XYBERNAUT CORP, SB-2/A, 1996-07-15

XYBERNAUT CORP
SB-2/A, 1996-07-15
COMPUTER COMMUNICATIONS EQUIPMENT

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1996

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

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

AMENDMENT NO. 2

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

<TABLE>
<CAPTION>
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- --------------------------------------------------------------------------------------------------------
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
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<S> <C> <C> <C> <C>
Units, each consisting of one share of Common Stock,
$.01 par value and one redeemable Warrant.......... 2,300,000 $ 5.50 $12,650,000 $ 4,362.07
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Common Stock, $.01 par value(2)...................... 2,300,000 -- -- --
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Warrants(2).......................................... 2,300,000 $ 9.00 $20,700,000 $ 7,137.93
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Common Stock, $.01 par value(3)...................... 2,300,000 -- -- --
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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
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Common Stock, $.01 par value(5)...................... 1,431,429 -- -- --
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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 -- -- --
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Common Stock, $.01 par value(7)...................... 20,000 $ 1.75 $ 35,000 $ 12.07
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Unit Purchase Option(8).............................. 200,000 -- $ 10 --
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Units, each consisting of one share of Common Stock,
$.01 par value and one redeemable Warrant(9)....... 200,000 $9.075 $ 1,815,000 $ 625.86
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Common Stock, $.01 par value(10)..................... 200,000 -- -- --
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Warrants(10)......................................... 200,000 $12.60 $ 2,520,000 $ 868.97
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Common Stock, $.01 par value(11)..................... 200,000 -- -- --
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TOTAL........................................... $53,107,871 $18,313.06
Previously Paid................................. $17,456.16
Paid With This Filing........................... $ 856.90
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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

2,000,000 UNITS

[XYBERNAUT LOGO]

XYBERNAUT CORPORATION

CONSISTING OF 2,000,000 SHARES OF COMMON STOCK AND
2,000,000 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 16.

------------------------
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 200,000 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
$895,000, 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 300,000 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 $12,650,000, $1,138,500 and
$11,511,500, respectively. See "Underwriting."

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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...................... 2,000,000 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)........................ 13,819,218 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>
<S> <C>
Nasdaq symbols:
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) 2,000,000 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) 600,000
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 400,000 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 $ 9,439,826
Total assets................................... 1,393,538 1,093,255 2,233,255 10,636,964
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) 9,414,128
</TABLE>

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(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 2,000,000 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 $2,300,000 (25.2% of the estimated net proceeds
from this offering) to marketing and sales; $750,000 (8.2% of estimated net
proceeds) to manufacturing inventory of the Mobile Assistant(R); $3,134,578
(34.4% of estimated net proceeds) to research and product development; $500,000
(5.5% of estimated net proceeds) to capital expenditures; $380,422 (4.2% of
estimated net proceeds) to repayment of short-term bank indebtedness and
indebtedness owed to the Representative; $50,000 (0.6% of estimated net
proceeds) to the acquisition of an affiliate; and $2,000,000 (21.9% 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
61.5% 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 $4.83
(88.0%) 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 13,819,218 shares of Common Stock to be
outstanding upon the completion of this offering, the 2,000,000 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 200,000 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 2,000,000
Units offered in this offering will be approximately $9,115,000 ($10,567,000 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)............................................... $2,300,000 25.2%
Acquisition of inventory for the Mobile Assistant(R)................. 750,000 8.2
Research and development(2).......................................... 3,134,578 34.4
Capital expenditures................................................. 500,000 5.5
Repayment of indebtedness(3)......................................... 380,422 4.2
Acquisition of affiliate(4).......................................... 50,000 0.6
Working capital(5)................................................... 2,000,000 21.9
---------- ------
Total........................................................... $9,115,000 100.0%
========= ==========
</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 2,000,000 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 $9,227,506
or $0.67 per share, representing an immediate increase in net tangible book
value of $0.89 per share to existing stockholders and an immediate dilution of
$4.83 (88.0%) 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......................... 0.66
------
Pro forma net tangible book value per share after the offering............... 0.67
-----
Dilution in net tangible book value per share to Unit purchasers............. $4.83
=====
</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 2,000,000 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 75.1% $ 2,282,634 14.4% $ 0.22
Stockholders from exchange of
Debentures(1)............................ 1,431,429 10.4 2,505,000 15.9 1.75
Unit purchasers............................ 2,000,000 14.5 11,000,000 69.7 $ 5.50
---------- ------- ----------- -------
Total................................. 13,804,218 100.0% $15,787,634 100.0%
========= ===== ========== =====
</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
2,000,000 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;
13,804,218 shares outstanding, as adjusted................. 103,731 138,045
Additional paid-in capital....................................... 2,340,657 13,509,810
Accumulated deficit.............................................. (4,233,727) (4,233,727)
------------- ---------------
Total stockholders' equity (deficit)........................ (1,789,339) 9,414,128
------------- ---------------
Total capitalization........................................ $ 786,626 $ 9,485,093
=========== ===========
</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) 600,000 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) 2,000,000 shares issuable upon
exercise of the Warrants and 1,431,429 shares issuable upon exercise of the
Exchange Warrants, (iii) 200,000 shares issuable upon exercise of the Unit
Purchase Option and 200,000 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
2,000,000 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% 32.8%
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% 2.7%
Steven A. Newman(4)........................................ 1,617,940 15.6% 11.7%
Phillip E. Pearce.......................................... -- -- --
Jacques Rebibo(5).......................................... 187,500 1.8% 1.4%
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% 61.5%
</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 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, a warrant and its obligations
pursuant to the Debentures. Upon completion of the offering, the Company will
have reserved 6,484,388 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
2,000,000 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 2,300,000 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 13,819,218 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 2,000,000 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 13,819,218 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....................................................... 2,000,000
============
</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 300,000 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 200,000 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 2,300,000 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 200,000 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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

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............................ 36
Principal Stockholders................ 42
Certain Transactions.................. 44
Description of Securities............. 46
Shares Eligible for Future Sale....... 49
Underwriting.......................... 50
Legal Matters......................... 51
Experts............................... 52
Additional Information................ 52
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.

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

2,000,000 UNITS

[XYBERNAUT LOGO]

XYBERNAUT
CORPORATION

CONSISTING OF
2,000,000 SHARES
OF COMMON STOCK
AND
2,000,000 REDEEMABLE
WARRANTS
------------------------
PROSPECTUS
------------------------
ROYCE INVESTMENT
GROUP, INC.

KENSINGTON WELLS INCORPORATED

JULY , 1996

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 79

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........................................... $ 18,313.06
NASD Fee....................................................... 5,810.78
NASDAQ Fee..................................................... 10,000.00
Representative's Non-Accountable Expense Allowance............. 330,000.00
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.................................................. 15,876.16
-----------
TOTAL................................................ $895,000.00
==========
</TABLE>

II-1
<PAGE> 80

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> 81

(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 Generale 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>
<CAPTION>
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> 82

<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
(supersedes exhibit previously filed).*
10.4 Form of Employment Agreement between the Company and John F. Moynahan
(supersedes exhibit previously filed).*
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 (supersedes exhibit
previously filed).*
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 (supersedes exhibit
previously filed).*
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 herewith.
** 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> 83

(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> 84

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. 2
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 , 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. 2 to the Registration Statement has been signed by the following
persons in the capacities indicated as of July , 1996.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ---------------------------------------- --------------------------------
<S> <C>
* 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> 85

<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> 86

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
(supercedes exhibit previously filed).*.................................
10.4 Form of Employment Agreement between the Company and John F. Moynahan
(supercedes exhibit previously filed).*.................................
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 (supercedes exhibit
previously filed).*.....................................................
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 (supercedes exhibit
previously filed).*.....................................................
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 herewith.

** Filed previously.

<PAGE> 87
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> 1

EXHIBIT 4.4

XYBERNAUT CORPORATION

NUMBER UNITS

XYU

CUSIP 984149 20 3

THIS IS TO CERTIFY THAT,

or registered assigns is the owner (the "Registered Owner") of the number of
Units ("Units") specified above, each of which Units entitles the Registered
Owner to one share of Common Stock, $.01 par value (the "Common Stock"), of
Xybernaut Corporation, a Delaware corporation (the "Company"), and one
Redeemable Common Stock Warrant ("Warrant") initially entitling the Registered
Owner to purchase one fully paid and nonassessable share of the Company's
Common Stock, at any time commencing on , the date on which the
component securities of this Unit are separably transferable (the
"Separation Date"), and prior to 5:00 P.M. Eastern Time, on , the
last day of the three year period commencing on the date the Registration
Statement on Form SB-2 (NO. 333-4156) is initially declared effective by the
Securities and Exchange Commission (the "Effective Date"), at an exercise price
of $9.00 per share (the "Exercise Price"), in lawful money of the United States
of America. The Warrants are issued pursuant to and are subject in all respects
to the terms and conditions set forth in the Warrant Agreement (the "Warrant
Agreement") by and among the Company and Continental Stock Transfer & Trust
Company, as Warrant Agent and Royce Investment Group, Inc. In the event of
certain contingencies provided for in the Warrant Agreement, the Exercise Price
and the number of shares of Common Stock available for purchase upon the
exercise of each Warrant are subject to modification or adjustment. Warrants
are subject to redemption by the Company, at a redemption price of $.05 per
Warrant, at any time commencing eighteen months from the Effective Date on less
than 30 days' notice, provided the closing bid price for the Company's Common
Stock equals or exceeds $18.00 per share for 20 consecutive trading days ending
five days immediately prior to such notice.

The Common Stock and the Warrants may not be traded separately or be
transferred separately until the Separation Date. Prior to such Separation
Date, the Company will not recognize any transfer or exchange other than in
Units. At any time after the Separation Date, the Registered Owner is entitled
to exchange this Unit Certificate for separate certificates representing the
number of shares of Common Stock and Redeemable Warrants included in the Units
represented by this Unit Certificate upon surrender of this Unit Certificate to
the Transfer Agent and Registrar at the office of the Transfer Agent and
Registrar, together with any documentation required by the Transfer Agent and
Registrar. This Unit Certificate is exchangeable, upon surrender hereof by the
Registered Owner to the Transfer Agent and Registrar, for a new Unit
Certificate or Unit Certificates of like tenor representing an equal aggregate
number of Units, each of such new Unit Certificates to represent such number of
Units as shall be designated by such Registered Owner at the time of such
surrender. This Unit Certificate is transferable at the office of the Transfer
Agent and Registrar by the Registered Owner in person or by attorney duly
authorized in writing upon surrender of this Unit Certificate. Upon due
presentment and payment of any tax or other charge imposed in connection
therewith or incident thereto by the Registered Owner, for registration of
transfer of this Unit Certificate at such office, a new Unit Certificate or
Unit Certificates representing an equal aggregate number of Units will be
issued to the transferee in exchange for this Unit Certificate.

Prior to due presentment for registration of transfer hereof the
Company and the Transfer Agent and Registrar may deem and treat the Registered
Owner as the absolute owner hereof and of each Unit represented hereby
(notwithstanding any notations of ownership or writing hereon made by anyone
other than a duly authorized officer of the Company or the Transfer Agent and
Registrar) for all purposes and shall not be affected by any notice to the
contrary.

The Warrants covered by this Unit Certificate are subject to the terms
of the Warrant Agreement. The Warrant Agreement is available at the offices of
the Transfer Agent and Registrar. The Warrant Agreement is incorporated herein
by this reference and made a part hereof and reference is hereby made thereto
for a full description of the rights, limitations of rights, obligations,
duties, and immunities hereunder.

This Unit Certificate shall be governed by and construed in accordance
with the laws of the State of Delaware without giving effect to conflicts of
laws.

This Unit Certificate shall not be valid or obligatory for any purpose
unless countersigned and registered by the Transfer Agent and Registrar of the
Company.

IN WITNESS WHEREOF, the Company has caused this Unit Certificate to be
duly executed, manually or in facsimile, by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.

DATED:

COUNTERSIGNED:

CONTINENTAL STOCK TRANSFER & TRUST COMPANY
BY: (NEW YORK, NY) TRANSFER AGENT

AUTHORIZED OFFICER

XYBERNAUT CORPORATION
DELAWARE CORPORATE SEAL 1996

[sig]

PRESIDENT SECRETARY
<PAGE> 2
XYBERNAUT CORPORATION

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-___________Custodian __________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ______________
in common (State)
</TABLE>

Additional abbreviations may also be used though not in the above list.

STOCK AND WARRANT EXCHANGE FORM

(To be executed by the Registered Owner to exercise the right to exchange this
Unit Certificate for that number of shares of Common Stock and Warrants
evidenced by this Unit Certificate.)

The undersigned hereby irrevocably tenders this Unit Certificate in
exchange for that number of shares of the Common Stock and Warrants of Xybernaut
Corporation evidenced by this Unit Certificate, pursuant to and in accordance
with the terms and conditions of this Unit Certificate and the Warrant
Agreement.
Please issue the Share and Warrant certificates for which this Unit
Certificate is being exchanged in accordance with the instructions given below.

Dated: _______________________, 19 __

Signature:
-------------------------

INSTRUCTIONS FOR REGISTRATION OF SHARE AND WARRANT CERTIFICATES

Name _______________________________________________________________________
(Print in Block Letters)

Address _______________________________________________________________________

ASSIGNMENT

FOR VALUE RECEIVED, ____________________________________ does hereby sell,
assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------

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

________________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)

______Units, each unit comprised of one share of Common Stock of Xybernaut
Corporation and one Warrant, as represented by the within Certificate, and does
hereby irrevocably constitute and appoint

________________________________________________________________________________
attorney to transfer the said Units on the books of Xybernaut Corporation with
full power of substitution in the premises.

Dated: _______________________, 19 __

Signature:
-------------------------

---------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.

Signature(s) Guaranteed:

- --------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.

REFERENCE IS MADE TO THE WARRANT AGREEMENT REFERRED TO ON THE FRONT SIDE HEREOF
AND THE PROVISIONS OF SUCH WARRANT AGREEMENT SHALL FOR ALL PURPOSES HAVE THE
SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS CERTIFICATE.

<PAGE> 1
EXHIBIT 4.5

[XYBERNAUT LOGO]

XYBERNAUT CORPORATION CERTIFICATE OF STOCK

NUMBER

XYB SHARES

INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS

XYBERNAUT CORPORATION CUSIP 984149 10 4

This Certifies that

is the owner of

fully paid and non-assessable shares of Common Stock, par value $.01
per share, of
XYBERNAUT CORPORATION

transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed.

This certificate is not valid unless countersigned by the Transfer Agent
and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.

Dated:

COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, N.J.) TRANSFER AGENT
AND REGISTRAR
BY

AUTHORIZED OFFICER

[SIG]
PRESIDENT SECRETARY
============================
XYBERNAUT CORPORATION
CORPORATE

SEAL
1996
DELAWARE
============================
<PAGE> 2

The Corporation will furnish without charge to each stockholder who so
requests a statement of the designations, powers, preferences and relative
participating, optional or other special rights of each class of stock or
series thereof of the Corporation and the qualifications, limitations or
restrictions of such preferences and/or rights. Such request may be made to
the Corporation or the Transfer Agent.

The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

Additional abbreviations may also be used though not in the above list.

For value received, the undersigned hereby sells, assigns and transfers unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------

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

- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)

________________________________________________________________________________

________________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
___________________________________________________________________ Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.

Dated _____________________

NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATSOEVER.

Signature(s) Guaranteed:

__________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.

<PAGE> 1
EXHIBIT 4.6

XYBERNAUT CORPORATION

NUMBER WARRANTS

XYW
REDEEMABLE COMMON STOCK PURCHASE WARRANT

CUSIP 984149 11 2

THIS CERTIFIES THAT, for value received

as registered owner (the "Registered Owner") of this Redeemable Common Stock
Purchase Warrant (the "Warrant"), is entitled at any time commencing on
(the "Separation Date"), and before 5:00 P.M. Eastern Time,
on (the "Expiration Date") which is the last day of the
three year period commencing on the date the Registration Statement on
Form SB-2 (No. 333-4156) is initially declared effective by the Securities and
Exchange Commission (the "Effective Date"), to subscribe for, purchase and
receive one fully paid and nonassessable share of common stock, $.01 par value
(a "Warrant Share"), of Xybernaut Corporation (the "Company"), for each one
Warrant specified above, at the price of $9.00 per share (the "Exercise
Price"), upon presentation and surrender of this Warrant, together with payment
of the Exercise Price for the Warrant Shares to be purchased, to the Company at
its principal office or to the Company's warrant agent at the warrant agent's
principal office in the manner described in the Warrant Agreement (the "Warrant
Agreement") among the Company, Continental Stock Transfer & Trust Company and
Royce Investment Group, Inc.; provided, however, that upon the occurrence of
any of the events specified in such Warrant Agreement, the rights granted by
this Warrant shall be adjusted as specified therein. This Certificate and the
Warrant represented hereby are issued pursuant to and are subject in all
respects to the terms and conditions set forth in the Warrant Agreement.

Upon exercise of this Warrant, the form of Election to Purchase
hereinafter provided must be duly executed, the Exercise Price must be paid in
lawful money of the United States of America in cash, certified check, bank
draft or wire transfer and the instructions for registration of the Warrant
Shares acquired by such exercise must be completed. If the rights represented
hereby shall not be exercised at or before 5:00 P.M., Eastern Time on the
Expiration Date, this Warrant shall become and be void without further force or
effect, and all rights represented hereby shall cease and expire.

Commencing eighteen months from the Effective Date, the Company may, at
its option, redeem this Warrant in whole for a redemption price of $.05 per
Warrant, on 30 days' prior written notice to the Registered Owner; provided,
however, the right to redeem this Warrant may be exercised by the Company only
in the event (i) the closing bid price for the Company's Common Stock equals or
exceeds $18.00 for 20 consecutive trading days ending five days immediately
prior to such notice, and (ii) the Company has a registration statement (or a
post-effective amendment to an existing registration statement) pertaining to
the Warrant Shares effective with the Securities and Exchange Commission, which
registration statement would enable the Registered Owner to exercise the
Warrant. In the event the Company exercises its right to redeem this Warrant,
the Expiration Date will be deemed to be, and this Warrant will be, exercisable
until the close of business on the date fixed for redemption in such notice.
If this Warrant has been called for redemption and is not exercised by such
time, this Warrant will cease to be exercisable and the Registered Owner hereof
will be entitled only to the redemption price.

Subject to the terms contained herein and in the Warrant Agreement,
this Warrant may be assigned or exercised by the Registered Owner in whole or
in part by execution by the Registered Owner of the form of Assignment or
Election to Purchase, as appropriate, appearing on the reverse side hereof. If
the assignment is in whole, the Company shall execute and deliver a new Warrant
or Warrants of like tenor to this Warrant to the appropriate assignee expressly
evidencing the right to purchase the aggregate number of Warrant Shares
purchasable hereunder; and if the assignment is in part, the Company shall
execute and deliver to the appropriate assignee a new Warrant or Warrants of
like tenor expressly evidencing the right to purchase the portion of the
aggregate number of Warrant Shares as shall be contemplated by any such
assignment, and shall concurrently execute and deliver to the Registered Owner
a new Warrant of like tenor evidencing the right to purchase the remaining
portion of Warrant Shares purchasable hereunder which has not been transferred
to the assignee. In the event this Warrant is exercised in part only, the
Company shall cause to be delivered to the Registered Owner a new Warrant of
like tenor evidencing the right of the Registered Owner to purchase the number
of Warrant Shares purchasable hereunder as to which this Warrant has not been
exercised. No fractional shares will be issued upon exercise of this Warrant.

In no event shall this Warrant (or the Warrant Shares issuable upon
full or partial exercise hereof) be offered or sold except in conformity with
all applicable state and federal securities laws.

The Company and the Warrant Agent may deem and treat the Registered
Owner hereof as the absolute owner of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone) for all
purposes and neither the Company nor the Warrant Agent shall be affected by any
notice to the contrary. The Registered Owner of this Warrant, as such, shall
not have any rights of a shareholder of the Company, either at law or at
equity, and the rights of the Registered Owner, as such, are limited to those
rights expressly provided in this Warrant Certificate and in the Warrant
Agreement. This certificate is not valid unless countersigned by the Warrant
Agent.

The Company has agreed to pay a fee of 6% of the Exercise Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
the Warrants represented hereby.

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers.

DATED:

COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(NEW YORK, NY) WARRANT AGENT

BY:

AUTHORIZED OFFICER

XYBERNAUT CORPORATION
DELAWARE CORPORATE SEAL 1996

[sig]

PRESIDENT SECRETARY

<PAGE> 2
XYBERNAUT CORPORATION

ELECTION TO PURCHASE

The undersigned hereby elects irrevocably to exercise the within Warrant and
to purchase __________________________________________________________ shares
of Common Stock of Xybernaut Corporation and hereby makes payment of $ _____
(at the rate of $ ______ per share) in payment of the Exercise Price pursuant
hereto. Please issue the shares as to which this Warrant is exercised in
accordance with the instructions given below.
The undersigned represents that the exercise of the within Warrant was
solicited by the member firm of the National Association of Securities Dealers,
Inc. ("NASD") listed below. If not solicited by an NASD member, the
undersigned has written "unsolicited" in the space below. If neither the name
of another member firm or "unsolicited" is entered, it will be assumed that
exercise was solicited by Royce Investment Group, Inc.

------------------------------------
(Insert Name of NASD Member or
"Unsolicited"

Dated: ______________________, 19 __

Signature:
--------------------------

INSTRUCTIONS FOR REGISTRATION OF SHARES

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF OWNER

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

Name __________________________________________________________________________
(Print in Block Letters)

Address _______________________________________________________________________

ASSIGNMENT

FOR VALUE RECEIVED,____________________________________does hereby sell, assign
and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

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

_____________________________________________________________________________
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)

the right to purchase _________ shares of Common Stock of Xybernaut
Corporation, evidenced by the within Warrant, and does hereby irrevocably
constitute and appoint

___________________________________________________________________ Attorney
to transfer such right on the books of Xybernaut Corporation, with full power of
substitution in the premises.

Dated: ______________________, 19 __

Signature:
--------------------------

Signature(s) Guaranteed:

<PAGE> 1
EXHIBIT 5.1

---------
BAKER
&
HOSTETLER
---------
COUNSELLORS AT LAW

- --------------------------------------------------------------------------------
Washington Square, Suite 1100 * 1050 Connecticut Avenue, N.W.
Washington, D.C. 20036-5304
(202) 861-1500 * Fax (202) 861-1783 * Telex 2357276
Writer's Direct Dial Number
(202) 861-1726

July 15, 1996

Xybernaut Corporation
12701 Fair Lakes Circle
Suite 550
Fairfax, VA 22033

Re: Registration of Units on Form SB-2; Registration No.
333-4156

Gentlemen:

We have acted as counsel to Xybernaut Corporation, a Delaware
Corporation ("Company"), in connection with the Company's initial public
offering of Units consisting of the Company's $.01 par value common stock (the
"Common Stock") and warrants entitling the holder to purchase one share of the
Common Stock (the "Warrants") as described in the above referenced registration
statement, as amended (the "Registration Statement"). In connection with the
registration and offering of these securities you have requested our opinion
with respect to the matters set forth below.

For purposes of rendering the opinion set forth herein, we have
examined copies of such documents and made such examination of law as we have
deemed relevant and necessary. We have assumed the genuineness of all
signatures, the authenticity of all documents

<PAGE> 2
Xybernaut Corporation
July 15, 1996
Page 2

submitted to us as originals, the conformity to originals of all documents
submitted to us as certified or photostatic copies, the authenticity of the
originals of such latter documents and that any certificate, telegram, public
certificate or other document on which we have relied that was given or dated
earlier than this opinion letter was accurate when given and has remained
accurate as far as relevant to the opinions contained herein from such earlier
date through and including the date hereof.

Based upon the foregoing, we are of the opinion that the Units, the
Common Stock and the Warrants which are the subject of the Registration
Statement, when sold as contemplated by the Registration Statement, will be
legally issued, fully paid and non-assessable.

We hereby consent to the filing of this Opinion as an Exhibit to
Amendment No. 2 to the Registration Statement and to the use of our name under
the heading LEGAL MATTERS in the Prospectus included in the Registration
Statement.

Sincerely,

/s/ BAKER & HOSTETLER

<PAGE> 1
EXHIBIT 10.3

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is made and entered into effective the 1st day of
January, 1996, by and between COMPUTER PRODUCTS & SERVICES, INC., a corporation
organized under the laws of the Commonwealth of Virginia (hereinafter referred
to as "EMPLOYER"), and EDWARD G. NEWMAN (hereinafter referred to as
"EMPLOYEE").

INTRODUCTION

A. EMPLOYER is engaged in the business of developing, manufacturing and
marketing computer products including hardware, software and services.

B. EMPLOYEE has served as the President and Chief Executive Officer of
EMPLOYER since 1992.

C. EMPLOYER believes it essential to obtain during the term of this
Agreement the ongoing services of EMPLOYEE and EMPLOYEE has agreed to
continue his employment services during the term of this Agreement for
the benefit of the EMPLOYER.

D. By entering into the Agreement hereinafter set forth, the parties
hereto desire to memorialize their full agreement with respect to the
terms and conditions of the management services to be provided by
EMPLOYEE.

AGREEMENT

NOW, THEREFORE, for good and lawful consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:

1. Employment. EMPLOYER hereby employs EMPLOYEE and EMPLOYEE hereby
accepts such employment, to serve as and in the capacity of President
and Chief Executive Officer of EMPLOYER upon and subject to the terms
and conditions set forth herein.

2. Term. The term of EMPLOYEE's engagement shall be for a period of three
(3) years from the date hereof commencing January 1, 1996 and
terminating December 31, 1998, unless sooner terminated in the manner
provided herein. The term of this Agreement and of the employment of
EMPLOYEE hereunder shall be automatically renewed for an additional
three (3) year period on terms no less favorable to EMPLOYEE than
those set forth in this Agreement, unless either party gives the other
party written notice of termination of this Agreement at least sixty
(60) days prior to the termination of the initial term of this
Agreement.

3. During the term of this Agreement, EMPLOYEE, shall devote his best
efforts, time, attention and energy to the business and affairs of
EMPLOYER. When he is acting as President and Chief Executive Officer,
EMPLOYEE shall perform all duties normally and properly incident to
the office or positions held by him and such further duties as may
from time to time be assigned to him by the Board of Directors of
EMPLOYER. During the term of this Agreement,

-1-
<PAGE> 2
EMPLOYEE shall not engage, directly or indirectly, in any activities
competitive with any business which is now or which hereafter may be
conducted by EMPLOYER. It is expressly agreed that EMPLOYEE's position
with Tech International of Virginia, Inc. does not violate the terms
of this Agreement.

4. Consideration.

a. The sum of One Hundred Fifty Thousand Dollars ($150,000) annually
commencing January 1, 1996 and continuing thereafter until January 1,
1997 when the annual base compensation will be increased to One
Hundred Ninety eight Thousand Dollars ($198,000) payable in accordance
with EMPLOYER's customary payroll practice in effect for its officers.
The annual base compensation hereunder shall be increased each year
during the term of this Agreement by at least the U.S. Consumer Price
Index plus two percent (2%).
b. As additional consideration for EMPLOYEE's services, EMPLOYER agrees
to pay EMPLOYEE an annual bonus in an amount to be determined by the
Compensation Committee of the EMPLOYER'S Board of Directors.

5. Expenses. EMPLOYER shall reimburse EMPLOYEE for all expenses
reasonably and necessarily incurred by him in the performance of his
duties hereunder consistent with EMPLOYER's policies covering expense
reimbursement for senior executives of the EMPLOYER, as such policies
may be modified from time to time.

6. Employment Benefits. During the term of this Agreement, EMPLOYEE shall
receive and be entitled to participate in all benefits customarily
offered to or conferred upon other executive officers and employees
of EMPLOYER also agrees to obtain a term life insurance policy on the
life of EMPLOYEE in the face amount of Two Million Dollars
($2,000,000) which is to be made payable to the beneficiary or
beneficiaries designated by EMPLOYEE. EMPLOYER further agrees to pay
all premiums on the policy during the term of the employment provided
herein.

7. Termination of Employment. Upon the occurrence of any of the following
events and expiration of the period, if any, specified, this Agreement
and the employment of EMPLOYEE hereunder shall terminate:

a. Death of EMPLOYEE.
b. By mutual agreement of EMPLOYER and EMPLOYEE.
c. The failure of EMPLOYEE to cure a material default under this
Agreement within thirty (30) days after receiving written notice of
default from EMPLOYER.
d. The "disability" of EMPLOYEE. The term "disability" as used herein,
shall mean the inability or failure of EMPLOYEE, by reason of any
medically demonstrable physical or mental condition, to perform his
duties hereunder. The disability of EMPLOYEE shall be deemed to have
occurred if; (1) the issuer of any disability income policy insuring
EMPLOYEE shall have determined that EMPLOYEE is disabled, whether
partially or totally, within the meaning of the provisions of such
policy; (2) EMPLOYEE shall be absent from work for a period of one
hundred twenty (120) consecutive business days all of which in the
aggregate shall be of more than one hundred fifty (150) business days
for any reason without the written consent of EMPLOYER, and (3)
EMPLOYER shall have received written opinions from two duly licensed
physicians that EMPLOYEE, by reason of any medically demonstrable
physical or mental condition, is unable to perform his duties
hereunder and will continue to be unable to perform his duties for the
foreseeable future or that the continued performance of his duties
will endanger his life.

- 2 -
<PAGE> 3

8. Change in Control. Should a change in control of the EMPLOYER take
place, this Agreement shall remain binding on EMPLOYER or its
successor in interest. A "Change in Control" of EMPLOYER for purposes
of this Agreement shall mean someone other than EMPLOYEE serving as
EMPLOYER's Chairman of the Board of Directors, President or Chief
Executive Officer. However, in the event of a change in control,
EMPLOYEE in his sole discretion, shall have the right to terminate
this Agreement and shall be entitled to severance pay equal to the
greater of the amount received by EMPLOYEE during the previous two (2)
calendar years of the term of this Agreement, pursuant to Section 4
above, or two (2) times the compensation due to EMPLOYEE pursuant to
Section 4, above, at the end of the then-current fiscal year.

9. Notices. All notices, requests and other communications hereunder
shall be in writing and shall be deemed to have been given only if
mailed, certified return receipt requested, or if sent by Federal
Express or other well recognized private courier ("Courier") or if
personally delivered to, or if sent by fax with the original thereof
sent by Courier to:

If to EMPLOYER at: Computer Products & Services, Inc.
12701 Fair Lakes Circle, Suite 550
Fairfax, VA 22033
Fax: (703) 631-7070

If to EMPLOYEE at: 9541 Fostern Lane
Manassas,VA 22111

All notices, requests and other communications shall be deemed
received on the date of acknowledgment or other evidence of actual
receipt in the ease of certified mail, Courier delivery or personal
delivery or, in the case of fax delivery, upon the date of fax receipt
provided that the original is delivered within two (2) business days.
Any party hereto may designate different or additional parties for the
receipt of notice, pursuant to notice given in accordance with the
foregoing.

10. Attorneys' Fees. In the event of default hereunder, the defaulting
party shall be liable to the non-defaulting party for all expenses
and costs incurred by the non-defaulting party in protecting or
enforcing its right hereunder including but not limited to reasonable
attorneys' fees and costs.

11. Subject Headings. The subject headings of the paragraphs of this
Agreement are included solely for the purposes of convenience and
reference only, and shall not be deemed to explain, modify, limit,
amplify or aid the meaning, construction or interpretation of any of
the provisions of this Agreement.

12. Amendments. No supplement, modification or amendment of this Agreement
shall be binding or enforceable unless executed in writing by the
parties hereto.

13. Entire Agreement and Waiver. This Agreement contains the entire
agreement between the parties hereto concerning the subject matter
hereof and supersedes all prior and contemporaneous agreements,
arrangements, negotiations and understandings between the parties
hereto relating to the subject matter hereof. There are no other
understandings, statements, promises or inducements, oral or
otherwise, contrary to the terms of this Agreement. No
representations, warranties, covenants or conditions, express or
implied, whether by statute or otherwise, other than as set forth
herein, have been made by any party

- 3 -
<PAGE> 4
hereto. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be, or shall constitute, a waiver of any
other provision hereof, whether or not similar, nor shall such waiver
constitute a continuing waiver, and no waiver shall be binding unless
executed in writing by the party making the waiver.

14. Parties In Interest. Nothing in this Agreement, whether express or
implied, is intended to confer upon any person other than the parties
hereto and their respective heirs, representatives, successors and
permitted assigns, any rights or remedies under or by reason of this
Agreement.

15. Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
representatives, successors and permitted assigns.

16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

17. Applicable Law. This Agreement shall be governed by and construed and
enforced in accordance with and shall be subject to the laws of the
Commonwealth of Virginia.

18. Further Documents. Each party agrees to execute and deliver, at any
time and from time to time, upon the request of the other parry, such
further instruments or documents as may be necessary or appropriate to
carry out the provisions contained herein, and to take such other
action as the party may reasonably request to effectuate the
provisions of this Agreement.

19. Severability. Should any part, term or provision of this Agreement be
declared by a court of competent jurisdiction to be invalid, void or
unenforceable at law or in equity, it is the express intention of the
parties hereto that such part, term or provision shall be construed in
such manner as to provide for the enforcement thereof to the maximum
extent and in the broadest scope permitted under law and all remaining
parts, terms and provisions hereof shall remain in full force and
effect and shall in no way be invalidated, impaired or affected
thereby.

20. Interpretations and Definitions. The parties agree that each party and
its counsel have reviewed and revised this Agreement and that any rule
of construction to the effect that ambiguities are to be resolved
against the drafting party shall not apply in the interpretation of
this agreement

- 4 -
<PAGE> 5
21. Miscellaneous. Time is hereby declared to be of the essence of each
provision of this agreement. This Agreement sets forth the entire
understanding between the parties hereto with respect to all matters
referred to herein and the provisions hereof may not be changed,
modified or supplemented either wholly or in part except by written
instrument signed by each of the parties hereto.

IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement
as of the date set forth at the beginning.

EMPLOYER: COMPUTER PRODUCTS & SERVICES, INC.,
A VIRGINIA CORPORATION

By:
----------------------------------------

EMPLOYEE:
------------------------------------------
EDWARD G. NEWMAN

- 5 -

<PAGE> 1
EXHIBIT 10.4

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT is made and entered into effective the 1st day of
January, 1996, by and between COMPUTER PRODUCTS & SERVICES, INC., a corporation
organized under the laws of the Commonwealth of Virginia (hereinafter referred
to as EMPLOYER), and JOHN F. MOYNAHAN (hereinafter referred to as EMPLOYEE).

INTRODUCTION

A. EMPLOYER is engaged in the business of developing, manufacturing and
marketing computer products including hardware, software and services.

B. EMPLOYEE has been serving as the Vice President, Chief Financial
Officer and Treasurer of EMPLOYER since October 1, 1994.

AGREEMENT

NOW, THEREFORE, for good and lawful consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows.

1. Employment. EMPLOYER hereby employs EMPLOYEE and EMPLOYEE hereby
accepts such employment, to serve as and in the capacity of Vice
President of EMPLOYER upon and subject to the terms and conditions set
forth herein.

2. Term and Termination. The term of EMPLOYEE'S engagement shall be for a
period of three (3) years from January 1, 1996 and terminating
December 31, 1998, unless sooner terminated in the manner provided
herein. After the initial three-year period, the Agreement shall
automatically renew for an additional three-year period on terms no
less favorable to EMPLOYEE than those set out in this Agreement,
unless either party gives the other party written notice of
termination of this Agreement at least sixty (60) days prior to the
termination of the original term of this Agreement. This Agreement may
be terminated by (a) mutual consent, (b) the material breach of this
Agreement by EMPLOYEE that remains uncured more than thirty (30) days
after the receipt of notice from EMPLOYER of such breach, or (c) the
commission by EMPLOYEE of fraud, misappropriation, embezzlement or the
like.

-1-
<PAGE> 2
3. Duties; During the term of this Agreement, EMPLOYEE shall devote his
best efforts, time, attention and energy to the business and affairs
of EMPLOYER. When he is acting as Vice President, EMPLOYEE shall
perform all duties normally and properly incident to the office or
positions held by him and such further duties as may from time to time
be assigned to him by the Board of Directors of EMPLOYER. During the
term of this Agreement, EMPLOYEE shall not engage, directly or
indirectly, in any activities competitive with any business which is
now or which hereafter may be conducted by EMPLOYER. EMPLOYEE shall
agree to serve on EMPLOYER's Board of Directors subject to the vote
and continued confirmation of the shareholders of EMPLOYER. EMPLOYEE
also agrees to execute and be bound by EMPLOYER's Confidentiality and
Nondisclosure Agreements.

4. Consideration
a. As consideration and compensation for EMPLOYEE's services to be
performed hereunder, EMPLOYER shall pay to EMPLOYEE during each year
of the term of this Agreement an annual base compensation in the sum
of One Hundred Forty Thousand Dollars ($140,000) payable in equal
consecutive semi-monthly payments commencing January 1, 1996 and
continuing thereafter on the first and fifteenth day of each
successive month during the term of this Agreement. This base
compensation will be increased to no less than One Hundred Fifty
Thousand Dollars ($150,000) on January 1, 1997, and thereafter on each
anniversary of this Agreement in an amount no less than the increase
in the U.S. Consumer Price Index for that year.
b. As additional consideration for EMPLOYEE's services, EMPLOYER agrees
to pay EMPLOYEE an annual bonus as established by the Compensation
Committee of the EMPLOYER's Board of Directors based on EMPLOYEE's
performance and the financial performance of EMPLOYER, as determined
by the sole discretion of EMPLOYER's Board of Directors.

5. Expenses. EMPLOYER shall reimburse EMPLOYEE for all expenses
reasonably and necessarily incurred by him in the performance of his
duties hereunder, consistent with EMPLOYER's policies covering expense
reimbursement for senior executives of the EMPLOYER, as such policies
may be modified from time to time.

6. Employment Benefits. During the term of this Agreement, EMPLOYEE shall
receive and be entitled to participate in all benefits customarily
offered to or conferred upon other executive officers and employees of
EMPLOYER. EMPLOYEE will be provided term life insurance coverage equal
to five (5) times EMPLOYEE's then current annual salary based on
typical conditions for the issuance of such policies.

7. Change in Control. A "change in control" of EMPLOYER for purposes of
this Agreement shall mean someone other than EDWARD NEWMAN serving as
EMPLOYER's Chairman of the Board of Directors, President and Chief
Executive Officer. However, in the event of a change of control,
EMPLOYEE, in his sole discretion, shall have the right to terminate
this Agreement and shall be entitled to severance pay equal to the
greater of the amount of compensation received by EMPLOYEE during the
previous two (2) calendar years of the term of this Agreement,
pursuant to Section 4, above, or two (2) times the amount of
compensation due to EMPLOYEE pursuant to Section 4, above, at the end
of the then current fiscal year. All unvested stock options held by
EMPLOYEE at the time of such change in control shall vest immediately.

- 2 -
<PAGE> 3
8. Notices. All notices, requests and other communications hereunder
shall be in writing and shall be deemed to have been given only if
mailed, certified return receipt requested, or if sent by Federal
Express or other well recognized private courier ("Courier") or if
personally delivered to, or if sent by fax with the original thereof
sent by Courier to:

If to EMPLOYER: Computer Products & Services, Inc.
12701 Fair Lakes Circle, Suite 550
Fairfax, VA 22033
Fax: (703) 631-7070

If to EMPLOYEE: John F. Moynahan
12302 Blair Ridge Road
Fairfax, VA 22033
Fax: (703)716-1074

All notices, requests and other communications shall be deemed
received on the date of acknowledgment or other evidence of actual
receipt in the case of certified mail, Courier delivery or personal
delivery or, in the case of fax delivery, upon the date of fax receipt
provided that the original is delivered within two (2) business days.
Any party hereto may designate different or additional parties for the
receipt of notice, pursuant to notice given in accordance with the
foregoing.

9, Attorneys' Fees. In the event of default hereunder, the defaulting
party shall be liable to the nondefaulting party for all expenses and
costs incurred by the non-defaulting party in protecting or enforcing
its right hereunder including but not limited to reasonable attorneys'
fees and costs.

10. Subject Headings. The subject headings of the paragraphs of this
Agreement are included solely for the purposes of convenience and
reference only, and shall not be deemed to explain, modify, limit,
amplify or aid the meaning, construction or interpretation of any of
the provisions of this Agreement.

11. Amendments. No supplement, modification or amendment of this Agreement
shall be binding or enforceable unless executed in writing by the
parties hereto.

12. Entire Agreement and Waiver. This Agreement contains the entire
agreement between the parties hereto concerning the subject matter
hereof and supersedes all prior and contemporaneous agreements,
arrangements, negotiations and understandings between the parties
hereto relating to the subject matter hereof There are no other
understandings, statements, promises or inducements, oral or
otherwise, contrary to the terms of this Agreement. No
representations, warranties, covenants or conditions, express or
implied, whether by statute or otherwise, other than as set forth
herein, have been made by any party hereto. No waiver of any term,
provision or condition of this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be, or
shall constitute, a waiver of any other provision hereof, whether or
not similar, nor shall such waiver constitute a continuing waiver, and
no waiver shall be binding unless executed in writing by the party
making the waiver.

- 3 -
<PAGE> 4
13. Parties In Interest. Nothing in this Agreement, whether express or
implied, is intended to confer upon any person other than the parties
hereto and their respective heirs, representatives, successors and
permitted assigns, any rights or remedies under or by reason of this
Agreement.

14. Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
representatives, successors and permitted assigns.

15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.

16. Applicable Law. This Agreement shall be governed by and construed and
enforced in accordance with and shall be subject to the laws of the
Commonwealth of Virginia.

17. Further Documents. Each party agrees to execute and deliver, at any
time and from time to time, upon the request of the other party, such
further instruments or documents as may be necessary or appropriate to
carry out the provisions contained herein, and to take such other
action as the party may reasonably request to effectuate the
provisions of this Agreement.

18. Severability. Should any part, term or provision of this Agreement be
declared by a court of competent jurisdiction to be invalid, void or
unenforceable at law or in equity, it is the express intention of the
parties hereto that such part, term or provision shall be construed in
such manner as to provide for the enforcement thereof to the maximum
extent and in the broadest scope permitted under law and all remaining
parts, terms and provisions hereof shall remain in full force and
effect and shall in no way be invalidated, impaired or affected
thereby.

19. Interpretations and Definitions. The parties agree that each party and
its counsel have reviewed and

- 4 -
<PAGE> 5
revised this Agreement and that any rule of construction to the effect
that ambiguities are to be resolved against the drafting party shall
not apply in the interpretation of this Agreement.

20. Miscellaneous. Time is hereby declared to be of the essence of each
provision of this Agreement. This Agreement sets forth the entire
understanding between the parties hereto with respect to all matters
referred to herein and the provisions hereof may not be changed,
modified or supplemented either wholly or in part except by written
instrument signed by each of the parties hereto.

IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement
as of the date set forth at the beginning hereof.

EMPLOYER: COMPUTER PRODUCTS & SERVICES, INC.,
A VIRGINIA CORPORATION

By:
----------------------------------------

EMPLOYEE:
------------------------------------------
JOHN F. MOYNAHAN

- 5 -

<PAGE> 1
[CPSI LOGO]

COMPUTER PRODUCTS & SERVICES, INC.

CONSULTANT/DIRECTOR AGREEMENT

This agreement made on May 5, 1995 between Andrew Heller
("Consultant/Director"), with offices at 4505 Henning Drive, Austin, Texas
78738 and Computer Products & Services, Inc. (CPSI), a company with offices at
12701 Fair Lakes Circle, Fairfax, Virginia 22033 ("Company").

WHEREAS the Consultant/Director possesses relevant knowledge and expertise in
the business areas of technology, management, marketing and development of
computing peripheral, semiconductor and other information systems related
products and services; and

WHEREAS CPSI wishes to avail itself of Consultant/Director's talents, advice,
and abilities during the term of this agreement as an independent consultant
and/or director, and Consultant/Director is willing to offer such services upon
the terms and conditions set forth herein;

NOW THEREFORE in consideration of the promises contained herein, and intending
to be legally bound, the parties hereto agree as follows:

1. ENGAGEMENT AND DUTIES. During the term hereof, CPSI hereby engages
and Consultant hereby agrees to work as an Independent Consultant to CPSI.
Consultant shall work as a Consultant to the Company in strategic planning,
business management, strategic product development, and market and financial
introductions for CPSI's business. The Consultant shall generally endeavor to
improve the business of the Company during the term of this Agreement and in
particular Consultant will make contacts for the Company and otherwise assist
the Company in creating relationships and securing business with potential
customers and consortium partners.

The Company understands and anticipates that Consultant will work for
other firms in the computer field. Consultant agrees not to perform services
that are in direct competition with the Company, or with the Company's major
focus, with other persons, firms, or corporations without notification to and
approval, in writing, from the Company prior to entering into such activity.

2. TERM. The term of this Agreement shall commence on May 5, 1995 and
shall terminate 36 months thereafter unless terminated earlier, in writing, by
either Consultant or Company. Any such termination in writing shall provide no
less than 60 days notice to the other party to this Agreement unless such
termination is for cause.

12701 FAIR LAKES CIRCLE - FAIRFAX, VIRGINIA 22033 - (703) 631-6925 -
FAX (703) 631-6734
<PAGE> 2
3. COMPENSATION. For all services rendered under this agreement,
Consultant is to be paid at a rate of $1 per annum.

Consultant agrees that his relationship with CPSI shall be that of a
Consultant/Director and Company shall not withhold taxes or Social Security
from any compensation paid hereunder.

4. REIMBURSEMENT OF EXPENSES. In addition to the compensation provided
for herein, Consultant shall be entitled to be reimbursed for all reasonable
and necessary expenses authorized, in writing, by an officer of CPSI and
incurred in connection with and while performing duties under this Agreement.
Consultant will expect reimbursement of the lowest generally available airfare
(economy or coach) even though he may chose a more expensive class of travel.
In the event of travel that can be cost shared with other meetings, Consultant
will, whenever possible, combine the travel with other business and expect
reimbursement for only a proportional part of the travel.

5. MISCELLANEOUS. Consultant agrees that he will not use or disclose to
the benefit of CPSI ("Company") any proprietary information owned by a third
party.

6. MEMBERSHIP ON THE ADVISORY BOARD OF DIRECTORS. If Consultant so
desires and the Founders agree it is in the best interest of the Company,
Consultant will serve on the Advisory Board of Directors for so long as it is
mutually agreeable. For serving on the Advisory Board of Directors, Consultant
would receive stock and/or stock options equal to that given to other Advisory
Directors for their services. (This would be in addition to the "compensation"
already enumerated herein).
<PAGE> 3
7. CONFIDENTIALITY. Except as required by the Company, Consultant shall
never directly or indirectly use, disseminate, publish articles concerning, or
otherwise disclose to anyone not confidentially bound to the Company, any
Confidential Information without first obtaining the prior written consent of
the Company. "Confidential Information" means information disclosed to or
known by the Consultant as a consequence of said Consultant/Director Agreement
and which is related to research, development, trade secrets, know-how,
inventions, technical data, manufacturing techniques, purchasing, accounting,
engineering, marketing, merchandising and/or selling of Company products or
processes; and also includes information entrusted to Company by third parties
under restrictions relating to Confidentiality which are disclosed to, or
become known by, Consultant.

8. PROVISIONS. If any of this Agreement is declared or found to be
illegal, unenforceable, or void, then both parties shall be relieved of all
obligations arising under such provision, but only to the extent that such
provision is illegal, unenforceable, or void. If the remainder of this
Agreement shall not be affected by such declaration or finding and is capable
of substantial performance, then each provision not so affected shall be
enforced to the extent permitted by law.

9. AMENDMENT. No amendment of this Agreement or waiver of any of its
provisions shall be effective in the absence of an express, written Agreement,
signed by both parties, as to the amendment or waiver made.

10. NOTICE. Wherever under this Agreement one party is required to give
notice to the other, such notice shall be deemed given when delivered by hand,
by registered mail (postage prepaid and return receipt requested), or by
facsimile (receipt of which is confirmed by facsimile).

This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Virginia. Any claim arising out of, or in
connection with, this Agreement shall be brought in the Commonwealth of
Virginia and Consultant/Director and Company hereby submit to the jurisdiction
of the courts of the Commonwealth of Virginia.
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have set their hands.

/s/ EDWARD NEWMAN
- -------------------------------
Edward Newman, President, CPSI

Date May 5, 1995
-----------

/s/ ANDREW R. HELLER
- ----------------------------
Andrew R. Heller, Consultant

Date May 18, 1995
------------

<PAGE> 1
EXHIBIT 10.20

CONSULTING AGREEMENT

THIS CONSULTING AGREEMENT is made and entered into effective the 1st
day of January, 1996, by and between COMPUTER PRODUCTS & SERVICES, INC., a
corporation organized under the laws of the Commonwealth of Virginia
hereinafter referred to as "CLIENT"), and STEVEN A. NEWMAN hereinafter referred
to as "CONSULTANT").

INTRODUCTION

A. CLIENT is engaged in the business of developing, manufacturing and
marketing computer products including hardware, software and services.

B. CLIENT believes it essential to obtain during the term of this
Agreement the ongoing services of CONSULTANT and CONSULTANT has agreed
to provide his services during the term of this Agreement for the
benefit of the CLIENT.

C. By entering into the Agreement hereinafter set forth, the parties
hereto desire to memorialize their full agreement with respect to the
terms and conditions of the services to be provided by CONSULTANT.

AGREEMENT

NOW, THEREFORE, for good and lawful consideration, the receipt of which is
hereby acknowledged, the parties hereto agree as follows:

1. Engagement and Duties. CLIENT hereby engages CONSULTANT and CONSULTANT
hereby accepts such engagement, to provide consulting, negotiating and
advisory services including, but not limited to identification and
contracting of strategic partners, identification and hiring of
employees, financings, and general management, upon and subject to the
terms and conditions set forth herein. CONSULTANT shall perform all
duties as may, from time to time, be assigned to him by the Board of
Directors of CLIENT. During the term of this Agreement, CONSULTANT
shall not engage directly or indirectly in any activities comparative
with any business which is now or which hereafter may be conducted by
CLIENT. It is agreed that CONSULTANT's position with Tech
International Virginia, Inc. does not violate the terms of this
Agreement.

2. Term. The term of CONSULTANT's engagement shall be for a period of
three (3) years commencing January 1, 1996 and terminating December
31, 1998. The term of this Agreement and of the engagement of
CONSULTANT hereunder shall be automatically renewed for an additional
three (3) year period on terms no less favorable to CONSULTANT than
those set forth in this Agreement, unless either party gives the other
party written notice of termination of this Agreement at least sixty
(60) days prior to the termination of each term of this Agreement. In
the event that CONSULTANT should become an employee of CLIENT, the
term of employment shall be no less than the remaining term of this
Agreement.

3. Consideration.
a. As consideration and compensation for CONSULTANT's services to
be performed hereunder, CLIENT shall pay to CONSULTANT a fee for
services rendered of One Thousand Dollars ($1,000) per day or Five
Thousand Dollars ($5,000) per week for services performed pursuant to
a statement of work authorized by the President or Board of Directors
of CLIENT.

4. Expenses. During the term of this Agreement, CLIENT agrees to
reimburse CONSULTANT for reasonable and necessary expenses incurred by
CONSULTANT in the performance of his duties under this Agreement,

5. Change in Control. Should a change in control of CLIENT take place,
this Agreement shall remain binding on CLIENT or its successor in
interest. A "Change in Control" of CLIENT for purposes of this

- 1 -
<PAGE> 2
Agreement shall mean someone other than EDWARD NEWMAN serving as
CLIENT's Chairman of the Board of Directors, President or Chief
Executive Officer, However, in the event of a change in control,
CONSULTANT, in his sole discretion, shall have the right to terminate
this Agreement and shall be entitled to severance pay equal to the
greater of the amount received by CONSULTANT during the previous two
(2) calendar years of the term of this Agreement, pursuant to Section
3, above, or two (2) times the amount of compensation due CONSULTANT
pursuant to Section 3, above, at the end of the then current fiscal
year. In the event that CONSULTANT should become an employee of
CLIENT, this section shall continue in full force and effect.

6. Notices All notices, requests and other communications hereunder shall
be in writing and shall be deemed to have been given only if mailed,
certified return receipt requested, or if sent by Federal Express or
other well recognized private courier ("Courier") or if personally
delivered to, or if sent by fax with the original thereof sent by
Courier to:

If to the CLIENT: Computer Products & Services, Inc.
12701 Fair Lakes Circle, Ste 550
Fairfax, VA 22033
Fax (703) 631-7070
If to CONSULTANT: Steven A. Newman
303 Avenida Cerritos
Newport Beach Ca 92660
Fax (714) 760-3865

7. Attorneys' Fees. In the event of default hereunder, the defaulting
party shall be liable to the non-defaulting party for all expenses and
costs incurred by the non-defaulting party in protecting or enforcing
its right hereunder including but not limited to reasonable attorneys'
fees and costs.

8. Subject Headings. The subject headings of the paragraphs of this
Agreement are included solely for the purposes of convenience and
reference only, and shall not be deemed to explain, modify, limit,
amplify or aid the meaning, construction or interpretation of any of
the provisions of this Agreement.

9. Amendments. No supplement, modification or amendment of this Agreement
shall be binding or enforceable unless executed in writing by the
parties hereto.

10. Entire Agreement and Waiver. This Agreement contains the entire
agreement between the parties hereto concerning the subject matter
hereof and supersedes all prior and contemporaneous agreements,
arrangements, negotiations and understandings between the parties
hereto relating to the subject matter hereof. There are no other
understandings, statements, promises or inducements, oral or
otherwise, contrary to the terms of this Agreement. No
representations, warranties, covenants or conditions, express or
implied, whether by statute or otherwise, other than as set forth
herein, have been made by any party hereto. No waiver of any term,
provision or condition of this Agreement, whether by conduct or
otherwise, in any one or more instances, shall be deemed to be, or
shall constitute, a waiver of any other

- 2 -
<PAGE> 3
provision hereof, whether or not similar, nor shall such waiver
constitute a continuing waiver, and no waiver shall be binding unless
executed in writing by the party making the waiver.

11. Miscellaneous. Nothing in this Agreement, whether express or implied,
is intended to confer upon any person other than the parties hereto
and their respective heirs, representatives, successors and permitted
assigns, any rights or remedies under or by reason of this Agreement.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, representatives,
successors and permitted assigns. This Agreement may be executed in
one or more counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same
instrument. This Agreement shall be governed by and construed and
enforced in accordance with and shall be subject to the laws of the
Commonwealth of Virginia. Each party agrees to execute and deliver, at
any time and from time to time, upon the request of the other party,
such further instruments or documents as may be necessary or
appropriate to carry out the provisions contained herein, and to take
such other action as the party may reasonably request to effectuate
the provisions of this Agreement. Should any part, term or provision
of this Agreement be declared by a court of competent jurisdiction to
be invalid, void or unenforceable at law or in equity, it is the
express intention of the parties hereto that such part, term or
provision shall be construed in such manner as to provide for the
enforcement thereof to the maximum extent and in the broadest scope
permitted under law and all remaining parts, terms and provisions
hereof shall remain in full force and effect and shall in no way be
invalidated, impaired or affected thereby. The parties agree that each
party and its counsel have reviewed and revised this Agreement and
that any rule of construction to the effect that ambiguities are to be
resolved against the drafting party shall not apply in the
interpretation of this Agreement. Time is hereby declared to be of the
essence of each provision of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Consulting Agreement
as of the date set forth at the beginning.

CLIENT: COMPUTER PRODUCTS & SERVICES, INC.,
A VIRGINIA CORPORATION

By:
----------------------------------------
CONSULTANT:
-------------------------------------------
STEVEN A. NEWMAN

- 3 -

<PAGE> 1
EXHIBIT 10.22

BUSINESS LOAN AGREEMENT

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C>
$50,000.00 07-09-1996 09-09-1996 19 [sig]
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C>
BORROWER: XYBERNAUT CORPORATION (TIN: 541799851) LENDER: FAIRFAX BANK & TRUST COMPANY
12701 FAIR LAKES CIRCLE, SUITE 550 FAIRFAX OFFICE
FAIRFAX, VA 22033 4117 CHAIN BRIDGE ROAD
P.O. BOX 1087
FAIRFAX, VA 22030
</TABLE>

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

THIS BUSINESS LOAN AGREEMENT BETWEEN XYBERNAUT CORPORATION ("BORROWER") AND
FAIRFAX BANK & TRUST COMPANY ("LENDER") IS MADE ON THE FOLLOWING TERMS AND
CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS FROM LENDER OR HAS
APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER FINANCIAL
ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT OR
SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS
FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE
"LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT:
(a) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON
BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS
AGREEMENT; (b) THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT
ALL TIMES SHALL BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (c)
ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND
CONDITIONS OF THIS AGREEMENT.

TERM. This Agreement shall be effective as of JULY 9, 1996, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.

DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.

AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Business Loan Agreement from time to time.

BORROWER. The word "Borrower" means Xybernaut Corporation and its
successors and assigns. The word "Borrower" also includes, as
applicable, all subsidiaries and affiliates of Borrower as provided
below in the paragraph titled "Subsidiaries and Affiliates."

CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.

COLLATERAL. The word "Collateral" means and includes without
limitation all property and assets granted as collateral security for
a Loan, whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien or
title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise.

ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.

EVENT OF DEFAULT. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "EVENTS OF DEFAULT."

GRANTOR. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, and their personal representatives,
successors and assigns.

GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness and their personal representatives,
successors and assigns.

INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, including all principal, interest and other
fees, costs and charges, if any, together with all other present and
future liabilities and obligations of Borrower, or any one or more of
them, to Lender, whether direct or indirect, matured or unmatured, and
whether absolute or contingent, joint, several, or joint and several,
and no matter how the same may be evidenced or shall arise.

LENDER. The word "Lender" means Fairfax Bank & Trust Company, its
successors and assigns.

LOAN. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender
to Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.

NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute, replacement
or refinancing note or notes therefor.

PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and
security interests securing Indebtedness owed by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet
due or being contested in good faith; (c) liens of materialmen,
mechanics, warehousemen, or carriers, or other like liens arising in
the ordinary course of business and securing obligations which are not
yet delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "Indebtedness and Liens" (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those
liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the net
value of Borrower's assets.

RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.

SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.

SECURITY INTEREST. The words "Security Interest" mean and include
without limitation any and all types of liens and encumbrances,
whether created by law, contract, or otherwise.

SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under
<PAGE> 2
07-09-1996 BUSINESS LOAN AGREEMENT PAGE 2
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this Agreement shall be subject to the fulfillment to Lender's satisfaction of
all of the conditions set forth in this Agreement and in the Related Documents.

LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b)
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests; (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel.

BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and
the Related Documents, and such other authorizations and other
documents and instruments as Lender or its counsel, in their sole
discretion, may require.

PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.

REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and
correct.

NO EVENT OF DEFAULT. There shall not exist at the time of any advance
a condition which would constitute an Event of Default under this
Agreement.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:

ORGANIZATION. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Delaware and is validly existing and in good standing in all states in
which Borrower is doing business. Borrower has the full power and
authority to own its properties and to transact the businesses in
which it is presently engaged or presently proposes to engage.
Borrower also is duly qualified as a foreign corporation and is in
good standing in all states in which the failure to so qualify would
have a material adverse effect on its businesses or financial
condition.

AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly
authorized by all necessary action by Borrower; do not require the
consent or approval of any other person, regulatory authority or
governmental body; and do not conflict with, result in a violation of,
or constitute a default under (a) any provision of its articles of
incorporation or organization, or bylaws, or any agreement or other
instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.

FINANCIAL INFORMATION. Each financial statement of Borrower supplied
to Lender truly and completely disclosed Borrower's financial
condition as of the date of the statement, and there has been no
material adverse change in Borrower's financial condition subsequent
to the date of the most recent financial statement supplied to Lender.
Borrower has no material contingent obligations except as disclosed in
such financial statements.

LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective
terms.

PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled
in Borrower's legal name, and Borrower has not used, or filed a
financing statement under, any other name for at least the last five
(5) years.

HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used
in this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49
U.S.C. Section 1801, et seq., the Resource Conservation and Recovery
Act, 42 U.S.C. Section 6901, et seq., or other applicable state or
Federal laws, rules, or regulations adopted pursuant to any of the
foregoing. Except as disclosed to and acknowledged by Lender in
writing, Borrower represents and warrants that: (a) During the
period of Borrower's ownership of the properties, there has been no
use, generation, manufacture, storage, treatment, disposal, release, or
threatened release of any hazardous waste or substance by any
person on, under, about or from any of the properties. (b) Borrower
has no knowledge of, or reason to believe that there has been (i) any
use, generation, manufacture, storage, treatment, disposal, release,
or threatened release of any hazardous waste or substance on, under,
about of from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or
claims of any kind by any person relating to such matters. (c) Neither
Borrower nor any tenant, contractor, agent or other authorized user of
any of the properties shall use, generate, manufacture, store, treat,
dispose of, or release any hazardous waste or substance on, under,
about or from any of the properties; and any such activity shall be
conducted in compliance with all applicable federal, state, and local
laws, regulations, and ordinances, including without limitation those
laws, regulations and ordinances described above. Borrower authorizes
Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense
and for Lender's purposes only and shall not be construed to create
any responsibility or liability on the part of Lender to Borrower or
to any other person. The representations and warranties contained
herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower
hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Borrower becomes liable for
cleanup under or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may
directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use,
generation, manufacture, storage, disposal, release or threatened
release occurring prior to Borrower's ownership or interest in the
properties, whether or not the same was or should have been known to
Borrower. The provisions of this section of the Agreement, including
the obligation to indemnify, shall survive the payment of the
Indebtedness and the termination or expiration of this Agreement and
shall not be affected by Lender's acquisition of any interest in any
of the properties, whether by foreclosure or otherwise.

LITIGATION AND CLAIMS. No litigation, claim, investigation,
administrative proceeding or similar action (including those for
unpaid taxes) against Borrower is pending or threatened, and no other
event has occurred which may materially adversely affect Borrower's
financial condition or properties, other than litigation, claims, or
other events, if any, that have been disclosed to and acknowledged by
Lender in writing.

TAXES. To the best of Borrower's knowledge, all tax returns and
reports of Borrower that are or were required to be filed, have been
filed, and all taxes, assessments and other governmental charges have
been paid in full, except those presently being or to be contested
by Borrower in good faith in the ordinary course of business and for
which adequate reserves have been provided.

LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.

BINDING EFFECT. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all
<PAGE> 3
07-09-1996 BUSINESS LOAN AGREEMENT PAGE 3
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of the Related Documents are binding upon Borrower as well as upon
Borrower's successors, representatives and assigns, and are legally
enforceable in accordance with their respective terms.

COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.

EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which
Borrower may have any liability complies in all material respects with
all applicable requirements of law and regulations, and (i) no
Reportable Event nor Prohibited Transaction (as defined in ERISA) has
occurred with respect to any such plan, (ii) Borrower has not
withdrawn from any such plan or initiated steps to do so, (iii) no
steps have been taken to terminate any such plan, and (iv) there are
no unfunded liabilities other than those previously disclosed to
Lender in writing.

LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 12701 Fair Lakes Circle,
Suite 550, Fairfax, VA 22033. Unless Borrower has designated otherwise
in writing this location is also the office or offices where Borrower
keeps its records concerning the Collateral.

INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.

SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in making the above
referenced Loan to Borrower. Borrower further agrees that the
foregoing representations and warranties shall be continuing in nature
and shall remain in full force and effect until such time as
Borrower's Indebtedness shall be paid in full, or until this Agreement
shall be terminated in the manner provided above, whichever is the
last to occur.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:

LITIGATION. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all
existing and all threatened litigation, claims, investigations,
administrative proceedings or similar actions affecting Borrower or
any Guarantor which could materially affect the financial condition of
Borrower or the financial condition of any Guarantor.

FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.

ADDITIONAL INFORMATION. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.

INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may from time to time
reasonably require with respect to Borrower's properties and
operations, in form, amounts, coverages and with insurance companies
acceptable to Lender. Borrower, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in
form satisfactory to Lender, including stipulations that coverages
will not be cancelled or diminished without at least ten (10) days'
prior written notice to Lender. Each insurance policy also shall
include an endorsement providing that coverage in favor of Lender will
not be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets
in which Lender holds or is offered a security interest for the Loans,
Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.

INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value
or replacement cost of any Collateral. The cost of such appraisal
shall be paid by Borrower.

OTHER AGREEMENTS. Comply with all terms and conditions of all
other agreements, whether now or hereafter existing, between Borrower
and any other party and notify Lender immediately in writing of any
default in connection with any other such agreements.

LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.

TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind of nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such
assessment, tax, charge, levy, lien or claim so long as (a) the
legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books
adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental
official to deliver to Lender at any time a written statement of any
assessments, taxes, charges, levies, liens and claims against
Borrower's properties, income, or profits.

PERFORMANCE. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in
a timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
this Agreement or under any of the Related Documents.

OPERATIONS. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender
of any change in executive and management personnel; conduct its
business affairs in a reasonable and prudent manner and in compliance
with all applicable federal, state and municipal laws, ordinances,
rules and regulations respecting its properties, charters, businesses
and operations, including without limitation, compliance with the
Americans With Disabilities Act and with all minimum funding standards
and other requirements of ERISA and other laws applicable to
Borrower's employee benefit plans.

INSPECTION. Permit employees or agents of Lender at any reasonable
time to inspect any and all Collateral for the Loan or Loans
and Borrower's other properties and to examine or audit
Borrower's books, accounts, and records and to make copies and
memoranda of Borrower's books, accounts, and records. If Borrower now
or at any time hereafter maintains any records (including without
limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third
party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and
to provide Lender with copies of any records it may request, all at
Borrower's expense.
<PAGE> 4
07-09-1996 BUSINESS LOAN AGREEMENT PAGE 4
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COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement
are true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of
Default exists under this Agreement.

ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statutes, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or
omission on its part or on the part of any third party, on property
owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental
activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to Lender promptly and in any event within
thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with
any environmental activity whether or not there is damage to the
environment and/or other natural resources.

ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
the Loans and to perfect all Security Interests.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:

INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, sell, transfer, mortgage, assign, pledge, lease, grant a
security interest in, or encumber any of Borrower's assets, or (c)
sell with recourse any of Borrower's accounts, except to Lender.

CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however that
notwithstanding the foregoing, but only so long as no Event of Default
has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in
the Internal Revenue Code of 1986, as amended), Borrower may pay cash
dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and
make estimated income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership
of shares of stock of Borrower, or (d) purchase or retire any of
Borrower's outstanding shares or alter or amend Borrower's capital
structure.

LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement
or any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or
any other loan with Lender; or (e) Lender in good faith deems itself insecure,
even though no Event of Default shall have occurred.

RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness against
any and all such accounts.

EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:

DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when
due on the indebtedness.

OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or
to perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.

DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of
the Related Documents.

FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.

DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security
Interest) at any time and for any reason.

INSOLVENCY. The dissolution or termination of Borrower's existence as
a going business, or a trustee or receiver is appointed for Borrower
or for all or a substantial pension of the assets of Borrower, or
Borrower makes a general assignment for the benefit of Borrower's
creditors, or Borrower files for bankruptcy, or an involuntary
bankruptcy petition is filed against Borrower and such involuntary
petition remains undismissed for sixty (60) days.

CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
Indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender.

EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of,
or liability under, any Guaranty of the Indebtedness.

CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
<PAGE> 5
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(CONTINUED)

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ADVERSE CHANGE. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.

INSECURITY. Lender, in good faith, deems itself insecure.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate and, at Lender's
option, all sums owing in connection with the Loans, including all principal,
interest, and all other fees, costs and charges, if any, will become
immediately due and payable, all without notice of any kind to Borrower, except
that in the case of an Event of Default of the type described in the
"Insolvency" subsection above, such acceleration shall be automatic and not
optional. In addition, Lender shall have all the rights and remedies provided
in the Related Documents or available at law, in equity, or otherwise. Except
as may be prohibited by applicable law, all of Lender's rights and remedies
shall be cumulative and may be exercised singularly or concurrently. Election
by Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an obligation
of Borrower or of any Grantor shall not affect Lender's right to declare a
default and to exercise its rights and remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:

AMENDMENTS. This Agreement together with any Related Documents,
constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by
the alteration or amendment.

APPLICABLE LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the Commonwealth of Virginia.

CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or
define the provisions of this Agreement.

MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower
under this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of
the Borrowers signing below is responsible for all obligations in this
Agreement.

CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to
Lender's sale or transfer, whether now or later, of one or more
participation interests in the Loans to one or more purchasers,
whether related or unrelated to Lender. Lender may provide, without
any limitation whatsoever, to any one or more purchasers, or potential
purchasers, any information or knowledge Lender may have about
Borrower or about any other matter relating to the Loan, and Borrower
hereby waives any rights to privacy it may have with respect to such
matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of
such participation interests. Borrower also agrees that the purchasers
of any such participation interests will be considered as the absolute
owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may
enforce Borrower's obligation under the Loans irrespective of the
failure or insolvency of any holder of any interest in the Loans.
Borrower further agrees that the purchaser of any such participation
interests may enforce its interests irrespective of any personal
claims or defenses that Borrower may have against Lender.

COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
out-of-pocket expenses incurred in connection with this Agreement or
in connection with the Loans made pursuant to this Agreement. Subject
to any limits under applicable law, if Lender hires an attorney to
help enforce this Agreement or to collect any Indebtedness, Borrower
agrees to pay Lender's attorney fees equal to 25.000% of the
principal balance due on the Note, and all of Lender's other
collection expenses, whether or not there is a lawsuit and including
legal expenses for bankruptcy proceedings.

NOTICES. All notices required to be given under this Agreement shall
be given in writing, may be sent by telefacsimile, and shall be
effective when actually delivered if hand delivered or when deposited
with a nationally recognized overnight courier or deposited as
certified or registered mail in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if
there is more than one Borrower, notice to any Borrower will
constitute notice to all Borrowers. For notice purposes, Borrower will
keep Lender informed at all times of Borrower's current address(es).

SEVERABILITY. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be
within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and
all other provisions of this Agreement in all other respects shall
remain valid and enforceable.

SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of
any provisions of this Agreement makes it appropriate, including
without limitation any representation, warranty or covenant, the word
"Borrower" as used herein shall include all subsidiaries and
affiliates of Borrower. Notwithstanding the foregoing however, under
no circumstances shall this Agreement be construed to require Lender
to make any Loan or other financial accommodation to any subsidiary or
affiliate of Borrower.

SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or
on behalf of Borrower shall bind its successors and assigns and
shall inure to the benefit of Lender, its successors and assigns.
Borrower shall not, however, have the right to assign its rights under
this Agreement or any interest therein, without the prior written
consent of Lender.

SURVIVAL. All warranties, representations, and agreements of Borrower
in this Agreement shall survive the making of the Loan or Loans
contemplated hereby, and shall be deemed made and redated by Borrower
at the time of the making of each disbursement of Loan proceeds.

TIME IS OF THE ESSENCE. Time is of the essence in the performance of
this Agreement.

WAIVER. Indulgence by Lender with respect to any of the terms and
conditions of this Agreement or the failure of Lender to exercise any
of its rights under this Agreement shall not constitute a waiver
thereof, and Borrower shall remain liable for the strict performance
of such terms and conditions until this Agreement shall be terminated.
No provision of this Agreement may be waived or modified orally, but
all such waivers or modifications shall be in writing. Whenever the
consent of Lender is required under this Agreement, the granting of
such consent by Lender in one instance shall not constitute Lender's
continuing consent in subsequent instances, and in all cases such
consent may be granted or withheld in the sole discretion of Lender.
<PAGE> 6
07-09-1996 BUSINESS LOAN AGREEMENT PAGE 6
(CONTINUED)

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

THIS BUSINESS LOAN AGREEMENT IS SIGNED, SEALED AND DELIVERED EFFECTIVE IN ALL
RESPECTS AS OF JULY 9, 1996.

BORROWER:

Xybernaut Corporation

By: /s/ JOHN F. MOYNAHAN (SEAL)
--------------------------------------------------
JOHN F. MOYNAHAN, VICE PRESIDENT & CFO

LENDER:

FAIRFAX BANK & TRUST COMPANY

By:
--------------------------------------------------
AUTHORIZED OFFICER

================================================================================
<PAGE> 7

PROMISSORY NOTE

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C>
$50,000.00 07-09-1996 09-09-1996 19
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

References in the shaded area are for Lender's use only and do not limit
the applicability of this document to any particular loan or item.

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

IMPORTANT NOTICE

THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A
WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO
OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE.

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

PRINCIPAL AMOUNT: $50,000.00 INITIAL RATE: 9.250%
DATE OF NOTE: JULY 9, 1996

PROMISE TO PAY. XYBERNAUT CORPORATION ("BORROWER") PROMISES TO PAY TO FAIRFAX
BANK & TRUST COMPANY ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES
OF AMERICA, THE PRINCIPAL AMOUNT OF FIFTY THOUSAND & 00/100 DOLLARS
($50,000.00), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE FROM JULY
9, 1996, UNTIL PAID IN FULL.

PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PRINCIPAL PAYMENT OF $50,000.00
PLUS INTEREST ON SEPTEMBER 9, 1996. THIS PAYMENT DUE SEPTEMBER 9, 1996, WILL BE
FOR ALL PRINCIPAL AND ACCRUED INTEREST NOT YET PAID. IN ADDITION, BORROWER WILL
PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH
PAYMENT DATE, BEGINNING AUGUST 9, 1996, WITH ALL SUBSEQUENT INTEREST PAYMENTS TO
BE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. Interest on this Note is
computed on a 365/360 simple interest basis; that is, by applying the ratio of
the annual interest rate over a year of 360 days, multiplied by the outstanding
principal balance, multiplied by the actual number of days the principal balance
is outstanding. Borrower will pay Lender at Lender's address shown above or at
such other place as Lender may designate in writing. Unless otherwise agreed or
required by applicable law, payments will be applied first to accrued unpaid
interest, then to principal, and any remaining amount to any unpaid collection
costs and late charges.

VARIABLE INTEREST RATE. The interest rate on this Note is subject to change
from time to time based on changes in an independent index which is the Chase
Manhattan Bank Announced Prime Rate As Adjusted Daily (the "Index"). The Index
is not necessarily the lowest rate charged by Lender on its loans. If the Index
becomes unavailable during the term of this loan, Lender may designate a
substitute index after notice to Borrower. Lender will tell Borrower the
current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each day. THE INDEX CURRENTLY IS 8.250% PER ANNUM. THE
INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL
BE AT A RATE OF 1.000 PERCENTAGE POINT OVER THE INDEX, RESULTING IN AN INITIAL
RATE OF 9.250% PER ANNUM. NOTICE: Under no circumstances will the interest rate
on this Note be more than the maximum rate allowed by applicable law.

PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment
of this Note, Borrower understands that Lender is entitled to a MINIMUM
INTEREST CHARGE OF $100.00. Other than Borrower's obligation to pay any minimum
interest charge, Borrower may pay without penalty all or a portion of the
amount owed earlier than it is due. Early payments will not, unless agreed to
by Lender in writing, relieve Borrower of Borrower's obligation to continue to
make payments under the payment schedule. Rather, they will reduce the
principal balance due.

LATE CHARGE. If a payment is 7 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE UNPAID PORTION OF THE REGULARLY SCHEDULED PAYMENT OR $250.00,
WHICHEVER IS LESS.

DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform
when due any other term, obligation, covenant, or condition contained in this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, in favor of any other creditor or person that may materially affect
any of Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor
tries to take any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrower's accounts
with Lender. (g) Any guarantor dies or any of the other events described in
this default section occurs with respect to any guarantor of this Note. (h) A
material adverse change occurs in Borrower's financial condition, or Lender
believes the prospect of payment or performance of the Indebtedness is
impaired. (i) Lender in good faith deems itself insecure.

LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest, together with all other
applicable fees, costs and charges, if any, immediately due and payable,
without notice, and then Borrower will pay that amount. Furthermore, subject to
any limits under applicable law, upon default, Borrower also agrees to pay
Lender's attorney fees equal to 25.000% of the principal balance due on the
Note, and all of Lender's other collection expenses, whether or not there is a
lawsuit and including without limitation legal expenses for bankruptcy
proceedings. This Note shall be governed by, construed and enforced in
accordance with the laws of the Commonwealth of Virginia.

CONFESSION OF JUDGMENT. Upon a default in payment of the Indebtedness at
maturity, whether by acceleration or otherwise, Borrower hereby irrevocably
authorizes and empowers Steven R. Wilson or Arlene F. Haley as Borrower's
attorney-in-fact to appear in the Fairfax County clerk's office and to confess
judgment against Borrower for the unpaid amount of this Note as evidenced by an
affidavit signed by an officer of Lender setting forth the amount then due,
plus attorneys' fees as provided in this Note, plus costs of suit, and to
release all errors, and waive all rights of appeal. If a copy of this Note,
verified by an affidavit, shall have been filed in the proceeding, it will not
be necessary to file the original as a warrant of attorney. Borrower waives the
right to any stay of execution and the benefit of all exemption laws now or
hereafter in effect. No single exercise of the foregoing warrant and power to
confess judgment will be deemed to exhaust the power, whether or not any such
exercise shall be held by any court to be invalid, voidable, or void; but the
power will continue undiminished and may be exercised from time to time as
Lender may elect until all amounts owing on this Note have been paid in full.

COLLATERAL. This Note is secured by All accounts receivable from Rockwell
International CACD now owned or hereafter arising and the proceeds
<PAGE> 8
07-09-1996 PROMISSORY NOTE PAGE 2
(CONTINUED)

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

thereof to include invoices no. 060, 061 and 062 dated 6/30/96.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any
change in the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize upon or perfect Lender's security interest in the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.

BORROWER:

XYBERNAUT CORPORATION

By /s/ JOHN F. MOYNAHAN (SEAL)
-------------------------------------------------
JOHN F. MOYNAHAN, VICE PRESIDENT & CFO

================================================================================
<PAGE> 9
COMMERCIAL SECURITY AGREEMENT

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C>
$50,000.00 07-09-1996 09-09-1996 19 (sig)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

References in the shaded area are for Lender's use only and do not limit
the applicability of this document to any particular loan or item.

<TABLE>
<S> <C> <C>
BORROWER: XYBERNAUT CORPORATION (TIN: 541799851) LENDER: FAIRFAX BANK & TRUST COMPANY
12701 FAIR LAKES CIRCLE, SUITE 550 FAIRFAX OFFICE
FAIRFAX, VA 22033 4117 CHAIN BRIDGE ROAD
P.O. BOX 1087
FAIRFAX, VA 22030
</TABLE>

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

THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN XYBERNAUT
CORPORATION (REFERRED TO BELOW AS "GRANTOR"); AND FAIRFAX BANK & TRUST COMPANY
(REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO
LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND
AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT
TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY
LAW.

AGREEMENT. The word "Agreement" means this Commercial Security
Agreement, as this Commercial Security Agreement may be amended or
modified from time to time, together with all exhibits and schedules
attached to this Commercial Security Agreement from time to time.

COLLATERAL. The word "Collateral" means the following described
property of Grantor, whether now owned or hereafter acquired, whether
now existing or hereafter arising, and wherever located:

ALL ACCOUNTS, TOGETHER WITH THE FOLLOWING SPECIFICALLY
DESCRIBED PROPERTY: DIRECT ASSIGNMENT OF ALL ACCOUNTS
RECEIVABLE FROM ROCKWELL INTERNATIONAL CACD NOW OWNED OR
HEREAFTER ARISING AND THE PROCEEDS THEREOF.

In addition, the word "Collateral" includes all the following, whether
now owned or hereafter acquired, whether now existing or hereafter
arising, and wherever located:

(a) All accessions, accessories, increases, and additions to
and all replacements of and substitutions for any property
described above.

(b) All products and produce of any of the property described
in this Collateral section.

(c) All accounts, general intangibles, instruments, rents,
monies, payments, and all other rights, arising out of a sale,
lease, or other disposition of any of the property described
in this Collateral section.

(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.

(e) All records and data relating to any of the property
described in this Collateral section, whether in the form of a
writing, photograph, microfilm, microfiche or electronic media,
together with all of Grantor's right, title, and interest in
and to all computer software required to utilize, create,
maintain, and process any such records or data on electronic
media.

EVENT OF DEFAULT. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "Events of Default."

GRANTOR. The word "Grantor" means Xybernaut Corporation, its
successors and assigns.

GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness and their personal representatives,
successors and assigns.

INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced
by the Note, including all principal, interest, and fees, costs, and
expenses, if any, together with all modifications of and renewals,
replacements and substitutions for any of the foregoing.
"Indebtedness" also includes all other present and future liabilities
and obligations of Grantor to Lender, whether direct or indirect,
matured or unmatured, and whether absolute or contingent, joint,
several or joint and several, and no matter how the same may be
evidenced or shall arise.

LENDER. The word "Lender" means Fairfax Bank & Trust Company, its
successors and assigns.

NOTE. The word "Note" means the note or credit agreement dated July
9, 1996, in the principal amount of $50,000.00 from Xybernaut
Corporation to Lender, together with all modifications of and
renewals, replacements, and substitutions for the note or credit
agreement.

RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all
of Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for
which the grant of a security interest would be prohibited by law. Grantor
authorizes Lender, to the extent permitted by applicable law, to charge or
setoff all Indebtedness against any and all such accounts.

OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:

PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such
financing statements and to take whatever other actions are requested
by Lender to perfect and continue Lender's security interest in the
Collateral. Upon request of Lender, Grantor will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Grantor will note Lender's interest upon any and all chattel paper if
not delivered to Lender for possession by Lender. Grantor hereby
appoints Lender as its irrevocable attorney-in-fact for the purpose of
executing any documents necessary to perfect or to continue the
security interest granted in this Agreement. Lender may at any time,
and without further authorization from Grantor, file a carbon,
photographic or other reproduction of any financing statement or of
this Agreement for use as a financing statement. Grantor will
reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN
EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL
AND EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO
LENDER.

NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is
a
<PAGE> 10
07-09-1996 COMMERCIAL SECURITY AGREEMENT PAGE 2
(CONTINUED)

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

party, and its certificate or articles of incorporation and bylaws do
not prohibit any term or condition of this Agreement.

ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies
with applicable laws concerning form, content and manner of
preparation and execution, and all persons appearing to be obligated
on the Collateral have authority and capacity to contract and are in
fact obligated as they appear to be on the Collateral. At the time any
account becomes subject to a security interest in favor of Lender, the
account shall be a good and valid account representing an undisputed,
bona fide indebtedness incurred by the account debtor, for merchandise
held subject to delivery instructions or theretofore shipped or
delivered pursuant to a contract of sale, or for services theretofore
performed by Grantor with or for the account debtor; there shall be no
setoffs or counterclaims against any such account; and no agreement
under which any deductions or discounts may be claimed shall have been
made with the account debtor except those disclosed to Lender in
writing.

REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the
extent the Collateral consists of intangible property such as
accounts, the records concerning the Collateral) at Grantor's address
shown above, or at such other locations as are acceptable to Lender.
Except in the ordinary course of its business, including the sales of
inventory, Grantor shall not remove the Collateral from its existing
locations without the prior written consent of Lender. To the extent
that the Collateral consists of vehicles, or other titled property,
Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the
Commonwealth of Virginia, without the prior written consent of Lender.

TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or
accounts collected in the ordinary course of Grantor's business,
Grantor shall not sell, offer to sell, or otherwise transfer or
dispose of the Collateral. Grantor shall not pledge, mortgage,
encumber or otherwise permit the Collateral to be subject to any lien,
security interest, encumbrance, or charge, other than the security
interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in
right to the security interests granted under this Agreement. Unless
waived by Lender, all proceeds from any disposition of the Collateral
(for whatever reason) shall be held in trust for Lender and shall not
be commingled with any other funds; provided however, this requirement
shall not constitute consent by Lender to any sale or other
disposition. Upon receipt, Grantor shall immediately deliver any such
proceeds to Lender.

TITLE. Grantor represents and warrants to Lender that it holds good
and marketable title to the Collateral, free and clear of all liens
and encumbrances except for the lien of this Agreement. No financing
statement covering any of the Collateral is on file in any public
office other than those which reflect the security interest created by
this Agreement or to which Lender has specifically consented. Grantor
shall defend Lender's rights in the Collateral against the claims and
demands of all other persons.

COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require,
and insofar as the Collateral consists of accounts, Grantor shall
deliver to Lender schedules of such Collateral, including such
information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts. Such
information shall be submitted for Grantor and each of its
subsidiaries or related companies.

MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not
commit or permit damage to or destruction of the Collateral or any
part of the Collateral. Lender and its designated representatives and
agents shall have the right at all reasonable times to examine,
inspect, and audit the Collateral wherever located.

TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon
this Agreement, upon any promissory note or notes evidencing the
Indebtedness, or upon any of the other Related Documents. Grantor may
withhold any such payment or may elect to contest any lien if Grantor
is in good faith conducting an appropriate proceeding to contest the
obligation to pay and so long as Lender's interest in the Collateral
is not jeopardized in Lender's sole opinion. If the Collateral is
subjected to a lien which is not discharged within fifteen (15) days,
Grantor shall deposit with Lender cash, a sufficient corporate surety
bond or other security satisfactory to Lender in an amount adequate to
provide for the discharge of the lien plus any interest, costs,
attorneys' fees or other charges that could accrue as a result of
foreclosure or sale of the Collateral. In any contest Grantor shall
defend itself and Lender shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender
as an additional obligee under any surety bond furnished in the
contest proceedings.

COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply
promptly with all laws, ordinances, rules and regulations of all
governmental authorities, now or hereafter in effect, applicable to
the ownership, production, disposition, or use of the Collateral.
Grantor may contest in good faith any such law, ordinance or
regulation and withhold compliance during any proceeding, including
appropriate appeals, so long as Lender's interest in the Collateral,
in Lender's opinion, is not jeopardized.

HAZARDOUS SUBSTANCES. Grantor represents and warrants that the
Collateral never has been, and never will be so long as this Agreement
remains a lien on the Collateral, used for the generation,
manufacture, storage, transportation, treatment, disposal, release or
threatened release of any hazardous waste or substance, as those terms
are defined in the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq.
("CERCLA"), the Superfund Amendments and Reauthorization Act of 1986,
Pub. L. No. 99--499 ("SARA"), the Hazardous Materials Transportation
Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable
state or Federal laws, rules, or regulations adopted pursuant to any
of the foregoing. The terms "hazardous waste" and "hazardous
substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's
due diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor
becomes liable for cleanup or other costs under any such laws, and (b)
agrees to indemnify and held harmless Lender against any and all
claims and losses resulting from a breach of this provision of this
Agreement. This obligation to indemnify shall survive the payment of
the indebtedness and the satisfaction of this Agreement.

MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain
all risks insurance, including without limitation fire, theft and
liability coverage together with such other insurance as Lender may
require with respect to the Collateral, in form, amounts, coverages
and basis acceptable to Lender and issued by a company or companies
acceptable to Lender. Grantor, upon request of Lender, will deliver
to Lender from time to time the policies or certificates of insurance
in form satisfactory to Lender, including stipulations that coverages
will not be cancelled or diminished without at least ten (10) days'
prior written notice to Lender and not including any disclaimer of the
insurer's liability for failure to give such a notice. Each insurance
policy also shall include an endorsement providing that coverage in
favor of Lender will not be impaired in any way by any act, omission
or default of Grantor or any other person. In connection with all
policies covering assets in which Lender holds or is offered a
security interest, Grantor will provide Lender with such loss payable
or other endorsements as Lender may require. If Grantor at any time
fails to obtain or maintain any insurance as required under this
Agreement, Lender may (but shall not be obligated to) obtain such
insurance as Lender deems appropriate, including if it so chooses
"single interest insurance," which will cover only Lender's interest
in the Collateral.

APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify
Lender of any loss or damage to the Collateral. Lender may make proof
of loss if Grantor fails to do so within fifteen (15) days of the
casualty. All proceeds of any insurance on the Collateral, including
accrued proceeds thereon, shall be held by Lender as part of the
Collateral. If Lender consents to repair or replacement of the damaged
or destroyed Collateral, Lender shall, upon satisfactory proof of
expenditure, pay or reimburse Grantor from the proceeds for the
reasonable cost of repair or restoration. If Lender does not consent
to repair or replacement of the Collateral, Lender shall retain a
sufficient amount of the proceeds to pay all of the indebtedness, and
shall pay the balance to Grantor. Any proceeds which have not been
disbursed within six (6) months after their receipt and
<PAGE> 11
07-09-1996 COMMERCIAL SECURITY AGREEMENT PAGE 3
(CONTINUED)

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

which Grantor has not committed to the repair or restoration of the
Collateral shall be used to prepay the Indebtedness.

INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of
the policy; (d) the property insured; (e) the then current value on
the basis of which insurance has bean obtained and the manner of
determining that value; and (f) the expiration date of the policy. In
addition, Grantor shall upon request by Lender (however not more often
then annually) have an independent appraiser satisfactory to Lender
determine, as applicable, the cash value or replacement cost of the
Collateral.

GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest
in such Collateral. Until otherwise notified by Lender, Grantor may collect any
of the Collateral consisting of accounts. At any time and even though no Event
of Default exists, Lender may exercise its rights to collect the accounts and
to notify account debtors to make payments directly to Lender for application
to the Indebtedness. If Lender at any time has possession of any Collateral,
whether before or after an Event of Default, Lender shall be deemed to have
exercised reasonable care in the custody and preservation of the Collateral if
Lender takes such action for that purpose as Grantor shall request or as
Lender, in Lender's sole discretion, shall deem appropriate under the
circumstances, but failure to honor any request by Grantor shall not of itself
be deemed to be a failure to exercise reasonable care. Lender shall not be
required to take any steps necessary to preserve any rights in the Collateral
against prior parties, nor to protect, preserve or maintain any security
interest given to secure the Indebtedness.

EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender for
such purposes will then bear interest at the rate charged under the Note from
the date incurred or paid by Lender to the date of repayment by Grantor. All
such expenses shall become a part of the Indebtedness and, at Lender's option,
will (a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will
be due and payable at the Note's maturity. This Agreement also will secure
payment of these amounts. Such right shall be in addition to all other rights
and remedies to which Lender may be entitled upon the occurrence of an Event of
Default.

EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:

DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when
due on the Indebtedness.

OTHER DEFAULTS. Failure of Grantor to comply with or to perform any
other term, obligation, covenant or condition contained in this
Agreement or in any of the Related Documents or in any other agreement
between Lender and Grantor.

FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement,
the Note or the Related Documents is false or misleading in any
material respect, either now or at the time made or furnished.

DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any collateral documents to create a valid and perfected security
interest or lien) at any time and for any reason.

INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a
receiver for any part of Grantor's property, any assignment for the
benefit of creditors, any type of creditor workout, or the
commencement of any proceeding under any bankruptcy or insolvency laws
by or against Grantor.

CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of
Grantor's deposit accounts with Lender.

EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor
dies or becomes incompetent.

ADVERSE CHANGE. A material adverse change occurs in Grantor's
financial condition, or Lender believes the prospect of payment or
performance of the Indebtedness is impaired.

INSECURITY. Lender, in good faith, deems itself insecure.

RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a
secured party under the Virginia Uniform Commercial Code. In addition and
without limitation, Lender may exercise any one or more of the following rights
and remedies:

ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to
pay, immediately due and payable, without notice.

ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender
all or any portion of the Collateral and any and all certificates of
title and other documents relating to the Collateral. Lender may
require Grantor to assemble the Collateral and make it available to
Lender at a place to be designated by Lender. Lender also shall have
full power to enter upon the property of Grantor to take possession
of and remove the Collateral. If the Collateral contains other goods
not covered by this Agreement at the time of repossession, Grantor
agrees Lender may take such other goods, provided that Lender makes
reasonable efforts to return them to Grantor after repossession.

SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in
its own name or that of Grantor. Lender may sell the Collateral at
public auction or private sale. Unless the Collateral threatens to
decline speedily in value or is of a type customarily sold on a
recognized market, Lender will give Grantor reasonable notice of the
time after which any private sale or any other intended disposition
of the Collateral is to be made. The requirements of reasonable notice
shall be met if such notice is given at ten (10) days before the time
of the sale or disposition. All expenses relating to the disposition of
the Collateral, including without limitation the expenses of retaking,
holding, insuring, preparing for sale and selling the Collateral,
shall became a part of the Indebtedness secured by this Agreement and
shall be payable on demand, with interest at the Note rate from date
of expenditure until repaid.

APPOINT RECEIVER. To the extent permitted by applicable law, Lender
shall have the following rights and remedies regarding the appointment
of a receiver: (a) Lender may have a receiver appointed as a matter of
right, (b) the receiver may be an employee of Lender and may serve
without bond, and (c) all fees of the receiver and his or her attorney
shall become part of the Indebtedness secured by this Agreement and
shall
<PAGE> 12
07-09-1996 COMMERCIAL SECURITY AGREEMENT PAGE 4
(CONTINUED)

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be payable on demand, with interest at the Note rate from date of
expenditure until repaid.

COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from
the Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the
Indebtedness in such order of preference as Lender may determine.
Insofar as the Collateral consists of accounts, general intangibles,
insurance policies, instruments, chattel paper, choses in action, or
similar property. Lender may demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose, or realize on the Collateral
as Lender may determine, whether or not Indebtedness or Collateral is
then due. For these purposes, Lender may, on behalf of and in the name
of Grantor, receive, open and dispose of mail addressed to Grantor;
change any address to which mail and payments are to be sent; and
endorse notes, checks, drafts, money orders, documents of title,
instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account
debtors and obligors on any Collateral to make payments directly to
Lender.

OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the
Collateral, Lender may obtain a judgment against Grantor for any
deficiency remaining on the Indebtedness due to Lender after
application of all amounts received from the exercise of the rights
provided in this Agreement. Grantor shall be liable for a deficiency
even if the transaction described in this subsection is a sale of
accounts or chattel paper.

OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and
remedies of a secured creditor under the provisions of the Uniform
Commercial Code, as may be amended from time to time. In addition,
Lender shall have and may exercise any or all other rights and
remedies it may have available at law, in equity, or otherwise.

CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Grantor
under this Agreement, after Grantor's failure to perform, shall not
affect Lender's right to declare a default and to exercise its
remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:

AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as
to the matters set forth in this Agreement. No alteration of or
amendment to this Agreement shall be effective unless given in writing
and signed by the party or parties sought to be charged or bound by
the alteration or amendment.

APPLICABLE LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the Commonwealth of Virginia.

ATTORNEYS' FEES; EXPENSES. Grantor agrees that if Lender hires an
attorney to help enforce this Agreement or to collect any sums owing
under this Agreement, Grantor will pay, subject to any limits under
applicable law, Lender's attorney fees equal to 25.000% of the
principal balance due on the Note, and all of Lender's other
collection expenses, whether or not there is a lawsuit and including
without limitation additional legal expenses for bankruptcy
proceedings.

CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or
define the provisions of this Agreement.

MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor
under this Agreement shall be joint and several, and all references to
Grantor shall mean each and every Grantor. This means that each of the
Borrowers signing below is responsible for ALL obligations in this
Agreement.

NOTICES. All notices required to be given under this Agreement shall
be given in writing, may be sent by telefacsimilie, and shall be
effective when actually delivered if hand delivered or when deposited
with a nationally recognized overnight courier or deposited as
certified or registered mail in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if
there is more than one Grantor, notice to any Grantor will constitute
notice to all Grantors. For notice purposes, Grantor will keep Lender
informed at all times of Grantor's current address(es).

POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and
lawful attorney-in-fact, irrevocably, with full power of substitution
to do the following: (a) to demand, collect, receive, receipt for, sue
and recover all sums of money or other property which may now or
hereafter become due, owing or payable from the Collateral; (b) to
execute, sign and endorse any and all claims, instruments, receipts,
checks, drafts or warrants issued in payment for the Collateral; (c)
to settle or compromise any and all claims arising under the
Collateral, and, in the place and stead of Grantor, to execute and
deliver its release and settlement for the claim; and (d) to file any
claim or claims or to take any action or institute or take part in any
proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary
or advisable. This power is given as security for the Indebtedness,
and the authority hereby conferred is and shall be irrevocable and
shall remain in full force and effect until renounced by Lender.

SUCCESSOR INTERESTS. Subject to the limitations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and
inure to the benefit of the parties, their successors and assigns.

WAIVER. Lender shall not be deemed to have waived any rights under
this Agreement unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any
right shall operate as a waiver of such right or any other right. A
waiver by Lender of a provision of this Agreement shall not prejudice
or constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing
between Lender and Grantor, shall constitute a waiver of any of
Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance
shall not constitute continuing consent to subsequent instances where
such consent is required and in all cases such consent may be granted
or withheld in the sole discretion of Lender.
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07-09-1996 COMMERCIAL SECURITY AGREEMENT PAGE 5
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GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JULY 9,
1996.

GRANTOR:

XYBERNAUT CORPORATION

By: /s/ JOHN F. MOYNAHAN (SEAL)
--------------------------------------------------
JOHN F. MOYNAHAN, VICE PRESIDENT & CFO

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<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