XYBERNAUT CORP, SB-2/A, 1996-07-17

XYBERNAUT CORP
SB-2/A, 1996-07-17
COMPUTER COMMUNICATIONS EQUIPMENT

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1996

REGISTRATION NO. 333-4156
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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

AMENDMENT NO. 3

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------

XYBERNAUT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)

3571
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)

54-1799851
(I.R.S. EMPLOYER
IDENTIFICATION NO.)

12701 FAIR LAKES CIRCLE, SUITE 550
FAIRFAX, VIRGINIA 22033
(703) 631-6925
(NAME, ADDRESS, INCLUDING ZIP CODE AND
TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE
OFFICES AND PRINCIPAL PLACE OF BUSINESS)
EDWARD G. NEWMAN
12701 FAIR LAKES CIRCLE, SUITE 550
FAIRFAX, VIRGINIA 22033
(703) 631-6925
(NAME, ADDRESS, INCLUDING ZIP CODE AND
TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S AGENT FOR SERVICE)

------------------
Copies to:

MARIO V. MIRABELLI, ESQ.
BAKER & HOSTETLER
1050 CONNECTICUT AVENUE, N.W., SUITE 1100
WASHINGTON, DC 20036
(202) 861-1500
ROBERT W. WALTER, ESQ.
BERLINER ZISSER WALTER & GALLEGOS, P.C.
1700 LINCOLN STREET, SUITE 4700
DENVER, CO 80203
(303) 830-1700

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

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

If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. /X/
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PURSUANT TO RULE 416, THERE ARE ALSO BEING REGISTERED SUCH ADDITIONAL
SHARES AND WARRANTS AS MAY BECOME ISSUABLE PURSUANT TO ANTI-DILUTION PROVISIONS
OF THE WARRANTS, EXCHANGE WARRANTS AND THE UNIT PURCHASE OPTION.
------------------
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2

CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT PRICE(1) FEE
- --------------------------------------------------------------------------------------------------------
Units, each consisting of one share of Common Stock,
$.01 par value and one redeemable Warrant.......... 2,415,000 $ 5.50 $13,282,500 $ 4,580.17
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Common Stock, $.01 par value(2)...................... 2,415,000 -- -- --
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Warrants(2).......................................... 2,415,000 $ 9.00 $21,735,000 $ 7,494.83
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Common Stock, $.01 par value(3)...................... 2,415,000 -- -- --
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Units, each consisting of one share of Common Stock,
$.01 par value and one redeemable Warrant(4)....... 1,431,429 $ 1.75 $ 2,505,000 $ 863.79
- --------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value(5)...................... 1,431,429 -- -- --
- --------------------------------------------------------------------------------------------------------
Warrants(5).......................................... 1,431,429 $ 9.00 $12,882,861 $ 4,442.37
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Common Stock, $.01 par value(6)...................... 1,431,429 -- -- --
- --------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value(7)...................... 20,000 $ 1.75 $ 35,000 $ 12.07
- --------------------------------------------------------------------------------------------------------
Unit Purchase Option(8).............................. 210,000 -- $ 10 --
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Units, each consisting of one share of Common Stock,
$.01 par value and one redeemable Warrant(9)....... 210,000 $9.075 $ 1,905,750 $ 657.16
- --------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value(10)..................... 210,000 -- -- --
- --------------------------------------------------------------------------------------------------------
Warrants(10)......................................... 210,000 $12.60 $ 2,646,000 $ 912.41
- --------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value(11)..................... 210,000 -- -- --
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TOTAL........................................... $54,992,121 $18,962.80
Previously Paid................................. $18,313.06
Paid With This Filing........................... $ 649.74
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</TABLE>

(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.

(2) Included in the Units.

(3) Issuable upon exercise of the Warrants included in the Units.

(4) Issuable in exchange for the Company's outstanding 7% Exchangeable
Debentures Due 1997 (the "Debentures").

(5) Included in the Units issuable in exchange for the Debentures.

(6) Issuable upon exercise of the Warrants included in the Units issued in
exchange for the Debentures.

(7) Issuable upon exercise of a warrant held by a holder of one of the
Debentures.

(8) To be issued to the Representative.

(9) Issuable upon exercise of the Unit Purchase Option.

(10) Included in the Units underlying the Unit Purchase Option.

(11) Issuable upon exercise of the Warrants underlying the Unit Purchase Option.

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<PAGE> 3

PROSPECTUS

2,100,000 UNITS

XYBERNAUT LOGO

XYBERNAUT CORPORATION

CONSISTING OF 2,100,000 SHARES OF COMMON STOCK AND

2,100,000 REDEEMABLE WARRANTS

All of the Units offered hereby are being sold by Xybernaut Corporation (the
"Company"). Each Unit consists of one share of Common Stock, $.01 par value (the
"Common Stock") and one redeemable warrant (the "Warrant"). The Units, the
Common Stock and the Warrants each will be separately transferable beginning on
the fourth business day following the date of this Prospectus (the "separation
date"). Each Warrant entitles the holder to purchase at any time from the
separation date until July , 1999, subject to the Company's earlier right of
redemption as described herein, one share of Common Stock at a price of $9.00.
Commencing 18 months from the date of this Prospectus and until the expiration
of the Warrants, the Company, in its discretion, may redeem outstanding
Warrants, in whole but not in part, upon not less than 30 days' notice, at a
price of $.05 per Warrant, provided that the closing bid price of the Common
Stock equals or exceeds $18.00 for 20 consecutive trading days ending five days
immediately prior to such notice. See "Description of Securities."

Prior to this offering there has been no market for the Company's
securities. For a discussion of the factors considered in determining the
initial public offering price of the Units, see "Underwriting." The initial
public offering price will be $5.50 per Unit. The Units, Common Stock and
Warrants have been approved for inclusion on The Nasdaq SmallCap Market under
the trading symbols XYBRU, XYBR and XYBRW. There can be no assurance that an
active trading market in the Company's securities will develop or be sustained.

Concurrent with this offering, the Company is registering for resale
1,431,429 units (the "Exchange Units") to be exchanged for $2,505,000 principal
amount of the Company's outstanding 7% Exchangeable Debentures Due 1997 (the
"Debentures"). Each Exchange Unit consists of one share of Common Stock and one
Warrant (the "Exchange Warrant"). The terms of the Exchange Warrants are
identical to those of the Warrants included in the Units. The Exchange Units may
be sold 180 days from the date of this Prospectus or earlier with the consent of
Royce Investment Group, Inc., the Representative of the Underwriters (the
"Representative"). See "Description of Securities" and "Shares Eligible for
Future Sale."
------------------------
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
AND SUBSTANTIAL DILUTION.

SEE "RISK FACTORS" BEGINNING ON PAGE 6 AND "DILUTION" BEGINNING ON PAGE 15.

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

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 NOR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

(1) The Company has agreed to issue and sell to the Representative, for nominal
consideration, an option to purchase 210,000 units exercisable at $9.075 per
Unit, a price equal to 165% of the Price to Public, and to pay the
Representative a non-accountable expense allowance equal to three percent
(3%) of the aggregate gross proceeds from the sale of the Units, including
the Over-Allotment Option. The Company also has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Act"). See "Underwriting."

(2) Before deducting offering expenses payable by the Company estimated at
$911,500, including the Representative's non-accountable expense allowance.

(3) The Company has granted the Representative a 45-day option to purchase an
aggregate of up to 315,000 additional Units solely to cover over-allotments,
if any (the "Over-Allotment Option"). If the Over-Allotment Option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $13,282,500, $1,195,425 and
$12,087,075, respectively. See "Underwriting."

------------------
The Units are offered by the Underwriters subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to the right
of the Underwriters to withdraw, cancel or modify such offer and reject orders
in whole or in part. It is expected that delivery of certificates representing
the Units will be made at the offices of the Representative on or about July ,
1996.
ROYCE INVESTMENT GROUP, INC.
KENSINGTON WELLS INCORPORATED

THE DATE OF THIS PROSPECTUS IS JULY , 1996.
<PAGE> 4
Front: Pictures of Mobile Assistant hardware and of workers utilizing the
Mobile Assistant while performing technical tasks.

<PAGE> 5

[FOUR COLOR PICTURES TO COME]

Mobile Assistant(R) is a registered trademark, and Mobile Inspector(TM) is
a trademark, of Xybernaut Corporation. This Prospectus also contains trademarks
of other companies.

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

On the effective date of the Registration Statement of which this
Prospectus forms a part, the Company will become a "reporting company" under the
Securities Exchange Act of 1934 (the "1934 Act"). The Company intends to
register the Units, Common Stock and Warrants under the 1934 Act as of the
effective date of the Registration Statement. The Company is a "small business
issuer" as defined under Regulation S-B adopted under the Act and will file
reports with the Commission pursuant to the 1934 Act on forms applicable to
small business issuers.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other periodic reports as the
Company may from time to time deem appropriate or as may be required by law.
<PAGE> 6

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, the information contained in this
Prospectus assumes (i) no exercise of the Representative's Over-Allotment
Option, and (ii) issuance of the Exchange Units for the Debentures. For a
description of the various risks associated with purchase of the Company's
securities, see "Risk Factors."

THE COMPANY

The Company is engaged in the research, development and commercialization
of mobile computer systems and related software solutions designed to enhance
all aspects of personal productivity, especially in commercial, industrial and
military applications. The Company's first mobile computing product is the
patented Mobile Assistant(R), which is a full function body-worn,
voice-controlled personal computer with a head-mounted video display providing
true computing mobility through hands-free operation. With the speed, memory,
data processing, multimedia and communications capabilities of a desktop PC in a
lightweight unit, the Mobile Assistant(R) combines full function PC features
with simultaneous user mobility. The Mobile Assistant(R) with application
software is designed to allow workers with minimal training to perform complex
and time consuming tasks such as maintenance, repair and inspection of complex
technological and mechanical systems, retrieval and analysis of medical
information from remote locations, and coordination of remote commercial and
industrial activities and military field operations, in a more efficient manner
than current technology allows. Purchasers of Mobile Assistants(R) have
included, among others, AT&T, Rockwell International Corporation, Eaton
Corporation, Martin Marietta (now Lockheed Martin), NeuroSystems Europe Limited,
SRI International and the United States Army. Recently, Rockwell International
Corporation, which manufactures the computing unit utilized in the Mobile
Assistant(R), licensed from the Company the right to manufacture and market
mobile computers utilizing the intellectual property and related technical
know-how which has been developed by the Company.

Since the introduction of the first large mainframe computers in the
1950's, there has been an ongoing evolution in the computer industry which has
resulted in both reductions in the size of computer hardware and significant
increases in the number and scope of software applications. The Company believes
the next phase in this evolution will be the commercialization of mobile,
body-worn computers which will combine portability with new and expanded
software applications. Based upon the current size and projected growth of the
market for all types of portable computers (i.e., less than eight pounds), the
Company believes that there exists the potential to develop a substantial market
for mobile computer systems and related software. The Company also believes
that, with the advent of hands-free mobile computing, the Mobile Assistant(R)
can be used to capitalize on the development of new markets by providing
computer capability in environments and applications where computer capability
previously was unavailable due to environmental constraints and hardware and
software limitations.

The Mobile Assistant(R) utilizes technologically advanced features such as
real time, two-way video and audio communications through radio frequency
transmissions, integrated cellular linkups and conventional telephone lines,
global positioning system tracking capabilities, and access to information
through the Internet and World Wide Web. The head-mounted display unit includes
a two-way audio system, weighs less than 16 ounces and presents a monochrome
image that is approximately equivalent to that of a 14" VGA monitor. The
body-worn computing unit is designed with a case allowing operation in
environmental extremes in which conventional portable computers could not
previously operate, weighs less than three pounds and is capable of running
software applications designed for Microsoft Windows and Windows 95, DOS and SCO
UNIX.

The Company intends to utilize its software development expertise acquired
through custom programming, including development of a graphical user interface
and neutral data storage systems for United States intelligence agencies, to
create standard and custom software toolkits for commercial applications.
Software toolkits provide a cost-effective platform for user customized programs
for the storage, processing and retrieval of information necessary for specific
commercial, industrial, military and other applications. The Company is the
exclusive licensee for body-worn applications of the Mobile Inspector(TM), its
first custom software toolkit, which develops protocols and procedures to
facilitate inspection of commercial, industrial and military facilities and
equipment. The Company intends to integrate its hardware and software
capabilities to provide total mobile computing solutions, thereby capitalizing
on all aspects of the Company's expertise.

3
<PAGE> 7

The Company is developing mobile computing systems to provide simultaneous
"hands-free" access to computerized data and information to technical personnel
while working in various applications including:

- Commercial maintenance: There are over 5,460,000 mechanics and
technicians (U.S. Bureau of Labor, 1996) in the United States alone
engaged in the maintenance and repair of equipment in such industries as
construction, transportation and telecommunications.

- Military: The Mobile Assistant(R) has been tested by United States Army
technicians for the maintenance and repair of the AH64 Apache Attack
helicopter. The Army also is performing feasibility studies on more
specialized versions of body-worn computers, including components of the
Mobile Assistant(R), for coordination of personnel movement and artillery
support. There are an estimated 700,000 mechanics in the U.S. Armed
Forces.

- Emergency healthcare: The Mobile Assistant(R) is designed to provide a
direct voice, video and data link between emergency medical personnel and
emergency room physicians to facilitate the remote diagnosis and
treatment of patients and can transmit global positioning and patient
information to medical helicopters and other evacuation vehicles
transporting the critically ill and injured.

The Company's objective is to become a leading supplier of integrated
mobile computing systems for use in a broad variety of commercial, industrial
and military applications. The Company intends to achieve this objective by (i)
continuing development of the functions and capabilities of the Mobile
Assistant(R), (ii) achieving market penetration for planned application
development software toolkit products, (iii) expanding and developing specific
software applications for the Mobile Assistant(R) through introduction of custom
software toolkits, such as the Mobile Inspector(TM), (iv) initiating a sustained
marketing program for its hardware and software products through value added
resellers ("VARs") and original equipment manufacturers ("OEMs"), and (v)
establishing technological leadership through continuous systems innovation to
meet the needs of a broad range of end users. Through these strategies, the
Company believes it will be well positioned to take advantage of anticipated
growth and expansion of the mobile computing industry.

THE OFFERING

<TABLE>
<S> <C>
Securities offered...................... 2,100,000 Units, each Unit consisting of one share
of Common Stock and one Warrant. Each Warrant
entitles the holder to purchase one share of Common
Stock at a price of $9.00 per share at any time
from the separation date until July , 1999,
subject to the Company's right to redeem the
Warrants under certain circumstances. See
"Description of Securities -- Warrants."
Common stock outstanding prior to this
offering(1)........................... 10,387,789 shares
Common stock outstanding after this
offering(1)(2)........................ 13,919,218 shares
Use of Proceeds......................... The net proceeds of the offering will be used for:
(i) marketing and sales, (ii) acquisition of
inventory for the Mobile Assistant, (iii) research
and development, (iv) capital expenditures, (v)
repayment of indebtedness, (vi) acquisition of an
affiliate, and (vii) working capital, including
general and administrative expenses. See "Use of
Proceeds."
</TABLE>

<TABLE>
<CAPTION>
Nasdaq symbols:
<S> <C>
Units.......................................................................... XYBRU
Common Stock................................................................... XYBR
Warrants....................................................................... XYBRW
</TABLE>

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(1) Includes 1,800,000 shares of Common Stock held in escrow and subject to
release upon the Company achieving certain objectives in the 12-month
periods ending September 30, 1997, 1998 and 1999. Does not include 300
shares of Tech Virginia. See "Principal Stockholders -- Escrowed Shares."

(2) Excludes (i) 921,530 shares of Common Stock issuable upon the exercise of
currently outstanding options and warrants, (ii) 2,100,000 shares of Common
Stock issuable upon the exercise of the Warrants and 1,431,429 shares of
Common Stock issuable upon exercise of the Exchange Warrants, (iii) 630,000
shares of Common Stock issuable upon exercise of the Over-Allotment Option
and the shares issuable upon the exercise of the Warrants underlying the
Units in such Option, and (iv) up to 420,000 shares of Common Stock issuable
upon full exercise of the Representative's Unit Purchase Option (as
hereinafter defined) and Warrants included in the Unit Purchase Option which
are exercisable at $12.60 per share. See "Management" and "Underwriting."

4
<PAGE> 8

SUMMARY COMBINED FINANCIAL DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED MARCH
YEAR ENDED MARCH 31, DECEMBER 31, 31,
------------------------- ------------------------- -------------------------
1994 1995 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data(1):
Revenues...................... $ 16,981 $ 79,324 $ 52,250 $ 352,648 $ 27,074 $ 315,371
Operating expenses............ 56,541 1,325,715 873,472 2,211,675 452,243 769,580
Cost of sales................. 8,155 61,301 35,544 263,621 25,757 228,289
Net loss...................... (47,352) (1,303,892) (853,249) (2,141,190) (450,643) (699,386)
Net loss per share............ $ -- $ (0.12) $ (0.08) $ (0.18) $ (0.04) $ (0.06)
Weighted average shares
outstanding................. 10,200,244 11,164,748 10,984,499 11,793,120 11,715,505 11,803,618
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------------------------
DECEMBER 31, 1995 ACTUAL PRO FORMA(2) ADJUSTED(3)
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit)...................... $ (38,534) $ (535,174) $ 324,826 $ 9,923,826
Total assets................................... 1,393,538 1,093,255 2,233,255 11,120,964
Total liabilities.............................. 2,486,491 2,882,594 4,022,594 1,222,836
Stockholders' equity (deficit)................. (1,092,953) (1,789,339) (1,789,339) 9,898,128
</TABLE>

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

(1) The Company changed from a fiscal year ended March 31 to a calendar year
ended December 31 effective for the transition period ended December 31,
1995.

(2) In April 1996 the Company sold $1,000,000 in principal amount of the
Debentures. Pro forma balance sheet information was prepared assuming these
Debentures were outstanding as of March 1996. See Note 13 to Combined
Financial Statements.

(3) Adjusted to give effect to the sale of 2,100,000 Units offered hereby at an
offering price of $5.50 per Unit, and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."

The Company was incorporated in Virginia in October 1990 and was
reincorporated in Delaware in April 1996. The Company's principal executive
offices are located at 12701 Fair Lakes Circle, Suite 550, Fairfax, Virginia,
22033, and its telephone number is (703) 631-6925. As used herein, the term
"Company" includes references to Xybernaut Corporation and Tech International of
Virginia, Inc., an affiliate of the Company. See "Certain Transactions -- Tech
International and Tech Virginia."

5
<PAGE> 9

RISK FACTORS

Investment in the Company's securities involves substantial risks, some of
which are summarized below. Prospective investors should carefully consider the
following risks, among others, concerning the Company and this offering prior to
investing.

HISTORY AND EXPECTATION OF FUTURE LOSSES; NEED FOR ADDITIONAL FINANCING

The Company was incorporated in October 1990 and commenced operations in
November 1992. In the fiscal years ended March 31, 1994 and 1995, the Company
incurred a net loss of $47,352 and $1,303,892, respectively. In the nine months
ended December 31, 1995, the Company incurred a net loss of $2,141,190. In the
three months ended March 31, 1996, the Company incurred a net loss of $699,386.
At March 31, 1996, the Company had an accumulated deficit of $4,233,727 and a
working capital deficit of $535,174. During the nine months ended December 31,
1995 and continuing to date, the Company has experienced severe cash flow
difficulties and a corresponding lack of liquidity, which has been addressed
through the sale of $2,505,000 in principal amount of the Debentures concluded
in April 1996 and a short-term bank loan which will be repaid from the proceeds
of this offering. The Company has a limited operating history. The Company
intends to conduct significant additional research, development and testing
which, together with establishment of marketing and distribution capabilities,
are expected to require substantial funding and to result in continuing
operating losses for the foreseeable future. There can be no assurance that,
notwithstanding these efforts and the expenditure of substantial funds, the
Company ever will achieve substantial sales of any of its products or profitable
operations. In the event the Company continues to incur losses after the
application of proceeds from this offering or requires more working capital than
is currently anticipated, the Company would be required to raise additional
capital in order to fund its operations. There can be no assurance that the
Company will be capable of raising additional capital or that the terms upon
which such capital would be available to the Company would be acceptable, in
which case the Company could be required to curtail materially, suspend or cease
operations. The success of the Company will be affected by expenses, operational
difficulties and other factors frequently encountered in the development of a
business enterprise in a competitive environment, many of which may be beyond
the Company's control. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."

GOING CONCERN QUALIFICATION

The report of the Company's independent accountants contains an explanatory
paragraph as to the Company's ability to continue as a going concern. Among the
factors cited by the independent accountants as raising substantial doubt as to
the Company's ability to continue as a going concern is that the Company has
incurred losses since inception and has a working capital deficit. There can be
no assurance that the Company will ever achieve significant revenues or
profitable operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements and
Notes thereto.

UNCERTAINTY OF MARKET DEVELOPMENT AND PRODUCT ACCEPTANCE

The mobile computing market is emerging and relatively undeveloped. The
Company sold its first Mobile Assistant(R) in 1993 and as of June 30, 1996 had
sold a total of 76 Mobile Assistants(R). Approximately 10 Mobile Inspector(TM)
software packages were sold by the licensor of the software prior to the Company
licensing the rights thereto. The Company recently has initiated marketing of
the Mobile Inspector(TM) but has not sold any Mobile Inspectors(TM) to date. The
size of the mobile computing market is currently limited by the high unit prices
of mobile computers as compared to laptops and other portable computers, the
specialized nature of each application and the need for custom applications and
system integration. The potential size of the market will be limited by the rate
at which prospective customers recognize and accept the functions and
capabilities of integrated mobile computing systems. There can be no assurance
that a significant market will develop for mobile computing systems or, if a
market develops, that the Mobile Assistant(R) and any of the Company's other
products will become a significant factor in any market which develops.

6
<PAGE> 10

The commercial success of the Mobile Assistant(R), the Mobile Inspector(TM)
and any other product which the Company may develop will depend upon acceptance
by commercial, industrial and military markets, of which there can be no
assurance. The Company believes that any product acceptance will be
substantially dependent upon educating the commercial, industrial and military
markets as to the capabilities, characteristics, benefits and efficacy of the
Mobile Assistant(R) and any of the Company's other products, of which there can
be no assurance. See "Business."

COMPETITION

The computer industry is intensely competitive and is characterized by
rapid technological advances, evolving industry standards and technological
obsolescence. Many of the Company's current competitors have longer operating
histories and greater financial, technical, sales, marketing and other resources
than the Company. In addition, there exist a number of large, well-capitalized
hardware companies such as IBM, Dell Computers, Compaq, Toshiba and Apple that
could, should they choose to do so, market mobile computers in direct
competition with the Company. The Company believes that the principal immediate
competitive factor which it will encounter will be the development of a
significant market for mobile computing. Assuming the development of such a
market, the principal competitive factors which the Company will encounter
include mobility, ease of use, adaptability to applications, integration of
functions and capabilities, and reliability as well as price, service and
support, and market presence. Other present or future competitors may develop
products or alternative technologies which render the Mobile Assistant(R), the
Mobile Inspector(TM) or the Company's planned products obsolete. The Company
currently considers InterVision, Phoenix Group, Computing Devices International,
a division of Ceridian Corporation, Texas Microsystems and a consortium of
Litton and TRW as competitors. At least two of these competitors have introduced
mobile computers which compete directly with the Mobile Assistant(R). There can
be no assurance that the Company will be able to compete successfully against
its competitors or that its patent will prevail over or can be enforced against
these and other competitors. See "Business -- Competition" and
"Business -- Intellectual Property."

DEPENDENCE UPON KEY SUPPLIERS

The Company purchases numerous parts and components from various suppliers,
which the Company assembles into the Mobile Assistant(R). Certain components are
currently purchased from single suppliers. The Company has not entered into
written agreements with its suppliers except for Rockwell International
Corporation ("Rockwell International") and Kopin Corporation ("Kopin"), its
primary suppliers for computing units and head-mounted displays, respectively.
Although the Company believes there are multiple sources for many parts and
components, the Company currently depends heavily on Rockwell International and
Kopin as well as on Sony Corporation, which has supplied the lithium-ion
batteries utilized by the Mobile Assistant(R). The Company's interim agreement
with Kopin obligates Kopin to provide head-mounted displays for the Company's
mobile computers at a fixed price through August 1996 pending negotiation of a
longer term agreement (of which there can be no assurance). The Company is
vulnerable to limits in supply and pricing and product changes by its suppliers.
Although management believes that the Company could adapt to any such
occurrences, supply interruptions could necessitate changes in product design or
assembly methods for the Mobile Assistant(R) and cause the Company to experience
temporary delays or interruptions in supply while such changes are incorporated.
Further, because the order time for certain components may range up to
approximately three months, the Company also could experience delays or
interruptions in supply in the event the Company is required to find a new
supplier for any of these components. Any disruptions in supply of necessary
parts and components from the Company's key suppliers could have a material
adverse effect on the Company's results of operations.

At various times there have been shortages of components in the computer
hardware industry and certain components have been subject to limited allocation
by some of the Company's suppliers. The Company estimates that approximately 25%
of the Mobile Assistants(R) scheduled for delivery through March 31, 1996 have
been delayed by 60 days or more as a result of such shortages and limited
allocation. Any future shortage or limited allocation of components for the
Mobile Assistant(R) could have a material adverse effect on the Company. See
"Business -- Key Suppliers."

7
<PAGE> 11

SUBSTANTIAL DEPENDENCE UPON SINGLE PRODUCT; POSSIBILITY OF UNSUCCESSFUL NEW
PRODUCT DEVELOPMENT

The Mobile Assistant(R) is the Company's principal product, and its success
will depend upon its commercial acceptance, which cannot be assured. For single
unit purchases, the Mobile Assistant(R) currently is priced from $8,749 to
$22,000, depending upon the features included. As technological developments
cause declines in hardware costs, the Company expects that mobile computer sales
will be driven by system capabilities and integration. There is no assurance
that the Mobile Assistant(R) will offer the performance capabilities or features
that customers will value and, if not, the Company could be required to modify
the design of the Mobile Assistant(R). While the Mobile Inspector(TM) and the
Company's planned software toolkits are intended for use both with the Mobile
Assistant(R) and independently, there can be no assurance that a separate market
for the Company's existing and planned software products will develop. There can
be no assurance that any products, if sold, will generate significant revenues
or any profits. The Company also intends to modify the Mobile Assistant(R) for
use in other applications and to develop other products utilizing its core
technologies. Additional product development will result in the Company
incurring significant research and development expenses that may be
unrecoverable should commercialization of new products prove unsuccessful. The
Company also could require additional funding if research and development
expenses are greater than anticipated. There can be no assurance that the
Company will be successful in its future product development efforts or in
diversifying its product line. See "Business."

UNCERTAIN PROTECTION OF PATENT AND PROPRIETARY RIGHTS; NO ASSURANCE OF
ENFORCEABILITY OR SIGNIFICANT COMPETITIVE ADVANTAGE

The Company considers its patent, trade secrets, and other intellectual
property and proprietary information to be important to its business prospects.
In September 1995 the Company received a notification from the United States
Patent and Trademark Office (the "Patent Office") entitled "office action in
reexamination" which indicated that the Company's claims under its existing
patent for the Mobile Assistant(R) were subject to reexamination and had been
preliminarily rejected. In April 1996 the Company received notification that a
second reexamination request had been filed with the Patent Office by the same
party which had initiated the prior reexamination. In April 1996 the Patent
Office essentially held that the Company's patent had been upheld with respect
to the issues raised in the September 1995 reexamination. The ultimate validity
of the patent will not be resolved until the second reexamination request has
been decided. Approximately 65% of the Company's revenue for the nine months
ended December 31, 1995 and approximately 95% of the Company's revenue for the
three months ended March 31, 1996 were derived from product based upon the
patent. A final rejection of the Company's patent could have a material adverse
effect on the Company, including, but not limited to, its license agreement with
Rockwell International. The Company has granted to Rockwell International a
nonexclusive license to the patent and related technical know-how. See
"Business -- Marketing and Sales." In October 1995 the Company filed a patent
application covering additional embodiments and extensions of the technologies
used in the Mobile Assistant(R). Notwithstanding the foregoing, there can be no
assurance that the Company's pending patent application will issue as a patent,
that any issued patent will provide the Company with significant competitive
advantages or that challenges will not be instituted against the validity or
enforceability of any patent held by the Company. The cost of litigation to
uphold the validity and prevent infringement of patents can be substantial.
There also can be no assurance that others will not independently develop
similar or more advanced products, design patentable alternatives to the
Company's products or duplicate the Company's trade secrets. The Company may in
some cases be required to obtain licenses from third-parties or to redesign its
products or processes to avoid infringement. The Company licensed exclusive
rights for body-worn applications to the Mobile Inspector(TM) from a software
developer, the president of which is now a consultant to the Company. There can
be no assurance that the license will be sufficient to protect the Company's
right to the Mobile Inspector(TM). The Company also relies on trade secrets and
proprietary technology and enters into confidentiality agreements with its
employees and consultants. There can be no assurance that the obligation to
maintain the confidentiality of such trade secrets or proprietary information
will not be breached by employees or consultants or that the Company's trade
secrets or proprietary technology will not otherwise become known or be
independently developed by competitors in such a manner that the Company has no
practical recourse. See "Business -- Intellectual Property."

8
<PAGE> 12

LIMITED MARKETING AND DIRECT SALES EXPERIENCE; DEPENDENCE ON OTHERS FOR
MARKETING AND SALES

The Company only recently has begun to develop a sales organization to
market and sell its mobile computing products to VARs, OEMs and end users and
intends to accelerate development of its sales organization following completion
of this offering. The Company intends to rely upon a network of VARs and OEMs
and to enter into joint ventures and licensing or other collaborative
arrangements to market and sell its mobile computing products. The Company
currently is a party to VAR agreements with FC Imaging, Inc., Electronic
Surveillance Technologies Corporation and NeuroSystems Europe Limited and a
license agreement with Rockwell International. Such arrangements may result in a
loss of control by the Company over the marketing and sale of its products.
There can be no assurance that the Company will be successful in entering into
any such arrangements or be able effectively to manage and maintain its
relationships with others, or that any marketing and sales efforts undertaken
for the Company by others will be successful. The Company also intends to market
its products outside of the United States. A number of risks are inherent in
international transactions, such as the imposition of governmental controls
including restrictions on the exporting of currency, fluctuations in foreign
currency exchange rates, export license requirements, political and economic
instability, trade restrictions, changes in tariffs and difficulties and
expenses in managing international operations. These and other factors beyond
the Company's control may adversely affect the Company's ability to achieve
significant sales. See "Business."

DEPENDENCE UPON AND NEED FOR KEY PERSONNEL; LIMITED MANAGEMENT TEAM

The Company's success depends to a significant extent on Edward G. Newman,
its President, Chief Executive Officer and Chairman of its Board of Directors.
The loss of Mr. Newman would have a material adverse effect on the Company's
progress and ultimate likelihood of success. Because the Company is
substantially dependent on Mr. Newman's services and there are currently only
two other executive officers of the Company, the Company may be considered to
have limited management. Although the Company has entered into a three-year
employment agreement with Mr. Newman, this agreement may not assure the Company
the continued services of Mr. Newman. The Company has obtained a key-person life
insurance policy on the life of Mr. Newman in the amount of $2,000,000. The
Company's success also will depend upon its ability to attract and retain highly
qualified and experienced management and technical personnel. The Company faces
competition for such personnel from numerous other entities, many of which have
significantly greater resources than the Company. There can be no assurance that
the Company will be successful in recruiting such personnel, or that if
recruited such persons would succeed in establishing profitable operations for
the Company. See "Business" and "Management."

BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS

The Company has allocated $2,450,000 (25.5% of the estimated net proceeds
from this offering) to marketing and sales; $750,000 (7.8% of estimated net
proceeds) to manufacturing inventory of the Mobile Assistant(R); $3,318,578
(34.6% of estimated net proceeds) to research and product development; $500,000
(5.2% of estimated net proceeds) to capital expenditures; $380,422 (4.0% of
estimated net proceeds) to repayment of short-term bank indebtedness and
indebtedness owed to the Representative; $50,000 (0.5% of estimated net
proceeds) to the acquisition of an affiliate; and $2,150,000 (22.4% of estimated
net proceeds) to working capital. The Company's success will depend in part on
the discretion and judgment of the Company's management with respect to the
application and allocation of these proceeds. Furthermore, management will
retain broad discretion over the allocation of amounts budgeted for working
capital and proceeds received from the exercise of Warrants, if any. See "Use of
Proceeds," "Business" and "Management."

CUSTOMER CONCENTRATION

For the transitional period ended December 31, 1995, three of the Company's
customers, Rockwell International, SRI International and Scientific Applications
International Corporation (SAIC), accounted for 15%, 18% and 19%, respectively,
of the Company's revenues. For the three month period ended March 31, 1996,
Rockwell International accounted for 100% of the Company's revenues.
Accordingly, the Company is significantly dependent on revenues derived from
these customers. The loss of one or more significant

9
<PAGE> 13

customers may have a material adverse effect on the ability of the Company to
achieve profitability. To the extent the Company's dependence increases on large
corporate customers in the future, the Company will be subject to an increased
risk that the loss of any such customers will have a material adverse effect on
the Company's results of operations. Because of the Company's limited historical
revenues, the Company may remain dependent in the immediate future upon a
limited number of customers (the identity of which may be subject to change from
year to year) for a material percentage of its annual operating revenue. See
"Business."

RAPID TECHNOLOGICAL CHANGE AND RISK OF OBSOLESCENCE

The market for computer products is characterized by rapid technological
advances, evolving industry standards, changes in end user requirements and
frequent new product introductions and enhancements. The introduction of
products embodying new technologies and the emergence of new industry standards
could render the Company's existing products and products currently under
development obsolete and unmarketable. The Company's success will depend upon
its ability to enhance its current products and develop and successfully
introduce and sell new products that keep pace with technological developments
and respond to evolving end user requirements. Any failure by the Company to
anticipate or respond adequately to technological developments or end user
requirements, or any significant delays in product development or introduction,
could damage the Company's competitive position in the marketplace and reduce
revenues. The Company expects to increase the size of its product development
staff in the near term to meet these challenges. There can be no assurance that
the Company will be successful in hiring and training qualified product
development personnel to meet its needs. There can be no assurance that the
Company will be successful in developing and marketing new products or product
enhancements on a timely basis. Any failure to successfully develop and market
new products and product enhancements would have a material adverse effect on
the Company's results of operations. See "Business."

INDUSTRY CYCLICALITY

The computer industry historically has been affected by general economic
downturns which have had an adverse economic effect on manufacturers of computer
hardware and software as well as upon end users of computers. In addition, the
life cycle of existing computer products and timing of new product development
and introduction can affect demand for computer products. The Company's results
of operations for any particular period may be adversely affected by numerous
factors, such as the loss of key suppliers or customers, price competition,
problems encountered in managing inventories or receivables, the timing or
cancellation of purchase orders with suppliers and the timing of expenditures in
anticipation of increased sales and customer product delivery requirements, if
any. Price competition in the computer industry in which the Company competes is
intense and could result in gross margin declines which could have an adverse
impact on the Company's financial performance. See "Business."

EFFECT OF POSSIBLE NON-CASH FUTURE CHARGE

The Company's stockholders have been required by the Representative to
deposit an aggregate of 1,800,000 shares of Common Stock (at least 1,620,000 of
which are owned by officers and directors of the Company) into an escrow account
(the "Escrowed Shares"). The Escrowed Shares will be subject to release to such
stockholders in increments over a three-year period only in the event the
Company's gross revenues and earnings (loss) per share for the 12-month periods
ending September 30, 1997, 1998 and 1999 equal or exceed certain gross revenue
and earnings (loss) per share targets which have been established through
negotiations with the Representative (the "Performance Targets"). If the
Performance Targets are not met in any of the relevant 12-month periods (and the
price of the Common Stock does not meet or exceed the price described below),
the Escrowed Shares will be returned to the Company in amounts which have been
agreed upon between the Representative and the Company for each period and
cancelled. In addition to the foregoing, all then Escrowed Shares will be
released to the stockholders if the closing price of the Common Stock as
reported on The Nasdaq SmallCap Market following this offering equals or exceeds
$11.00 for 25 consecutive trading days or 30 out of 35 consecutive trading days
during the period ending September 30, 1999. In the event any Escrowed Shares
held by officers, employees and consultants are released, the

10
<PAGE> 14

difference between the initial offering price and the market value of such
shares at the time of release will be deemed to be additional compensation
expense to the Company. Assuming the price of Common Stock is equal to or
greater than the offering price of $5.50 per Unit (of which there can be no
assurance), the release of the Escrowed Shares would result in an earnings
charge which would have the effect of reducing or eliminating any earnings per
share and could have a negative effect on the market price for the Common Stock.
The earnings per share target calculation will be based on the average number of
shares issued and outstanding during each period, but excluding shares issued
pursuant to the Representative's Unit Purchase Option (as hereinafter defined),
extraordinary items, or compensation expense charged to the Company related to
the release of the Escrowed Shares. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Principal Stockholders."

CONTROL BY EXISTING STOCKHOLDERS

Following this offering, the Company's executive officers, directors and
principal stockholders will, in the aggregate, beneficially own approximately
61.0% of the Company's outstanding shares of Common Stock (assuming the exercise
of their currently exercisable options to purchase the Company's Common Stock).
These stockholders, if acting together, will be able effectively to control most
matters requiring approval by the stockholders of the Company, including the
election of directors. The voting power of these stockholders under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company. See "Management," "Principal Stockholders" and
"Description of Securities."

ARBITRARY DETERMINATION OF OFFERING PRICE; POSSIBLE PRICE VOLATILITY

The initial public offering price of the Units and the exercise prices and
other terms of the Warrants have been determined by negotiations between the
Company and the Representative and are not related to the Company's asset value,
net worth or results of operations or other investment criteria. The market
prices for securities of emerging technology companies historically have been
highly volatile. Future announcements concerning the Company or its competitors,
including the results of testing, technological innovations or new commercial
products, government regulations and developments concerning proprietary rights
or litigation may have a significant impact on the market price of the Company's
securities. See "Underwriting."

DILUTION

This offering will result in immediate substantial dilution of $4.80
(87.3%) per share, which amount represents the difference between the pro forma
net tangible book value per share after this offering and the public offering
price of $5.50 per Unit, assuming no part of the Unit offering price is
allocated to the Warrants. See "Dilution."

LIMITATION OF LIABILITY

The Company's Certificate of Incorporation provides that directors of the
Company shall not be personally liable for monetary damages to the Company or
its stockholders for a breach of fiduciary duty as a director, subject to
limited exceptions. Although such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission,
these provisions of the Certificate of Incorporation could prevent the recovery
of monetary damages against directors of the Company. See "Management --
Limitation of Liability and Indemnification Matters."

WARRANT EXERCISE AND REDEMPTION PROVISIONS

Each Warrant offered hereby entitles the holder to purchase one share of
Common Stock at a price of $9.00 per share commencing on the separation date,
and expiring three years from the date hereof. The Warrants may be exercised
only if a current prospectus relating to the Common Stock underlying the
Warrants is then in effect and only if such shares are qualified for sale under
applicable state securities laws of the states in which holders of the Warrants
reside. There can be no assurance that the Company will be successful in
maintaining a current prospectus in effect during the Warrant exercise period.
The Warrants may

11
<PAGE> 15

be rendered valueless in the event this Prospectus or another prospectus
covering the shares issuable upon exercise of the Warrants is not kept current
or if the shares are not registered or otherwise qualified in the state in which
the holder of the Warrant resides. Although during this offering the Warrants
will not knowingly be sold in any jurisdiction in which they are not registered
or otherwise qualified, purchasers of the Warrants may relocate to a
jurisdiction in which the Common Stock underlying the Warrants is not so
registered or qualified. In addition, purchasers of the Warrants in the open
market may reside in a jurisdiction in which the Common Stock underlying the
Warrants is not registered or qualified. If the Company is unable or chooses not
to register or qualify or maintain the registration or qualification of the
Common Stock underlying the Warrants for sale in all of the states in which the
Warrant holders reside, the Company would not permit such Warrants to be
exercised and Warrant holders in those states may have no choice but either to
sell their Warrants or let them expire. Prospective investors and other
interested persons can inquire concerning whether Common Stock may be issued
upon the exercise of Warrants by holders in a particular state by sending a
written inquiry to the Company or the Representative. Commencing 18 months from
the date hereof, the Warrants may be redeemed by the Company, in whole but not
in part, upon 30 days prior written notice at a price of $.05 per Warrant at
such time as the closing bid price of the Common Stock on the Nasdaq SmallCap
Market has equaled or exceeded $18.00 for 20 consecutive trading days. The
redemption notice must be provided not more than five business days after the
conclusion of the 20 consecutive trading days for which the closing bid price of
the Common Stock has equaled or exceeded $18.00 per share. While the Warrants
may be exercised during the 30-day notice period prior to the date of
redemption, the holder may be unable (for financial or other reasons) to
exercise the Warrants at the time of receipt of the notice of redemption. The
foregoing terms also are applicable to the Exchange Warrants. See "Description
of Securities -- Warrants."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of the Company's Common Stock in
the public market following this offering could adversely affect the market
price of the Common Stock. Of the 13,919,218 shares of Common Stock to be
outstanding upon the completion of this offering, the 2,100,000 shares sold in
this offering and included in the Units will be freely tradeable and the
1,431,429 shares of Common Stock, 1,431,429 Exchange Warrants and, upon exercise
thereof, 1,431,429 shares of Common Stock underlying the Exchange Warrants, all
of which are registered on the Registration Statement of which this Prospectus
forms a part, will be freely tradeable 180 days from the date hereof, or earlier
with the consent of the Representative. The remaining 10,387,789 shares of the
Common Stock are eligible for sale in the public market, subject to compliance
with Rule 144 under the Act. Rule 144 generally provides that beneficial owners
of shares who have held such shares for two years may sell within a three-month
period a number of shares not exceeding the greater of one percent of the total
outstanding shares or the average trading volume of the shares during the four
calendar weeks preceding such sale. In the absence of agreements with the
Representative, the outstanding restricted Common Stock could be sold in
accordance with Rule 144 commencing 90 days from the date of this Prospectus and
at various times thereafter through November 1997. However, pursuant to the
terms of the Underwriting Agreement, the Representative has required that the
holders of 10,180,543 shares enter into lock-up agreements which restrict the
sale or disposition of such shares for two years from the date of this
Prospectus without the prior written consent of the Representative. The
Representative also has required that holders of the remaining 207,246
restricted shares enter into lock-up agreements which restrict the sale or
disposition of such shares for 12 months from the date of this Prospectus
without the prior written consent of the Representative. See "Shares Eligible
for Future Sale."

SECURITIES ISSUABLE PURSUANT TO OPTIONS, WARRANTS AND REPRESENTATIVE'S UNIT
PURCHASE OPTION

At the date of this Prospectus, the Company has reserved an aggregate of
921,530 shares of Common Stock for issuance on exercise of outstanding options
and warrants. The exercise prices of the options presently outstanding are $0.01
per share for 250,000 shares granted in September 1994 and $6.00 per share for
551,530 shares granted between April 1995 and June 1996. The exercise price of
the warrants is $1.75 per share for 20,000 warrants granted in November 1995 and
$6.00 per share for 100,000 warrants granted in 1996. At the completion of this
offering, the Representative will receive an option (the "Unit Purchase Option")
to purchase 210,000 Units at a price of $9.075 per Unit (165% of the offering
price of the Units)

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<PAGE> 16

during a period of four years commencing one year from the date of this
Prospectus. The Warrants included in the Unit Purchase Option are exercisable at
$12.60 per share. During the terms of the outstanding options, warrants and the
Unit Purchase Option, the holders are given the opportunity to profit from a
rise in the market price of the Common Stock, and their exercise may dilute the
ownership interest of existing stockholders, including investors in this
offering. The existence of the options, the warrants and the Unit Purchase
Option may adversely affect the terms on which the Company may obtain additional
equity financing. Moreover, the holders are likely to exercise their rights to
acquire Common Stock at a time when the Company would otherwise be able to
obtain capital on terms more favorable than could be obtained through the
exercise of such securities. See "Description of Securities" and "Underwriting."

NO DIVIDENDS ANTICIPATED

The Company has never paid any dividends on its securities and does not
anticipate the payment of dividends in the foreseeable future. See "Description
of Securities -- Dividend Policy."

ABSENCE OF PUBLIC MARKET

Prior to this offering, there has been no public trading market for the
Units, Common Stock or Warrants. Although the Company has applied for inclusion
of the Units, Common Stock and Warrants on The Nasdaq SmallCap Market, there can
be no assurance that an active market in any of these securities will develop
or, if such a market develops, that it will be sustained. Most of the Company's
current stockholders acquired their shares at a cost substantially below the
offering price. To the extent the Company incurs losses, investors in this
offering will bear a disproportionate risk of such losses. See "Shares Eligible
for Future Sale."

POSSIBLE RESTRICTIONS ON MARKET-MAKING ACTIVITIES IN THE COMPANY'S SECURITIES

Rule 10b-6 under the 1934 Act will prohibit the Representative from
engaging in any market-making activities with regard to the Company's securities
for the period from nine business days (or such other applicable period as Rule
10b-6 may provide) prior to any solicitation by the Representative of the
exercise of Warrants until the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right that the
Representative may have to receive a fee for the exercise of Warrants following
such solicitation. As a result, the Representative may be unable to make a
market in the Company's securities during certain periods while the Warrants are
exercisable. Any temporary cessation of such market-making activities could have
an adverse effect on the market prices of the Company's securities. See
"Underwriting."

RIGHTS OF PREFERRED STOCK

The Company's Certificate of Incorporation authorizes the issuance of up to
5,000,000 shares of $.01 par value preferred stock (the "Preferred Stock"). As
of the date of this Prospectus, none of the shares of Preferred Stock are issued
and outstanding. The authorized and unissued Preferred Stock may be issued with
voting, conversion or other terms determined by the Board of Directors which
could be used to delay, discourage or prevent a change of control of the
Company. Such terms could include, among other things, dividend payment
requirements, redemption provisions, preferences as to dividends and
distributions and preferential voting rights. The issuance of Preferred Stock
with such rights could have the effect of limiting stockholder participation in
certain transactions such as mergers or tender offers and could discourage or
prevent a change in management of the Company. The Company has no present
intention to issue any Preferred Stock. See "Description of
Securities -- Preferred Stock."

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<PAGE> 17

USE OF PROCEEDS

The Company estimates that the cash proceeds from the sale of the 2,100,000
Units offered in this offering will be approximately $9,599,000 ($11,123,600 if
the Over-Allotment Option is exercised in full) after deducting underwriting
discounts and commissions and expenses of this offering. The Company intends to
apply the net proceeds of this offering as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF
APPLICATION OF PROCEEDS AMOUNT NET PROCEEDS
- --------------------------------------------------------------------- ---------- -------------
<S> <C> <C>
Marketing and sales(1)............................................... $2,450,000 25.5%
Acquisition of inventory for the Mobile Assistant(R)................. 750,000 7.8
Research and development(2).......................................... 3,318,578 34.6
Capital expenditures................................................. 500,000 5.2
Repayment of indebtedness(3)......................................... 380,422 4.0
Acquisition of affiliate(4).......................................... 50,000 0.5
Working capital(5)................................................... 2,150,000 22.4
---------- ------
Total........................................................... $9,599,000 100.0%
========= ==========
</TABLE>

- ---------------
(1) Includes continued development of the Company's marketing capability for the
Mobile Assistant(R), the Mobile Inspector(TM) and the Company's proposed
products, expanding marketing and sales of the Mobile Assistant(R), and
establishing a distribution network or entering into joint ventures,
partnerships, licensing or similar collaborative arrangements. See
"Business."

(2) Includes (i) continued development and testing of the various custom
hardware and software applications of the Mobile Assistant(R), and (ii)
research and development of other products using Mobile Assistant(R)
technology, including the development of software toolkits.

(3) Represents $279,882 in commissions and expenses payable to the
Representative for serving as placement agent in the sale of the Debentures,
and $100,540 representing the outstanding principal balance of, and accrued
interest upon, a short-term bank loan. See "Capitalization" and
"Underwriting."

(4) Simultaneous with the closing of this offering the Company will acquire all
of the issued and outstanding shares of Tech International of Virginia,
Inc., which is owned by Edward G. Newman, the Company's President, Chief
Executive Officer and Chairman of the Board of Directors, and Steven A.
Newman and Eugene J. Amobi, directors of the Company. The purchase price was
established with Messrs. Newman, Newman and Amobi and approved by the
Company's disinterested directors. See "Certain Transactions."

(5) Working capital will be used for corporate and other general and
administrative purposes including the costs attributable to the Company's
public reporting obligations and the payment of accrued salaries and expense
reimbursement from Tech Virginia as follows: Eugene J. Amobi, $145,000;
Edward G. Newman, $40,500; Steven A. Newman, $40,500. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."

The net proceeds, if any, from the exercise of the Over-Allotment Option,
the Warrants, the Exchange Warrants or the Unit Purchase Option will be added to
working capital.

The foregoing represents the Company's best estimate of the allocation of
the net proceeds of this offering during a minimum of the next 12 months. This
estimate is based upon certain assumptions, including that research, development
and testing of the Company's technology can be completed at anticipated costs.
Projected expenditures are estimates or approximations only. Future events,
including the delays, expenses and complications frequently encountered by
companies in an early stage of development, changes in economic, regulatory, or
competitive conditions, or the success or lack thereof of the Company's
development and sales and marketing efforts during the 12-month period following
completion of this offering or thereafter may necessitate reallocation of funds
and curtailment of certain planned expenditures. Any changes in the utilization
of the proceeds of this offering will be at the discretion of the Company.

Until used, the net proceeds of this offering will be invested in
short-term interest-bearing securities, money market funds or United States
government securities.

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<PAGE> 18

DILUTION

The following tables and discussion assume that no part of the Unit
offering price is allocated to the Warrants.

At March 31, 1996, the Company's net tangible deficit was $2,252,494, or
$0.22 per share. Net tangible deficit per share is determined by dividing the
Company's tangible assets less total liabilities by the number of shares of
Common Stock outstanding. Adjusted net tangible worth is $112,506, or $0.01 per
share, and gives effect to the exchange of all of the Company's Debentures for
1,431,429 Exchange Units. Assuming no changes in the adjusted net tangible book
value at March 31, 1996 other than to give effect to the issuance of the
Exchange Units and the sale of 2,100,000 Units by the Company (based on an
initial public offering price of $5.50 per Unit after deducting underwriting
discounts and commissions and other estimated offering expenses) the Company's
pro forma net tangible book value at March 31, 1996 would have been $9,711,506
or $0.70 per share, representing an immediate increase in net tangible book
value of $0.92 per share to existing stockholders and an immediate dilution of
$4.80 (87.3%) per share to purchasers of Units in this offering. Dilution to
Unit purchasers is determined by subtracting pro forma net tangible book value
per share of Common Stock immediately after completion of this offering from the
assumed initial public offering price per Unit. The following table illustrates
this per share dilution.

<TABLE>
<S> <C> <C>
Initial public offering price per Unit....................................... $5.50
Net tangible deficit per share at March 31, 1996........................... $(0.22)
Increase per share attributable to Debenture exchange(1)................... 0.23
Increase per share attributable to Unit purchasers......................... 0.69
------
Pro forma net tangible book value per share after the offering............... 0.70
-----
Dilution in net tangible book value per share to Unit purchasers............. $4.80
=====
</TABLE>

- ---------------
(1) Assumes the issuance of 1,431,429 shares of Common Stock included in the
Exchange Units. Does not include the shares of Common Stock underlying the
Exchange Warrants.

The following table sets forth as of March 31, 1996 (i) the number of
shares of Common Stock issued by the Company to the existing stockholders and
the number of shares of Common Stock issuable in exchange for the Debentures,
the total consideration paid and the average price per share paid for such
shares by the existing stockholders, and (ii) the 2,100,000 shares of Common
Stock to be included in the Units, the total consideration to be paid and the
price per share to be paid by Unit purchasers:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 10,372,789 74.6% $ 2,282,634 14.0% $ 0.22
Stockholders from exchange of
Debentures(1)............................ 1,431,429 10.3 2,505,000 15.3 1.75
Unit purchasers............................ 2,100,000 15.1 11,550,000 70.7 $ 5.50
---------- ------- ----------- -------
Total................................. 13,904,218 100.0% $16,337,634 100.0%
========= ===== ========== =====
</TABLE>

- ---------------
(1) Assumes the issuance of 1,431,429 shares of Common Stock included in the
Exchange Units. Does not include the shares of Common Stock underlying the
Exchange Warrants.

The foregoing information assumes no exercise of the Over-Allotment Option,
outstanding options and warrants to purchase the Common Stock, the Warrants, the
Exchange Warrants or the Representative's Unit Purchase Option or underlying
Warrants. See "Description of Securities" and "Underwriting." To the extent that
currently outstanding options and warrants are exercised, there will be further
dilution to Unit purchasers in this offering.

15
<PAGE> 19

CAPITALIZATION

The following table sets forth the pro forma capitalization of the Company
at March 31, 1996 and as adjusted to reflect (i) the sale by the Company of
2,100,000 Units offered hereby at an initial public offering price of $5.50 per
Unit and the application of the net proceeds therefrom, and (ii) the exchange of
all outstanding Debentures for 1,431,429 Exchange Units (excluding shares in
exchange for accrued interest, if any). See "Use of Proceeds." The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Combined Financial Statements and Notes thereto and other financial information
included in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1996(1)
--------------------------------
PRO FORMA(2) AS ADJUSTED(3)
------------- ---------------
<S> <C> <C>
Long-term debt:
Notes and loans payable..................................... $ 70,965 $ 70,965
Debentures.................................................. 2,505,000 --
------------- ---------------
Total long-term debt........................................ 2,575,965 70,965
------------- ---------------
Stockholders' equity:
Preferred Stock
5,000,000 shares authorized; no shares outstanding.......... -- --
Common Stock
30,000,000 shares authorized; 10,372,789 shares outstanding;
13,904,218 shares outstanding, as adjusted................. 103,731 139,045
Additional paid-in capital....................................... 2,340,657 13,992,810
Accumulated deficit.............................................. (4,233,727) (4,233,727)
------------- ---------------
Total stockholders' equity (deficit)........................ (1,789,339) 9,898,128
------------- ---------------
Total capitalization........................................ $ 786,626 $ 9,969,093
=========== ===========
</TABLE>

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

(1) Sets forth capitalization of the Company and Tech Virginia as of such date.
Shares of Common Stock outstanding do not include 300 outstanding shares of
Tech Virginia.

(2) In April 1996 the Company sold $1,000,000 in principal amount of the
Debentures. Pro forma balance sheet information was prepared assuming all
Debentures were outstanding in March 1996. See Note 13 to Combined Financial
Statements.

(3) Does not include (i) 630,000 shares issuable upon exercise of the
Over-Allotment Option and the shares issuable upon exercise of the Warrants
underlying the Units in such Option, (ii) 2,100,000 shares issuable upon
exercise of the Warrants and 1,431,429 shares issuable upon exercise of the
Exchange Warrants, (iii) 210,000 shares issuable upon exercise of the Unit
Purchase Option and 210,000 shares issuable upon exercise of the Warrants
included therein, and (iv) 921,530 shares of Common Stock issuable upon the
exercise of the outstanding options and warrants. Does not include a
$100,000 principal amount loan to the Company from Fairfax Bank & Trust
Company evidenced by promissory notes executed in July 1996 which are
secured by the Company's accounts and accounts receivable. See "Management,"
"Description of Securities" and "Underwriting."

16
<PAGE> 20

SELECTED FINANCIAL DATA

The combined selected historical financial data set forth below as of
December 31, 1995 and March 31, 1994 and 1995 and for the nine months ended
December 31, 1995 and for each of the two years in the period ended March 31,
1995 has been derived from the financial statements of the Company included
elsewhere herein which have been audited by Coopers & Lybrand L.L.P.,
independent accountants (whose report thereon includes an explanatory paragraph
which refers to conditions that raise substantial doubt about the Company's
ability to continue as a going concern) and should be read in conjunction with
those financial statements (including the notes thereto) and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
appearing elsewhere in this Prospectus. The statement of operations data for the
three-month periods ended March 31, 1995 and 1996 and the nine months ended
December 31, 1994 and the selected balance sheet data as of March 31, 1996 have
been derived from the Company's unaudited consolidated financial statements
which, in the opinion of management, reflect all adjustments (consisting solely
of normal recurring adjustments) necessary for a fair presentation of the
results for these periods and as of this date. The selected financial data
provided below is not necessarily indicative of the future results of the
operations or financial performance of the Company.

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, DECEMBER 31, MARCH 31,
------------------------- ------------------------- -------------------------
1994 1995 1994 1995 1995 1996
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues....................... $ 16,981 $ 79,324 $ 52,250 $ 352,648 $ 27,074 $ 315,371
Cost of sales.................. 8,155 61,301 35,544 263,621 25,757 228,289
----------- ----------- ----------- ----------- ----------- -----------
Gross margin................. 8,826 18,023 16,706 89,027 1,317 87,082
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing.......... 15,521 207,377 150,934 383,960 56,443 114,010
General and administrative... 35,970 859,082 575,346 917,533 283,736 449,685
Research and development..... 5,050 259,256 147,192 910,182 112,064 205,886
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses....... 56,541 1,325,715 873,472 2,211,675 452,243 769,580
----------- ----------- ----------- ----------- ----------- -----------
Interest income (expense)...... 363 3,800 3,517 (18,542) 283 (16,888)
----------- ----------- ----------- ----------- ----------- -----------
Net loss....................... $ (47,352) $(1,303,892) $ (853,249) $(2,141,190) $ (450,643) $ (699,386)
============ ============ ============ ============ ============ ============
Net loss per common and common
equivalent share(1).......... $ (0.00) $ (0.12) $ (0.08) $ (0.18) $ (0.04) $ (0.06)
============ ============ ============ ============ ============ ============
Weighted average number of
common and common equivalent
shares outstanding........... 10,200,244 11,164,748 10,984,499 11,793,120 11,715,505 11,803,618
============ ============ ============ ============ ============ ============
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------
MARCH 31, DECEMBER 31, PRO
1995 1995 ACTUAL FORMA(2)
--------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit)........................... $(129,634) $ (38,534) $ (535,174) $ 324,826
Total assets........................................ 336,809 1,393,538 1,093,255 2,233,255
Total liabilities................................... 310,763 2,486,491 2,882,594 4,022,594
Stockholders' equity (deficit)...................... 26,046 (1,092,953) (1,789,339) (1,789,339)
</TABLE>

- ---------------
(1) Net loss per share of Common Stock is computed based upon the weighted
average number of shares of Common Stock outstanding during the period.

(2) Pro forma balance sheet information was prepared assuming all Debentures
were outstanding in March 1996.

17
<PAGE> 21

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

The following analysis should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this Prospectus.

OVERVIEW

The Company was incorporated in October 1990 to develop, manufacture and
sell mobile computing systems and commenced active operations in November 1992.
Since commencing operations, the Company has incurred significant operating
losses. In April 1996, the Company was reincorporated under the laws of the
State of Delaware and its name changed to Xybernaut Corporation. The Company has
derived its revenues from sales of the Mobile Assistant(R) and from consulting
services related to application software for the Mobile Assistant(R) and other
computer platforms, together with other computing applications. During the nine
months ended December 31, 1995, the Company derived approximately 65% of its
revenues from sales of the Mobile Assistant(R) and 35% of its revenues from
consulting services. All of the Company's sales for the three months ending
March 31, 1996 were to Rockwell International. During the three months ending
March 31, 1996, the Company derived 95% of its revenues from sales of the Mobile
Assistant(R) and 5% of its revenues from consulting services. In the future, the
Company expects to derive additional revenues from the sale of software
development toolkits, software runtime modules and additional optional
components of the Mobile Assistant(R). The Company intends to increase
expenditures on research and development of additional products, especially
software development toolkits, and to establish a full-service sales and support
function. See "Business." The Company also anticipates an increase in general
and administrative expenses related to legal, auditing, investor relations and
other obligations.

The Company's revenues include sales of the Mobile Assistant(R) and related
software and consulting services which relate to the Mobile Assistant(R) and to
other software applications, less volume discounts on product sales. Cost of
sales include the cost of Mobile Assistant(R) components, direct labor and
overhead expense, manuals, diskettes and duplication, packaging materials,
assembly, paper goods and shipping. Research and development expenses consist
primarily of personnel and equipment costs required to conduct the Company's
development activities. Software development costs are expensed as incurred
until technological feasibility is established in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86 (Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed), after which any
additional costs are capitalized until the software is ready for release. The
Company has expensed all software development costs to date.

Revenues from sales to VARs and OEMs and direct sales are recognized when
products are shipped. The Company's sales agreements generally do not involve
any significant obligations to customers subsequent to delivery except as
provided in separate service or support agreements. Revenues from future
software sales will be recognized at the time the software master is delivered
in accordance with Statement of Position No. 91-1.

Research and development expenses consist primarily of consulting fees and
test components, as well as salaries and related benefits paid to Company
personnel engaged in the research and design of new products. Research and
development expenses during fiscal 1994 and 1995, the nine months ended December
31, 1994 and 1995, and the three months ended March 31, 1995 and 1996 were
$5,050, $259,256, $147,192, $910,182, $112,064 and $205,886, respectively, none
of which was capitalized. Salaries paid to the Company's software programmers
and fees paid to outside software development consulting firms for further
development and enhancement after technological feasibility of a product has
been established and related development expenses, will be capitalized in the
future in accordance with SFAS No. 86.

The Company's combined financial statements include the results of
operations of Tech International of Virginia, Inc. ("Tech Virginia"), a supplier
of software and consulting services to the United States government and others.
Tech Virginia is owned by Edward G. Newman, the Company's President, Chief
Executive Officer and Chairman of the Board of Directors, and Steven A. Newman
and Eugene Amobi, directors of the Company. Messrs. Newman, Newman and Amobi are
also the officers and directors of Tech Virginia. From December 1992 until
November 1994, the Company sublet office space and contracted for personnel
services from the Virginia business unit of Tech International, Inc. ("Tech
International"), which

18
<PAGE> 22

spun-off its Virginia operations as Tech Virginia on December 30, 1994. In
December 1994 the Company received an option to purchase Tech Virginia for
$50,000. In March 1996 the Company notified Tech Virginia that it intends to
exercise this option upon the closing of this offering. See "Certain
Transactions." The combined financial statements contain eliminations for all
material transactions between the Company and Tech Virginia in prior periods.

Prior to March 31, 1995 the Company had elected Subchapter S status under
the Internal Revenue Code. The Company has revoked its Subchapter S election and
will be taxed as a C corporation. The change in the Company's tax status may
result in the Company recording current and deferred income taxes. As of the
date of this Prospectus, the Company has a history of operating losses and has
not had any taxable income.

The Company's financial statements do not contain a provision for income
tax expense in fiscal 1994 and fiscal 1995 due to the Company's prior status as
a Subchapter S Corporation from its inception through the revocation of its
Subchapter S election. Subject to realization, the Company has generated net
operating losses that can be used to offset taxable operating income in the
future. The Company's future operations, if profitable, will be subject to
income tax expense not previously incurred by the Company. See Note 8 to
Combined Financial Statements. At March 31, 1996, the Company had approximately
$2,900,000 of net operating loss carryforwards for federal income tax purposes
which expire in 2011. The use of these carryforwards may be limited in any one
year under Internal Revenue Code sec. 382 because of significant ownership
changes.

RESULTS OF OPERATIONS

The following table sets forth certain combined financial data as a
percentage of revenues for the years ended March 31, 1994 and 1995, the
nine-month periods ended December 31, 1994 and 1995 and the three-month periods
ended March 31, 1995 and 1996.

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, DECEMBER 31, MARCH 31,
-------------------- -------------------- ------------------
1994 1995 1994 1995 1995 1996
------ -------- -------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................. 48.0 77.3 68.0 74.8 95.1 72.4
------ -------- -------- ------ ------- -----
Gross margin................ 52.0 22.7 32.0 25.2 4.9 27.6
------ -------- -------- ------ ------- -----
Operating expenses:
Sales and marketing......... 91.4 261.4 410.5 108.9 208.5 36.1
General and
administrative........... 211.8 1,083.0 979.5 260.2 1,048.0 142.6
Research and development.... 29.7 326.8 281.7 258.1 413.9 65.3
------ -------- -------- ------ ------- -----
Total operating expenses...... 333.0 1,671.3 1,671.7 627.2 1,670.4 244.0
------ -------- -------- ------ ------- -----
Interest income (expense)..... 2.1 4.8 6.7 (5.3) 1.0 (5.4)
------ -------- -------- ------ ------- -----
Net loss...................... (278.9)% (1,643.8)% (1,633.0)% (607.2)% 1,664.5% 221.8%
------ -------- -------- ------ ------- -----
</TABLE>

THREE MONTHS ENDED MARCH 31, 1995 AND 1996

Revenues. Revenues for the three months ended March 31, 1996 were
$315,371, an increase of $288,297, or 1,065%, compared to $27,074 for the
corresponding period in 1995. This increase resulted primarily from increased
sales of the Mobile Assistant(R), all of which were to one customer.

Cost of goods sold. The cost of goods sold for the three months ended
March 31, 1996 was $228,289, an increase of $202,532, or 786%, compared to
$25,757 for the corresponding period in 1995. This increase resulted primarily
from costs related to increased sales of the Mobile Assistant(R).

Research and development expense. Research and development expense for the
three months ended March 31, 1996 was $205,886, an increase of $93,822, or 84%,
from $112,064 for the corresponding period in 1995. This increase was related to
the opening of a design center in Los Gatos, California, the internal

19
<PAGE> 23

development of a head-mounted display, the development of a new body-worn
computing unit and planning and development for software toolkits.

Sales, marketing, general and administrative expenses. Sales, marketing,
general and administrative expenses for the three months ended March 31, 1996
were $563,695, an increase of $223,516, or 66%, from $340,179 for the
corresponding period in 1995. Of this increase, $67,221 was for compensation
expense related to the issuance of the Common Stock to consultants. Sales and
marketing expenses increased resulting from the establishment of a full-time
sales group and general and administrative expenses increased resulting from an
increase in staff and the use of outside service providers.

Net loss. As a result of the factors described above, the net loss for the
three months ended March 31, 1996 was $699,386, an increase of $248,743, or 55%,
from $450,643 for the corresponding period in 1995. Although the Company was
subject to taxation during the three months ended March 31, 1996, the Company
incurred a net loss during the period and no provision for taxes was made.

NINE MONTHS ENDED DECEMBER 31, 1994 AND 1995

Revenues. Revenues for the nine months ended December 31, 1995 were
$352,648, an increase of $300,398, or 575%, compared to $52,250 for the
corresponding period in 1994. This increase resulted primarily from increased
sales of the Mobile Assistant(R) and, to a lesser extent, increased consulting
revenues.

Cost of goods sold. The cost of goods sold for the nine months ended
December 31, 1995 was $263,621, an increase of $228,077, or 642%, compared to
$35,544 for the corresponding period in 1994. This increase resulted primarily
from costs related to increased sales of the Mobile Assistant(R).

Research and development expense. Research and development expense for the
nine months ended December 31, 1995 was $910,182, an increase of $762,990, or
518%, from $147,192 for the corresponding period in 1994. Of this increase,
$494,500 was for compensation expense related to the issuance of stock to
employees and a consultant involved in research and development. The remaining
increase was related to additional research and development of software toolkits
as well as power management, accessories and communication capabilities for the
Mobile Assistant(R).

Sales, marketing, general and administrative expenses. Sales, marketing,
general and administrative expenses for the nine months ended December 31, 1995
were $1,301,493, an increase of $575,213, or 79% from the corresponding period
in 1994. Of this increase, $58,022 was for compensation expense attributable to
the issuance of stock to employees and a consultant involved in sales and
marketing and general and administrative activities. The remaining increase
resulted from establishing a business plan, arranging manufacturing capacity
with third-party suppliers, establishing relationships with potential VARs and
OEMs, obtaining orders from customers, supervising beta-site tests and initial
installations of the Company's products, attending trade shows, sales
presentations and demonstrations.

Net loss. As a result of the factors described above, the net loss for the
nine months ended December 31, 1995 was $2,141,190, an increase of $1,287,941,
or 151%, from $853,249 for the corresponding period in 1994. No provision for
taxes was required for the nine months ended December 31, 1994 because the
Company was a Subchapter S corporation during that period and the Company
incurred a net loss. Although the Company was subject to taxation during the
nine months ended December 31, 1995, the Company incurred a net loss during the
period and no provision for taxes was made.

FISCAL YEARS ENDED MARCH 31, 1994 AND 1995

Revenues. Revenues increased 367% from $16,981 for the fiscal year ended
March 31, 1994 ("fiscal 1994") to $79,324 for the fiscal year ended March 31,
1995 ("fiscal 1995"). This increase is attributable primarily to increased sales
of the Mobile Assistant(R) and, to a lesser extent, increased consulting
revenues.

Cost of goods sold. Costs of goods sold increased 652% from $8,155 for
fiscal 1994 to $61,301 for fiscal 1995. This increase was related to increased
sales of the Mobile Assistant(R).

20
<PAGE> 24

Research and development expense. Research and development expense
increased 5,034% from $5,050 for fiscal 1994 to $259,256 for fiscal 1995. Of
this increase, $5,500 was for compensation expense related to the issuance of
stock and stock options to employees involved in research and development. The
remaining increase was attributable to the establishment in October 1994 of
Company operations separate from those of Tech International, the hiring of
personnel to staff the Company's research and development functions and
continued development of the Mobile Assistant(R) hardware, software and
accessories.

Sales, marketing, general and administrative expenses. Sales, marketing,
general and administrative expenses increased 1,971% from $51,491 for fiscal
1994 to $1,066,459 for fiscal 1995. Of this increase, $188,841 was for
compensation expense related to the issuance of stock and stock options to
employees involved in sales and marketing and general and administrative
activities. The remaining increase was attributable to the establishment in
October 1994 of Company operations in its current location, the hiring of
personnel to staff the Company's marketing, financial and administrative
functions and the subsequent expansion of related activities. These related
activities included establishing a business plan, arranging manufacturing
capacity with third-party suppliers, establishing relationships with potential
VARs and OEMs, obtaining orders from customers, supervising beta-site tests and
initial installations of the Company's products, attending trade shows and sales
presentations and demonstrations.

Net loss. As a result of the factors described above, the Company's net
loss increased 2,654% from $47,352 for fiscal 1994 to $1,303,892 for fiscal
1995. No provision for taxes is made for fiscal 1994 or 1995 since the Company
was not a taxable entity during these periods and the Company incurred a net
loss.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations through the
private sale of its securities, from vendor credit and by short-term loans from
management, stockholders and others. Funding requirements through October 1994
were met by credit extended by Tech International for services provided to the
Company. In conjunction with the Company's business activities prior to November
1994, the Company subleased space at the offices of Tech International and used
certain equipment and facilities of Tech International. The Company contracted
for the services of certain Tech International employees in conducting its
business until October 1994 when the Company hired several of such employees
directly. The Company has continued to contract for the services of several
other Tech International employees since October 1994. See "Certain
Transactions."

From October 1994 to August 1995 the Company raised $1,243,476 from the
private sale of shares of Common Stock at $6.00 per share. From November 1995 to
April 1996 the Company raised $2,505,000 through the private sale of the
Debentures. The Company received $1,201,718 and $2,143,642 from these financings
net of offering costs, a portion of which are payable from the proceeds of this
offering. See "Use of Proceeds."

For the three months ended March 31, 1996, the Company's operating
activities used cash of $221,198 compared to $329,087 for the corresponding
period in 1995. The net use of cash during the three months ended March 31, 1996
was primarily the result of a $699,386 net loss, offset by a $300,000 licensing
fee, an increase in accounts payable and accrued expenses of $100,468 and
depreciation and amortization of $71,406. The net use of cash by operations for
the three months ended March 31, 1995 was primarily the result of a $450,643 net
loss, partially offset by an increase in accounts payable and accrued expenses
of $47,870. Cash used by investing activities in the three months ended March
31, 1996 was $4,685 for the acquisition of office equipment and $13,444 related
to the maintenance and defense of patents. Cash used by investing activities in
the three months ended March 31, 1995 was $300 for the acquisition of property
and equipment. The Company's financing activities in the three months ended
March 31, 1996 consisted primarily of $78,943 of capitalized expenses related to
the initial public offering. The Company's financing activities in the three
months ended March 31, 1995 consisted of $396,000 raised through the private
placements of Common Stock, offset by issuance costs of $41,758. As a result of
the above, cash on hand as of March 31, 1996 was $191,031, or a decrease of
$317,635 from the $508,666 of cash on hand as of December 31, 1995.

21
<PAGE> 25

For the nine months ended December 31, 1995, the Company's operating
activities used cash of $1,400,230 compared to $442,774 for the corresponding
period in 1994. The use of cash by operations for the nine months ended December
31, 1995 was primarily the result of a $2,141,190 net loss and $240,709 of cash
used by inventories, offset by $671,500 of non-cash charges for Common Stock
issued for services. The use of cash by operations for the nine months ended
December 31, 1994 was primarily the result of a $853,249 net loss offset by a
$220,950 increase in accounts payable and accrued expenses. Cash used by
investing activities in the nine months ended December 31, 1995 was $33,958 for
the acquisition of property and equipment and $45,998 related to the acquisition
of patents. Cash used by investing activities in the nine months ended December
31, 1994 was $92,756 for the acquisition of property and equipment, furniture,
leasehold improvements and fixtures related to the establishment of separate
Company offices in November 1994 and $23,878 related to the acquisition of
patents in the United States and internationally. The Company's financing
activities in the nine months ended December 31, 1995 consisted primarily of
$1,505,000 raised through the sale of the Debentures in November 1995 and
$185,924 in other loans, offset by $98,608 in deferred financing expenses in
connection with the Debentures. The Company's financing activities in the nine
months ended December 31, 1994 consisted primarily of $600,000 raised through
the private placements of Common Stock. As a result of the above, cash on hand
as of December 31, 1995 was $508,666, or an increase of $359,606 from the
$149,060 of cash on hand as of March 31, 1995.

The Company's operations generated cash for fiscal 1994 of $104 and used
cash for fiscal 1995 of $829,792. The generation of cash by operations for
fiscal 1994 was primarily the result of a $47,352 net loss that was more than
offset by a $41,943 increase in accounts payable and accrued expenses and $7,358
in depreciation and amortization. The use of cash by operations for fiscal 1995
was primarily the result of a $1,303,892 net loss offset by $194,341 of non-cash
charges for Common Stock issued for services and a $268,820 increase in accounts
payable and accrued expenses. Cash used by investing activities for fiscal 1994
was $20,215 for the acquisition of property and equipment, primarily
demonstration units, and $25,020 related to the acquisition of patents. Cash
used by investing activities for fiscal 1995 was $93,056 for the acquisition of
property and equipment, furniture, leasehold improvements and fixtures related
to the establishment of the Company's current offices in November 1994, and
$23,878 related to the acquisition of patents in the United States and
internationally. The Company's financing activities in fiscal 1994 consisted
primarily of raising $30,424 in capital contributions from stockholders of the
Company. The Company's financing activities in fiscal 1995 consisted primarily
of raising $996,000 through the private placement of Common Stock. As a result
of the above, cash on hand as of March 31, 1995 was $149,060, an increase of
$148,307 from the $753 of cash on hand as of March 31, 1994.

At March 31, 1996, the Company had no material capital commitments, a
working capital deficit of $535,174 and pro forma working capital of $324,826
after giving effect of the sale of $1,000,000 of Debentures after March 31,
1996.

The Company anticipates that its working capital needs and operating
expenses will increase as the Company implements its business plan to expand
production and sales of the Mobile Assistant(R), establishes a full sales and
service function and expands research and development, primarily of its software
development toolkits. See "Use of Proceeds." The proceeds of this offering are
expected to be sufficient to meet the Company's working capital needs and
operating expenses for a minimum of 12 months. The timing of development for the
software toolkits, the amount of working capital consumed by accounts receivable
and inventories and competitive pressures on gross margins will impact the
magnitude and timing of the Company's cash requirements. To meet working capital
needs created by anticipated increases in accounts receivable, the Company
intends to obtain a bank working capital line of credit following this offering.
There can be no assurance that the Company can or will obtain a bank working
capital line of credit.

POSSIBLE NON-CASH FUTURE CHARGE

As a condition of this offering, the Representative has required the
Company's officers, directors and certain other stockholders to deposit an
aggregate of 1,800,000 shares of Common Stock (at least 1,620,000 of which are
owned by directors and officers of the Company) into an escrow account (the
"Escrowed Shares"). The Escrowed Shares will be subject to release to such
stockholders in increments over a three-year period

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<PAGE> 26

only in the event the Company's gross revenues and earnings (loss) per share for
the 12-month periods ending September 30, 1997, 1998 and 1999 equal or exceed
targets which have been established through negotiations with the Representative
(the "Performance Targets"). If the Performance Targets are not met in any of
the relevant 12-month periods (and the price of the Common Stock has not met or
exceeded the price described below), the Escrowed Shares will be returned to the
Company in amounts which have been agreed upon between the Representative and
the Company for each period and cancelled. In addition to the foregoing, all
then Escrowed Shares will be released to the stockholders if the closing price
of the Common Stock as reported on The Nasdaq SmallCap Market following this
offering equals or exceeds $11.00 for 25 consecutive trading days or 30 out of
35 consecutive trading days during the period ending September 30, 1999. In the
event any Escrowed Shares held by officers, employees or consultants are
released, the difference between the initial offering price and the market value
of such shares at the time of release will be deemed to be additional
compensation expense to the Company. Assuming the price of Common Stock is equal
to or greater than the offering price of $5.50 per Unit (of which there can be
no assurance), the release of the Escrowed Shares could result in an earnings
charge which would have the effect of reducing or eliminating any earnings per
share and could have a negative effect on the market price for the Common Stock.
The earnings per share target calculation will be based on the average number of
shares issued and outstanding during each period, but excluding shares issued
pursuant to the Representative's Unit Purchase Option (as hereinafter defined),
extraordinary items, or compensation expense charged to the Company related to
the release of the Escrowed Shares. See "Risk Factors -- Effect of Possible
Non-Cash Future Charge" and Principal Stockholders -- Escrowed Shares."

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<PAGE> 27

BUSINESS

INTRODUCTION

The Company is engaged in the research, development and commercialization
of mobile computer systems and related software solutions designed to enhance
all aspects of personal productivity, especially in commercial, industrial and
military applications. The Company's first mobile computing product is the
patented Mobile Assistant(R), which is a full function body-worn,
voice-controlled "486" computer with a head-mounted video display providing true
computing mobility through hands-free operation. With the speed, memory, data
processing, multimedia and communications capabilities of a desktop PC in a
lightweight unit, the Mobile Assistant(R) combines full function PC features
with simultaneous user mobility. The Mobile Assistant(R) with application
software is designed to allow workers with minimal training to perform complex
and time consuming tasks such as maintenance, repair and inspection of complex
technological and mechanical systems, retrieval and analysis of medical
information from remote locations, and coordination of remote commercial and
industrial activities and military field operations, in a more efficient manner
than current technology allows. Purchasers of Mobile Assistants(R) have
included, among others, AT&T, Rockwell International, Eaton Corporation, Martin
Marietta (now Lockheed Martin), SRI International and the United States Army.
Recently, Rockwell International, which manufactures the computing unit utilized
in the Mobile Assistant(R), licensed from the Company the right to manufacture
and market mobile computers utilizing the intellectual property and related
technical know-how which has been developed by the Company.

The Mobile Assistant(R) utilizes technologically advanced features such as
real time, two-way video and audio communications through radio frequency
transmissions, integrated cellular linkups and conventional telephone lines,
global positioning system tracking capabilities and access to information
through the Internet and World Wide Web. The head-mounted display unit includes
a two-way audio system, weighs less than 16 ounces and presents a monochrome
image that is approximately equivalent to that of a 14" VGA monitor. The
body-worn computing unit is designed with a case allowing operation in
environmental extremes in which conventional portable computers could not
previously operate, weighs less than three pounds and is capable of running
software applications designed for Microsoft Windows and Windows 95, DOS and SCO
UNIX.

The Company was incorporated in Virginia as Contemporary Products &
Services, Inc. in November 1990 and changed its name to Computer Products &
Services, Inc. in November 1992. In April 1996 the Company merged with Xybernaut
Corporation, a Delaware corporation, in order to change its name and
reincorporate in Delaware.

Simultaneously with the closing of this offering, the Company will acquire
100% of the issued and outstanding shares of Tech Virginia. Tech Virginia is the
former Virginia business unit of Tech International. In December 1994 Tech
International spun-off its Virginia business unit as Tech Virginia, and Tech
Virginia was thereafter incorporated in Delaware in June 1994. See "Certain
Transactions -- Tech International and Tech Virginia."

INDUSTRY OVERVIEW

Since the introduction of the first large mainframe computers in the
1950's, there has been an ongoing evolution in the computer industry which has
resulted in both reductions in the size of computer hardware and significant
increases in the number and scope of software applications. The Company believes
the next phase in this evolution will be the commercialization of mobile,
body-worn computers which will combine portability with new and expanded
software applications. The Company believes it is in the forefront of the
development of mobile computing technology and that the potential to develop a
substantial market for its mobile computing hardware and software products is
demonstrated by the substantial historic and projected growth in all forms of
mobile and portable computers. According to MarkIntel, a service which compiles
market

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<PAGE> 28

research reports, total revenues from the overall portable computer market (20
pounds or lighter) were expected to exceed $12 billion in 1995, with anticipated
average annual growth of approximately 13% to over $23 billion through the year
2000. MarkIntel reports that notebook computers (i.e. weighing from 5 to 8
pounds) currently constitute over 70% of portable units sold. MarkIntel also
states that sub-notebook computers (3 to 5 pounds) currently constitute
approximately 15% of sales of portable computers and are expected to increase to
almost 19% of sales by the year 2000. Sales of mini-computing and communication
devices (3 pounds or less, and which still are considered to be in an
evolutionary cycle) are projected by MarkIntel to experience an average annual
sales growth rate of 65% and an average annual revenue growth rate of 33%. The
Company believes that these projected figures demonstrate the significant
potential size of this still-evolving market for various forms of mobile and
portable computers.

BUSINESS STRATEGY

The Company's objective is to be a leading provider of mobile computing
systems and related software solutions to enhance productivity in a wide variety
of applications for commercial, industrial and military customers. To achieve
this objective, the Company intends to pursue the following strategies:

Provide Custom Software Solutions for Diverse Customer Needs. The
Company intends to develop software toolkits to enable its customers to
more rapidly create customized software applications for use with the
Mobile Assistant(R) and on a stand-alone basis. These toolkits will be
designed to provide prepackaged application expertise that incorporates the
end user's existing programs, procedures and technical documentation,
thereby permitting the cost-effective development of productivity-enhancing
software applications by customers. The Company believes that revenues from
custom software such as the Mobile Inspector(TM) and other application
development toolkits may become an important contributor to operating
margins in the future.

Penetrate Target Markets Through OEMs, VARs and Direct Sales. The
Company believes that its mobile computing technology is especially well
suited for the repair and maintenance of complex commercial, industrial and
military equipment and facilities. The Company intends to penetrate its
target markets through multiple sales channels, including direct sales and
by leveraging internal marketing and sales resources using OEMs and VARs.
Through implementation of this strategy, the Company will seek to achieve
rapid foreign and domestic market penetration resulting in a diversified
customer base.

Achieve Technology Leadership. The Company is committed to achieving
and maintaining technological superiority of the Mobile Assistant(R) and
its other mobile computing products through the continuous reassessment of
product performance and the utilization and integration of state of the art
components and technologies. The Company believes its substantial
expenditure of time and effort in developing the Mobile Assistant(R) has
resulted in a set of core competencies which provide the Company with an
advantage over its competition in the mobile computing industry. The
Company intends to maintain this advantage through ongoing research and
development, which will ensure that the Mobile Assistant(R) will continue
to provide a full range of PC capabilities, including two-way video
communication and access to the Internet, World Wide Web, remote databases
and other reference resources as well as additional capabilities which may
be developed in the future.

Commitment to Open Architecture. The Company utilizes standard PC
hardware and software architectures and designs its products using open
systems technologies, including industry standard operating systems and
open system computer platforms. The Company continually evaluates the
feasibility of integrating its software and hardware products with new
technologies as these are developed and accepted in the marketplace. The
Company anticipates that its current products will be upgraded to
incorporate, and its future products designed using, open architectures to
allow use with existing and emerging standards and hardware and software
technology.

Leverage Core Competencies. The Company believes its core
competencies which have been developed since its inception are the
integration and adaptation of innovative computer hardware and software
technologies into mobile computing products that enhance end user
productivity. The Company will seek to expand applications for its
technologies and to capitalize on the breadth of its expertise to develop
new hardware and software products. Consistent with this strategy, the
Company will continue to focus on integration of mobile computing hardware
with internally developed custom software applications rather than the
research and development of basic technologies or the internal mass
manufacture of its products.

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<PAGE> 29

Develop and Strengthen Strategic Alliances. The Company intends to
form strategic associations with VARs, OEMs and hardware and software
vendors. The benefits that the Company receives from these associations
include access to a larger potential customer base and to complementary
technologies, and reduced capital investment through utilization of outside
resources. The Company currently has strategic relationships with Rockwell
International, which supplies computing units and has purchased and resold
Mobile Assistant(R) units, and Kopin, which supplies head-mounted displays
and has worked with the Company on joint development projects. Recently,
Rockwell International, which manufactures the computing unit utilized in
the Mobile Assistant(R), licensed from the Company the right to manufacture
and market mobile computers utilizing the intellectual property and related
technical know-how which has been developed by the Company. See
"Business -- Marketing and Sales." The Company intends to pursue additional
strategic associations to enhance its product offerings and expand its
marketing activities.

PRODUCTS AND PRODUCT DEVELOPMENT

The Company's principal existing and proposed products and applications are
summarized in the following table.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
PRODUCT NAME DESCRIPTION/FUNCTION APPLICATIONS
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
MOBILE ASSISTANT(R) Body-worn, hands-free, voice-activated Hands-free access to information
INTEGRATED MOBILE battery powered integrated hardware and while performing tasks in conditions
COMPUTING SYSTEM software computer system utilizing a that require full mobility.
head-mounted display.
- ----------------------------------------------------------------------------------------------------------
MOBILE INSPECTOR(TM) Software toolkit for the rapid user Aerospace, utilities and other
customization of simple or sophisticated commercial, industrial and military
protocols and procedures for inspection uses which rely on
of facilities and equipment. maintenance-intensive heavy or
complex equipment.
- ----------------------------------------------------------------------------------------------------------
CELLULAR AND RADIO Used for hands-free access with cellular Hands-free access to information
COMMUNICATIONS phones or radio links for wireless stored on databases or the Internet,
TOOLKIT* communications anywhere in the world or to audio and/or video
through telephone, modem or Internet communications on remote work sites.
lines.
- ----------------------------------------------------------------------------------------------------------
VOICE USER Software tools and procedures to Hands-free, voice-activated
INTERFACE(TM) TOOLKIT* integrate voice navigation capability applications with accurate voice
into existing applications or navigation and a simple voice
applications under development or for a interface on the Mobile Assistant(R)
computer system. or a computer platform.
- ----------------------------------------------------------------------------------------------------------
AUDIOVISUAL Camera and communication hardware with Capture, transfer or communication
COMMUNICATIONS voice-controlled software to allow of audio and/or video information on
TOOLKIT* hands-free capture, transmission and a real time or delayed basis.
reception of video information and
two-way teleconferencing.
- ----------------------------------------------------------------------------------------------------------
DATA CONVERSATION Software standards and procedures on Conversion of information or
TOOLKIT* converting hard copy, digital, audio existing hard copy, digital, audio
and/or visual data into suitable form for and/or video information to neutral
inclusion in a neutral database for format.
operation.
- ----------------------------------------------------------------------------------------------------------
MICROCOSM VOICE* A software shell for consistent Creation of maintenance, repair and
navigation through, and presentation of, operation applications by linking
existing computer files regardless of existing computer files without
original format, hardware or software. reprogramming or altering data in
existing files or databases.
- ----------------------------------------------------------------------------------------------------------
PRESENTATION MANAGER* Graphical user interface and navigation Expansion of the scope of
software toolkit for user customization information available on job sites
of applications with consistent, allowing performance of an expanded
easy-to-use interface to the user of a range of tasks with minimum training
computer platform. Uses HTML software by accessing information utilizing a
similar to that used on the Internet. consistent methodology and format.
- ----------------------------------------------------------------------------------------------------------
MOBILE COUNTER(TM)* Bar-code readers combined with software Performance of continuous or
and voice recognition to interface with periodic hands-free counting and
customized and existing inventory inspection of inventories with
applications. minimum personnel, time and
training.
- ----------------------------------------------------------------------------------------------------------
</TABLE>

- ---------------
* Product under development.

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<PAGE> 30

The Mobile Assistant(R) is a combination of hardware and software
specifically designed for body-worn mobile computing. A patent has been issued
by the Patent Office regarding certain aspects of the Mobile Assistant(R). See
"Business -- Intellectual Property" and "Risk Factors -- Uncertain Protection of
Patent and Proprietary Rights; No Assurance of Enforceability or Significant
Competitive Advantage."

The Company believes that commercial, industrial and military mechanics and
technicians frequently spend a significant portion of their time searching for
and accessing needed technical data and information rather than performing the
substantive work to which the information is applied, even when conventionally
digitized manuals are used on a desktop or notebook PC. The concept for the
Mobile Assistant(R) originates from the perceived need for, and potential
significant cost savings which would result from, providing commercial,
industrial and military mechanics and technicians hands-free, immediate access
to computerized reference materials and other data necessary for completion of
maintenance and technical work.

In order to address the market which the Company believes exists for
body-worn mobile computers, the Mobile Assistant(R) has been designed with four
key features:

- Compact, lightweight and rugged hardware specifically designed for
mobile, body-worn use

- Easy to use human interface and expert systems

- Voice command control

- Head-worn miniature display

Compact Hardware for Mobile, Body-Worn Use. The Mobile Assistant(R)
currently utilizes primarily off-the-shelf miniaturized hardware components in a
body-worn package weighing approximately three pounds. The base system currently
features:

- "486" computer running at 50 MHZ

- Main memory of 4 Mb to 16 Mb RAM

- Internal hard disk (currently ranging from 540 Mb to 810 Mb)

- Internal dual PCMCIA readers (industry-standard peripheral cards)

- Enclosure to allow use in a wide range of environmental conditions

- Advanced-technology battery and power management

- Serial, parallel, keyboard and printer ports

- Compatibility with DOS, Windows(TM), Windows 95(TM) and SCO UNIX
operating systems

- Integrated pointing device (trackball)

The base system Mobile Assistant(R) utilizes advanced batteries and power
management to provide an estimated three to four hour duty cycle. Spare
batteries can be carried on the user's belt to provide additional duty cycle
time. The Company offers optional lithium-ion batteries to purchasers.

As a full-featured PC, the Mobile Assistant(R) has external serial and
parallel ports, and ports for a keyboard, printer and monitor to allow its use
as a desktop PC. The Mobile Assistant(R) has a modular design for the
incorporation of a wide range of capabilities including a portable CD ROM
reader, a bar code reader, a battery-operated printer, still and motion video
cameras, global positioning technology, cellular and radio frequency
communications and interfaces for medical and test equipment.

The Company intends to include advanced processors, such as "586," "686,"
Pentium and Power PC chips, in the Mobile Assistant(R) in the future. The
Company is developing a Mobile Assistant(R) with Pentium-class processing
capability using a "586" Cyrix chip and expects to have this system available
for sale during 1996. The Company also intends to incorporate evolving operating
systems into the Mobile Assistant(R) as they become available.

Easy to Use Human Interface and Expert Systems. The Company believes that
a consistent "look and feel" presentation and an easy, intuitive means of
navigation through the application software used in the Mobile Assistant(R) are
critical aspects of its full productivity potential. The presentation and means
of navigation for Mobile Assistant(R) applications are based upon software which
served as a model for use by the

27
<PAGE> 31

United States Department of Defense and several United States federal agencies.
Using a United States federal secure network similar to the Internet, and with
familiar screens and navigation techniques, this software allows personnel from
one agency easily to access the information gathered by another agency,
regardless of the computer platform or operating system used. Previously, this
benefit was unavailable largely because of the learning time required for an
analyst at one agency to learn other agencies' presentation and navigation
methods.

Voice Command Control. The Mobile Assistant(R) includes the use of
proprietary and licensed state-of-the-art voice recognition software, hardware
and algorithms to communicate digitized speech as input to the processor through
an integrated analog-to-digital/digital-to-analog circuit. The voice recognition
aspect of the Mobile Assistant(R) is based upon independent software which
incorporates state-of-the-art, off-the-shelf voice recognition algorithms and
utilizes analog/digital circuitry to recognize predeveloped vocabularies.
Significant user training generally is not required because the operable
vocabulary is created in advance to be recognizable by a wide range of users.
The system can be programmed to "learn" on the fly during real time field use.
The speaker-independent approach works well for the menu and button-driven
programs used in the Mobile Assistant(R). System accuracy is improved greatly
since the words and phrases for each menu screen can be predetermined,
preprogrammed and used to limit recognition ranges to the screen at hand.

An integrated pointing device (trackball) is installed in the Mobile
Assistant(R) for environments where voice navigation is not possible. The
combination of voice recognition and head-worn display provides the user of the
Mobile Assistant(R) with hands-free access to information and the ability to
apply this information to operations and tasks with direct lines of sight and
tactile access. The Company believes that this combination results in "See and
Speak" technology which has the potential for opening additional commercial,
industrial and military markets for the Mobile Assistant(R).

Head-Worn Miniature Display. The Mobile Assistant(R) uses a lightweight,
head-worn miniature display which currently is offered in monochrome 640 X 480
pixel (VGA) 256 gray scale resolution. It is anticipated that this display will
be offered by the Company in color VGA, monochrome 1280 X 1024 pixel (SVGA)
resolution, color SVGA and eventually in color resolutions exceeding those
planned for High-Definition TV. All displays are approximately one square inch
in size. These displays are available in monocular form, and can be worn on a
mounting device similar to a runner's visor or sunglasses, or on helmets,
hardhats, soft baseball caps or similar headgear. These high quality, miniature
displays present information in a heads-up display format without occluding
vision.

Development of Software Packages. Initially, development of software for
the Mobile Assistant(R) was targeted primarily at specific military uses. The
Company has invested significant sums in converting this software to a variety
of other uses. The Company has identified the proprietary software packages
described in "Business -- Products and Product Development." The Company intends
to continue the development of these software packages through a combination of
its employees, third-party software developers and contract labor. There can be
no assurance that the Company will have sufficient capital to develop all or any
of these software packages or, even if successfully developed, that there will
be any significant market for these software packages. See "Risk Factors."

MARKETING AND SALES

Markets

The Company's marketing efforts are designed to increase awareness of and
demand for its products in the commercial, industrial and military markets.
Within these markets, the Company believes there are defined submarkets which
are well-suited to use the Company's mobile computing products. The following
are examples of select submarkets that initially will be addressed by the
Company:

Commercial Maintenance and Repairs. Information from the United
States Bureau of Labor Statistics and Bureau of Census indicates that as of
1994 there were more than 5,460,000 mechanics and technicians in the United
States, whom the Company believes are potential users of the Mobile
Assistant(R) and the Company's other products. There are three sources of
savings available from use of

28
<PAGE> 32

the Mobile Assistant(R) and the Company's other products in maintenance and
repair operations: less formal training is required for a similar level of
performance, the time required for tasks is reduced as "just in time"
refreshers and improved technical information can be provided, and
personnel can address a wider range of complex tasks or products with the
same level of basic training. While these savings can be realized in most
industries, the Company anticipates that these savings will be most
immediate and apparent in those industries that require a large investment
in equipment and machinery, including the transportation, automotive,
construction, power generation, health services and agriculture industries
and the military. In industries such as construction or mining, the Company
believes downtime on critical equipment can cost over $75,000 per day.
Accordingly, a reduction measured in minutes or hours of downtime in these
industries can, in the Company's view, provide ample cost justification for
a Mobile Assistant(R). The telecommunications industry is expected to be a
prime candidate for mobile computing systems given the industry's complex
technologies, increased competition and assets spread over a wide
geographic area. The Mobile Assistant(R) can provide needed knowledge to
workers on the top of a telephone pole, at a remote relay station or in a
conduit tunnel. Crew locations can be monitored and coordinated in the
field with the Mobile Assistant(R) through optional global positioning
system technology. Crews at remote locations can consult with experts using
two-way audio and/or video communications.

Healthcare. It is estimated that over 13.9% of the U. S. Gross
Domestic Product, or $1 trillion, is spent annually on healthcare, with an
estimated 25% of such expenses consumed by administrative expenses.
According to the National Center for Health Statistics, Health, United
States, 1994, the United States has over 6,000 hospitals and over 540
health maintenance organizations. According to the United States Department
of Labor, in 1994 there were approximately 4,714,000 healthcare workers in
the United States. The Company believes that many of the current processing
and data systems used in healthcare, both in institutions and in the field,
are not well developed or integrated and that mobile computing systems
could reduce expenses and increase efficiency in this industry. The Mobile
Assistant(R) is believed to present great potential in field medical
operations by providing on-board and remote diagnostics, audio and/or video
communication with doctors for emergency procedures, and transmission of
locations for helicopter pickup through global positioning systems
integrated into the Mobile Assistant(R). Another anticipated benefit of the
Company's mobile computing technologies is that fewer healthcare personnel
will be needed to perform complex tasks. By providing remote delivery of
medical information, the Company's mobile computing systems can become a
key component within both managed care and telemedicine organizations,
which are two key submarkets developing within the healthcare industry.

Education. The Company believes that its mobile computing systems are
well-suited for educational applications. The Mobile Assistant(R) is
especially suited for hands-free applications, such as laboratory work,
field research and dissections and has the potential to serve as a mobile
student workstation. In addition, it can provide an ideal computing and
control platform for special education and handicapped needs.

Military. Potential military applications for the Company's mobile
computing systems include intelligence, maintenance and field operations.
The military has long been an early adopter of advanced technologies and,
as a result, was one of the first sectors to experience problems with the
ability of personnel to maintain, diagnose and repair the advanced
technology employed in both weapons and equipment. These problems have been
compounded by the downsizing of the United States military and related
budget constraints. As a result, even greater pressure will be placed upon
the military to maintain its equipment and weapons platforms with fewer
personnel. The Company believes that most of the United States' estimated
700,000 military maintenance personnel could be made more efficient and
productive by the Company's mobile computing systems.

The United States' increasingly sophisticated weapon systems require
volumes of operational and technical manuals and have dramatically
increased the importance of maintenance. The United States Army has
purchased the Mobile Assistant(R) and has tested its use in the maintenance
and repair of the AH64 Apache Attack helicopter. The Apache can send and
receive maintenance data via an industry-

29
<PAGE> 33

standard electrical interface which can be read by an optional interface
for the Mobile Assistant(R). Operating and performance data can be
downloaded directly from the Apache and the Mobile Assistant(R) can be used
to diagnose existing and potential maintenance and repair problems. The
Company anticipates that manufacturers of complex military equipment
increasingly will incorporate integrated data collection and transmission
capabilities into their technologies to reduce downtime and repair and
maintenance related costs.

The ability to deliver information to soldiers in combat field
operations is the focus of several development programs sponsored by the
United States Army. The Army has been conducting simulated combat maneuvers
using body-worn computing components, including those provided by the
Company, to determine effectiveness for use in coordinating troop locations
and movements, determining enemy locations, and using global positioning
systems to provide coordinates for artillery, helicopter pickup and air
support.

Marketing

Because the Company's products are frequently combined with products from
other manufacturers to form complete integrated information systems, the Company
believes that it is more effective to sell principally through multiple
distributors and resellers with defined market niche expertise and presence as
well as to end users. The Company believes that by forming relationships with
VARs and OEMS who supply various submarkets and types of end users, serve
customers or have in-place sales and distribution channels that identify new
customers and sales opportunities, the Company is able to reach end users more
rapidly in a variety of industries.

To ensure VAR and OEM quality, the Company intends to offer detailed
in-house training sessions to prepare and update personnel for field sales and
training. In addition, the Company is developing a comprehensive sales manual to
be used by VARs and OEMs. To avoid computer memory conflicts and hardware
interruptions (a potential problem when adding third-party peripherals to any
computer), the Company is developing a standard architecture with preapproved
hardware and software that can be combined on the Mobile Assistant(R) without
risk of conflict.

The Company's marketing and sales employees are responsible for
implementing direct marketing plans and sales programs, coordinating sales
activities with VARs and OEMs and customer service. The Company has had limited
sales to date and therefore has maintained a limited sales and marketing staff,
which the Company intends to increase following completion of this offering. The
Company expects to add 10 marketing and sales representatives and three customer
service personnel using the proceeds of this offering. The Company also expects
to expand its marketing activities significantly to meet anticipated increase in
product demand. These activities are expected to include increased attendance at
trade shows, preparation of advertising and sales materials, advertising in
industry literature and maintenance of its web site for technical and product
inquiries.

Sales and Backlog

As of June 30, 1996 the Company had sold and delivered approximately
$885,000 of Mobile Assistant(R) units and had a purchase order backlog of
approximately $1,250,000 which the Company anticipates will be shipped prior to
December 31, 1996, although there can be no assurance of shipment by such date.
As of June 30, 1995, the Company's order backlog was $346,000. Customers who
have placed orders for these units in the past include, among others, AT&T,
Eaton Corporation, Battelle Memorial Institute, PRC Inc., SRI International,
Rockwell International, Martin Marietta (now Lockheed Martin), NeuroSystems, IAI
Elta Electronics and the United States Army. Purchase orders are cancellable by
the customers without penalty and are not binding upon the customer.

The Company anticipates that for at least the immediate future, it will be
dependent upon a limited number of key customers for its revenues. The Company
believes that as more Mobile Assistant(R) units are delivered, the number of its
customers will increase and it will be less dependent upon a few key customers.
While the Company has received letters of intent from additional prospective
customers to purchase Mobile

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<PAGE> 34

Assistant(R) units, these letters are not binding and there can be no assurance
that it will receive purchase orders on the basis of these letters of intent.

The Company entered into an exclusive license agreement for the Mobile
Inspector(TM) in June 1995. Prior to the execution of the license agreement, the
licensor had made approximately ten sales of Mobile Inspector(TM) software.
Although prior sales of Mobile Inspector(TM) software were for stand-alone use,
the Company intends to sell the Mobile Inspector(TM) for both stand-alone use
and for use with the Mobile Assistant(R).

Rockwell International Agreement

In March 1996 Rockwell International, which manufactures the computing unit
utilized in the Mobile Assistant(R), and the Company entered into a
non-exclusive five-year license agreement (the "License Agreement"). Pursuant to
the License Agreement, Rockwell International has been granted the nonexclusive
worldwide (excluding Germany and Japan) rights to manufacture, sell, distribute,
lease or repair under the Rockwell International name portable computers meeting
certain operating specifications utilizing and limited to the technical
information and intellectual property (including patent) rights which have been
developed by the Company as of the effective date of the License Agreement. The
License Agreement provides for an initial payment of $300,000 by Rockwell
International to the Company, the release of the Company from the obligation to
pay Rockwell International $1,395,000 pursuant to the current purchase order
between the Company and Rockwell International, and for the payment by Rockwell
International to the Company of a royalty of 4% of units sold by Rockwell
International through August 31, 1998; 3% of units sold by Rockwell
International from September 1, 1998 through August 31, 1999; 2% of units sold
by Rockwell International from September 1, 1999 through August 31, 2000; and 1%
of units sold by Rockwell International from September 1, 2000 through August
31, 2001. Pursuant to the License Agreement, Rockwell International will sell
the Company computing units meeting certain specifications on price, performance
and delivery terms no less favorable than offered by Rockwell International to
any other customer. Upon the termination of the License Agreement pursuant to
its terms, Rockwell International will receive an irrevocable, unrestricted,
perpetual license to the Company's intellectual property rights related to
mobile computers including data, designs, methodology, processes and procedures
as granted in, and as of the effective date of, the License Agreement. An
adverse determination by the Patent Office with respect to the pending
reexamination of the Company's Patent or any other material adverse development
concerning the Patent or the Company's other intellectual property rights could
have a material adverse effect upon the Company's future rights under the
License Agreement. See "Risk Factors -- Uncertain Protection of Patent and
Proprietary Rights; No Assurance of Enforceability or Significant Competitive
Advantage" and "-- Intellectual Property."

KEY SUPPLIERS

The Company currently has subcontracted the manufacture of the body-worn
computing unit, headset and battery portions of the Mobile Assistant(R) unit to
third-party vendors. These components are assembled and integrated with the
software applications for the Mobile Assistant(R) at the Company's headquarters.
The Company currently has a contract with Rockwell International for the
manufacture and supply of the body-worn mobile computing unit of the Mobile
Assistant(R). Under this contract, Rockwell International is to provide the
Company with processing units and body-worn computing systems on the most
favorable pricing, system performance and delivery terms available to any
Rockwell International customer. Rockwell International purchases and manages
parts and components inventory, manufactures computer boards, and assembles and
tests (including obtaining Federal Communications Commission certification) the
body-worn computing unit of the Mobile Assistant(R). Rockwell International also
provides warranty coverage and warranty service for the body-worn unit. The
contract between Rockwell International and the Company is terminable by mutual
agreement of the parties upon 90 days prior written notice. The Company
currently is purchasing head-mounted displays from Kopin at a fixed unit cost
pursuant to an interim agreement which expires in August 1996. This interim
agreement obligates the Company and Kopin to negotiate a further agreement for
the purchase and sale of head-mounted displays beyond August 1996. There can be
no assurance that the Company and Kopin will reach a mutually satisfactory
agreement for the sale of head-mounted displays

31
<PAGE> 35

subsequent to the expiration of the current interim agreement. See "Risk
Factors -- Dependence upon Key Suppliers."

Most of the parts and components for the current Mobile Assistant(R) are
off-the-shelf PC components that are available in high quantity from multiple
vendors. Custom-designed components and Application Specific Integrated Circuits
(ASIC) will be utilized to reduce weight, size and power consumption of the
Mobile Assistant(R) as well as to increase its capabilities and performance.

WARRANTIES

The Company provides customers with a parts and labor warranty for 90 days
and a one-year warranty on parts only. Warranty services for the body-worn
computing unit are provided by Rockwell International. Warranty services for the
head-mounted display are provided by Kopin.

COMPETITION

The Company anticipates that ultimately it will face severe competition
from laptop PC and other portable computing systems manufacturers. Several other
companies are engaged in the manufacture and development of body-mounted or
hand-held computing systems which compete with the Mobile Assistant(R),
including InterVision, Phoenix Group, Computing Devices International, a
division of Ceridian Corporation, Texas Microsystems and a consortium of Litton
and TRW. Personal digital assistants and laptop and notebook computers also are
products that could compete against the Mobile Assistant(R) in applications
where hands-free, voice-activated operation is not required. Many of these
computers are manufactured by major domestic and foreign computer manufacturers
which possess far more resources than the Company and can be expected to compete
vigorously with the Company for the market at which the Mobile Assistant(R) is
directed. The Company believes the principal competitive factors in the mobile
computing market include mobility, ease of use, adaptability to applications,
integration of functions and capabilities, reliability, price, service, support
and market presence. The Company is aware of at least two competitors which have
introduced mobile computing systems that compete directly with the Mobile
Assistant(R). There can be no assurance the Company will be able to compete
successfully against its competitors or that the competitive pressures faced by
the Company will not adversely affect its financial performance.

INTELLECTUAL PROPERTY

The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect its
proprietary rights. The Company has entered into confidentiality and invention
assignment agreements with its employees, and enters into non-disclosure
agreements with its suppliers, VARs, OEMs and actual and potential customers to
limit access to and disclosure of its proprietary information. There can be no
assurance that these statutory protections and contractual arrangements will
prove sufficient to deter misappropriation of the Company's trade secrets or
independent third-party development of similar technologies. The laws of certain
foreign countries in which the Company may conduct business may not protect the
Company's products or intellectual property rights to the same extent as the
laws of the United States and thus lessen the protection of the Company's
products and intellectual property. The Company will endeavor to keep the
results of its research and development programs proprietary, but may not be
able to prevent others from using some or all of such information or technology
with or without compensation. The Company has registered its Mobile Assistant
trademark on the Principal Register of the United States Patent and Trademark
Office ("Patent Office"). The Company also has a common law trademark for the
Mobile Inspector(TM).

In April 1994 U.S. patent number 5,305,244 ("hands-free, user-supported
portable computers") (the "Patent") for the Mobile Assistant(R) was granted to
the Company. The patent application was previously assigned to the Company by
several employees of the Company. In September 1995 the Company received a
notification from the Patent Office entitled "office action in reexamination,"
which indicated that certain claims under the Patent were subject to
reexamination and were preliminarily rejected. The reexamination of the Patent
was initiated as a result of a request from one of the Company's competitors.
See "Risk Factors --

32
<PAGE> 36

Uncertain Protection of Patent and Proprietary Rights; No Assurance of
Enforceability or Significant Competitive Advantage."

The Company has been advised by its patent counsel, who is the Company's
Secretary and a director, that it is common for the Patent Office to grant
reexamination requests, which ordinarily are accompanied by a preliminary
rejection. Once a reexamination request is granted, the patent holder has an
opportunity to respond, both in writing and in person, with respect to the
reexamination and preliminary rejection. The Company filed a written response to
this request for reexamination and preliminary rejection on December 27, 1995.
Subsequently, representatives of the Company, including legal counsel, met with
representatives of the Patent Office to discuss the status of the matter. In May
1996 the Patent Office issued a Notice of Intent to Issue Reexamination
Certificate and Reexamination Reasons for Patentability/Confirmation with
respect to the September 1995 reexamination wherein it concluded that the
Company's claims are patentable with respect to the issues raised by that
request for reexamination.

On April 16, 1996 a second reexamination request was filed with the Patent
Office by the same competitor of the Company which filed the first such request
in September 1995. The Company has been advised by patent counsel that the
Patent Office permits multiple copending reexamination proceedings and that the
second request will be processed essentially in the same manner as the prior
request. If the Patent Office determines that the second request raises
substantial new questions of patentability, a second order granting request for
reexamination will be issued and the Company will have two months within which
to make an optional response to the request before the Patent Office issues a
formal office action. The Company has been advised by its patent counsel that
the prior proceeding will not be concluded until the second request has been
acted upon by the Patent Office.

The Company has been advised by its patent counsel handling this matter
that it is unlikely that the Patent Office will issue a Reexamination
Certificate (which certifies that the Company's Patent has been upheld) unless
the April 1996 reexamination request is denied. Even if the Company's patent
claims ultimately are rejected, the Company has pending another patent
application which the Company believes it may rely upon to assist in the
protection of the Company's proprietary rights. However, there is no assurance
that any patent will be granted to the Company or upheld in the future.

The Company has notified two of its competitors of the existence of the
Patent, which the Company's counsel believes may have been infringed by each of
such competitors. In the event that the Patent is upheld, the Company intends to
take any and all appropriate measures, including legal action, necessary to
maintain and enforce its rights under the Patent and to recover any damages
suffered as a result of any alleged infringement.

A second patent application for related mobile computing technology was
filed on October 2, 1995 in the United States by certain employees of the
Company, and it is anticipated that one or more of the claims in this
application may be filed as separate applications. All patents obtained by
Company employees under pending and future applications have been and will be
assigned to the Company under existing invention agreements.

The Company also has applied for patent protection for its hands-free,
body-worn mobile computing technology under the laws of European countries as
well as The People's Republic of China, Japan, Republic of Korea, Republic of
China (Taiwan), Canada and Australia.

LITIGATION

The Company is not a party to any litigation and is not aware of any
pending or threatened litigation. An "office action in reexamination" and a
second reexamination request have been filed with the Patent Office regarding
the Company's claims under the Patent for the Mobile Assistant(R). See
"-- Intellectual Property."

33
<PAGE> 37

EMPLOYEES AND CONSULTANTS

As of June 30, 1996, the Company had 22 full-time and seven part-time
employees. Of these, three are executive officers, six are administrative
employees, 10 are engaged in research and development, seven are engaged in
assembly and testing and three are engaged in marketing. None of the Company's
employees are represented by a union and management believes that the Company's
relations with its employees are good.

In November 1995 the Company entered into a consulting agreement with CMC
Services, whereby CMC Services agreed to provide sales representation and
marketing services to the Company at the Company's direction in exchange for the
payment of $5,000 a month. An affiliate of the principal of CMC Services, Pacel,
is the licensor of the Mobile Inspector(TM) software. The consulting agreement
may be terminated by either party upon 30 days prior written notice.

The Company has entered into a consulting agreement with Steven Newman, a
director of the Company, whereby Mr. Newman has agreed to provide negotiating,
strategic planning, financial advisory and general management services to the
Company through 1998. The agreement provides for a fee of $1,000 per day or
$5,000 per week for services performed pursuant to statements of work approved
by the Company's President or Board of Directors. Mr. Newman's consulting
agreement provides for an automatic three-year renewal unless terminated in
writing by either party on or before October 31, 1998. Mr. Newman's consulting
agreement also provides for termination at his option in the event of a change
of control (which is defined as Edward Newman ceasing to serve as Chairman of
the Company's Board of Directors or its President and Chief Executive Officer)
and that upon any such termination Mr. Newman is entitled to at least two years
of compensation pursuant to his agreement. Services rendered by Mr. Newman will
be subject to periodic review by the Board of Directors.

In 1996 the Company entered into a two-year consulting agreement with
Victor J. Lombardi whereby Mr. Lombardi agreed to provide business development
and marketing services to the Company in exchange for warrants which entitle Mr.
Lombardi to purchase 100,000 shares of Common Stock at $6.00 per share through
December 31, 1999.

In May 1995 the Company entered into a three-year consulting agreement with
Andrew Heller whereby Mr. Heller agreed to provide strategic planning, business
management, strategic product development and market and financial introductions
services to the Company. In consideration of services rendered by Mr. Heller to
the Company prior to that time and as an inducement to enter into the consulting
agreement, Mr. Heller was granted 100,000 shares of Common Stock which were
valued at $5 per share for financial reporting purposes.

FACILITIES

The Company's office and development facility consists of 7,276 square feet
located at 12701 Fair Lakes Circle, Fairfax, Virginia. The Company's current
lease is for a three-year term expiring November 1997 and requires monthly rent
of approximately $9,500. The lease is renewable at the Company's option for an
additional three years.

The Company also has a month to month tenancy agreement for the lease of
approximately 1,497 square feet located at 142 South Santa Cruz Avenue, Los
Gatos, California which is used as the Company's design and prototype center.
The tenancy agreement requires monthly base rent of $3,293 plus a pro-rata share
of building operating expenses, and that the Company give at least 60 days prior
written notice before vacating the premises. This lease is personally guaranteed
by Edward G. Newman, the Company's President, Chief Executive Officer and
Chairman of the Board of Directors. See "Certain Transactions."

The Company leases an apartment located at 4401 Sedgehurst Drive, #301,
Fairfax, Virginia 22033 pursuant to a month to month lease requiring monthly
rent of $875. The Company must give at least 45 days prior written notice before
termination of the lease.

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<PAGE> 38

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------------ ---- ------------------------------------------------
<S> <C> <C>
Edward G. Newman 53 President, Chief Executive Officer and Chairman
of the Board of Directors
John F. Moynahan 39 Vice President, Chief Financial Officer,
Treasurer and Director
John W. Williams 53 Vice President and Chief Operating Officer
Lt. Gen. Harry E. Soyster (Ret.)(1) 60 Director
James J. Ralabate, Esq. 68 Secretary and Director
Keith P. Hicks, Esq.(2) 74 Director
Steven A. Newman, M.D.(1)(2) 50 Director
Phillip E. Pearce(1)(2) 67 Director
Jacques Rebibo 56 Director
Eugene J. Amobi 51 Director
</TABLE>

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

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

Officers are appointed by and serve at the discretion of the Board of
Directors. Each director holds office until the next annual meeting of
stockholders or until a successor has been duly elected and qualified. All of
the Company's officers will devote full time to the Company's business and
affairs following the completion of this offering.

Edward G. Newman has been the Company's President since March 1993, Chief
Executive Officer and Chairman of the Board of Directors since December 1994 and
a director since 1990. Mr. Newman served as Treasurer of the Company from 1993
to 1994. From 1984 to 1992 Mr. Newman was President of Electro-Tech
International Corporation, a software consulting firm. From 1973 to 1981 Mr.
Newman was employed by Xerox Corporation in several management positions in
office systems strategy, legal systems and international financial systems. Mr.
Newman served with the Central Intelligence Agency from 1966 to 1972. Mr. Newman
also has been an Executive Vice President and a director of Tech International
since 1990, and of Tech Virginia since 1994. See "Certain Transactions." Mr.
Newman is a graduate of the University of Maryland (B.A. 1971) and the
University of New Haven (M.B.A. 1984). Mr. Newman is the brother of Steven A.
Newman, M.D., a director of the Company.

John F. Moynahan joined the Company in October 1994, has served as a
director since January 1995 and currently serves as the Company's Vice
President, Chief Financial Officer and Treasurer. From 1992 to 1994 Mr. Moynahan
was Vice President and Treasurer of Joy Technologies Inc., a publicly-traded
machinery and pollution control equipment manufacturer. From 1990 to 1992 he was
Vice President and Chief Financial Officer of Sym-Tek Systems, Inc., a
publicly-traded high technology company. Prior to that time, Mr. Moynahan was
Treasurer of Fisher Scientific Group, Inc., a publicly-traded medical, health
and research equipment manufacturer and distributor. Mr. Moynahan is a graduate
of Colgate University (B.A. 1979) and New York University (M.B.A. 1982).

John W. ("Wes") Williams joined the Company in May 1996 and currently
serves as the Company's Vice President and Chief Operating Officer. From 1994 to
1996 Mr. Williams was Director of Advanced Concepts of the CACD Division of
Rockwell International, and from 1991 to 1994 he was Director of Programs of
Tecom Industries, a subsidiary of Tech-Sym Corp. Prior to 1991, Mr. Williams
served as International Marketing Manager, Deputy Director of Navigation Systems
Engineering and Avionics Integration Manager for Magnavox Advanced Products and
Systems Company. Mr. Williams is a graduate of California State University (B.S.
1980, M.B.A. 1982). It is the intention of management to nominate, and

35
<PAGE> 39

utilize its best efforts to elect, Mr. Williams as a director at the Company's
Annual Meeting of Stockholders in 1997.

Lt. Gen. Harry E. Soyster (Ret.) has been a director of the Company since
January 1995. He is currently Director of Washington Operations and Vice
President of International Operations of Military Professional Resources, Inc.
From 1988 until his retirement in 1991, Lieutenant General Soyster (Ret.) was
the Director of the United States Defense Intelligence Agency. Prior to that
time, he was Commander of the United States Army Intelligence and Security
Command and a Deputy Assistant Chief of Staff for Intelligence, Department of
the Army. Lieutenant General Soyster (Ret.) is a graduate of the United States
Military Academy at West Point (B.S. 1957), Penn State University (M.S. 1963),
the University of Southern California (M.S. 1973) and the National War College
(1977).

James J. Ralabate, Esq. has been a director of the Company since January
1995 and currently serves as the Company's Secretary. Mr. Ralabate has been in
the private practice of patent law since 1982. Prior to that time, Mr. Ralabate
was General Patent Counsel for Xerox Corporation, responsible for worldwide
patent licensing and litigation, and an examiner for the Patent Office. Mr.
Ralabate is intellectual property counsel to the Company, and is a graduate of
Canisius College (B.S. 1950) and The American University (J.D. 1959).

Keith P. Hicks, Esq. has been a director of the Company since July 1994 and
currently is a principal in C&H Properties and the owner of Hicks Bonding Co.,
Hicks Auctioneering Co. and Hicks Cattle Co. Mr. Hicks is a graduate of the
University of Denver (B.A. 1954) and LaSalle University School of Law (L.L.B.
1969).

Steven A. Newman, M.D. has been a director of the Company since January
1995 and a consultant to the Company since January 1996. See
"Business -- Employees and Consultants." Dr. Newman was Executive Vice President
and Secretary of the Company from December 1994 through October 1995. Dr. Newman
also provides business, management and administrative consulting services to
medical groups. Dr. Newman was President of Fed American, Inc., a mortgage
banking firm, from 1988 to 1991. In connection with the bankruptcy of Sandco
American Inc., a real estate development company in California of which he was
the principal and guarantor, Dr. Newman declared personal bankruptcy and was
discharged from liabilities in 1992. Dr. Newman has been a director of Tech
International since 1990, a director of Tech Virginia since 1994 and an employee
of Tech Virginia since 1994. See "Certain Transactions." Dr. Newman is a
graduate of Brooklyn College (B.A. 1967) and the University of Rochester (M.D.
1972). Dr. Newman is the brother of Edward G. Newman, the Company's President,
Chief Executive Officer and Chairman of the Board of Directors.

Phillip E. Pearce has been a director of the Company since October 1995.
Mr. Pearce has been an independent business consultant with Phil E. Pearce &
Associates, Chairman and Director of Financial Express Corporation since 1990
and since 1988 has been a principal of Pearce-Henry Capital Corp. Prior to 1988
Mr. Pearce was Senior Vice President and a director of E.F. Hutton, Chairman of
the Board of Governors of the National Association of Securities Dealers, a
Governor of the New York Stock Exchange and a member of the Advisory Council to
the United States Securities and Exchange Commission on the Institutional Study
of the Stock Markets. Mr. Pearce also is a director of RX Medical Services,
Inc., a publicly-traded operator of medical diagnostic facilities and clinical
laboratories, InfoPower International, Inc., a software development company and
Starbase Company, a software development company. Mr. Pearce is a graduate of
the University of South Carolina (B.A. 1953) and attended the Wharton School of
Investment Banking at the University of Pennsylvania.

Jacques Rebibo has been a director of the Company since January 1996. Since
1983 Mr. Rebibo has been Chairman of the Board and a director of Selfware, Inc.,
a software development and consulting firm, and since 1985 has been President,
Chief Executive Officer and a director of Mortgage Investment Corporation, a
mortgage banking firm. Prior to 1983 Mr. Rebibo was President of Rebibo and
Chorazy, a financial planning firm, and Executive Vice President of Systematics
General Corporation, a publicly-traded manufacturer and distributor of computer
systems. Mr. Rebibo was a director of Fairfax Bank & Trust from 1985 through
1995. Mr. Rebibo is a graduate of Memphis State University (B.S. 1962) and the
University of Maryland (M.A. 1964).

36
<PAGE> 40

Eugene J. Amobi has been a director of the Company since January 1996.
Since 1983 Mr. Amobi has been President, a director and a principal stockholder
of Tech International, which provides engineering, technical support and
consulting services to government and domestic and international commercial
clients. Mr. Amobi has been president and a director of Tech Virginia since its
spin-off from Tech International and will serve in this position until the
acquisition of Tech Virginia by the Company. Prior to 1983, Mr. Amobi was a
Senior Engineer with E.I. DuPont de Nemours and a Managing Director of Stanley
Consultants, an international engineering consulting firm. Mr. Amobi is a
graduate of The Technion, Israel Institute of Technology (B.S. 1969), Princeton
University (M.S. 1970) and Syracuse University (M.B.A. 1973).

ADVISORS

Advisors to the Board of Directors are:

Maarten Heybroek has been an advisor to the Board of Directors since 1992.
Since 1986 Mr. Heybroek has been employed by Citibank, as Chief of Staff and
Controller for consumer banking activities in central Europe and, most recently,
as Director, Compliance and Risk Management for Citibank's United States
consumer banking operations. Prior to that time, Mr. Heybroek was Director,
Finance-European Operations and then Director, Corporate Finance for Intergraph
Corporation, a publicly-traded computer hardware and software firm, and with
Xerox Corporation in a variety of financial and management positions. Mr.
Heybroek is a graduate of Pace University.

Andrew Heller is an advisor to the Board of Directors for a three-year term
through May 5, 1998. Since 1989 Mr. Heller has been Chairman and Chief Executive
Officer of Heller Associates, a consulting firm to high technology companies.
From 1990 to 1993 Mr. Heller was Chairman and Chief Executive Officer of HaL
Computer Systems, Inc., a software and hardware systems development company.
From 1966 to 1989 Mr. Heller was employed by IBM (where he was the youngest
person ever to be selected as an IBM Fellow) in a variety of positions including
Corporate Director of Advanced Technology Systems, member of the Executive
Committee on Technology, member of the Technical Review Board, and General
Manager, Advanced Workstation Independent Business Unit. While at IBM, Mr.
Heller created and ran the business unit that created the AIX (UNIX) operating
system for IBM and the RISC RS/6000 family of workstations and servers, from
which the current Power PC was developed. Mr. Heller is a director of Rambus,
Inc., Cross/Z, Inc., Network Translation, Inc., EPR, Inc., Eco Instrumentation,
Inc. and UDI Software, Inc. Mr. Heller has a three-year consulting agreement
with the Company whereby Mr. Heller has agreed to provide strategic planning,
business management, strategic product development and market and financial
introductions services to the Company. See "Business -- Employees and
Consultants."

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation provides that directors shall
not be personally liable for monetary damages to the Company or its stockholders
for breach of fiduciary duty as a director, except for liability resulting from
a breach of the director's duty of loyalty to the Company or its stockholders,
intentional misconduct or wilful violation of law, actions or inactions not in
good faith, an unlawful stock purchase or payment of a dividend under Delaware
law, or transactions from which the director derives improper personal benefit.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.

The Company intends to enter into an Indemnification Agreement (the
"Indemnification Agreement") with each of its directors and officers which may,
in some cases, be broader than the specific indemnification provisions contained
in the Company's Certificate of Incorporation or as otherwise permitted under
Delaware law. Each Indemnification Agreement may require the Company, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as a director or

37
<PAGE> 41

officer, against liabilities arising from willful misconduct of a culpable
nature, and to obtain directors' and officers' liability insurance if available
on reasonable terms.

Although the Company intends to obtain directors' and officers' liability
insurance, there can be no assurance that the Company will qualify for such
insurance or that such insurance will be available to the Company on acceptable
terms. If the Company is unable or elects not to obtain directors' and officers'
liability insurance, any payments required to be made by the Company with
respect to its indemnification obligations will have an adverse impact on the
Company's earnings, if any.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company. The Company is not aware of
any threatened litigation or proceeding which may result in a claim for such
indemnification.

It is the position of the Securities and Exchange Commission (the
"Commission") that insofar as the foregoing provisions may be invoked to
indemnify against liability for damages arising under the Act, such provisions
are against public policy as expressed in the Act and are unenforceable.

EXECUTIVE COMPENSATION

Summary Compensation Table. The following sets forth the annual and
long-term compensation for services in all capacities to the Company (i) for the
transitional year ended December 31, 1995 and the fiscal years ended March 31,
1995 and 1994 of Edward G. Newman, the Company's President, Chief Executive
Officer and Chairman of the Board of Directors, and (ii) for the transitional
year dated December 31, 1995 of John F. Moynahan, the Company's Vice President,
Chief Financial Officer, Treasurer and a director. No other officer of the
Company received annual salary and bonus exceeding $100,000 during the relevant
periods.

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL AWARDS(1)
COMPENSATION(1) ------------
NAME AND ------------------ OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (SHARES) COMPENSATION
- --------------------------------- ---- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Edward G. Newman................. 1995* $112,500 $-0- -0- $-0-
President, Chief Executive 1995 $ 68,750 $-0- -0- $-0-
Officer and Chairman of the 1994 $ 26,500 $-0- -0- $-0-
Board of Directors
John F. Moynahan................. 1995* $105,000 $-0- -0- $-0-
Vice President, Chief Financial 1995 $ 64,167 $-0- 200,000 $-0-
Officer and Treasurer 1994 -- -- -- --
</TABLE>

- ---------------
* Transitional year ended December 31, 1995.

Option Grants Table. The following table sets forth information on grants
of stock options during fiscal 1995 to John F. Moynahan, the Company's Vice
President, Chief Financial Officer, Treasurer and a director. All such options
are exercisable to purchase shares of Common Stock. No options were granted to
Messrs. Edward G. Newman or John F. Moynahan during the transitional year ended
December 31, 1995.

<TABLE>
<CAPTION>
PERCENT OF TOTAL EXERCISE OR
OPTIONS GRANTED OPTIONS GRANTED TO BASE PRICE
NAME (SHARES) EMPLOYEES IN YEAR ($/SHARE) EXPIRATION DATE
- --------------------------------- --------------- ------------------ ----------- -------------------
<S> <C> <C> <C> <C>
John F. Moynahan................. 200,000(1) 80% $0.01 September 30, 2004
</TABLE>

- ---------------
(1) Mr. Moynahan's options vest pro rata over the five-year period from 1995
through 1999.

38
<PAGE> 42

Fiscal Year-End Options/Option Values Table.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#) AT FISCAL YEAR-END($)(1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John F. Moynahan................. 40,000 160,000 $ 219,600 $ 878,400
</TABLE>

- ---------------
(1) Dollar values are the difference between $5.50, the offering price for the
Units and the exercise price of the options at issuance.

In 1996, in addition to 70,000 options granted to certain employees, the
Company has granted to an executive officer and certain directors an aggregate
of 225,000 ten-year options to purchase the Common Stock at $6.00 per share as
follows: Mr. Williams -- 50,000; Mr. Pearce -- 50,000; Mr. Rebibo -- 50,000; Mr.
Hicks -- 50,000; Mr. Soyster -- 25,000. All of the foregoing options will vest
pro-rata over the five-year period ending either in April 2001 or June 2001.
None of the foregoing options are exercisable within 60 days of the date of this
Prospectus.

The Company has no retirement, pension or profit sharing program for the
benefit of its directors, officer or other employees, but the Board of Directors
may recommend one or more such programs for adoption in the future.

PROFIT SHARING PROGRAM

The Company intends to establish a profit sharing program to be
administered by the Board of Directors. Under this program, which will remain in
effect for five years unless extended by the Board of Directors, executives, key
employees and consultants will be eligible to participate in a cash bonus pool.
The amount of the cash bonus pool will be determined annually and will be up to
10% of the amount by which the Company's pretax income exceeds 10% of
stockholders' equity.

COMPENSATION OF DIRECTORS

The Company currently does not pay or accrue salaries or consulting fees to
outside directors for each board or committee meeting attended. While it is the
Company's intention to establish such payments eventually, it does not
anticipate doing so in the foreseeable future. Any payments when implemented
will be comparable to those made by companies of similar size and developmental
stage. The Company also has adopted an Omnibus Stock Incentive Plan in which
directors are eligible to participate. See "--Omnibus Stock Incentive Plan."
Steven A. Newman has entered into a consulting agreement with the Company. See
"Business--Employees and Consultants."

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with Edward G. Newman
and John F. Moynahan. Mr. Newman's employment agreement provides for a
three-year term through December 31, 1998; initial annual base compensation of
$150,000 subject to a minimum annual increase to $198,000 on January 1, 1997 and
of at least the annual increase in the United States Consumer Price Index
("CPI") plus two percent annually thereafter; an annual cash bonus in an amount
to be determined by the Board of Directors; and a $2,000,000 life insurance
policy payable to his designated beneficiaries.

Mr. Moynahan's employment agreement provides for a three-year term through
December 31, 1998; initial annual base compensation of $140,000 subject to a
minimum annual increase to $150,000 on January 1, 1997 and of at least the
annual increase in the CPI thereafter; and an annual cash bonus in an amount to
be determined by the Board of Directors.

The employment agreements with Mr. Newman and Mr. Moynahan also entitle
them to participate in all benefits which the Company may offer to its executive
officers and employees. The Company anticipates that such benefits will include
an automobile, health insurance and expense reimbursement. Each of the
employment agreements renew for an additional three-year term unless terminated
in writing by either party

39
<PAGE> 43

on or before October 31, 1998. Each of the employment agreements also provides
for termination at the option of the employee in the event of a change of
control (which is defined as Mr. Edward Newman ceasing to serve as either the
Chairman of the Company's Board of Directors or its president and chief
executive officer) and that upon any such termination the employee is entitled
to at least two years of annual compensation under his employment agreement.

OMNIBUS STOCK INCENTIVE PLAN

The 1996 Omnibus Stock Incentive Plan (the "Incentive Plan") was adopted by
the Company's Board of Directors effective January 1, 1996. The Incentive Plan
provides for the granting of incentive stock options ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), nonqualified stock options, stock appreciation rights
("SARs") and grants of shares of Common Stock subject to certain restrictions
("Restricted Stock") up to a maximum of 650,000 shares to officers, directors,
employees and others. Incentive Stock Options can be awarded only to employees
of the Company at the time of the grant. No options, SARs or restricted stock
("Restricted Stock") may be granted under the Incentive Plan subsequent to
December 31, 2006.

The Incentive Plan is administered by the Compensation Committee of the
Board of Directors (subject to the authority of the full Board of Directors),
which determines the terms and conditions of the options, SARs and Restricted
Stock granted under the Incentive Plan, including the exercise price, number of
shares subject to the option and the exercisability thereof. Messrs. Steven A.
Newman, Soyster and Pearce currently are the members of the Compensation
Committee.

The exercise price of all Incentive Stock Options granted under the
Incentive Plan must equal at least the fair market value of the Common Stock on
the date of grant. In the case of an optionee who owns stock possessing more
than ten percent of the total combined voting power of all classes of stock of
the Company ("Substantial Stockholders"), the exercise price of Incentive Stock
Options must be at least 110% of the fair market value of the Common Stock on
the date of grant. The exercise price of all nonqualified stock options granted
under the Incentive Plan shall be determined by the Compensation Committee. The
term of any Incentive Stock Option granted under the Incentive Plan may not
exceed ten years, or, for Incentive Stock Options granted to Substantial
Stockholders, five years. The Incentive Plan may be amended or terminated by the
Board of Directors, but no such action may impair the rights of a participant
under a previously granted option.

The Incentive Plan provides the Board of Directors or the Compensation
Committee the discretion to determine when options granted thereunder shall
become exercisable and the vesting period of such options. Upon termination of a
participant's employment or relationship with the Company, all options terminate
and no longer are exercisable unless termination is due to death or disability,
in which case the options are exercisable within one year of termination.

The Incentive Plan provides that upon a change in control of the Company,
all previously granted options and SARs immediately shall become exercisable in
full and all Restricted Stock immediately shall vest and any applicable
restrictions shall lapse. The Incentive Plan defines a change of control as the
consummation of a tender offer for 25% or more of the outstanding voting
securities of the Company, a merger or consolidation of the Company into another
corporation less than 75% of the outstanding voting securities of which are
owned in aggregate by the stockholders of the Company immediately prior to the
merger or consolidation, the sale of substantially all of the Company's assets
other than to a wholly-owned subsidiary, or the acquisition by any person,
business or entity other than by reason of inheritance of over 25% of the
Company's outstanding voting securities. The change of control provisions of the
Incentive Plan may operate as a material disincentive or impediment to the
consummation of any transaction which could result in a change of control.

The Incentive Plan provides the Board of Directors or the Compensation
Committee discretion to grant SARs in connection with any grant of options. Upon
the exercise of a SAR, the holder shall be entitled to receive a cash payment in
an amount equal to the difference between the exercise price per share of
options then exercised by him and the fair market value of the Common Stock as
of the exercise date. The holder is required to exercise options covering the
number of shares which are subject to the SAR so exercised. SARs

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<PAGE> 44

are not exercisable during the first six months after the date of grant, and may
be transferred only by will or the laws of descent and distribution.

The Incentive Plan also provides the Board of Directors or the Compensation
Committee discretion to grant to key persons shares of Restricted Stock subject
to certain limitations on transfer and substantial risks of forfeiture.

As of June 1, 1996 a total of 801,530 options were outstanding, 400,000 of
which either will be formally reissued under the Incentive Plan or counted
against the number of shares subject to issuance under the Incentive Plan. Each
of the outstanding options has an exercise price greater than the assumed public
offering price of the Units offered hereby with the exception of 200,000 shares
which are subject to acquisition by Mr. Moynahan and 50,000 shares which are
subject to acquisition by an employee of the Company at $.01 per share over the
period 1995 through 1999. As of the date of this Prospectus there were no SARs
outstanding and there have been no grants of Restricted Stock other than 10,000
shares granted to Mr. Williams. All outstanding options vest on a pro-rata basis
over a five-year period.

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of the date of this Prospectus, certain
information as to the beneficial ownership of the Common Stock of (i) each of
the Company's directors and executive officers, (ii) directors and executive
officers as a group, and (iii) all persons known by the Company to be the
beneficial owners of more than five percent of the outstanding Common Stock of
the Company prior to this offering and giving pro forma effect to the sale of
2,100,000 Units offered hereby and the exchange of the Debentures for 1,431,429
Exchange Units.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
PRIOR TO OFFERING
-------------------- PERCENTAGE OWNED
NAME(1) NUMBER PERCENT AFTER OFFERING
- ----------------------------------------------------------- --------- ------- ----------------
<S> <C> <C> <C>
Edward G. Newman(2)........................................ 4,529,200 43.7% 32.5%
John F. Moynahan(3)........................................ 50,000 * *
John W. Williams........................................... 10,000 * *
Lt. Gen. Harry E. Soyster (Ret.)........................... 25,000 * *
James J. Ralabate.......................................... 50,000 * *
Keith P. Hicks............................................. 368,000 3.5% 2.6%
Steven A. Newman(4)........................................ 1,617,940 15.6% 11.6%
Phillip E. Pearce.......................................... -- -- --
Jacques Rebibo(5).......................................... 187,500 1.8% 1.3%
Eugene J. Amobi............................................ 300,000 2.9% 2.2%
Frances C. Newman(6)....................................... 776,950 7.5% 5.6%
Manassas Bay Trust(7)...................................... 580,000 5.6% 4.2%
Officers and directors (9 persons)......................... 8,494,590 81.8% 61.0%
</TABLE>

- ---------------
* Less than 1%

(1) The address for Messrs. Edward G. Newman and Moynahan and Mrs. Newman is
12701 Fair Lakes Circle, Suite 550, Fairfax, Virginia 22033; the address for
Mr. Steven A. Newman is 303 Avenida Cerritos, Newport Beach, California
92660; the address for Mr. Hicks is 4121 Roberts Road, Fairfax, Virginia
22032; the address for Mr. Rebibo is 7216 Dulany Drive, McLean, Virginia
22101; the address for Mr. Amobi is 100 Jade Drive, Wilmington, Delaware
19810; the address for Mr. Ralabate is 5792 Main Street, Williamsville, New
York 14221; the address for Mr. Pearce is 6624 Glenleaf Court, Charlotte,
North Carolina 28270; the address for Lt. Gen. Soyster (Ret.) is 1201 E.
Abingdon Drive, Suite 425, Alexandria, Virginia 22314; and the address for
the Manassas Bay Trust is South Esplanade Street, St. Peter Port, Island of
Guernsey, United Kingdom.

(2) Includes 200,000 shares owned by a trust for Mr. Newman's children and
580,000 shares owned by the Manassas Bay Trust, a trust established by Mr.
Newman. See footnote 7 below. Excludes 776,950 shares owned by Mr. Newman's
wife, Frances C. Newman. See footnote 6 below.

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<PAGE> 45

(3) Includes 40,000 shares of Common Stock subject to acquisition by Mr.
Moynahan at $.01 per share pursuant to a stock option.

(4) Includes 100,000 shares owned by a trust for Dr. Newman's children.

(5) Includes 17,500 shares owned by Mortgage Investment Corp., an affiliate of
Mr. Rebibo, and 10,000 shares owned by the profit sharing plan of Rebibo and
Corazy.

(6) Frances C. Newman is the wife of Edward G. Newman.

(7) A trust created by Edward G. Newman. Mr. Newman disclaims beneficial
ownership of the shares of Common Stock owned by the trust.

ESCROWED SHARES

As a condition to this offering, the Representative has required the
Company's stockholders to deposit the Escrowed Shares, which are 1,800,000
shares of Common Stock (of which 1,620,000 shares are owned by officers and
directors of the Company) in escrow pursuant to an escrow agreement with
Continental Stock Transfer & Trust Company, the escrow agent and the
Representative. The Escrowed Shares will be subject to incremental release to
the depositing stockholders based upon the Company's total revenues and net
earnings (loss) for the 12-month periods ending September 30, 1997, 1998 and
1999. The Escrowed Shares will be released in the amounts set forth below only
upon the achievement by the Company of the following Performance Targets:

- 300,000 shares if the Company achieves gross revenues of at least
$20,000,000 and a net loss, if any, not in excess of $500,000 for the 12
months ending September 30, 1997;

- 750,000 shares if the Company achieves gross revenues of at least
$45,000,000, and earnings per share of at least $1.00 for the 12 months
ending September 30, 1998;

- 750,000 shares if the Company achieves gross revenues of at least
$90,000,000 and earnings per share of at least $1.25 for the 12 months
ending September 30, 1999.

Notwithstanding the foregoing, if at any time the closing bid price of the
Common Stock reported on The Nasdaq SmallCap Market equals or exceeds $11.00 per
share for 25 consecutive trading days or for 30 out of 35 consecutive trading
days (the "Nasdaq Price Target") during the period ending September 30, 1999,
all Escrowed Shares then remaining in escrow will be released from the escrow
and returned to the stockholders.

The Escrowed Shares will be subject to incremental release only in the
event the Company achieves the Performance Targets in the 12 months ending
September 30, 1997, 1998 and/or 1999. In addition, upon achieving the Nasdaq
Price Target at any time during the period ending September 30, 1999 all then-
Escrowed Shares will be released. If the Performance Targets are not met in any
of the relevant 12-month periods (and the price of the Common Stock has not met
or exceed the price described above prior to the expiration of the applicable
12-month period), the Escrowed Shares in the amounts stated above will be
returned to the Company and cancelled. The earnings per share calculation will
be based on the fully diluted earnings per share, but excluding shares issued
pursuant to the Unit Purchase Option, extraordinary items, or any compensation
expense charged to the Company related to the release of the Escrowed Shares.
The determination of earnings per share will be made in accordance with
generally accepted accounting principles and will be based on the financial
statements of the Company filed pursuant to the Securities Exchange Act of 1934,
as amended. Escrowed shares are not transferable or assignable, although they
may be voted by the holder.

The Performance Targets and the Nasdaq Price Target were determined by
negotiation between the Company and the Representative and do not imply or
predict any future performance by the Company. The market value of any Escrowed
Shares held by officers, employees or consultants at the time they are released
will be deemed to be additional compensation expense to the Company. Upon such
an occurrence the Company will recognize a potentially material charge to income
which could reduce or eliminate earnings, if any. The amount of compensation
expense recognized by the Company will not affect the Company's total
stockholders' equity or working capital. See "Risk Factors -- Effect of Possible
Non-Cash Future Charge."

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<PAGE> 46

CERTAIN TRANSACTIONS

In connection with the transactions described below, the Company did not
secure an independent determination of the fairness and reasonableness of such
transactions and arrangements with affiliates of the Company. In each instance
described below, the disinterested directors (either at or following the time of
the transaction) reviewed and approved the fairness and reasonableness of the
terms of the transaction. The Company believes that each transaction was fair
and reasonable to the Company and on terms at least as favorable as could have
been obtained from non-affiliates. Transactions between any corporation and its
officers and directors are subject to inherent conflicts of interest. There is
no assurance that approval of such transactions by the Company's Board of
Directors will protect the best interests of the Company. The Company could be
subject to litigation or claims by stockholders or third-parties, or regulatory
action, in the event such transactions are found to be contrary to the best
interests of the Company.

TECH INTERNATIONAL AND TECH VIRGINIA

Since December 1992 the Company has maintained various business
relationships with Tech International and since 1994, with Tech Virginia. Tech
International operates a computer software and consulting business. Until
December 30, 1994, Tech International's Virginia operations were conducted
through its Virginia business unit. On December 30, 1994, Tech International
spun-off the Virginia business unit (the "Spin-Off") as Tech Virginia. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Edward G. Newman, a principal stockholder, director, the Chairman,
President and Chief Executive Officer of the Company and Steven A. Newman and
Eugene J. Amobi, directors of the Company, are the stockholders, officers and
directors of Tech Virginia. Eugene J. Amobi is the sole director and stockholder
of Tech International.

From December 1992 until November 1994 the Company utilized, on a fee
basis, a portion of the office facilities and certain personnel, office support
and equipment of Tech International's Virginia business unit. In November 1994
the Company relocated its office to its current location and ceased using Tech
International's office facility, support and equipment. The Company continued to
use certain Tech International personnel until the Spin-Off, after which the
Company began purchasing certain consulting services from Tech Virginia.

As part of the Spin-Off, Tech Virginia acquired approximately $45,000 of
net receivables owed by the Company to Tech International for office and
personnel support. On December 31, 1994, Tech Virginia forgave those receivables
and agreed to provide six months of free consulting services to the Company in
exchange for serving as the Company's principal VAR and Small Business
contracting agent for federal government contracts accounts. The Company treated
approximately $45,000 of net payables forgiven by Tech Virginia as a
contribution to capital as of December 31, 1994 for which no additional shares
were issued.

Simultaneous with the closing of this offering the Company will acquire
100% of the issued and outstanding shares of Tech Virginia, which are owned by
Messrs. Amobi, Edward G. Newman and Steven A. Newman, for $50,000 pursuant to a
December 31, 1994 option agreement (the "Tech Virginia Option"). The Tech
Virginia Option was executed together with an agreement pursuant to which Tech
Virginia forgave the Company's net indebtedness of approximately $45,000 for
services rendered and the Company retained Tech Virginia as its VAR and
contracting agent for all sales to the United States government. The acquisition
of Tech Virginia provides the Company with the technical capability, data and
key personnel for portions of the data conversion, voice and presentation
manager toolkits and the ability to bid Company products in United States
government contracts requiring security clearances and to have Company products
listed on approved United States Government purchasing lists. Tech Virginia has
accrued salary obligations and expense reimbursement of $145,000 to Mr. Amobi,
$40,500 to Mr. Edward Newman and $40,500 to Mr. Steven Newman which will be paid
by the Company following the completion of the offering. See "Use of Proceeds."
The terms of the Tech Virginia Option were negotiated between Mr. Amobi and the
Company, and approved by the Company's disinterested directors. Upon the
conclusion of this transaction Tech Virginia will be a wholly-owned subsidiary
of the Company.

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<PAGE> 47

PATENT

In 1993 each of Messrs. Edward G. Newman, the Company's President, Chief
Executive Officer and Chairman of the Board of Directors, Gil Christian, a
former employee of the Company, and Michael Jenkins, an employee of the Company,
assigned to the Company all of their right, title and interest in and to the
Patent. In consideration of the assignment of their interests in the Patent, Mr.
Edward G. Newman, Mr. Christian and Mr. Jenkins each received 300,000 shares of
Common Stock (valued at $.01 per share or $9,000 in the aggregate), and $22,500
in the aggregate. In addition, Messrs. Edward G. Newman, Jenkins and Steven J.
Schwartz, who also is an employee of the Company, have related patent
applications pending in the United States and certain other countries. Any
patents obtained by employees of the Company will be assigned to the Company
under existing invention agreements. See "Business -- Intellectual Property."

In September 1995 the Company received a notification from the Patent
Office entitled "office action in re-examination," which indicated that certain
claims were subject to re-examination and were preliminarily rejected. The
re-examination of the Patent was initiated as a result of a request from one of
the Company's competitors. A second request for re-examination was received by
the Company in April 1996. In April 1996 the Company was notified by the Patent
Office that the Patent had been upheld with respect to the issues raised by the
September 1995 re-examination. Mr. James J. Ralabate, the Company's Secretary
and a director has advised the Company with respect to legal matters concerning
the reexamination requests (and other intellectual property matters) although he
is not formally representing the Company before the Patent Office on those
matters. During the transitional period ended December 31, 1995, the Company
paid Mr. Ralabate fees, in cash or in shares of Common Stock, of $135,904 for
legal services rendered to the Company.

CONVERSION OF DEBT AND PAYABLES

On December 30, 1994, Messrs. Edward G. Newman, Steven A. Newman and Keith
P. Hicks forgave outstanding loans due to them from the Company. For financial
statement purposes, these amounts were considered to be paid-in capital which
increased the Company's paid-in capital surplus by $105,000. On December 31,
1994, the Company also agreed with Tech Virginia to forgive approximately
$45,000 of net accounts payable owed to Tech Virginia by the Company.

MANAGEMENT PERSONNEL EMPLOYMENT AGREEMENTS WITH TECH VIRGINIA

Messrs. Edward G. Newman, Steven A. Newman and Eugene Amobi each have
employment agreements with Tech Virginia under which each of them is entitled to
a salary and is eligible to receive certain bonuses. The agreements with Messrs.
Edward G. Newman and Steven A. Newman require each of them to devote only
reasonable time and attention to Tech Virginia, provided their activities for
Tech Virginia do not interfere with their obligations to the Company. Upon the
acquisition of Tech Virginia by the Company, such employment agreements will
terminate by agreement with Messrs. Newman, Newman, and Amobi.

GUARANTY OF DESIGN CENTER LEASE

Mr. Edward G. Newman, the Company's President, Chief Executive Officer and
Chairman of the Board of Directors, personally guaranteed the Company's lease of
approximately 1,497 square feet located at 142 South Santa Cruz Avenue, Los
Gatos, California which is used as the Company's design and prototype center.
Mr. Newman was not separately compensated for providing such guaranty.

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<PAGE> 48

DESCRIPTION OF SECURITIES

GENERAL

The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, par value $.01 per share, and 5,000,000 shares of Preferred
Stock, par value $.01 per share. As of the date hereof, 10,387,789 shares of
Common Stock are issued and outstanding and no Preferred Stock is issued and
outstanding. The Company currently has reserved 2,352,959 shares of Common Stock
for issuance pursuant to outstanding options, warrants and its obligations
pursuant to the Debentures. Upon completion of the offering, the Company will
have reserved 6,619,388 shares of Common Stock for issuance pursuant to
outstanding options, Warrants, Exchange Warrants and the Representative's Unit
Purchase Option.

UNITS

Each Unit consists of one share of Common Stock and one Warrant. The
Warrants will be separately transferable from the Common Stock on the separation
date.

COMMON STOCK

The holders of the Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. The Company's
Certificate of Incorporation and By-Laws do not provide for cumulative voting
rights in the election of directors. Accordingly, holders of a majority of the
shares of Common Stock entitled to vote in any election of directors may elect
all of the directors standing for election. Holders of Common Stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in the assets remaining after payment of liabilities. Holders
of Common Stock have no preemptive, conversion or redemption rights. All of the
outstanding shares of Common Stock are fully paid and nonassessable.

WARRANTS

Each Warrant will entitle the holder to purchase one share of Common Stock
at an exercise price of $9.00 from the separation date until July , 1999,
subject to the Company's redemption rights described below. The Warrants will be
issued pursuant to the terms of a Warrant Agreement between the Company and
Continental Stock Transfer & Trust Company (the "Warrant Agent"). The Company
has authorized and reserved for issuance the shares of Common Stock issuable on
exercise of the Warrants. The Warrants are exercisable to purchase a total of
2,100,000 shares of Common Stock of the Company unless the Over-Allotment Option
is exercised, in which case the Warrants are exercisable to purchase a total of
up to 2,415,000 shares of Common Stock. Upon exchange of the Debentures,
1,431,429 Exchange Warrants will be issued to the holders of the Debentures. The
terms of the Exchange Warrants are identical to those of the Warrants.

The Warrant exercise price and the number of shares of Common Stock
purchasable upon exercise of the Warrants are subject to adjustment in the event
of, among other events, a stock dividend on, or a subdivision, recapitalization
or reorganization of, the Common Stock, the merger or consolidation of the
Company with or into another corporation or business entity or issuances of
Common Stock at a price below the Common Stock market price, subject to certain
exceptions.

Commencing 18 months from the date of this Prospectus and until the
expiration of the Warrants, the Company, in its discretion, may redeem
outstanding Warrants, in whole but not in part, upon not less than 30 days'
notice, at a price of $.05 per Warrant, provided that the closing bid price of
the Common Stock equals or exceeds $18.00 for 20 consecutive trading days ending
five days immediately prior to such notice. In the event the Company exercises
its right of redemption, the Warrants will be exercisable until the close of
business on the date fixed for redemption in such notice. If any Warrant called
for redemption is not exercised by such time, it will cease to be exercisable
and the holder thereof will be entitled only to the redemption price.

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<PAGE> 49

The Company must have on file a current registration statement with the
Commission pertaining to the Common Stock underlying the Warrants in order for a
holder to exercise the Warrants or in order for the Warrants to be redeemed by
the Company. The shares underlying the Warrants also must be registered or
qualified for sale under the securities laws of the state in which the Warrant
holder resides. The Company intends to use its best efforts to keep the
Registration Statement incorporating this Prospectus current, but there can be
no assurance that the Registration Statement (or any other registration
statement filed by the Company covering shares underlying the Warrants) can be
kept current. In the event the Registration Statement is not kept current, or if
the Common Stock underlying the Warrants is not registered or qualified for sale
in the state in which a Warrant holder resides, the Warrants may be deprived of
any value.

The Company is not required to issue any fractional shares of Common Stock
upon the exercise of Warrants or upon the occurrence of adjustments pursuant to
anti-dilution provisions. The Company will pay to holders of fractional
interests an amount equal to the cash value of such fractional interests based
upon the then-current market price of a share of Common Stock.

The Warrants may be exercised upon surrender of the certificate
representing the Warrants on or prior to the expiration date (or earlier
redemption date) of the Warrants at the offices of the Warrant Agent with form
of "Election to Purchase" on the reverse side of the Warrant certificate
completed and executed as indicated, accompanied by payment of the full exercise
price by check payable to the order of the Company for the number of Warrants
being exercised. Shares of Common Stock issued upon exercise of Warrants for
which payment has been received in accordance with the terms of the Warrants
will be fully paid and nonassessable.

The Warrants do not confer upon the Warrant holder any voting or other
rights of a stockholder of the Company. Upon notice to the Warrant holders, the
Company has the right to reduce the exercise price or extend the expiration date
of the Warrants. Although this right is intended to benefit Warrant holders, to
the extent the Company exercises this right when the Warrants would otherwise be
exercisable at a price higher than the prevailing market price of the Common
Stock, the likelihood of exercise and resultant increase in the number of shares
outstanding, may impede or increase the cost of a change in control of the
Company.

DEBENTURES

As of the date of this Prospectus, the Company has issued and outstanding
$2,505,000 in principal amount of 7% Exchangeable Debentures Due 1997 (the
"Debentures"). Each Debenture entitles the holder to repayment of the principal
amount on November 16, 1997 (the "Maturity Date") and payments of interest at
the annual rate of 7% on September 30, 1996, March 30, 1997, and the Maturity
Date. Upon the closing of this offering, each Debenture will be exchanged for
one Exchange Unit consisting of one share of Common Stock and one Exchange
Warrant exercisable for one share of Common Stock for each $1.75 of outstanding
principal amount of the Debenture, which exchange shall constitute full and
complete satisfaction of the Company's obligations under the Debenture. In this
offering, the Company is registering for resale 1,431,429 shares of the Common
Stock included in the Exchange Units, the Exchange Warrants and the shares of
Common Stock underlying the Exchange Warrants. As of the completion of this
offering, there will be no outstanding Debentures. The holders of the Debentures
have agreed not to sell or otherwise dispose of the shares of the Exchange
Units, the Common Stock, the Exchange Warrants or, upon exercise thereof, the
shares of Common Stock underlying the Exchange Warrants exchanged for the
Debentures for 180 days following the completion of this offering. See "Shares
Eligible for Future Sale."

PREFERRED STOCK

The Board of Directors has the authority, without further stockholder
approval, to issue up to 5,000,000 shares of Preferred Stock from time to time
in one or more series, to establish the number of shares to be included in each
such series, and to fix the designations, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock, if any, or could adversely affect the rights and
powers, including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuances could have the effect of decreasing the market
price of the

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<PAGE> 50

Common Stock. As of the date of this Prospectus, the Company has not designated
any shares of Preferred Stock. There are no shares of Preferred Stock
outstanding, and the Company currently has no plans to issue any share of
Preferred Stock.

DELAWARE BUSINESS COMBINATION PROVISIONS

As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which regulates large
accumulations of shares, including those made by tender offers. Section 203 may
have the effect of significantly delaying a purchaser's ability to acquire the
entire interest in the Company if such acquisition is not approved by the
Company's Board of Directors. In general, Section 203 prevents an "Interested
Stockholder" (defined generally as a person with 15% or more of a corporation's
outstanding voting stock) from engaging in a "Business Combination" (defined
below) with a Delaware corporation for three years following the date such
person became an Interested Stockholder. For purposes of Section 203, the term
"Business Combination" is defined broadly to include mergers and certain other
transactions with or caused by the Interested Stockholder, sales or other
dispositions to the Interested Stockholder (except proportionately with the
corporation's other stockholders) of assets of the corporation or a subsidiary
equal to 10% or more of the aggregate market value of the corporation's
consolidated assets or its outstanding stock; the issuance or transfer by the
corporation or a subsidiary of stock of the corporation or such subsidiary to
the Interested Stockholder (except for transfers in a conversion or exchange or
a pro-rata distribution or certain other transactions, none of which increase
the Interested Stockholder's proportionate ownership of any class of series of
the corporation's or such subsidiary's stock); or receipt by the Interested
Stockholder (except proportionately as a stockholder), directly or indirectly,
of any loans, advances, guarantees, pledges or other financial benefits provided
by or through the corporation or a subsidiary.

The three-year moratorium imposed on Business Combinations by Section 203
does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Board approves either the Business Combination or
the transaction which resulted in the person becoming an Interested Stockholder,
(b) the Interested Stockholder owns 85% of the corporation's voting stock upon
consummation of the transaction which made him or her an Interested Stockholder
(excluding from the 85% calculation shares owned by directors who are also
officers of the corporation and shares held by employee stock plans which do not
permit employees to decide confidentially whether to accept a tender or exchange
offer); or (c) on or after the date a person becomes an Interested Stockholder,
the Board approves the Business Combination, and it is also approved at a
stockholder meeting by two-thirds of the voting stock not owned by the
Interested Stockholder.

Under Section 203, the restrictions described above do not apply if, among
other things, the corporation's original certificate of incorporation contains a
provision electing not to be governed by Section 203. The Company's Certificate
of Incorporation does not contain such a provision. The restrictions described
above also do not apply to certain Business Combinations proposed by an
Interested Stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an Interested Stockholder during the previous three years or who
became an Interested Stockholder with the approval of a majority of the
corporation's directors.

DIVIDEND POLICY

The Company has never paid any cash dividends on its Common Stock. The
Company anticipates that any future earnings will be retained for use in the
business of the Company or for other corporate purposes, and it is not
anticipated that cash dividends in respect to the Common Stock will be paid.

LISTING

The Company's Units, Common Stock and Warrants (including the Exchange
Warrants) have been approved for inclusion on The Nasdaq SmallCap Market.

TRANSFER AGENT, WARRANT AGENT AND REGISTRAR

Continental Stock Transfer & Trust Company will serve as the Company's
transfer agent for the Units and Common Stock and the Warrant Agent for the
Warrants.

47
<PAGE> 51

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have outstanding
approximately 13,919,218 shares of Common Stock. All of the shares of Common
Stock included in the Units offered hereby will be freely tradeable without
restriction or further registration under the Act except for any shares
purchased by any person who is or becomes an affiliate of the Company, which
shares will be subject to the resale limitations contained in Rule 144
promulgated under the Act.

Holders of the Warrants included in the Units will be entitled to purchase
an aggregate of 2,100,000 shares of Common Stock (not including the
Over-Allotment Option) upon exercise of the Warrants at any time commencing on
the separation date through July , 1999 provided that the Company satisfies
certain securities registration requirements with respect to the securities
underlying the Warrants. Any and all shares of Common Stock purchased upon
exercise of the Warrants will be freely tradeable, except for any shares
purchased by any person who is or thereby becomes an affiliate of the Company,
provided such registration requirements are met.

In general under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
affiliate of the Company as that term is defined under the Act, is entitled to
sell, within any three-month period, a number of shares beneficially owned for
at least two years that does not exceed the greater of (i) one percent of the
number of the then outstanding shares of Common Stock, or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 also are subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. Furthermore, a person who is not deemed to
have been an affiliate of the Company during 90 days preceding a sale by such
person and who has beneficially owned such shares for at least three years is
entitled to sell such shares without regard to the volume, manner of sale or
notice requirements. Upon completion of this offering approximately 8,494,590
shares of the 13,919,218 shares of the Common Stock which will then be issued
and outstanding will be held by affiliates of the Company. The Company's
officers, directors and certain stockholders have agreed not to publicly offer,
sell or otherwise dispose of any shares of Common Stock owned by them (the
"Representative's Lock-Up") for a period of two years after the date hereof.
Certain stockholders who purchased their shares of Common Stock for at least
$6.00 per share (and who in the aggregate own 207,246 shares of the Common
Stock) have agreed to a one-year Representative's Lock-Up following the date
hereof. Holders of the Debentures exchanging their Debentures for Common Stock
pursuant to this offering have agreed to a 180-day Representative's Lock-Up
following the date hereof. Shares of the Common Stock subject to the
Representative's Lock-Up will be eligible for sale under Rule 144 at various
times commencing in November, 1997. Any of the Representative's Lock-Ups are
subject to earlier release at the discretion of the Representative.

Prior to this offering, there has been no public market for the Company's
securities. Following this offering, the Company cannot predict the effect, if
any, that market sales of the Common Stock, or the availability of such shares
for sale, will have on the market price prevailing from time to time.
Nevertheless, sales by the existing stockholders of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices for the Company's securities. In addition, the availability for sale of
substantial amounts of Common Stock acquired through the exercise of the
Warrants, Exchange Warrants, options, warrants, or the Unit Purchase Option
could adversely affect prevailing market prices for the Common Stock.

48
<PAGE> 52

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Royce Investment Group, Inc. is acting as
representative (the "Representative"), have severally agreed to purchase from
the Company the number of Units set forth below:

<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF UNITS
---------------------------------------------------------------------- ---------------
<S> <C>
Royce Investment Group, Inc...........................................
Kensington Wells Incorporated.........................................
---------------
Total....................................................... 2,100,000
============
</TABLE>

The Underwriting Agreement provides that the Underwriters' obligations are
subject to conditions precedent and that the Underwriters are committed to
purchase all Units offered hereby (other than those covered by the
Over-Allotment Option described below) if the Underwriters purchase any Units.

The Underwriters have advised the Company that they propose to offer the
Units directly to the public at the price set forth on the cover page of this
Prospectus, and that they may allow to certain dealers which are members of the
National Association of Securities Dealers, Inc., concessions not in excess of
$ per Unit. The Underwriters may allow, and such dealers may reallow, a
concession not exceeding $ per Unit to other dealers. After the Units are
released for sale to the public, the Underwriters may change the initial price
to the public and other selling terms.

The Company has agreed to pay the Representative a nonaccountable expense
allowance of three percent of the aggregate public offering price of the Units,
including Units sold on exercise of the Over-Allotment Option, of which $50,000
previously has been paid to the Representative. The Company also has agreed to
pay all expenses in connection with qualifying the Units for sale under the laws
of such states as the Representative may designate, including expenses of
counsel to the Representative which will be retained for such purpose.

The Company has granted the Representative an option (the "Over-Allotment
Option"), exercisable for 45 days after the date of this Prospectus, to purchase
up to 315,000 additional Units at the initial public offering price of the
Units. The Representative may purchase these Units solely to cover any
over-allotments, if any, in connection with the sale of the Units offered
hereby.

The Company's officers, directors and certain stockholders have agreed not
to publicly offer, sell or otherwise dispose of any shares of capital stock
owned by them for a period of two years after the date of this Prospectus
without the prior written consent of the Representative. Certain stockholders
who purchased their shares of Common Stock for at least $6.00 per share (and who
in the aggregate own 207,246 shares of Common Stock) have agreed to similar
restriction for a one-year period following the date of this Prospectus. Holders
of the Debentures exchanging their Debentures for Exchange Units have agreed to
a similar restriction for a 180-day period following the date of this
Prospectus.

In connection with this offering the Company has agreed to issue and sell
to the Representative, for nominal consideration, the Unit Purchase Option to
purchase an aggregate of 210,000 Units. The Unit Purchase Option will be
exercisable at a price per share equal to 165% of the initial price to the
public of the Units commencing one year after the closing date of this offering
and will continue to be exercisable until five years from the date of this
Prospectus. The Warrants included in the Unit Purchase Option are exercisable
for $12.60 per share. During the exercise period, holders of the Unit Purchase
Option are entitled to certain demand and incidental registration rights with
respect to the securities issuable upon exercise of the Unit Purchase Option.
For a period of one year from the date of this Prospectus, the Unit Purchase
Option is not transferable except to Underwriters, selling group members and
their officers and/or partners.

49
<PAGE> 53

Upon any exercise of the Warrants after one year from the date of this
Prospectus, the Company will pay the Representative a fee of 6% of the aggregate
exercise price for Warrant exercises solicited by it if (i) the market price of
the Common Stock on the date the Warrant is exercised is greater than the
then-exercise price of the Warrant, (ii) the exercise of the Warrant was
solicited by a member of the National Association of Securities Dealers, Inc.
and the holder designates in writing on the Warrant Certificate subscription
form the broker-dealer to receive compensation for such exercise, (iii) the
Warrant is not held in a discretionary account, (iv) disclosure of compensation
arrangements was made both at the time of this offering and at the time of
exercise of the Warrant, and (v) the solicitation of exercise of the Warrant was
not in violation of Rule 10b-6 promulgated under the 1934 Act. A portion of the
6% fee may be reallowed by the Representative to participating broker-dealers.
The Company has agreed not to solicit Warrant exercises through any broker-
dealer other than the Representative. The Company will not be required to pay a
fee to the Representative with respect to any Warrant exercise solicited solely
by the Company.

Rule 10b-6 will prohibit the Representative from engaging in any
market-making activities with regard to the Company's securities for the period
commencing nine business days (or such other applicable period as Rule 10b-6 may
provide) prior to any solicitation by the Representative of the exercise of
Warrants until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Representative may
have to receive a fee for the exercise of Warrants following such solicitation.
As a result, the Representative may be unable to make a market in the Company's
securities during certain periods while the Warrants are exercisable.

The Representative acted as placement agent in the placement of the
Debentures, for which it received a commission of $270,500 evidenced by two
promissory notes which bear interest at the rate of 8% per annum and which are
payable from the proceeds of this offering. See "Use of Proceeds."

Prior to this offering, there has not been a public market for the Units,
Common Stock or Warrants. The public offering price of the Units and the
exercise price of the Warrants have been determined by arms-length negotiation
between the Company and the Representative. There is no direct relation between
the offering price of the Units or the exercise price of the Warrants and the
assets, book value or net worth of the Company. Among the factors considered by
the Company and the Representative in pricing the Units were the results of
operations, the current financial condition and future prospects of the Company,
the experience of management, the amount of ownership to be retained by present
stockholders, and the general condition of the economy and the securities
markets. The Company has agreed to list the securities offered hereby on the
Nasdaq National Market at such time, if ever, as the Company meets the listing
criteria therefor.

In connection with this offering, the Company and the Underwriters have
agreed to indemnify each other against certain liabilities, including
liabilities under the Act, and if such indemnification is unavailable or
insufficient, the Company and the Underwriters have agreed to damage
contribution arrangements based upon relative benefits received from this
offering and relative fault resulting in such damages.

50
<PAGE> 54

LEGAL MATTERS

The validity of the securities offered will be passed upon for the Company
by Baker & Hostetler, Washington, D.C. Certain patent and proprietary law
matters will be passed upon for the Company by James J. Ralabate, Esq.,
Williamsville, New York. James J. Ralabate is Secretary and a director of the
Company and owns 50,000 shares of Common Stock of the Company. Certain legal
matters will be passed upon for the Underwriters by Berliner Zisser Walter &
Gallegos, P.C., Denver, Colorado.

EXPERTS

The combined balance sheets as of March 31, 1994 and 1995 and December 31,
1995 and the combined statements of operations, combined statements of
stockholders' equity (deficit) and combined statements of cash flows for the
nine months ended December 31, 1995 and for each of the two years in the period
ended March 31, 1995 included in this Prospectus have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants
(whose report, dated March 15, 1996, except as to the information in Note 13,
for which the date is April 24, 1996, includes an explanatory paragraph which
refers to conditions that raise substantial doubt about the Company's ability to
continue as a going concern), given on the authority of that firm as experts in
accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission,
Washington, D.C., a registration statement (together with all amendments
thereto, the "Registration Statement") under the Act with respect to the
securities offered by this Prospectus. This Prospectus, filed as part of the
Registration Statement, omits certain the information contained in the
Registration Statement in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement and to the financial statements and exhibits filed as a part thereof.
Copies of the Registration Statement, together with such financial statements
and exhibits, may be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the Commission's Regional Offices located at 500 West Madison Street,
Chicago, Illinois 60661 and 7 World Trade Center, New York, New York 10048, at
prescribed rates. Any statements contained herein concerning the provisions of
any document are not necessarily complete and in each instance reference is made
to the copy of such document files as an exhibit to the Registration Statement
or otherwise filed with the Commission. Each such statement is qualified in its
entirety by such reference.

51
<PAGE> 55

XYBERNAUT CORPORATION AND AFFILIATE

REPORT ON AUDITS OF
COMBINED FINANCIAL STATEMENTS
<PAGE> 56

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.................................................... F-2
Combined Balance Sheets -- March 31, 1994 and 1995, December 31, 1995 and Pro Forma
December 31, 1995 (unaudited)...................................................... F-3
Combined Statements of Operations -- Years ended March 31, 1994 and 1995 and nine
months ended December 31, 1994 (unaudited) and nine months ended December 31,
1995............................................................................... F-4
Combined Statements of Stockholders' Equity (Deficit) -- Years ended March 31, 1994
and 1995 and the nine months ended December 31, 1995............................... F-5
Combined Statements of Cash Flows -- Years ended March 31, 1994 and 1995 and the nine
months ended December 31, 1994 (unaudited) and nine months ended December 31,
1995............................................................................... F-6
Notes to the Combined Financial Statements........................................... F-7
Combined Balance Sheets -- March 31, 1996 (unaudited) and Pro Forma March 31, 1996
(unaudited)........................................................................ F-17
Combined Statements of Operations -- Three Months ended March 31, 1996 (unaudited)
and 1995 (unaudited)............................................................... F-18
Combined Statement of Stockholders' Equity (Deficit) -- Three Months ended March 31,
1996 (unaudited)................................................................... F-19
Combined Statements of Cash Flows -- Three Months ended March 31, 1996 (unaudited)
and 1995 (unaudited)............................................................... F-20
Notes to the Combined Financial Statements........................................... F-21
</TABLE>

F-1
<PAGE> 57

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
Xybernaut Corporation and Affiliate:

We have audited the accompanying combined balance sheets of Xybernaut
Corporation (formerly Computer Products & Services, Inc) and Affiliate as of
March 31, 1994 and 1995 and December 31, 1995 and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
March 31, 1994 and 1995 and the nine months ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of Xybernaut
Corporation and Affiliate as of March 31, 1994 and 1995 and December 31, 1995
and the results of their operations and their cash flows the years ended March
31, 1994 and 1995 and the nine months ended December 31, 1995 in conformity with
generally accepted accounting principles.

The accompanying combined financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1, the
Company incurred losses accumulating to $3,492,434 through December 31, 1995,
and has a working capital deficit of $38,534 at December 31, 1995. These
factors, among others, raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The combined financial statements do not include any adjustments that
might result from the outcome of these uncertainties.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 15, 1996, except as to the information
in Note 13, for which the date is April 24, 1996

F-2
<PAGE> 58

XYBERNAUT CORPORATION AND AFFILIATE

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31, PRO FORMA
----------------------- DECEMBER 31, DECEMBER 31,
ASSETS 1994 1995 1995 1995
-------- ----------- ------------ ------------
(UNAUDITED
NOTE 13)
<S> <C> <C> <C> <C>
Current assets:
Cash...................................... $ 753 $ 149,060 $ 508,666 $ 1,508,666
Accounts receivable....................... 16,834 90,725 90,725
Inventories............................... 10,000 9,241 249,950 249,950
Prepaid and other current assets.......... 5,994 20,617 20,617
-------- ----------- ------------ ------------
Total current assets.............. 10,753 181,129 869,958 1,869,958
-------- ----------- ------------ ------------
Fixed assets:
Property and equipment.................... 24,265 130,352 164,310 164,310
Less accumulated depreciation............. 5,680 38,281 75,508 75,508
-------- ----------- ------------ ------------
18,585 92,071 88,802 88,802
-------- ----------- ------------ ------------
Debenture issuance costs, net of accumulated
amortization of $0, $0, $24,815 and
$24,815, respectively..................... 196,542 336,542
Patent costs, net of accumulated
amortization of $2,353, $5,264, $31,017
and $31,017, respectively................. 39,987 61,105 184,565 184,565
Other....................................... 2,504 53,671 53,671
-------- ----------- ------------ ------------
39,987 63,609 434,778 574,778
-------- ----------- ------------ ------------
Total assets...................... $ 69,325 $ 336,809 $ 1,393,538 $ 2,533,538
======== ========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable............................. $ 263,425 $ 383,425
Accounts payable.......................... $ 162,828 420,801 440,801
Accrued expenses.......................... 147,935 224,266 224,266
----------- ------------ ------------
Total current liabilities......... 310,763 908,492 1,048,492
----------- ------------ ------------
Long-term liabilities:
Due to Tech International, Inc............ $ 41,943
Notes and loans payable................... 72,999 72,999
Debentures................................ 1,505,000 2,505,000
-------- ----------- ------------ ------------
Total long-term liabilities....... 41,943 1,577,999 2,577,999
-------- ----------- ------------ ------------
Total liabilities................. 41,943 310,763 2,486,491 3,626,491
-------- ----------- ------------ ------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock.............................. 86,197 101,763 103,725 103,725
Additional paid-in capital................ 30,444 1,317,434 2,337,663 2,337,663
Accumulated deficit....................... (89,259) (1,393,151) (3,534,341) (3,534,341)
-------- ----------- ------------ ------------
27,382 26,046 (1,092,953) (1,092,953)
-------- ----------- ------------ ------------
Total liabilities and
stockholders'
equity (deficit)................ $ 69,325 $ 336,809 $ 1,393,538 $ 2,533,538
======== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part
of the combined financial statements.

F-3
<PAGE> 59

XYBERNAUT CORPORATION AND AFFILIATE

COMBINED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------- --------------------------
1994 1995 1994 1995
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Product sales and leases................. $ 13,650 $ 51,712 $ 25,582 $ 227,793
Consulting............................... 3,331 27,612 26,668 124,855
----------- ----------- ----------- -----------
Total revenues................... 16,981 79,324 52,250 352,648
Cost of sales.............................. 8,155 61,301 35,544 263,621
----------- ----------- ----------- -----------
Gross margin..................... 8,826 18,023 16,706 89,027
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing...................... 15,521 207,377 150,934 383,960
General and administrative............... 35,970 859,082 575,346 917,533
Research and development................. 5,050 259,256 147,192 910,182
----------- ----------- ----------- -----------
Total operating expenses......... 56,541 1,325,715 873,472 2,211,675
----------- ----------- ----------- -----------
(47,715) (1,307,692) (856,766) (2,122,648)
Interest income (expense).................. 363 3,800 3,517 (18,542)
----------- ----------- ----------- -----------
Net loss......................... $ (47,352) $(1,303,892) $ (853,249) $(2,141,190)
========== ========== ========= ==========
Net loss per common and common
equivalents share........................ $ (0.00) $ (0.12) $ (0.08) $ (0.18)
========== ========== ========= ==========
Weighted average number of common and
common equivalent shares outstanding..... 10,200,244 11,164,748 10,984,499 11,793,120
========== ========== ========= ==========
</TABLE>

The accompanying notes are an integral part
of the combined financial statements.

F-4
<PAGE> 60

XYBERNAUT CORPORATION AND AFFILIATE

COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 1994 AND 1995 AND
NINE MONTHS ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK COMMON STOCK
TECH VIRGINIA CLASS A SHARES CLASS B SHARES
------------------ ------------------- ------------------ ADDITIONAL
NUMBER OF NUMBER OF NUMBER OF PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ --------- ------- --------- ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, April 1,
1993................ 8,579,680 $85,797 $ 20 $ (41,507) $ 44,310
Shares issued......... 40,000 400 (400) --
Contributed capital... 30,424 30,424
Net loss.............. (47,352) (47,352)
--- -- --------- ------- --------- ------ ----------- ------------ ------------
Balance, March 31,
1994................ 8,619,680 86,197 30,444 (89,259) 27,382
Contributed capital... 153,476 153,476
Shares issued for
services and
incentives.......... 1,040,400 10,404 349,920 $3,499 152,935 166,838
Shares issued in
private placements,
net of costs of
$41,758............. 166,000 1,660 952,582 954,242
Shares issued......... 300 $3 497 500
Stock options issued
for services and
incentives.......... 27,500 27,500
Net loss.............. (1,303,892) (1,303,892)
--- -- --------- ------- --------- ------ ----------- ------------ ------------
Balance, March 31,
1995................ 300 3 9,826,080 98,261 349,920 3,499 1,317,434 (1,393,151) 26,046
Shares issued......... 41,246 412 247,064 247,476
Shares issued for
services and
incentives.......... 154,943 1,550 773,165 774,715
Net loss.............. (2,141,190) (2,141,190)
--- -- --------- ------- --------- ------ ----------- ------------ ------------
Balance, December 31,
1995................ 300 $3 9,867,326 $98,673 504,863 $5,049 $ 2,337,663 $(3,534,341) $ (1,092,953)
=== == ========== ======== ========== ======= ========== ============ ============
</TABLE>

The accompanying notes are an integral part
of the combined financial statements.

F-5
<PAGE> 61

XYBERNAUT CORPORATION AND AFFILIATE

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
----------------------- --------------------------
1994 1995 1994 1995
-------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(47,352) $(1,303,892) $ (853,249) $(2,141,190)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization...................... 7,358 35,512 23,089 87,795
Noncash charges for stock and options issued
for services..................................... 194,341 194,341 671,500
(Increase) decrease in assets:
Inventories...................................... (1,845) 759 (1,952) (240,709)
Accounts receivable.............................. (16,834) (11,038) (73,891)
Other current assets............................. (5,994) (3,121) (14,623)
Other assets..................................... (2,504) (2,504) (23,416)
Increase in liabilities:
Accounts payable and accrued expenses............ 41,943 268,820 220,950 334,304
-------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities.................................. 104 (829,792) (433,484) (1,400,230)
-------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment................. (20,215) (93,056) (92,756) (33,958)
Acquisition of patents and related costs.............. (25,020) (23,878) (23,878) (45,998)
-------- ----------- ----------- -----------
Net cash used in investing activities......... (45,235) (116,934) (116,634) (79,956)
-------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from:
Contributed capital................................ 30,424 140,791 73,570
Issuance of stock.................................. 996,000 600,000 247,476
Issuance of debentures............................. 1,505,000
Notes payable...................................... 185,924
Debenture issuance costs.............................. (70,857)
Common stock issuance costs........................... (41,758) (27,751)
-------- ----------- ----------- -----------
Net cash provided by financing activities..... 30,424 1,095,033 673,570 1,839,792
-------- ----------- ----------- -----------
Net increase (decrease) in cash......................... (14,707) 148,307 123,452 359,606
Cash, beginning of period............................... 15,460 753 753 149,060
-------- ----------- ----------- -----------
Cash, end of period..................................... $ 753 $ 149,060 $ 124,205 $ 508,666
======== =========== =========== ===========
</TABLE>

The accompanying notes are an integral part
of the combined financial statements.

F-6
<PAGE> 62

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS ACTIVITY:

THE COMPANY:

Since the commencement of operations in November 1992 Xybernaut Corporation
(formerly Computer Products Services, Inc.) (the "Company") has engaged in the
research, development and commercialization of products intended to bridge the
widening gap between people and knowledge. The first product to be
commercialized by the Company is the proprietary portable computer technology
and related software applications embodied in its Mobile Assistant(R) product.
Additional software products are planned for use on the Mobile Assistant(R) and
other personal computers.

During fiscal year 1995, the Company obtained $996,000 of equity financing
through private placements of common stock. Additional financing of $1,505,000
and $1,000,000 was received in November 1995 and April 1996 the issuance of 7%
convertible debentures, due 1997. The Company is attempting to sell shares of
its common stock through an initial public offering. However, there can be no
assurance that the Company's business will develop as anticipated by management
or that additional financing will be available. The combined financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classifications of
liabilities that might result if the Company is unable to continue as a going
concern.

The Company was a development stage enterprise through March 31, 1995.
Subsequently, the Company has commenced principal operations and, accordingly,
these financial statements are not presented in compliance with Statement of
Financial Accounting Standard No. 7 which describes the financial presentation
for development stage enterprises.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

PRINCIPALS OF COMBINATION:

The combined financial statements include the accounts of the commonly
controlled companies Xybernaut Corporation (formerly Computer Products &
Services, Inc.) and Tech International of Virginia Inc. ("Tech Virginia"),
because the Company intends to exercise its option to purchase Tech Virginia
concurrent with the closing of the contemplated initial public offering. All
significant intercompany accounts and transactions have been eliminated.

FISCAL YEAR:

In connection with the proposed initial public offering, Computer Products
and Services, Inc. changed its fiscal year end from March 31 to December 31. The
combined financial statements for the nine months ended December 31, 1994 and
the related footnote information are unaudited, but, in the opinion of
management, have been prepared on the same basis as the audited consolidated
financial statements and reflect all adjustments, consisting of normal recurring
accruals, necessary for a fair representation of the information set forth
therein.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:

The preparation of 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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

F-7
<PAGE> 63

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

CASH AND CASH EQUIVALENTS:

For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less to
be cash equivalents.

INVENTORIES:

Inventories, consisting principally of component parts held for resale, are
stated at the lower of cost or market, with cost determined by the first-in,
first-out method.

PROPERTY, EQUIPMENT, FURNITURE AND FIXTURES:

Property, equipment, furniture and fixtures are stated at cost and are
depreciated using the straight-line method over the estimated useful lives of
the assets as follows:

<TABLE>
<S> <C>
Equipment......................................................... 5 years
Furniture and fixtures............................................ 5 years
Demonstrator units................................................ 2 years
Leasehold improvements............................................ 3 years
</TABLE>

Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions and betterments are capitalized.

SOFTWARE DEVELOPMENT COSTS:

The Company's policy is to capitalize software development costs when
technological feasibility has been established, based on a detailed program
design that is complete, has been confirmed and for which no high-risk
development issues remain in accordance with Statement of Financial Accounting
Standards (SFAS) No. 86, "Accounting for the Cost of Computer Software to be
Sold, Leased, or Otherwise Marketed."

The establishment of technological feasibility and the ongoing assessment
of the recovery of capitalized software costs requires considerable judgment by
management with respect to certain external factors including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies. Capitalization
of software costs will cease when the software is available for general release
to customers, at which time amortization of the costs begins. These costs will
be amortized using the greater of the straight-line method or the ratio of
current gross revenues from a product to the total of current and anticipated
future gross revenues from the product. Since the Company is currently in the
planning phase and has not yet prepared a product design or detailed program
design for software development tool kits, no costs have been capitalized to
date.

INTANGIBLE ASSETS:

Patent costs consist of legal fees and other direct costs incurred in
obtaining and maintaining patents and are amortized over a five-year period.

IMPAIRMENT OF LONG-LIVED ASSETS:

Management of the Company periodically reviews the carrying value of
intangible assets for potential impairment by comparing the carrying value of
these assets with their related, expected future net cash flows. Should the sum
of the related, expected future net cash flows be less than the carrying value,
management would determine whether an impairment loss should be recognized. An
impairment loss would be measured by the amount by which the carrying value of
the asset exceeds the future discounted cash flows.

F-8
<PAGE> 64

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION AND WARRANTIES:

Product sales are recorded on shipment. For equipment shipped under
equipment loan agreements, revenue is recognized when equipment evaluation is
completed and accepted by the customer. Consulting revenue is recognized as the
services are performed. The Company generally provides a 90 day warranty on
parts and labor and a one year warranty on parts. The Company's suppliers for
the computing unit and the head mounted display provide the Company with similar
warranties and as a result warranty reserves are immaterial.

RESEARCH AND DEVELOPMENT PROGRAMS:

Research and development costs are charged to operations as incurred,
including the cost of components purchased for testing and product development
that are saleable but are intended for development work only.

INCOME TAXES:

Prior to March 31, 1995, the Company had elected to be taxed under
Subchapter S of the Internal Revenue Code. As a result, any federal and state
taxes are the responsibility of the shareholders. The Company has revoked its S
corporation election and will be taxed as a C corporation. Accordingly, deferred
income tax assets and liabilities are computed annually for differences between
the financial statement and income tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future. Such deferred income tax
asset and liability computations are based on enacted tax laws and rates
applicable to periods in which the differences are expected to affect taxable
income. Income tax expense is the tax payable or refundable for the period plus
or minus the change during the period in deferred income tax assets and
liabilities.

NET LOSS PER COMMON AND COMMON EQUIVALENT SHARES:

The net loss per common and common equivalent share is based on the
weighted average number of common and common equivalent shares outstanding
during the period. All stock options, warrants and issuances within one year
prior to the Company's initial public offering have been included in the
calculation of common equivalent shares outstanding (using the treasury stock
method assuming an initial public offering price of $5.50 per unit) as if they
were outstanding for all periods presented.

ESCROWED SHARES

Escrowed shares, if any, are considered issued and outstanding and reported
as such on the balance sheet. For purposes of computing the net loss per common
and common equivalent share, they will not be considered outstanding until the
conditions for their release are met.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value as
of December 31, 1995, March 31, 1994 and 1995 because of the relatively short
maturity of these instruments. The carrying value of the notes and loans payable
and the debentures approximated fair value as of December 31, 1995, based upon
market prices for the same or similar debt issues.

F-9
<PAGE> 65

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

3. PROPERTY AND EQUIPMENT:

PROPERTY AND EQUIPMENT CONSISTS OF THE FOLLOWING:

<TABLE>
<CAPTION>
MARCH 31,
------------------ DECEMBER 31,
1994 1995 1995
------- ------- ------------
<S> <C> <C> <C>
Equipment............................................ $24,265 $46,197 $ 75,660
Furniture and fixtures............................... 17,696 22,191
Demonstrator units................................... 29,600 29,600
Leasehold improvements............................... 36,859 36,859
------- ------- ------------
24,265 130,352 164,310
Less accumulated depreciation........................ 5,680 38,281 75,508
------- ------- ------------
$18,585 $92,071 $ 88,802
======= ======= ===========
</TABLE>

Depreciation expense for the years ended March 31, 1994 and 1995 and for
the nine months ended December 31, 1994 and 1995 was $5,005 $32,601, $22,421,
and $37,227, respectively.

4. DEBT:

Effective November 17, 1995, the Company sold $1,505,000 of 7% convertible
debentures due in 1997 (the debenture offering). Under the terms of the
debenture offering, the debentures will convert into common stock upon the
Company's successful initial public offering ("IPO"). The rate of conversion
will be one share of common stock and one warrant to purchase a share of common
stock at $9.00 for every $1.75 of principal and accrued interest.

Under the terms of these debentures, the Company has the right to redeem
all debentures, at a price equal to 105% of principal, plus accrued interest, if
the IPO has not occurred within one year after the closing date.

Under the agreement with the placement agent, the Company paid a placement
fee of 10% of the proceeds from the debenture offering. The fee is in the form
of an interest-bearing promissory note due on the earlier of the effective date
of the proposed IPO or May 17, 1996.

5. STOCKHOLDERS' EQUITY:

OUTSTANDING COMMON STOCK:

The Company and its affiliate's outstanding common stock is summarized
below:

<TABLE>
<CAPTION>
NUMBER OF SHARES ISSUED
AND OUTSTANDING
NUMBER -------------------------
PAR VALUE OF SHARES MARCH 31, DECEMBER 31,
PER SHARE AUTHORIZED 1995 1995
---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Computer Products & Services Inc.:
Class A.............................. $ 0.01 15,000,000 9,826,080 9,867,326
Class B.............................. $ 0.01 1,000,000 349,920 504,863
Tech International of Virginia, Inc.... $ 0.01 1,500 300 300
</TABLE>

Class A and Class B shares are identical except that Class B shares are
nonvoting.

On August 18, 1994, the Company's Board of Directors authorized a 40-for-1
stock split. All references in the combined financial statements to number of
shares, per share amounts and stockholders' equity have been restated to reflect
the split.

F-10
<PAGE> 66

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

5. STOCKHOLDERS' EQUITY, CONTINUED:

During fiscal year 1995, prior to the manufacture of any Mobile Assistant
products, the Company issued the following shares of stock as an inducement or
in exchange for services provided by either employees or members of the board,
independent contractors or outside counsel.

<TABLE>
<S> <C>
Class A shares................................... 1,040,400
Class B shares................................... 349,920
</TABLE>

For financial reporting purposes, these shares were valued at $0.12 per
share and operations were charged a total of $166,838 to account for the
issuance of these shares.

During fiscal year 1995, after the Company had successfully manufactured
six Mobile Assistant products, the Company issued 166,000 shares of the Class A
Common Stock in connection with private placements at $6.00 per share.

During the nine months ended December 31, 1995, the Company issued 42,499
of Class A shares and 154,943 of Class B shares. The Class A shares issued were
pursuant to private placement offerings at $6.00 per share and the Class B
shares were issued as incentives to consultants, two of whom are also board
members. For financial reporting purposes, the Class B shares were valued at
$5.00 per share and operations were charged a total of $774,715 to account for
the issuance of these shares.

6. STOCK OPTIONS:

During fiscal year 1995 and the nine months ended December 31, 1995, the
Company's Board of Directors approved stock options which become exercisable,
beginning one year after the date granted, in five equal annual installments.

Information on options is as follows:

<TABLE>
<CAPTION>
SHARES
UNDER
OPTION RANGE
------- -----------
<S> <C> <C>
Outstanding at March 31, 1994.................................. --
Granted........................................................ 250,000 $ .01
------- -----------
Outstanding at March 31, 1995.................................. 250,000 .01
Granted........................................................ 243,530 6.00
------- -----------
Outstanding at December 31, 1995............................... 493,530 $0.01-$6.00
======= ===========
</TABLE>

During the year ended March 31, 1995, 250,000 options were granted to
employees for services and incentives. For financial reporting purposes, the
value of the stock was $0.12 and operations were charged a total of $27,500 to
account for the issuance of these shares.

F-11
<PAGE> 67

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

7. SIGNIFICANT CUSTOMERS:

The percentages of total revenue from sales to customers in excess of 10%
of the total for each period were as follows:

<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
------------- ---------------------
1994 1995 1994 1995
---- ---- ------------ ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A....................................... 80%
Customer B....................................... 20%
Customer C....................................... 46% 46% 15%
Customer D....................................... 35% 52%
Customer E....................................... 17%
Customer F....................................... 18%
Customer G....................................... 19%
</TABLE>

8. INCOME TAXES:

For the nine months ended December 31, 1995 no income tax benefit has been
provided because the losses could not be carried back and realization of the
benefit of the net operating losses carried forward was not assured. The pro
forma effects of accounting for income taxes for the years ended March 31, 1994
and 1995 and the nine months ended December 31, 1994 would not be different from
the financial statements presented herein because no income tax benefit would
have been provided.

At December 31, 1995, the Company has approximately $2.2 million of net
operating loss carryforwards for federal income tax purposes. These losses
expire in 2011. The use of these carryforwards may be limited in any one year
under Internal Revenue Code Section 382 because of significant ownership
changes.

Net deferred tax assets are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Excess of book over tax depreciation........................... $ (1,000)
Net operating loss carryforwards............................... 830,000
Adjustment to accrual basis of accounting...................... 84,000
Tax credit carryforwards....................................... 30,000
Less valuation allowance....................................... (943,000)
------------
Net deferred tax asset of temporary differences.............. --
===========
</TABLE>

F-12
<PAGE> 68

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

9. COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS:

During the year ended March 31, 1995, the Company began leasing its
operating facilities and certain equipment under various operating leases
expiring on various dates through 1998. Future minimum payments under
noncancelable operating leases at December 31, 1995 are:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C> <C>
1996.................................. $112,753
1997.................................. 9,084
1998.................................. 8,327
</TABLE>

Total rental expense charged to operations for the year ended March 31,
1995 and the nine months ended December 31, 1994 and 1995 was $89,747, $14,477
and $42,673, respectively.

Prior to entering into the operating facility lease, the Company shared
space with an affiliate.

PURCHASE COMMITMENTS:

The Company has agreements with Rockwell International Corp. and Kopin
Corporation to purchase specialized components necessary to produce the Mobile
Assistant(R). Failure of any of these parties to comply with the terms and
conditions of existing agreements could adversely affect the Company's
performance.

PATENTS:

The Company considers its patents, trade secrets, and other intellectual
property and other proprietary information to be important to its business
prospects. In September 1995, the Company received a notification from the
Patent Office entitled "office action in re-examination" which indicated that
the Company's claims under its existing patent for the Mobile Assistant(R) were
subject to re-examination and had been preliminary rejected. Based upon the
advice of its patent counsel, who also is a director of the Company, the Company
believes that the re-examination will not result in any adverse action with
respect to the patent. In October 1995, the Company filed a patent application
covering additional embodiments and extensions of the technologies used in the
Mobile Assistant(R).

10. RELATED PARTY TRANSACTIONS:

Since December 1992, the Company has had various business relationships
with Tech International, Inc. ("Tech International"), and since 1994, with Tech
Virginia.

Tech International's principal stockholder is a stockholder and a director
of the Company and a shareholder of Tech Virginia.

Tech International operates a computer software and consulting business.
Until December 30, 1994, Tech International's Virginia operations were conducted
through its Virginia division. On December 30, 1994, Tech International spun-off
the Virginia division (the "Spin-Off ") as Tech Virginia. Certain of the
Company's stockholders are officers, directors and shareholders of Tech
Virginia.

From December 1992 until December 1994, the Company utilized, on a fee
basis, a portion of the office facilities and certain personnel, office support
and equipment of Tech International's Virginia division.

F-13
<PAGE> 69

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

10. RELATED PARTY TRANSACTIONS, CONTINUED:

As part of the Spin-Off, Tech Virginia assumed approximately $45,000 of net
receivables owed by the Company for office and personnel support which have been
eliminated in combination. On December 31, 1994, Tech Virginia forgave those
receivables and agreed to provide six months of free consulting services to the
Company in exchange for serving as the Company's principal VAR and Small
Business contracting agent for federal government contract accounts. The Company
converted approximately $45,000 of the net payables balance to equity as of
December 31, 1994.

On December 30, 1994, the Company received an option to purchase Tech
Virginia for $50,000. This option expires on July 1, 1998. The Company has
notified Tech Virginia that it intends to exercise the option concurrent with
the closing of the contemplated initial public offering.

In April 1995 a shareholder exercised an option to purchase 510,000 shares
of Class A Common Stock directly from the Company's President and majority
stockholder under an agreement dated February 28, 1994. These shares were
purchased at $0.05 per share.

In 1993, three employees assigned to the Company all of their right, title
and interest in and to a patent in consideration for 900,000 shares of Class A
Common Stock and $22,500 in cash.

The Company uses a director of the Company as its Patent Counsel. The
Company paid or issued stock of the following amounts in connection with work
performed by Patent Counsel:

<TABLE>
<CAPTION>
YEARS ENDED MARCH NINE MONTHS ENDED
31, DECEMBER 31,
------------------ ----------------------------
1994 1995 1994 1995
------- ------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
$28,865 $16,844 $ 15,710 $ 135,904
</TABLE>

CONVERSION OF DEBT AND PAYABLES:

On December 30, 1994, the Company agreed with three existing shareholders
to contribute $103,994 of outstanding loan balances. For financial statement
purposes, the amounts were assumed to be additional paid-in capital.

11. CONCENTRATION OF CREDIT RISK ARISING FROM CASH DEPOSITS:

The Company maintains cash balances at a financial institution located in
Virginia. The accounts at the institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. As of March 31, 1995, the Company's
exposure for uninsured cash balances was approximately $50,000.

12. SUPPLEMENTAL CASH FLOW DISCLOSURES:

During 1995, the Company incurred a note payable of $150,500 related to
costs in issuing $1,505,000 of debentures.

During 1995, the Company issued $194,341 in Class B common stock and stock
options in exchange for services provided.

During 1995, Tech International contributed approximately $13,000 of
furniture, fixtures and equipment to Tech Virginia.

F-14
<PAGE> 70

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

12. SUPPLEMENTAL CASH FLOW DISCLOSURES, CONTINUED:
During the nine months ended December 31, 1995, the Company issued $103,725
of Class B common stock for services provided in connection with patents and
$670,990 of Class B common stock for other services and incentives.

13. SUBSEQUENT EVENTS:

SALES OF DEBENTURES:

On April 16, 1996, the Company sold $1,000,000 principal amount of 7%
Convertible Debentures due in 1997 (the "Debentures") and incurred fees and
expenses of approximately $140,000 in a private placement. The Debentures will
convert into common stock upon the Company's successful IPO. The rate of
conversion will be one share of common stock and one warrant to purchase a share
of common stock at $9.00 for every $1.75 of principal and accrued interest.

The accompanying unaudited combined December 31, 1995 pro forma balance
sheet was prepared assuming the private placement had been completed as of
December 31, 1995; it does not assume the debentures had been converted to
common stock since the conversion will not occur unless the public offering
closes. The summarized effect of all pro forma adjustments are as follows:

<TABLE>
<CAPTION>
DEBENTURE DEBENTURE
ISSUANCE PRO FORMA CONVERSION PRO FORMA
PRO FORMA DECEMBER 31, PRO FORMA DECEMBER 31,
DECEMBER 31, ADJUSTMENTS 1995 ADJUSTMENTS 1995
1995 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets........................ $1,393,538 $ 1,140,000 $2,533,538 $ (336,542) $2,196,996
Liabilities................... 2,486,491 1,140,000 3,626,491 (2,505,000) 1,121,491
Stockholders' equity
(deficit)................... (1,092,953) (1,092,953) 2,168,458 1,075,505
</TABLE>

RECAPITALIZATION:

On January 25, 1996, the shareholders of Computer Products & Services, Inc.
approved the exchange of their common stock for shares of Xybernaut Corporation,
a Delaware Corporation, on a one for one basis to change the Company name and
reincorporate in the State of Delaware. All references in the combined financial
statements, including the number of shares and per share amounts, have been
retroactively adjusted. Additionally, 30,000,000 shares of common stock and
5,000,000 shares of preferred stock of Xybernaut Corporation have been
authorized. No such shares were issued or outstanding at December 31, 1995. The
Company expects to complete this exchange prior to the completion of the
contemplated initial public offering.

PROPOSED PUBLIC OFFERING (UNAUDITED):

The Company has entered into a Letter of Intent with an underwriter for a
public offering of up to 2,415,000 units which consists of one share of common
stock and one warrant to purchase one share of the Company's common stock.

At the completion of the offering, the underwriter will receive an option
to purchase 210,000 units at a price equal to 165% of the unit offering price
per unit during a period of four years commencing one year from the date of the
Prospectus.

In connection with this offering, the Company's stockholders have been
required to deposit an aggregate of 1,800,000 shares of Common Stock of the
Company in an escrow account (escrowed shares). The

F-15
<PAGE> 71

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

13. SUBSEQUENT EVENTS, CONTINUED:

Common Stock in the escrow account will be subject to release to such
stockholders in increments over a three year period only in the event the
Company's gross revenues and earnings (loss) per share for the twelve month
periods ending September 30, 1997, 1998 and 1999 equal or exceed performance
targets. If the performance targets are not met in any of the twelve month
periods ending September 30, 1997, 1998, or 1999, the escrowed shares will be
returned to the Company. In addition to the foregoing, all escrowed shares will
be released to the shareholders if certain stock price targets are met.

STOCK OPTION PLAN:

On April 18, 1996, the Board of Directors approved, effective January 1,
1996, the Company's 1996 Omnibus Stock Incentive Plan (the "Plan"). Under the
Plan, the Company has reserved 650,000 shares of common stock for issuance of
both incentive and non-qualified options.

F-16
<PAGE> 72

XYBERNAUT CORPORATION AND AFFILIATE

COMBINED BALANCE SHEETS
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA
MARCH 31, 1996
ASSETS MARCH 31, 1996 --------------
-------------- (NOTE 5)
<S> <C> <C>
Current Assets:
Cash......................................................... $ 191,031 $ 1,191,031
Accounts Receivable.......................................... 128,621 128,621
Inventories.................................................. 195,663 195,663
Prepaid and other current assets............................. 21,140 21,140
-------------- --------------
Total current assets................................. 536,455 1,536,455
-------------- --------------
Fixed Assets:
Property and equipment....................................... 168,995 168,995
Less accumulated depreciation................................ 87,716 87,716
-------------- --------------
81,279 81,279
-------------- --------------
Debenture issuance costs, net of accumulated amortization of
$70,900...................................................... 151,138 291,138
Patent costs, net of accumulated amortization of $42,404....... 186,623 186,623
Other.......................................................... 137,760 137,760
-------------- --------------
39,987 574,778
-------------- --------------
Total Assets......................................... $ 1,093,255 $ 2,233,255
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current portion of deferred licensing revenue................ $ 60,000 $ 60,000
Notes payable................................................ 266,094 386,094
Accounts payable............................................. 406,305 426,305
Accrued expenses............................................. 339,230 339,230
-------------- --------------
Total current liabilities............................ 1,071,629 1,211,629
-------------- --------------
Long-term liabilities:
Deferred licensing revenue................................... 235,000 235,000
Notes and loans payable...................................... 70,965 70,965
Debentures................................................... 1,505,000 2,505,000
-------------- --------------
Total long-term liabilities.......................... 1,810,965 2,810,965
-------------- --------------
Total liabilities.................................... 2,882,594 4,022,594
-------------- --------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock................................................. 103,731 103,731
Additional paid-in capital................................... 2,340,657 2,340,657
Accumulated deficit.......................................... (4,233,727) (4,233,727)
-------------- --------------
(1,789,339) (1,789,339)
-------------- --------------
Total liabilities and stockholders' equity
(deficit).......................................... $ 1,093,255 $ 2,233,255
============ ============
</TABLE>

The accompanying notes are an integral part
of the combined financial statements.

F-17
<PAGE> 73

XYBERNAUT CORPORATION AND AFFILIATE

COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1995 1996
---------- ----------
<S> <C> <C>
Revenue:
Product sales and leases........................................ $ 26,130 $ 299,888
Consulting...................................................... 944 15,483
---------- ----------
Total revenues.................................................... 27,074 315,371
Cost of sales..................................................... 25,757 228,289
---------- ----------
Gross margin............................................ 1,317 87,082
---------- ----------
Operating expenses:
Sales and marketing............................................. 56,443 114,010
General and administrative...................................... 283,736 449,685
Research and development........................................ 112,064 205,886
---------- ----------
Total operating expenses................................ 452,243 769,580
---------- ----------
Interest income (expense)......................................... 283 (16,888)
---------- ----------
Net loss................................................ $ 450,643 $ 699,386
========= =========
Net loss per common and common equivalents share.................. $ (0.04) $ (0.06)
========= =========
Weighted average number of common and common equivalent shares
outstanding..................................................... 11,715,505 11,803,618
========= =========
</TABLE>

The accompanying notes are an integral part
of the combined financial statements.

F-18
<PAGE> 74

XYBERNAUT CORPORATION AND AFFILIATE

COMBINED STATEMENT OF STOCKHOLDERS' (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(UNAUDITED)

The accompanying notes are an integral part
of the combined financial statements.

F-19
<PAGE> 75

XYBERNAUT CORPORATION AND AFFILIATE

COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
------------------------
1995 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $(450,643) $(699,386)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 12,423 71,406
Noncash charges for stock and options issued for services..... 67,221 3,000
(Increase) decrease in assets:
Inventories................................................. 2,711 54,287
Accounts receivable......................................... (5,796) (37,896)
Other current assets........................................ (2,873) (523)
Other assets................................................ (7,554)
Increase in liabilities:
Accounts payable and accrued expenses....................... 47,870 100,468
Deferred licensing revenue.................................. 295,000
--------- ---------
Net cash used in operating activities.................... (329,087) (221,198)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment............................ (300) (4,685)
Acquisition of patents and related costs......................... (13,444)
--------- ---------
Net cash used in investing activities.................... (300) (18,129)
--------- ---------
Cash flows from financing activities:
Proceeds from:
Issuance of stock............................................. 396,000
Notes payable................................................. 50,635
Payment of notes payable......................................... (50,000)
Common stock issuance costs...................................... (41,758)
Deferred offering costs.......................................... (78,943)
--------- ---------
Net cash provided by (used in) financing activities...... 354,242 (78,308)
--------- ---------
Net increase (decrease) in cash.................................... 24,855 (317,635)
Cash, beginning of period.......................................... 124,205 508,666
--------- ---------
Cash, end of period................................................ $ 149,060 $ 191,031
========= =========
</TABLE>

The accompanying notes are an integral part
of the combined financial statements.

F-20
<PAGE> 76

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS ACTIVITY:

THE COMPANY:

Since the commencement of operations in November 1992 Xybernaut Corporation
(the "Company")
has engaged in the research development and commercialization of products
intended to bridge the widening gap between people and knowledge. The first
product to be commercialized by the Company is the proprietary portable computer
technology and related software applications embodied in its Mobile Assistant(R)
product. Additional software products are planned for use on the Mobile
Assistant(R) and other personal computers.

During the year ended March 31, 1995, the Company obtained $996,000 of
equity financing through private placements of common stock. Additional
financing of $1,505,000 and $1,000,000 was received in November 1995 and April
1996 from the issuance of 7% convertible debentures, due 1997. The Company is
attempting to sell shares of its common stock through an initial public
offering. However, there can be no assurance that the Company's business will
develop as anticipated by management or that additional financing will be
available. The combined financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classifications of liabilities that might result if the Company
is unable to continue as a going concern.

2. BASIS OF PRESENTATION:

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been reflected herein. For further information, refer to the financial
statements and footnotes thereto for the year ended March 31, 1995 and 1994 and
for the nine months ended December 31, 1995 included elsewhere herein. Results
of operations for the three months ended March 31, 1996 are not necessarily
indicative of results of operations expected for the full year.

3. STOCKHOLDERS' EQUITY:

OUTSTANDING COMMON STOCK:

The Company and its affiliate's outstanding common stock is summarized
below:

<TABLE>
<CAPTION>
NUMBER OF SHARES
NUMBER OF ISSUED AND
PAR VALUE SHARES OUTSTANDING
PER SHARE AUTHORIZED MARCH 31, 1996
---------- ----------- -----------------
<S> <C> <C> <C>
Xybernaut
Common Stock................................. $ 0.01 30,000,000 10,372,789
Preferred Stock.............................. $ no par 5,000,000 --
Tech International of Virginia, Inc............ $ 0.01 1,500 300
</TABLE>

F-21
<PAGE> 77

XYBERNAUT CORPORATION AND AFFILIATE

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

3. STOCKHOLDERS' EQUITY, CONTINUED:
RECAPITALIZATION:

On January 25, 1996, the shareholders of Computer Products & Services, Inc.
approved an exchange of their common stock for shares of Xybernaut Corporation,
a Delaware Corporation, on a one-for-one basis to change the Company name and
reincorporate in the State of Delaware.

4. LICENSING AGREEMENT

In March 1996, the Company entered into a non-exclusive five-year licensing
agreement with Rockwell International. Pursuant to this agreement, the Company
received an initial payment of $300,000 which has been recorded as deferred
licensing revenue and is being recognized as revenue on a straight-line basis
over the five year term.

5. SUBSEQUENT EVENTS:

SALES OF DEBENTURES:

The accompanying unaudited combined March 31, 1996 pro forma balance sheet
was prepared assuming the private placement had been completed as of March 31,
1996; it does not assume the debentures had been converted to common stock since
the conversion will not occur unless the public offering closes. The summarized
effect of all pro forma adjustments are as follows:

<TABLE>
<CAPTION>
DEBENTURE DEBENTURE
ISSUANCE PRO FORMA CONVERSION PRO FORMA
MARCH 31, PRO FORMA MARCH 31, PRO FORMA MARCH 31,
1996 ADJUSTMENTS 1996 ADJUSTMENTS 1996
----------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Assets.......................... $ 1,093,255 $ 1,140,000 $ 2,233,255 $ (291,138) $1,942,117
Liabilities..................... 2,882,594 1,140,000 4,022,594 (2,505,000) 1,517,594
Stockholders' equity
(deficit)..................... (1,789,339) (1,789,339) 2,213,862 424,523
</TABLE>

F-22
<PAGE> 78
Back: Comparison pictures of technical tasks being performed in a traditional
manner (i.e. without the Mobile Assistant) and with the Mobile Assistant by
fewer personnel. Additional pictures of a military technician performing
maintenance on a helicopter using the Mobile Assistant.

<PAGE> 79

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

NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE 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 OR BY THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 14
Dilution.............................. 15
Capitalization........................ 16
Selected Financial Data............... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 18
Business.............................. 24
Management............................ 35
Principal Stockholders................ 41
Certain Transactions.................. 43
Description of Securities............. 45
Shares Eligible for Future Sale....... 48
Underwriting.......................... 49
Legal Matters......................... 51
Experts............................... 51
Additional Information................ 51
Index to Financial Statements......... F-1
</TABLE>

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

2,100,000 UNITS

XYBERNAUT LOGO

XYBERNAUT
CORPORATION

CONSISTING OF

2,100,000 SHARES

OF COMMON STOCK
AND

2,100,000 REDEEMABLE

WARRANTS

------------------------
PROSPECTUS
------------------------

ROYCE INVESTMENT
GROUP, INC.

KENSINGTON WELLS INCORPORATED
JULY , 1996

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 80

PART II

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Reference is made to the Certificate of Incorporation of the Company, as
amended from time to time (the "Certificate of Incorporation") (Exhibit 3.1) and
the Indemnification Agreement to be entered into with the Registrant's directors
and officers (Exhibit. 10.2).

Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law, (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law, and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.

The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the fullest extent permitted under Delaware law. The Company
intends to enter into separate indemnification agreements with 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 such officers and directors 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), to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors' and officers' insurance if
available on reasonable terms.

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

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
See Item 28, "Undertakings."

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the approximate expenses (other than the
underwriting discount and commission) expected to be incurred in connection with
the issuance and distribution of the securities being registered.

<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 18,962.80
NASD Fee....................................................... 5,999.21
NASDAQ Fee..................................................... 10,000.00
Representative's Non-Accountable Expense Allowance............. 346,500.00
Printing and Engraving Expenses................................ 80,000.00
Legal Fees and Expenses........................................ 250,000.00
Accounting Fees and Expenses................................... 150,000.00
Blue Sky Fees and Expenses..................................... 35,000.00
Miscellaneous.................................................. 15,037.99
-----------
TOTAL................................................ $911,500.00
==========
</TABLE>

II-1
<PAGE> 81

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

(a) The Company has made the following sales of its Common Stock within the
past three years to the following persons for the cash or other consideration
indicated, which sales were not registered under the Securities Act.

<TABLE>
<CAPTION>
CONSIDERATION
DATE OF -----------------------
NAME ISSUANCE TOTAL PER SHARE # SHARES
------------------------------------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Keith P. Hicks, Esq.(1).................... 7-10-94 $ 39,360 $0.12 328,000
Michael Jenkins(2)......................... 8-19-94 17,395 0.12 144,960
Steven A. Newman, M.D.(1)(2)............... 8-19-94 98,626 0.12 821,880
Grace Murphy(2)............................ 8-19-94 1,500 0.12 12,500
Charles McCarthy(2)........................ 8-19-94 1,500 0.12 12,500
James J. Ralabate, Esq.(1)(2).............. 8-19-94 3,000 0.12 25,000
Edward G. Newman(2)........................ 8-19-64 6,936 0.12 57,800
Martin Cohen(2)............................ 8-19-94 49,488 0.12 412,400
Gil Christian(2)........................... 8-19-94 17,395 0.12 144,960
Eugene J. Amobi(1)(2)...................... 8-19-94 36,000 0.12 300,000
John F. Moynahan(1)(2)..................... 10-3-94 1,200 0.12 10,000
Nidus Enterprises.......................... 2-24-95 600,000 6.00 100,000
Luethi IRA................................. 2-24-95 36,000 6.00 6,000
Kleingartner............................... 2-24-95 6,000 6.00 1,000
Duessel Trust.............................. 2-24-95 24,000 6.00 4,000
Behan IRA.................................. 2-24-95 12,000 6.00 2,000
Behan...................................... 2-24-95 12,000 6.00 2,000
Henderson Trust............................ 2-24-95 12,000 6.00 2,000
Luethi..................................... 3-14-95 24,000 6.00 4,000
Gerald J. Olivet........................... 5-1-95 60,000 6.00 10,000
Summa Inc.................................. 5-1-95 150,000 6.00 25,000
Salyer Trust............................... 5-1-95 60,000 6.00 10,000
Veritas Offshore........................... 5-1-95 150,000 6.00 25,000
Gerald J. Olivet........................... 8-8-95 12,504 6.00 2,084
Andrew Heller(2)........................... 8-8-95 500,000 5.00 100,000
John W. Saunders(2)........................ 8-8-95 6,265 5.00 1,253
James J. Ralabate, Esq.(1)(2).............. 8-8-95 125,000 5.00 25,000
Lt. Gen. Harry E. Soyster (Ret.)(1)(2)..... 8-8-95 125,000 5.00 25,000
Nathaniel T. Harris, Jr.................... 8-8-95 24,972 6.00 4,162
Georgia A. Ross............................ 8-8-95 60,000 6.00 10,000
Kevin Friel(2)............................. 12-31-95 4,165 5.00 833
Bill Saunders(2)........................... 12-31-95 8,285 5.00 1,657
Chris Chinnock(2).......................... 12-31-95 6,000 5.00 1,200
Chris Chinnock(2).......................... 3-31-96 3,000 5.00 600
John W. Williams(2)........................ 4-29-96 50,000 5.00 10,000
Jen Que Louis(2)........................... 6-6-96 25,000 5.00 5,000
---------- ---------
TOTAL............................ $2,368,591 2,647,789
========= ========
</TABLE>

- ---------------
(1) Director or officer.
(2) Received as compensation for services.

II-2
<PAGE> 82

(b) The Company has made the following sales of the Debentures within the
past three years to the following persons for the cash or other consideration
indicated, which sales were not registered under the Securities Act.

<TABLE>
<CAPTION>
CONSIDERATION
-----------------------
DATE OF PER NUMBER OF
NAME ISSUANCE TOTAL DEBENTURE DEBENTURES
------------------------------------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Jacqueline L. Towell....................... 11-16-95 $ 50,000 $50,000 1
Noord Holdings, Ltd. ...................... 11-16-95 300,000 50,000 6
Keith J. Burns............................. 11-16-95 150,000 50,000 3
Ashdown Holdings Limited................... 11-16-95 330,000 50,000 6.6
Medway Investments, Ltd. .................. 11-16-95 325,000 50,000 6.5
Northwest Holdings, Ltd. .................. 11-16-95 300,000 50,000 6
Victor J. Lombardi......................... 11-16-95 50,000 50,000 1
Victor J. Lombardi......................... 4-16-96 50,000 50,000 1
Elono Portfolio S.A. ...................... 4-16-96 500,000 50,000 10
Planate Business S.A. ..................... 4-16-96 450,000 50,000 9
---------- ---------
TOTAL............................ $2,505,000 50.1
========= ========
</TABLE>

All the foregoing sales were made to individuals who, or entities which,
had access to information enabling them to evaluate the merits and risks of the
investment by virtue of their relationship to the Company or their economic
bargaining power.

The Company relied on Rule 505 and Section 4(2) of the Securities Act for
the exemption from the registration requirements of such Act and made sales
solely to accredited investors. Each investor was furnished with information
concerning the operations of the Company and each had the opportunity to verify
the information supplied. Additionally, the Company obtained a signed
representation from each of the foregoing persons of his or her intent to
acquire the Common Stock of the Company for the purpose of investment only, and
not with a view toward the subsequent distribution thereof; each of the
certificates representing the Common Stock issued to the foregoing persons has
been stamped with a legend restricting transfer of the Common Stock represented
thereby, and the Company will issue stop transfer instructions to Continental
Stock Transfer & Trust Company, the Transfer Agent for the Common Stock of the
Company, concerning all the certificates representing the Common Stock of the
Company issued and outstanding as represented by the foregoing table.

ITEM 27. EXHIBITS.

<TABLE>
PAGE
-----
<C> <S> <C>
1.1 Form of Underwriting Agreement.**
1.2 Form of Financial Consulting Agreement between the Company and the
Representative.**
1.3 Form of Selected Dealers Agreement.**
3.1 Certificate of Incorporation of the Company.**
3.2 Bylaws of the Company.**
4.1 Warrant Exercise Fee Agreement.**
4.2 Form of Forfeiture Escrow.**
4.3 Form of Unit Purchase Option between the Company and the Representative.**
4.4 Form of specimen certificate for Units.**
4.5 Form of specimen certificate for Common Stock.**
4.6 Form of specimen certificate for Warrants.**
4.7 Form of Warrant Agreement among the Company, the Representative, and the
Warrant Agent.**
4.8 Form of Debenture.**
5.1 Opinion of Baker & Hostetler re legality.**
</TABLE>

II-3
<PAGE> 83

<TABLE>
<CAPTION>
PAGE
-----
<C> <S> <C>
10.1 December 31, 1994 Acquisition Agreement between the Company and Tech
Virginia.**
10.2 Form of Indemnification Agreement to be entered into between the Company and
each officer and director of the Company.**
10.3 Form of Employment Agreement between the Company and Edward G. Newman.**
10.4 Form of Employment Agreement between the Company and John F. Moynahan.**
10.5 November 30, 1994 Lease Agreement between Hyatt Plaza Limited Partnership and
the Company.**
10.6 March 22, 1996 Month-to-Month Tenancy Agreement between the Company and The
Original Tollhouse Historical Preservation Company.**
10.7 October 27, 1994 Residential Deed of Lease between the Company and Frank E.
and Heather H. Moxley.**
10.8 June 10, 1994 Rockwell International Corporation contract.**
10.9 January 5, 1995 Kopin Corporation contract.**
10.10 June 19, 1995 License Agreement for Mobile Inspector(TM) software.**
10.11 1996 Omnibus Stock Incentive Plan.**
10.12 May 5, 1995 Consulting Agreement with Andrew Heller.**
10.13 November 20, 1995 Consulting Agreement with CMC Services.**
10.14 Form of Consulting Agreement with Victor J. Lombardi.**
10.15 March 29, 1996 License Agreement with Rockwell International Corporation.**
10.16 Interim 90-Day Agreement with Kopin Corporation.**
10.17 December 7, 1995 Multicosm Ltd. software licensing agreement.**
10.18 April 4, 1996 Electronic Surveillance Technologies Corporation VAR
agreement.**
10.19 January 22, 1996 FC Imaging, Inc. VAR agreement.**
10.20 Form of Consulting Agreement with Steven A. Newman.**
10.21 June 18, 1996 NeuroSystems Europe Limited VAR agreement.**
10.22 Business Loan Agreement, Promissory Note and Commercial Security Agreement by
and between Fairfax Bank & Trust Company and the Company.**
23.1 Consent of Baker & Hostetler (included in Exhibit 5.1).**
23.2 Consent of Coopers & Lybrand L.L.P.*
24.1 Power of Attorney (included in signature page hereto).**
</TABLE>

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

** Filed previously.

ITEM 28. UNDERTAKINGS.

(1) The undersigned registrant hereby undertakes that it will:

(a) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and

(iii) Include any additional or changed material information on the
plan of distribution.

II-4
<PAGE> 84

(b) For determining liability under the Securities Act, that each
post-effective amendment as a new registration statement of the securities
offered, and this Offering of the securities at that time to be the initial
bona fide Offering.

(c) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of this Offering.

(2) The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.

(3) 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 foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the 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, 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.

(4) The undersigned registrant hereby undertakes that it will:

(a) For determining any liability under the Securities Act, treat 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 as part of this registration statement as
of the time it was declared effective.

(b) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and this Offering of such securities at that time as the initial
bona fide offering of those securities.

II-5
<PAGE> 85

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment No. 3
to the Registration Statement, or amendment thereto, to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Fairfax,
Commonwealth of Virginia, on July 17, 1996.

XYBERNAUT CORPORATION

By: /s/ EDWARD G. NEWMAN
------------------------------------
Edward G. Newman
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)

By: /s/ JOHN F. MOYNAHAN
------------------------------------
John F. Moynahan
Vice President, Chief Financial
Officer and Treasurer
(Principal Accounting Officer)

In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 3 to the Registration Statement has been signed by the following
persons in the capacities indicated as of July 17, 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------- --------------------------------
<C> <S>
* President, Chief Executive
- ---------------------------------------- Officer, Chairman of the Board
EDWARD G. NEWMAN of Directors and a Director
(Principal Executive Officer)

* Vice President, Chief Financial
- ---------------------------------------- Officer, Treasurer and a
JOHN F. MOYNAHAN Director
(Principal Accounting Officer)

* Director
- ----------------------------------------
LT. GEN. HARRY E. SOYSTER (RET.)

* Secretary and a Director
- ----------------------------------------
JAMES J. RALABATE, ESQ.

* Director
- ----------------------------------------
KEITH HICKS, ESQ.

* Director
- ----------------------------------------
STEVEN A. NEWMAN, M.D.
</TABLE>

II-6
<PAGE> 86

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------- --------------------------------
<S> <C>
* Director
- ----------------------------------------
PHILLIP E. PEARCE

* Director
- ----------------------------------------
JACQUES REBIBO

* Director
- ----------------------------------------
EUGENE AMOBI

BY: EDWARD G. NEWMAN
- ----------------------------------------
Edward G. Newman
Attorney-in-Fact
</TABLE>

II-7
<PAGE> 87

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------ ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement.**.......................................
1.2 Form of Financial Consulting Agreement between the Company and the
Representative.**.......................................................
1.3 Form of Selected Dealers Agreement.**...................................
3.1 Certificate of Incorporation of the Company.**..........................
3.2 Bylaws of the Company.**................................................
4.1 Warrant Exercise Fee Agreement.**.......................................
4.2 Form of Forfeiture Escrow.**............................................
4.3 Form of Unit Purchase Option between the Company and the
Representative.**.......................................................
4.4 Form of specimen certificate for Units.**...............................
4.5 Form of specimen certificate for Common Stock.**........................
4.6 Form of specimen certificate for Warrants.**............................
4.7 Form of Warrant Agreement among the Company, the Representative, and the
Warrant Agent.**........................................................
4.8 Form of Debenture.**....................................................
5.1 Opinion of Baker & Hostetler re legality.**.............................
10.1 December 31, 1994 Acquisition Agreement between the Company and Tech
Virginia.**.............................................................
10.2 Form of Indemnification Agreement to be entered into between the Company
and each officer and director of the Company.**.........................
10.3 Form of Employment Agreement between the Company and Edward G.
Newman.**...............................................................
10.4 Form of Employment Agreement between the Company and John F.
Moynahan.**.............................................................
10.5 November 30, 1994 Lease Agreement between Hyatt Plaza Limited
Partnership and the Company.**..........................................
10.6 March 22, 1996 Month-to-Month Tenancy Agreement between the Company and
The Original Tollhouse Historical Preservation Company.**...............
10.7 October 27, 1994 Residential Deed of Lease between the Company and Frank
E. and Heather H. Moxley.**.............................................
10.8 June 10, 1994 Rockwell International Corporation contract.**............
10.9 January 5, 1995 Kopin Corporation contract.**...........................
10.10 June 19, 1995 License Agreement for Mobile Inspector(TM)software.**.....
10.11 1996 Omnibus Stock Incentive Plan.**....................................
10.12 May 5, 1995 Consulting Agreement with Andrew Heller.**..................
10.13 November 20, 1995 Consulting Agreement with CMC Services.**.............
10.14 Form of Consulting Agreement with Victor J. Lombardi.**.................
10.15 March 29, 1996 License Agreement with Rockwell International
Corporation.**..........................................................
10.16 Interim 90-Day Agreement with Kopin Corporation.**......................
10.17 December 7, 1995 Multicosm Ltd. software licensing agreement.**.........
10.18 April 4, 1996 Electronic Surveillance Technologies Corporation VAR
agreement.**............................................................
10.19 January 22, 1996 FC Imaging, Inc. VAR agreement.**......................
10.20 Form of Consulting Agreement with Steven A. Newman.**...................
10.21 June 18, 1996 NeuroSystems Europe Limited VAR agreement.**..............
10.22 Business Loan Agreement, Promissory Note and Commercial Security
Agreement by and between Fairfax Bank & Trust Company and the
Company.**..............................................................
23.1 Consent of Baker & Hostetler (included in Exhibit 5.1).**...............
23.2 Consent of Coopers & Lybrand L.L.P.*....................................
24.1 Power of Attorney (included in signature page hereto).**................
</TABLE>

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

** Filed previously.

<PAGE> 1
EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form SB-2 of our
report, which includes an explanatory paragraph that refers to conditions that
raise substantial doubt about the Company's ability to continue as a going
concern, dated March 15, 1996, except as to the information in Note 13, for
which the date is April 24, 1996, on our audits of the financial statements of
Xybernaut Corporation (formerly Computer Products & Services, Inc.) and
Affiliate as of March 31, 1994 and 1995 and December 31, 1995 and for each of
the two years in the period ended March 31, 1995 and the nine months ended
December 31, 1995. We also consent to the reference to our firm under the
captions "Experts" and "Selected Financial Data."

/s/ COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, PA
July 15, 1996