02, $0.54 and $6.69, respectively, on the date of
grant using the minimum value method prior to the IPO and the Black-Scholes
option pricing model after the IPO with the following weighted-average
assumptions: 1995 -- expected dividend yield 0.0%, risk-free interest rate of
5.79%, and expected life of 4 years; 1996 -- expected dividend yield 0.0%,
risk-free interest rate of 6.32%, and expected life of 4 years; 1997 -- expected
dividend yield 0.0%, risk-free interest rate of 6.24%, volatility at 100%, and
expected life of 4 years.

6. GEOGRAPHIC INFORMATION

Information regarding operations in different geographic regions is as
follows (in thousands):

YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------

Net sales to unaffiliated customers:
Europe.............................................. $ 8,848 $11,289 $19,079
United States....................................... 9,218 10,231 8,690
------- ------- -------
$18,066 $21,520 $27,769
======= ======= =======
Transfers between geographic areas (eliminated in
consolidation):
Europe.............................................. $ 8,608 $ 6,241 $ 6,342
United States....................................... -- -- 1,040
------- ------- -------
$ 8,608 $ 6,241 $ 7,382
======= ======= =======
Income (loss) from operations:
Europe.............................................. $ (907) $(1,144) $ 2,562
United States....................................... (1,693) 164 (2,487)
------- ------- -------
$(2,600) $ (980) $ 75
======= ======= =======
Identifiable assets:
Europe.............................................. $ 4,168 $ 6,912 $11,101
United States....................................... 3,975 4,547 56,264
------- ------- -------
$ 8,143 $11,459 $67,365
======= ======= =======

F-15
78
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company's European operations are in Germany and France. Intercompany
transfers between geographic areas are accounted for using the transfer prices
in effect for subsidiaries.

7. INCOME TAXES

The domestic and foreign components of net income (loss) before income
taxes are as follows (in thousands):

YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------

Domestic.............................................. $(1,693) $ 133 $(1,214)
Foreign............................................... (1,233) (1,243) 2,622
------- ------- -------
Net income (loss)........................... $(2,926) $(1,110) $ 1,408
======= ======= =======

Actual tax expense for the year ended December 31, 1995 and 1996 differs
from expected tax expense due to the recognition of valuation allowances for
deferred tax assets. Tax expense for the year ended December 31, 1997 results
principally from tax liabilities associated with foreign operations of the
Company and minimum state income taxes.

The Company has a deferred tax asset as of December 31, 1996 and 1997, of
approximately $2,200,000, which is fully offset by a valuation allowance. The
deferred tax asset principally results from the net operating loss
carryforwards. The Company has provided a valuation allowance due to the
uncertainty of generating future profits that would allow for the realization of
such deferred tax assets.

As of December 31, 1997, SCM Microsystems GmbH had German net operating
loss carryforwards of approximately $1,400,000, which can be used to offset
GmbH's income. The German net operating loss carryforwards can be carried
forward indefinitely.

SCM Microsystems, Inc. had net operating loss carryforwards of
approximately $3,300,000 and $1,600,000 for federal and California income tax
purposes, respectively. The federal net operating loss carryforwards will expire
in the years 2009 through 2011, and the California net operating loss
carryforwards will expire in the years 1999 through 2001.

Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company, which constitutes an "ownership change" as defined by
the Internal Revenue Code, Section 382. An ownership change occurred in 1996,
resulting in the U.S. subsidiary's federal and California net operating loss
carryforwards being subject to an annual limitation of approximately $340,000.
Another ownership change resulted from the Company's IPO. The limitation exceeds
the amount of net operating loss carryforwards as of October 6, 1997. Any unused
annual limitations may be carried forward to increase the limitations in
subsequent years.

8. COMMITMENTS

The Company leases its facilities, certain equipment, and automobiles under
noncancelable operating lease agreements. These lease agreements expire at
various dates during the next four years. Rent expense was $343,000, $467,000,
and $491,000 in 1995, 1996, 1997, respectively.

F-16
79
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Future minimum lease payments under noncancelable operating leases are as
follows as of December 31, 1997 (in thousands):

YEARS ENDING
DECEMBER 31,
------------

1998........................................................ $ 487
1999........................................................ 315
2000........................................................ 212
2001........................................................ 124
2002 and thereafter......................................... 131
------
Total minimum lease payments...................... $1,269
======

9. RELATED PARTY TRANSACTIONS

The Company purchased inventory under terms and conditions that are
believed to be substantially equivalent to those negotiated by independent
parties totaling $3,478,000, $3,294,000 and $3,379,000 in 1995, 1996 and 1997,
respectively, from a contract manufacturing company who is a stockholder in the
Company. A director of the Company also served as a member of management of the
contract manufacturing company. Included in accounts payable are amounts owed
this stockholder of $396,000 and $1,058,000 as of December 31, 1996 and 1997,
respectively.

In May 1997, the Company entered into a development and supply agreement
with a shareholder. Revenues under this agreement in 1997 were $2,692,000, and
the amount owed the Company as of December 31, 1997 by the shareholder was
$336,000.

10. MAJOR CUSTOMERS AND SALES INFORMATION

A summary of the net sales to major customers that exceeded 10% of total
net sales during each of the years in the three-year period ended December 31,
1997, and the amount due from these customers as of December 31, 1997, follows
(accounts receivable in thousands):

ACCOUNTS
1995 1996 1997 RECEIVABLE
---- ---- ---- ----------

Customer 1......................................... -- 11% 45% $3,221
Customer 2......................................... -- 12% -- --
Customer 3......................................... 17% -- -- --
Customer 4......................................... 16% -- -- --

During 1995, 1996 and 1997, net sales of PCMCIA peripheral products
amounted to 30.7%, 22.7% and 0.6%, respectively, of sales. As discussed in Note
1, the Company made the final shipment of such products in the first quarter of
1997, completing its exit from this business.

11. LEGAL PROCEEDINGS

The Company was notified by Smith Corona Corporation ("Smith Corona") that
Smith Corona believes that the "SCM" in the Company's name, logo and a certain
product name infringe a trademark held by Smith Corona and that the Company has
engaged in unfair competition. The Company believes that it has defenses to
Smith Corona's claim and has so notified Smith Corona. In the event that Smith
Corona were to initiate legal proceedings against the Company with respect to
this matter, the Company would vigorously defend the action. Defending any
action can be costly and time consuming regardless of the outcome and, as with
any litigation matter, there can be no assurance that the outcome of any such
dispute would be favorable to the Company. An unfavorable outcome in the matter
could subject the Company to monetary damages and may

F-17
80
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

result in the Company having to change its name and logo, which would require
the Company to incur costs related thereto and may result in a loss of the
goodwill associated with its name and logo. Although it is reasonably possible
that the Company may incur expenses upon resolution of this matter, the Company
currently is unable to estimate the amount of these expenses, if any, or the
range of such amounts.

In April 1997, Gemplus served the Company with a complaint alleging that
certain of the Company's products infringe certain claims of a French patent
held by Gemplus. In September 1997, the Company entered into a license agreement
and memorandum of understanding, and settled this dispute, with Gemplus. In
connection with these transactions, the Company sold 200,000 shares of Common
Stock to Gemplus for net proceeds of $1,643,000. Additionally, the Company
issued warrants to Gemplus to purchase up to 200,000 shares of Common Stock at
an exercise price of $13.00 per share and up to 200,000 shares of Common Stock
at an exercise price of $14.00 per share. The fair value of these warrants
approximated $453,000 and such cost, along with related legal fees of
approximately $62,000, was charged to operations as patent claim settlement
expense in the third quarter of 1997. Such warrants remain outstanding at
December 31, 1997.

F-18
81
APPENDIX - DESCRIPTION OF GRAPHICS

INSIDE FRONT COVER

DESCRIPTION:

Photo of SwapBox product with caption "SwapBox PC Card Adaptors"

Photo of SwapAccess product and smart card with caption "SwapAccess
Digital Video Broadcast--Conditional Access Modules

Photo of SwapSmart product and smart card with caption "SwapSmart Smart
Card Readers"

Image of SmartOS logo with caption: "SmartOS Universal Smart Card
Interface Architecture"

TEXT

SCM Microsystems Logo;

Securing Access to Digital Information

Today's world increasingly relies upon computer networks, the Internet
and intranets and direct broadcast systems to access information,
entertainment and data in a digital form and to conduct electronic
commerce. This increasing proliferation and reliance upon digital data
has caused data security to become a paramount concern.

SCM Microsystems provides OEMs with key standards-compliant enabling
hardware, firmware and software products and technologies for smart
card and other token-based network security systems and conditional
access to DVB content and services.

PAGE 30

The Data Security "Patchwork"

DESCRIPTION:

These graphics depict numerous icons representing laptop computers,
servers, firewalls and clouds (representing the internet and other
networks), each with a caption identifying the particular icon, and
all of which are tied to each other by solid, connecting lines.

TEXT

Information Sources and Types of Users Seeking Access

Websites and other information sources which include applets
and push technologies.

Enterprise websites and limited network access sought by
external users such as customers and vendors.

Full network access sought by mobile and remote employees.

PAGE 33

Securing Digital Video Broadcasts

DESCRIPTION:

These graphics depict a satellite receiving a television signal, the
forwarding of the signal to a set-top box containing a smart card
and the continuation of the signal to a television.

TEXT

The text describes the process depicted by the graphics.

1. Set-top box receives DVB signal
2. Set-top box transfers MPEG2 data to
Conditional Access Model ("CAM")
3. CAM checks Smart Card for authorization to view broadcast
4. If card is accepted, CAM descrambles MPEG2 data
5. Set-top box decodes MPEG2 data and provides output for
standard TVs and VCRs.

Enables services such as:
-- Video-on-Demand
-- Home Banking
-- Pay-Per-View
-- Interactive Video and Games
-- Home Shopping

INSIDE BACK COVER

DESCRIPTION:

Lap top personal computer, palm-top computer, computer key board, desk
top personal computer, SmartOS logo and four smart cards labeled:
"memory," "cryptographic," "microprocessor" and "any other."

TEXT Extensible smart card interface Architecture Ensures Flexibility.

Industry Standards & Operating Systems. SCM Microsystems' open
systems-based smart card interface architecture (Smart OS(TM)) allows
OEMs to integrate smart card support cost-effectively within desktop,
notebook or network computers and peripheral devices. The SmartOS
solution allows integrators to utilize only essential components to
control cost and maximize design flexibility. Many hardware designs,
such as a keyboard or network computer, may already incorporate a
controller chip, but lack an interface unit and firmware for the
completion of a smart card reader solution. Instead of being forced to
purchase all components, the SmartOS solution offers just those
components an integrator needs and those tools necessary for the quick
implementation of smart card readers at a minimum cost.

SmartOS(TM) provides support for most smart cards. SmartOS-based
products can be upgraded through software to support additional smart
cards, operating systems, applications and evolving industry standards.

======================================================

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR BY ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE ON OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

PAGE
----

Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 15
Dividend Policy....................... 15
Price Range of Common Stock........... 16
Capitalization........................ 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 27
Management............................ 45
Certain Transactions.................. 51
Principal and Selling Stockholders.... 52
Description of Capital Stock.......... 54
Shares Eligible for Future Sale....... 56
Underwriting.......................... 57
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 60
Index to Consolidated Financial
Statements.......................... F-1

======================================================
======================================================

3,000,000 SHARES

LOGO

COMMON STOCK
---------------------------

PROSPECTUS

---------------------------
COWEN & COMPANY

HAMBRECHT & QUIST

WESSELS, ARNOLD & HENDERSON
, 1998
======================================================
83
[Alternate Page for International Prospectus]

INFORMATION CONTAINED HEREIN IS
SUBJECT TO COMPLETION OR AMENDMENT.

PROSPECTUS (Subject to Completion)

March 25, 1998

3,000,000 SHARES

LOGO

COMMON STOCK
---------------------------

Of the 3,000,000 shares of Common Stock offered, 1,500,000 shares are being
offered hereby in an International Offering outside the United States and Canada
(the "International Offering") and 1,500,000 shares are being offered in a
concurrent offering in the United States and Canada (the "U.S. Offering"),
subject to transfers of shares between the International Underwriters and U.S.
Underwriters (collectively, the "Underwriters"). The public offering price and
the aggregate underwriting discount per share are identical for both offerings.
The closing of the International Offering and U.S. Offering are conditioned upon
each other. See "Underwriting."

The Common Stock is listed on the Nasdaq National Market under the symbol
"SCMM" and on the Neuer Markt of the Frankfurt Stock Exchange under the symbol
"SMY." On March 24, 1998, the last reported sales prices of shares of the Common
Stock on the Nasdaq National Market and the Neuer Market of the Frankfurt Stock
Exchange were $67.25 and DM127.50 per share, respectively.

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

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
---------------------------

THIS INTERNATIONAL PROSPECTUS IS INTENDED FOR USE ONLY IN CONNECTION WITH OFFERS
AND SALES OF THE COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA AND IS NOT TO
BE SENT OR GIVEN TO ANY PERSON WITHIN THE UNITED STATES OR CANADA. THE COMMON
STOCK OFFERED HEREBY IS NOT BEING REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933 FOR THE PURPOSES OF SALES OUTSIDE THE UNITED STATES.

================================================================================

Per share......................... $ $ $ $
Total(3).......................... $ $ $ $

================================================================================

COWEN INTERNATIONAL L.P.
WESTDEUTSCHE LANDESBANK
GIROZENTRALE
HAMBRECHT & QUIST
, 1998
84
[Alternate Page for International Prospectus]

======================================================

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

TABLE OF CONTENTS

PAGE
----

======================================================
======================================================

3,000,000 SHARES

LOGO

COMMON STOCK
---------------------------

PROSPECTUS

---------------------------
COWEN INTERNATIONAL L.P.

WESTDEUTSCHE LANDESBANK GIROZENTRALE

HAMBRECHT & QUIST
, 1998
======================================================
85

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee and the Nasdaq National Market
listing fee.

AMOUNT
TO BE PAID
----------

SEC registration fee.............................................fee........................................ $ 15,26864,946
NASD filing fee.................................................. 5,539fee............................................. 22,515
Nasdaq National Market listing fee............................... 25,000fee.......................... 15,000
Printing and engraving expenses.................................. 100,000expenses........................................... 125,000
Legal fees and expenses.......................................... 350,000expenses..................................... 200,000
Accounting fees and expenses..................................... 225,000expenses................................ 150,000
Directors' and officers' liability insurance..................... 200,000
Blue Sky qualification fees and expenses......................... 3,000insurance................ 75,000
Transfer agent and registrar fees................................ 5,000
Miscellaneous.................................................... 241,193
----------
Total.................................................. $1,170,000
==========fees........................... 10,000
Miscellaneous............................................... 87,539
--------
Total............................................. $750,000
========

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the Bylaws, as
amended, of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and officers and persons serving in such capacities in
other business enterprises (including, for example, subsidiaries of the
Registrant) at the Registrant's request, to the fullest extent permitted by
Delaware law, including in those circumstances in which indemnification would
otherwise be discretionary; (ii) the Registrant may, in its discretion,
indemnify employees and agents in those circumstances where indemnification is
not required by law; (iii) the Registrant is required to advance expenses, as
incurred, to its directors and officers in connection with defending a
proceeding (except that it is not required to advance expenses to a person
against whom the Registrant brings a claim for breach of the duty of loyalty,
failure to act in good faith, intentional misconduct, knowing violation of law
or deriving an improper personal benefit); (iv) the rights conferred in the
Bylaws, as amended, are not exclusive, and the Registrant is authorized to enter
into indemnification agreements with its directors, officers and employees; and
(v) the Registrant may not retroactively amend the Bylaw provisions in a way
that is adverse to such directors, officers and employees.

The Registrant's policy is to enter into indemnification agreements with
each of its directors and officers that provide the maximum indemnity allowed to
directors and officers by Section 145 of the Delaware General Corporation Law
and the Bylaws, as amended, as well as certain additional procedural
protections.

The indemnification provisions in the Bylaws, as amended, and the
indemnification agreements entered into between the Registrant and its directors
and officers may be sufficiently broad to permit indemnification of the
Registrant's directors and officers for liabilities arising under the Securities
Act.

II-1
386

Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:

EXHIBIT
DOCUMENT NUMBER
-------------------------------------------------------------------- -------------- -------

Form of U.S. Underwriting Agreement.................................Agreement......................... 1.1
Form of International Underwriting Agreement........................Agreement................ 1.2
Form of Third Amended and Restated Certificate of Incorporation..... 3.1
Form of
Fourth Amended and Restated Certificate of Incorporation to
be effective upon completion of this offering..................... 3.2Incorporation.... 3.1
Bylaws, as amended..................................................amended.......................................... 3.3
Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers.................officers.................................................. 10.1

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The Registrant has recently issued and sold the following unregistered
securities:

(i) From January 1, 1994 through September 4, 1997March 6, 1998 the Registrant issued
and sold 3,944,495 shares of Preferred Stock at purchase prices ranging
from $3.83 to $8.58 for aggregate consideration of approximately
$21,290,570;

(ii) From January 1, 1994 through September 4, 1997March 6, 1998 the Registrant issued
and sold 586,296 shares of Common Stock to employees and consultants at an
exercise price of $0.10 for aggregate consideration of approximately
$59,000;

(iii) From January 1, 1994 through September 4, 1997,March 6, 1998, the Registrant
issued warrants to purchase up to 784,121 shares of Common Stock at
exercise prices ranging from $5.72 to $14.00 per share in connection with
the issuance of a portion of the Preferred Stock described in (i) above,
certain loan arrangements and thea settlement with Gemplus;a third party; and

(iv) Concurrently with these offerings,the Company's initial public offering in
October 1997, the Registrant will issuehas issued and sellsold 200,000 shares of Common
Stock at $9.00 per share.

The issuances referred to in paragraphs (i), (iii) and (iv) were deemed
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof. The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant. The issuances of Common Stock described in
paragraph (ii) above were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated under the Securities Act.

II-2
87

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

EXHIBIT NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------

1.1*1.1 Form of U.S. Underwriting Agreement.
1.2*1.2 Form of International Underwriting Agreement.
3.1* Third Amended and Restated Certificate of Incorporation of Registrant.
3.2* Form of Fourth Amended and Restated Certificate of Incorporation to be
effective upon completion of this offering.
3.3Incorporation.
3.2* Bylaws, as amended, of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
5.1*5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding legality of the securities being
issued.
9.1* Voting Trust Agreement with Nicholas Efthymiou.
9.2* Voting Trust Agreement with Reiner Pohl.
10.1* Form of Director and Officer Indemnification Agreement.
10.2*9.2* 1997 Stock Plan.
10.3*10.1* 1997 Employee Stock Purchase Plan.

II-2
4

EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------

10.4* 1997 Director Option Plan.
10.5* 1997 Stock Option Plan for French Employees.
10.6* 1997 Employee Stock Purchase Plan for Non-U.S. Employees.
10.7* Partnership* Revolving Credit Loan and Security Agreement, dated
June 8, 1995, between Registrant and
Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank.
10.8* Continuing Guarantee, dated January 15,September 26, 1997, between Registrant and ImperialComerica Bank.
10.9*10.8* Line of Credit, dated October 23, 1996, between Registrant
and Deutsche Bank.
10.10*10.9* Line of Credit, dated December 3, 1996, between Registrant
and BHF Bank.
10.11*10.10* Line of Credit, dated November 11, 1996, between Registrant
and Stadtsparkasse Munchen.
10.12*10.11* Lease, dated September 29, 1994, between Registrant and Los
Gatos Business Park.
10.13*10.12* Sublease Agreement, dated December 17, 1996, between
Intermart Systems, Inc. and Registrant.
10.14*10.13* Lease, dated September 30, 1994, between Registrant and
Olbrich Franz.
10.15*10.14* Amended and Restated Stockholders' Agreement, dated April
11, 1997, between Registrant and certain investors.
10.16*10.15* Form of Employment Agreement between SCM GmbH and Messrs.
Schneider and Meier.
10.17*10.16* Employment Agreement, dated May 15, 1995, between Registrant
and Jean-Yves Le Roux.
10.18*10.17*+ Commitment Instrument, dated August 7, 1996, among France
Telecom, Matra Communication, Registrant and Matra MHS.
10.19*10.18*+ Teaming Agreement, dated October 6, 1995, between
Temic/Matra MHS, Matra Communication and Registrant.
10.20* Form of amendment to the Partnership Agreement, dated June 8, 1995, between
Registrant and Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank and
form of warrant.
10.21*10.19*+ Development Agreement, dated March 6, 1997, between Intel
Corporation and Registrant.
10.22*10.20*+ Technology Development and License Agreement, dated
September 27, 1996, between Registrant and Sun Microsystems,
Inc.
10.23*10.21* Cooperation Contract, dated March 25, 1996, between
Registrant and Stocko Metallwarenfabriken Henkels and Sohn
GmbH & Co.
10.24*10.22*+ Development and Supply Agreement, dated October 9, 1996,
between BetaDigital Gesellschaft fur digitale Fernsehdienste
mbH and Registrant.
10.25* Framework Contract, dated December 23, 1996, between Siemens Nixdorf
Informationssysteme AG and Registrant.
10.26* Intentionally omitted.
10.27*+10.23* Framework Contract, dated December 23, 1996, between Siemens
Nixdorf Informationssysteme AG and Registrant.

II-3
88

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------

10.24* B-1 License and Know-How Contract, dated September 4, 1996,
between Deutsche Telekom AG and Registrant, as amended.
10.28*10.25* Technology Option Agreement, dated January 31, 1997, between
Wolfgang Neifer and Registrant.
10.29*10.26*+ Patent License Agreement, dated November 15, 1995, between MIPS Dataline
America, Inc. and Registrant.
10.30+ Development and Supply Agreement, dated May 15, 1997,
between Telenor Conax and Registrant.
10.31*10.27*+ Manufacturer's Sales Representative Agreement, dated
December 8, 1994, between Registrant and AGM.
10.32*+10.28* License Agreement, dated September 5, 1997, between the
Registrant and Gemplus.
10.33*10.29* Warrant Issuance and Common Stock Agreement, dated September
5, 1997, between the Registrant and Gemplus.
10.34*10.30* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.35*10.31* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.36*10.32* Waiver and Amendment to Amended and Restated Stockholders'
Agreement dated September 5, 1997.
11.1*11.1 Statement of computation of earnings per share.
21.1*21.1 Subsidiaries of the Registrant.
23.1* Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants

II-3
5

EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------

23.2*23.1 Consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants .
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1*.
24.1 Power of Attorney 27.1*(included on page II-6).
27.1 Financial Data ScheduleSchedule.

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

* Filed previously.previously as an exhibit to the Company's Registration Statement on
Form S-1 (SEC Registration No. 333-29073).

** Filed previously as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 (See File No. 000-22689).

+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a
confidential treatment request under 17 C.F.R. sec.sec.Section Section 200.80(b)(4),

200.83 and 230.46.

II-4
89

(b) FINANCIAL STATEMENT SCHEDULES

Schedule II -- Valuation and Qualifying Accounts

Schedules not listed above have been omitted becauseThe following financial statement schedule should be read in conjunction
with the information
required to be set forth therein is not applicable or is shown in theconsolidated financial statements orand the notes thereto.

SCM MICROSYSTEMS, INC. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

BALANCE AT BALANCE AT
BEGINNING OF END OF
CLASSIFICATION PERIOD ADDITIONS DEDUCTION PERIOD
-------------- ------------ --------- ----------- ----------

Allowance for returns and doubtful accounts
Year ended December 31, 1995....................... 28 65 -- 93
Year ended December 31, 1996....................... 93 159 42 210
Year ended December 31, 1997....................... 210 54 76 188

Warranty accrual
Year ended December 31, 1995....................... -- 84 -- 84
Year ended December 31, 1996....................... 84 19 -- 103
Year ended December 31, 1997....................... 103 40 42 101

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the CaliforniaDelaware General Corporation Law, the Registrant's
Certificate of Incorporation, as amended, the Registrant's Bylaws, as amended,
the Registrant's indemnification agreements or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4II-5
690

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Company's Registration Statement on Form S-1 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Gatos, State of California, on this 3rd24th day of October 1997.March, 1998.

SCM MICROSYSTEMS, INC.

By: /s/ STEVEN HUMPHREYS

------------------------------------
Steven Humphreys
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this
Amendment
No. 3 to the Company's Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

SIGNATURESIGNATURES TITLE DATE
- ----------------------------------------------- -------------------------- -------------------------- ----- ----

/s/ STEVEN HUMPHREYS President and Chief October 3, 1997March 24, 1998
- ---------------------------------------------------------------------------------------------------- Executive Officer (Principal
Steven Humphreys (Principal Executive Officer) and
Director

/s/ JOHN NIEDERMAIERNIEDERMAIER* Vice President, Finance October 3, 1997and March 24, 1998
- ----------------------------------------------- and----------------------------------------------------- Chief Financial Officer
John Niedermaier Officer (Principal Financial and
Accounting Officer)

/s/ ROBERT SCHNEIDER* Chairman of the Board October 3, 1997, 1998
- ----------------------------------------------------------------------------------------------------
Robert Schneider

/s/ BERND MEIER* Chief Operations Officer October 3, 1997and March 24, 1998
- ----------------------------------------------- and----------------------------------------------------- Director
Bernd Meier

/s/ FRIEDRICH BORNIKOEL* Director October 3, 1997, 1998
- ----------------------------------------------------------------------------------------------------
Friedrich Bornikoel

/s/ BRUCE GRAHAM* Director October 3, 1997March 24, 1998
- ----------------------------------------------------------------------------------------------------
Bruce Graham

/s/ RANDALL LUNN* Director October 3, 1997March 24, 1998
- ----------------------------------------------------------------------------------------------------
Randall Lunn

/s/ POH CHUAN NG* Director October 3, 19971998
- ----------------------------------------------------------------------------------------------------
Poh Chuan Ng

/s/ ANDREW VOUGHT* Director October 3, 1997March 24, 1998
- ----------------------------------------------------------------------------------------------------
Andrew Vought

*By: /s/ JOHN NIEDERMAIER
- -----------------------------------------------
John NiedermaierSTEVEN HUMPHREYS
---------------------------------------
Steven Humphreys
Attorney-in-Fact

II-5II-6
791

EXHIBIT INDEX

EXHIBIT
NO.NUMBER DESCRIPTION OF DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------------------------------

1.1*1.1 Form of U.S. Underwriting Agreement
1.2*Agreement.
1.2 Form of International Underwriting AgreementAgreement.
3.1* Third Amended and Restated Certificate of Incorporation of
Registrant
3.2* Form of Fourth Amended and Restated Certificate of Incorporation
to be effective upon completion of this offering
3.3Incorporation.
3.2* Bylaws, as amended, of RegistrantRegistrant.
4.1* Form of Registrant's Common Stock Certificate
5.1*Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding legality of the securities being
issuedissued.
9.1* Voting Trust Agreement with Nicholas Efthymiou
9.2* Voting Trust Agreement with Reiner Pohl
10.1* Form of Director and Officer Indemnification Agreement
10.2*Agreement.
9.2* 1997 Stock Plan
10.3*Plan.
10.1* 1997 Employee Stock Purchase PlanPlan.
10.4* 1997 Director Option PlanPlan.
10.5* 1997 Stock Option Plan for French EmployeesEmployees.
10.6* 1997 Employee Stock Purchase Plan for Non-U.S. EmployeesEmployees.
10.7* Partnership* Revolving Credit Loan and Security Agreement, dated
June 8, 1995, between Registrant and
Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank
10.8* Continuing Guarantee, dated January 15,September 26, 1997, between Registrant and Imperial Bank
10.9*Comerica Bank.
10.8* Line of Credit, dated October 23, 1996, between Registrant
and Deutsche Bank
10.10*Bank.
10.9* Line of Credit, dated December 3, 1996, between Registrant
and BHF Bank
10.11*Bank.
10.10* Line of Credit, dated November 11, 1996, between Registrant
and Stadtsparkasse Munchen
10.12*Munchen.
10.11* Lease, dated September 29, 1994, between Registrant and Los
Gatos Business Park
10.13*Park.
10.12* Sublease Agreement, dated December 17, 1996, between
Intermart Systems, Inc. and Registrant
10.14*Registrant.
10.13* Lease, dated September 30, 1994, between Registrant and
Olbrich Franz
10.15*Franz.
10.14* Amended and Restated Stockholders' Agreement, dated April
11, 1997, between Registrant and certain investors
10.16*investors.
10.15* Form of Employment Agreement between SCM GmbH and Messrs.
Schneider and Meier
10.17*Meier.
10.16* Employment Agreement, dated May 15, 1995, between Registrant
and Jean-Yves Le Roux
10.18*Roux.
10.17*+ Commitment Instrument, dated August 7, 1996, among France
Telecom, Matra Communication, Registrant and Matra MHS
10.19*MHS.
10.18*+ Teaming Agreement, dated October 6, 1995, between
Temic/Matra MHS, Matra Communication and Registrant
10.20* Form of Amendment to the Partnership Agreement, dated June 8,
1995, between Registrant and Technologie-Beteiligungs-GmbH of
Deutsche Ausgleichsbank and form of Warrant
10.21*Registrant.
10.19*+ Development Agreement, dated March 6, 1997, between Intel
Corporation and Registrant.
10.20*+ Technology Development and License Agreement, dated
September 27, 1996, between Registrant 10.22*+ Technology Development and License Agreement, dated September 27,
1996, between Registrant and Sun Microsystems, Inc.
8

EXHIBIT NO. DESCRIPTION
----------- -----------------------------------------------------------------

10.23*Sun Microsystems,
Inc.
10.21* Cooperation Contract, dated March 25, 1996, between
Registrant and Stocko Metallwarenfabriken Henkels and Sohn
GmbH & Co.
10.24*10.22*+ Development and Supply Agreement, dated October 9, 1996,
between BetaDigital Gesellschaft fur digitale Fernsehdienste
mbH and Registrant
10.25*Registrant.
10.23* Framework Contract, dated December 23, 1996, between Siemens
Nixdorf Informationssysteme AG and Registrant
10.26* Intentionally omitted
10.27*+Registrant.
10.24* B-1 License and Know-How Contract, dated September 4, 1996,
between Deutsche Telekom AG and Registrant, as amended
10.28*amended.
92

EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------

10.25* Technology Option Agreement, dated January 31, 1997, between
Wolfgang Neifer and Registrant
10.29*Registrant.
10.26*+ Patent License Agreement, dated November 15, 1995, between MIPS
Dataline America, Inc. and Registrant
10.30+ Development and Supply Agreement, dated May 15, 1997,
between Telenor Conax and Registrant
10.31*Registrant.
10.27*+ Manufacturer's Sales Representative Agreement, dated
December 8, 1994, between Registrant and AGM
10.32*+AGM.
10.28* License Agreement, dated September 5, 1997, between the
Registrant and Gemplus
10.33*Gemplus.
10.29* Warrant Issuance and Common Stock Agreement, dated September
5, 1997, between the Registrant and Gemplus
10.34*Gemplus.
10.30* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus
10.35*Gemplus.
10.31* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus
10.36*Gemplus.
10.32* Waiver and Amendment to Amended and Restated Stockholders'
Agreement dated September 5, 1997
11.1*1997.
11.1 Statement of computation of earnings per share
21.1*share.
21.1 Subsidiaries of the Registrant
23.1*Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants 23.2*.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1*.
24.1 Power of Attorney 27.1*(included on page II-6).
27.1 Financial Data ScheduleSchedule.

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

* Filed previously.previously as an exhibit to the Company's Registration Statement on
Form S-1 (SEC Registration No. 333-29073).

** Filed previously as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 (See File No. 000-22689).

*** To be filed by amendment.