INTEGRATED TECHNOLOGY USA INC, SB-2/A, 1996-12-24

INTEGRATED TECHNOLOGY USA INC
SB-2/A, 1996-12-24
COMPUTER PERIPHERAL EQUIPMENT, NEC

Previous: WARBURG PINCUS GLOBAL POST VENTURE CAPITAL FUND INC, NSAR-B, 1996-12-24

Next: UNITED AUTO GROUP INC, 8-K, 1996-12-24

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 24, 1996

REGISTRATION NO. 333-13447

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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 1
TO
FORM SB-2

REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933

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

INTEGRATED TECHNOLOGY USA, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3577 22-3136782
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

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

545 CEDAR LANE, TEANECK, NEW JERSEY 07666, (201) 907-0200
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)

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

ALAN HABER, PRESIDENT AND CHIEF EXECUTIVE OFFICER
545 CEDAR LANE, TEANECK, NEW JERSEY 07666, (201) 907-0200
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)

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

Copies of all communications, including communications
sent to the agent for service, should be sent to:

JOSEPH EHRENREICH, ESQ.
EHRENREICH & KRAUSE
1140 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10036
212-302-8050

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

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

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

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

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /x/

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

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

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

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

<PAGE>

PROSPECTUS

199,174 SHARES

INTEGRATED TECHNOLOGY USA, INC.

COMMON STOCK

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

This Prospectus relates to up to 199,174 shares of Common Stock ('Common
Stock') of Integrated Technology USA, Inc. (the 'Company'), that may from time
to time be sold by the holders thereof identified herein (the 'Selling Security
Holders'). See 'Selling Security Holders.' Each Selling Security Holder has
agreed not to sell any of such shares until January 1, 1997. The shares of
Common Stock to which this Prospectus relates are shares that have been
acquired, or may hereafter be acquired, by the Selling Security Holders pursuant
to warrants (the 'Bridge Warrants') that were issued in connection with a bridge
financing (the 'Bridge Financing') completed by the Company in the second and
third quarters of 1996. The Company will not receive any of the proceeds from
the sales of shares of Common Stock by the Selling Security Holders. However,
the Company will receive the proceeds from any exercise of such warrants. See
'Use of Proceeds.'

The Common Stock offered by the Selling Security Holders (the 'Resale
Shares') may be sold from time to time by the Selling Security Holders directly
to purchasers or, alternatively, may be offered from time to time through
agents, brokers, dealers or underwriters, who may receive compensation in the
form of concessions or commissions from the Selling Security Holder or
purchasers of the Resale Shares (which compensation may be in excess of
customary commissions). Sales of the Resale Shares may be made in one or more
transactions through the American Stock Exchange (the 'AMEX'), in the over-
the-counter market, in privately negotiated transactions or otherwise, and such
sales may be made at the market price prevailing at the time of sale, a price
related to such prevailing market price or a negotiated price.

Any brokers, dealers or agents that participate in the distribution of the
Resale Shares may be deemed to be underwriters and any commissions received by
them and any profit on the resale of such shares positioned by them might be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.

FOR INFORMATION THAT SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE
INVESTORS, SEE 'RISK FACTORS' COMMENCING ON PAGE 8.

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

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

The date of this Prospectus is December 24, 1996.

<PAGE>

NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY SELLING SECURITY HOLDER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO
WHICH IT RELATES OR AN OFFER OF ANY SECURITIES IN ANY JURISDICTION TO
ANY PERSON WHERE SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................................................................................... 3
Risk Factors............................................................................................... 8
Use of Proceeds............................................................................................ 17
Certain Information Concerning Initial Public Offering..................................................... 17
Price Range of Common Stock................................................................................ 18
Dividend Policy............................................................................................ 19
Capitalization............................................................................................. 19
Selected Consolidated Financial Data....................................................................... 21
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22
Business................................................................................................... 28
Management................................................................................................. 37
Certain Transactions....................................................................................... 42
Principal Stockholders..................................................................................... 42
Description of Securities.................................................................................. 43
Shares Eligible for Future Sale............................................................................ 46
Israeli Taxation........................................................................................... 49
Conditions in Israel....................................................................................... 51
Selling Security Holders................................................................................... 53
Plan of Distribution....................................................................................... 53
Legal Matters.............................................................................................. 54
Experts.................................................................................................... 54
Available Information...................................................................................... 54
</TABLE>

<PAGE>

PROSPECTUS SUMMARY

The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus gives retroactive effect to a
760.6291 for 1 stock split and an amendment of the Company's Certificate of
Incorporation that was effected on September 10, 1996 (as described under
'Description of Securities'). Unless otherwise indicated, the terms the
'Company' and 'Integrated Technology' refer collectively to Integrated
Technology USA, Inc. and its subsidiaries, and the term 'ITI USA' refers solely
to Integrated Technology USA, Inc.

On October 7, 1996, the Company completed an initial public offering (the
'IPO') of 3,000,000 shares of Common Stock and 3,000,000 Redeemable Common Stock
Purchase Warrants (the 'Public Warrants'). In November 1996, the Company issued
an additional 360,082 Public Warrants upon exercise of the over-allotment option
(described under 'Certain Information Concerning Initial Public Offering')
granted to the underwriters in connection with the IPO. Such shares of Common
Stock and Public Warrants are sometimes hereinafter collectively referred to as
the 'Public Securities.'

THE COMPANY

Integrated Technology designs, develops and markets innovative products for
two rapidly emerging computer-related markets: the transmission of voice
communications over the Internet ('Internet Telephony') and computer/telephone
integration. The Company has also developed a wireless printing product that the
Company believes has certain advantages over products currently on the market.

With the introduction by various companies of software that enables
Internet Telephony, the Company has focused on developing add-on products that
can expand the potential benefits of Internet Telephony, make Internet Telephony
more productive and efficient, and simplify the ancillary hardware devices
required for Internet Telephony. The first product developed by the Company for
this market is CompuNet 2000. This product is a PC keyboard that also functions
as a conventional telephone and enables the conferencing together of an Internet
and conventional telephone call. This feature allows each party on an Internet
call that is using CompuNet 2000 to add an additional party that is using a
conventional telephone. In addition, a handset or optional headset attached to
CompuNet 2000 functions as the sound transmitting hardware device required for
Internet calls (rather than a microphone and external speakers which are the
devices typically being used). This feature enables CompuNet 2000 users to
employ a single handset or headset for both conventional and Internet calls,
thereby eliminating desktop clutter and enabling parties to an Internet call to
conduct private conversations. The Company commenced sales of CompuNet 2000 in
September 1996 pursuant to a distribution agreement with Gemini Industries, Inc.
('Gemini'), a supplier of consumer electronics accessories that has been in
business for over 30 years. Under the terms of this agreement, Gemini has
committed to purchase 10,000 units of CompuNet 2000 in 1996 (subject to certain

conditions relating to the Company's ability to make the product available) and
must purchase a minimum of 10,000 units per month in 1997 in order to maintain
certain exclusivity rights.

For the computer/telephone integration market, the Company currently offers
CompuPhone 2000. This product is a PC keyboard that enables users to make and
receive telephone calls using the PC keyboard (together with a headset that is
provided with the product or an optional handset) without the need for a
conventional telephone or modem. Included with CompuPhone 2000 is proprietary
telephone management software that integrates the telephone function with the
computer. This software enables a number of features for enhancing productivity
and efficiency, including the ability to dial from a screen or data base (rather
than manually dialing), automatic logging of information concerning each call,
and the ability to record notes regarding each call in a 'note box' that can
appear automatically. CompuPhone 2000 also interfaces with most widely used
personal information management programs. The Company commenced sales of
CompuPhone 2000 in early 1995.

Integrated Technology USA, Inc., was incorporated in the State of Delaware
in August 1990. Its principal executive offices are located at 545 Cedar Lane,
Teaneck, New Jersey, and its telephone number is (201) 907-0200.

<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Securities Offered...................... This Prospectus relates to up to 199,174 shares of Common Stock
that may from time to time be sold by the Selling Security
Holders. Each Selling Security Holder has agreed not to sell any
of such shares until January 1, 1997. The shares of Common Stock
to which this Prospectus relates are shares that have been
acquired, or may hereafter be acquired, by the Selling Security
Holders pursuant to outstanding warrants (the 'Bridge Warrants')
that were issued in connection with a bridge financing (the
'Bridge Financing') completed by the Company in the second and
third quarters of 1996. See 'Selling Security Holders.'

Plan of Distribution.................... Sales of the shares offered by the Selling Security Holders may be
made in one or more transactions through the AMEX, in the
over-the-counter market, in privately negotiated transactions or
otherwise.

Offering Price.......................... Sales of the Resale Shares may be made at the market price
prevailing at the time of sale, a price related to such prevailing
market price or a negotiated price.

Proceeds of the Offering................ The Company will not receive any proceeds from the sale of the

Resale Shares by the Selling Security Holders. The Company may, in
the future, receive proceeds from the exercise of the Bridge
Warrants, but only if such warrants are exercised and then only in
an amount equal to the exercise price thereof ($0.60 per share)
multiplied by the number of warrants exercised. The Company
expects to use any such proceeds for working capital and general
corporate purposes.

Common Stock and Public Warrants
Outstanding........................... As of December 2, 1996, there were 6,005,179 shares of Common
Stock and 3,360,082 Public Warrants outstanding(1)

American Stock Exchange Symbols:
Common Stock....................... ITH
Public Warrants.................... ITH.WS
</TABLE>

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

(1) Does not include (i) 124,173 shares of Common Stock covered by this
Prospectus that are issuable upon exercise of outstanding Bridge Warrants,
(ii) 3,360,082 shares of Common Stock issuable upon exercise of the Public
Warrants sold in connection with the IPO, (iii) 300,000 shares of Common
Stock issuable upon exercise of the Representative's Warrants (as defined
under 'Certain Information Concerning Initial Public Offering') issued in
connection with the IPO, (iv) warrants to purchase 300,000 shares of Common
Stock issuable upon exercise of the Representative's Warrants, (v) 915,988
shares issuable upon exercise of outstanding options (257,322 of which
provide for an exercise price of approximately $.01 per share, 133,111 of
which provide for an exercise price of approximately $1.64 per share and
525,555 of which provide for an exercise of $6.00 per share), and (vi)
307,778 shares reserved for possible future grants of options under the
Company's 1996 Stock Option Plan.

<PAGE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION

Selling, general and
administrative expense...... 595,004 1,723,929 1,634,164 1,134,581 1,321,318
Research and development
expenses, net............... 30,023 291,970 357,117 145,045 261,297
--------- ----------- ----------- ----------- -----------
Loss from operations.......... (620,917) (2,011,163) (1,678,891) (1,057,028) (1,397,013)
Interest income (expense),
net......................... (935) 33,535 (4,173) 23,954 (391,725)
--------- ----------- ----------- ----------- -----------
Net loss...................... (621,852) (1,977,628) (1,683,064) (1,033,074) (1,788,738)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Net loss per share(1)......... $ (.34) $ (.71) $ (.54) $ (.34) $ (.57)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficiency)................ $(799,764) $ 14,257,461
Total assets.................. 1,353,933 15,442,229
Total liabilities............. 2,111,843 1,142,914
Stockholders' equity (net
capital deficiency)......... (757,910) 14,299,315
</TABLE>

- ------------------
(1) For information concerning the computation of net loss per share, see Note 2
of Notes to Consolidated Financial Statements.

(2) As adjusted to give effect to the sale of the Public Securities in the IPO
(not including 360,082 Public Warrants subsequently issued upon exercise of
the underwriters' over-allotment option), deduction of the underwriting
discounts and commissions and estimated offering expenses payable in
connection with the IPO, and application of a portion of the net proceeds to
repay certain promissory notes issued in connection with the Bridge
Financing.

SUMMARY RISK FACTORS

In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the factors described under

'Risk Factors' in evaluating the Company. These factors include, among others,
the following:

o The Company has a limited operating history, has incurred net losses in
each year since its inception and, as of September 30, 1996, had an
accumulated deficit of $6.99 million.

o The Company is dependent on a limited number of products. The Company has
had either very limited or no sales experience with these products and,
accordingly, there can be no assurance that any of these products will
achieve market acceptance. Each of these products may contain undetected
errors or defects or require design changes. Competitors of the Company
may achieve technological advances that provide a competitive advantage
over the Company's products or that make such products obsolete.

o CompuPhone 2000 has certain functional limitations that may limit the
potential end user market for this product.

<PAGE>

o CompuNet 2000 has the same functionality as CompuPhone 2000 when used for
conventional telephone calls and, consequently, the Company expects that
the introduction of CompuNet 2000 will reduce the market for CompuPhone
2000 somewhat. Although the Company believes that a viable potential
market for CompuPhone 2000 will remain because it will be priced
substantially lower than CompuNet 2000, there can be no assurance of
this.

o The success of CompuNet 2000 is dependent in large part on the use of
Internet Telephony becoming widespread. However, the market for Internet
Telephony has only recently begun to develop and, as a result, the extent
to which Internet Telephony will achieve market acceptance is subject to
a high level of uncertainty.

o The Company expects that a significant portion of its revenues relating
to CompuNet 2000 will be attributable to sales made pursuant to a
distribution agreement recently entered into with Gemini. Consequently,
the Company is highly dependent on its relationship with Gemini.

o The Company commenced sales of CompuNet 2000 in September 1996 and, as of
November 30, 1996, had sold an aggregate of approximately 5,000 units.
Such sales were made to Gemini. Although the Company expects to sell
additional units of CompuNet 2000, there can be no assurance that the
Company will be able to make such additional sales within the expected
time frame or at all.

o The Company has not yet commenced sales of its wireless printing product.
Although the Company expects to commence such sales in the first quarter

of 1997, there can be no assurance that the Company will be able to
commence such sales within the expected time frame or at all. This
product is currently in the preproduction, prototype stage. The Company
may discover that the performance of the prototype cannot be replicated
in a mass produced product or that design changes are necessary. The
Company estimates that the potential market for this product may be
significantly reduced or eliminated in the near future (by 1998 according
to one market study).

o The Company anticipates that a significant portion of its revenues may be
accounted for by Gemini and a limited number of other key customers, the
identity of which may vary from period to period.

o The Company is exposed to the risks associated with: (i) potential
product returns, (ii) potential claims related to 'price protection
clauses' included in distribution agreements and (iii) potential warranty
claims.

o The Company depends on contract manufacturers for substantially all of
its manufacturing and assembly requirements. The Company does not have a
long-term agreement with any contract manufacturer that it uses. There
can be no assurance that the Company will be able to obtain its
requirements for any product from any contract manufacturer that it uses.
The Company estimates that six months or more would be required in order
for it to qualify an alternate manufacturer for any product.

o Shortages may occur in components required for the manufacture of the
Company's products.

o The Company's international business operations may be negatively
impacted by a variety of factors that relate generally to the conduct of
international business operations.

o The markets for the Company's products are characterized by intense
competition and rapid change.

o The Company is highly dependent on its senior management team and key
personnel.

o The Company's success depends significantly on its ability to protect its
proprietary technology.

o There can be no assurance that claims will not be made asserting that the
Company's products infringe the proprietary rights of third parties.

o The Company is subject to certain risks associated with its use of
foreign currencies.

o Management of the Company will have broad discretion in determining the
manner in which the net proceeds of the IPO are applied.

<PAGE>

o The executive officers and directors of the Company (together with
affiliated or related entities) may be deemed to have effective control
of the Company due to the number of shares of Common Stock that they own.

o The Company has never paid, and has no plans to pay, any dividends on its
Common Stock.

o Prior to the IPO, there had been no public market for the Common Stock or
the Public Warrants.

o Sales of substantial amounts of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices for
the Public Securities.

o The price and liquidity of the Public Securities may be significantly
affected by the degree, if any, of the participation of the
Representative (as defined under 'Certain Information Concerning Initial
Public Offering') in the market for the Public Securities.

o The Board of Directors has the authority without first obtaining the
approval of the holders of Common Stock to issue from time to time
preferred stock having rights superior to the Common Stock. Such
authority may have the effect of delaying, deferring or preventing a
change of control of the Company, even if such event would be beneficial
to the stockholders of the Company.

o A substantial amount of the Company's business is conducted in the State
of Israel. Consequently, the Company is directly influenced by the
political, economic and military conditions affecting Israel.

<PAGE>

RISK FACTORS

An investment in the Common Stock offered hereby involves a high degree of
risk. In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the Common Stock offered hereby. Prospective
investors should be in a position to risk the loss of their entire investment.

CONSIDERATIONS RELATING TO THE BUSINESS OF THE COMPANY

LIMITED OPERATING HISTORY; HISTORY OF LOSSES; NO ASSURANCE OF PROFITABILITY;
GOING CONCERN EXPLANATORY PARAGRAPH IN INDEPENDENT ACCOUNTANT'S REPORT

Integrated Technology USA, Inc. was incorporated in 1990. The Company has
incurred net losses in each year since its inception and, as of September 30,
1996, had an accumulated deficit of $6.99 million. There can be no assurance
that the Company will ever achieve or be able to sustain profitability. The
report of independent accountants on the Company's financial statements included
elsewhere herein contains an explanatory paragraph stating that the Company's
financial statements have been prepared assuming that the Company will continue
as a going concern while expressing substantial doubt as to the Company's
ability to do so.

CERTAIN GENERAL RISKS RELATED TO PRODUCTS

Dependence on Limited Number of Products. The Company to date has
developed three products (not including a predecessor version of CompuPhone 2000
that the Company is no longer selling). These products are: (i) CompuPhone 2000,
(ii) CompuNet 2000 and (iii) WPS-1000 (a wireless printing product that is in
the preproduction, prototype stage). The Company projects that in 1996 and 1997
substantially all of the Company's revenues will be generated by the sale of
these three product lines and/or enhanced versions of these products (the
'Existing Products'). The failure by the Company to successfully market any one
of the Existing Products could have a material adverse effect on the Company's
business and financial condition.

Unproven Acceptance of the Company's Existing Products. The Company
commenced sales of CompuPhone 2000 in January 1995 and to date has made only
limited sales of such product ($804,000 in 1995 and $309,000 in the first nine
months of 1996). The Company commenced sales of CompuNet 2000 in September 1996,
and, as of November 30, 1996, had sold an aggregate of approximately 5,000
units. Such sales were made to Gemini. The Company expects that it will commence
the initial commercial introduction of WPS-1000 in the first quarter of 1997,
although there can be no assurance that the Company will meet this expected time
schedule. See '--Certain Risks Specific to WPS 1000.' In view of the fact that
the Company has had either very limited or no sales experience with each of the
Existing Products, there can be no assurance that any of the Existing Products
will achieve market acceptance (or sufficient market acceptance to make sales of
the product profitable). The failure of one or more of the Existing Products to
achieve market acceptance (or sufficient market acceptance to make sales of the
product profitable), would have a material adverse effect on the Company's
business and financial condition.

Possibility of Undetected Errors. One or more of the Existing Products
offered by the Company or any new product may contain undetected errors or
defects when first introduced or as new versions are released. Introduction by
the Company of products with reliability, quality or compatibility problems
could result in product returns, reduced orders, uncollectible accounts
receivable, delays in collecting accounts receivable, product redevelopment
costs, and loss of, or delay in, market acceptance. Any such event could have a
material adverse effect on the Company's business and financial condition.

Possibility of Need For Design Change. There can be no assurance that the

technology incorporated into the Existing Products or new products will be
operational as expected in all environments. As new products are tested in the
marketplace, the Company may discover that design changes are necessary to
achieve the expected performance. There can be no assurance that any design
changes required will be developed and incorporated in a timely or economical
manner, or at all.

Need to Develop Product Enhancements and New Products; Risk of
Obsolescence. The markets for the Company's products are characterized by rapid
technological change, evolving industry standards and customer

<PAGE>

demands, and frequent new product introductions and enhancements. As a result,
the Company's ability to remain competitive will depend in significant part upon
its ability to continually develop and introduce, in a timely and cost-effective
manner, enhancements for its existing products in response to both evolving
demands of the marketplace and competitive product offerings. In addition, over
the longer-term, the Company's ability to remain competitive will depend in
significant part upon its ability to develop and introduce, in a timely and
cost-effective manner, new products to expand and diversify its product
offerings. There can be no assurance that the Company will be successful in
developing and introducing, in a timely and cost-effective manner, any
enhancements or extensions for existing products or any new products. In
addition, there can be no assurance that competitors of the Company will not
achieve technological advances that provide a competitive advantage over the
Company's products or that make such products obsolete.

CERTAIN RISKS SPECIFIC TO COMPUPHONE 2000

Certain Functional Limitations. CompuPhone 2000 has certain functional
limitations described below that narrow the potential end-user markets for the
product. There can be no assurance that this will not result in the demand level
for the CompuPhone 2000 being insufficient to make sales of this product
profitable. For information concerning the end user markets for the CompuPhone
2000, see 'Business--End Users, Distribution, Sales and Marketing--End User
Markets.'

CompuPhone 2000 is currently limited to functioning as a single-line
telephone. Although the Company may seek to develop multiple-line capability for
this product, there can be no assurance that the Company will be successful in
developing this enhancement in a timely and cost-effective manner or at all.
Since many functions, particularly many business functions, require telephones
with multiple lines, the current single-line limitation of the CompuPhone 2000
limits the potential end-user market for this product.

The CompuPhone 2000 has been designed so that it can interface with the
analog port of a digital PBX system, thereby enabling the CompuPhone 2000 to be
integrated into the general PBX telephone systems being used by businesses.
However, due to the fact that CompuPhone 2000 interfaces only with the analog
port of a PBX system, many of the telephone features enabled by a PBX system may
not be available on the CompuPhone 2000 even when it is successfully integrated

with a PBX system. The features that may not be available will vary depending on
the particular PBX system being used, but may include, among others, (i)
conference call capability, (ii) one-touch speed dialing and other functions
that require memory and (iii) the ability to display incoming call information.
The limitations involved in seeking to integrate CompuPhone 2000 with PBX
systems may limit the potential end-user market for CompuPhone 2000 among
business users.

Impact of Introduction of CompuNet 2000. When used for conventional
telephone calls, CompuNet 2000 has the same functionality as CompuPhone 2000.
See 'Business--Internet Telephony Product.' As a result, the Company expects
that the introduction of CompuNet 2000 will reduce the market for CompuPhone
2000 somewhat. The Company cannot at present quantify the extent of this
reduction. However, the Company believes that a viable potential market for
CompuPhone 2000 will remain because CompuPhone 2000 will be priced substantially
lower than CompuNet 2000. Specifically, the Company believes that CompuPhone
2000 will remain attractive to users that (i) are engaged in functions that do
not require the Internet Telephony features of CompuNet 2000 (such as
telemarketing, order processing, customer service and support, market research,
and emergency dispatching) or (ii) are not willing to pay the additional cost
required to obtain such features. There can be no assurance, however, that the
introduction of CompuNet 2000 will not result in there being an insufficient
market for CompuPhone 2000 to make sales of this product profitable.

CERTAIN RISKS SPECIFIC TO THE COMPUNET 2000

Unproven Acceptance of Internet Telephony. Over the past one and one-half
years, various companies have developed and released software that enables voice
and audio communications over the Internet ('Internet Telephony'). CompuNet 2000
is designed to expand the potential benefits of Internet Telephony, make
Internet Telephony more productive and efficient, and simplify the ancillary
hardware devices required for Internet Telephony. Accordingly, the success of
this product is dependent in large part on the use of Internet Telephony

<PAGE>

becoming widespread. There can be no assurance, however, that this will in fact
occur due to a number of factors, including:

o The market for Internet Telephony has only recently begun to develop and
is rapidly evolving. As a result, the extent to which Internet Telephony
will achieve market acceptance is subject to a high level of uncertainty.

o The quality of conversations over the Internet is currently inferior to
the quality of those conducted on conventional telephones, mainly due to
the Internet infrastructure and each user's hardware limitations, which
may result in delays of up to a few seconds in the transmission of
speech, loss of voice packets and relatively inferior sound quality.

o In order for Internet Telephony to become widespread, the continued
expansion of the Internet and its network infrastructure will be
required. However, there can be no assurance that this will occur or that

the Internet will be able to meet additional demand or its users'
changing requirements on a timely basis, at a commercially reasonable
cost, or at all.

o The increased acceptance of Internet Telephony could result in
intervention by governmental regulatory agencies in the United States or
elsewhere in the world under existing or newly enacted legislation and in
the imposition of fees or charges on users and providers of products and
services in this area. There can be no assurance that such intervention
or imposition of fees or charges would not have a material adverse impact
upon the acceptance and attractiveness of Internet Telephony.

o Based upon current cost structures, the cost of a long distance or
international call made using Internet Telephony can be substantially
lower than the cost of a comparable conventional telephone call, making
Internet Telephony a potentially attractive alternative or supplement to
conventional telephone. However, in the future this price differential
may be reduced, or completely eliminated, in the event that new fees or
taxes are imposed on use of the Internet and/or rates for conventional
telephone calls are reduced. If this should occur, the economic incentive
to use the Internet for voice communications would be significantly
reduced or eliminated.

Dependence on New Relationship With Gemini Industries. The Company has
entered into a distribution agreement with Gemini Industries, Inc. ('Gemini')
that provides Gemini with the exclusive right to distribute CompuNet 2000 in the
United States through retail stores to end users during the term of the
agreement. The Company has retained the right to distribute the product through
other distribution channels in the United States (such as sales to corporate
accounts) and without any limitations outside of the United States. The term of
such agreement commences on June 1, 1996 and extends until the end of 1997
(subject to extension by mutual agreement). Under the terms of the agreement,
Gemini has committed to purchase from the Company 10,000 units of CompuNet 2000
in 1996 (subject to the condition that the Company is able to make the product
available in a timely manner and in the quantities requested by Gemini for
particular time periods, including traditional selling seasons) and must
purchase a minimum of 10,000 units per month in 1997 in order to maintain
exclusivity. The Company commenced making sales pursuant to the distribution
agreement in September 1996, and, as of November 30, 1996, had sold an aggregate
of approximately 5,000 units to Gemini. Gemini has the right to terminate the
agreement under certain circumstances, including if (i) the Company fails to
comply with its material obligations under the agreement (subject to specified
notice provisions and cure rights) or (ii) if any competitive product is offered
in the market place and the Company fails to keep Gemini competitive in price
and quality. The Company expects that a significant portion of revenues relating
to CompuNet 2000 will be attributable to sales made to Gemini. Consequently, the
Company's business and financial condition could be adversely affected in the
event that Gemini (i) for any reason fails to purchase the 10,000 units of
CompuNet 2000 that the distribution agreement contemplates that it will purchase
in 1996, (ii) fails to effectively market CompuNet 2000, (iii) terminates the
distribution agreement for any reason or (iv) fails to extend the term of the

distribution agreement beyond 1997.

Possible Delay in Commencement of Sales. The Company's ability to make the
additional sales of CompuNet 2000 contemplated by the distribution agreement
with Gemini described above may be delayed by various circumstances, including,
among others, production or shipping delays, unforeseen technical problems
and/or failure by Gemini for any reason to purchase the units of CompuNet 2000
that the Company expects

<PAGE>

Gemini to purchase in 1996 pursuant to such distribution agreement.
Consequently, there can be no assurance that the Company will be able to make
additional sales of CompuNet 2000 within the expected time frame or at all. The
failure by the Company to make additional sales of CompuNet 2000 within the
expected time frame would have a material adverse effect on the Company's
business and financial condition.

Possible 'Bundling' of Internet Telephony Enabling Software With
Competitive Products. There are only a limited number of software companies
that sell the software that enables Internet Telephony. One or more of these
companies may elect to bundle with its software a hardware product that competes
with the Company's CompuNet 2000 product. Any such occurrence would adversely
affect the ability of the Company to market CompuNet 2000.

Certain Functional Limitations. When used for conventional telephone
calls, CompuNet 2000 has the same functional limitations as CompuPhone 2000
described under '--Considerations Relating to the Business of the
Company--Certain Risks Specific to CompuPhone 2000.'

CERTAIN RISKS SPECIFIC TO THE WPS-1000 PRODUCT

Possible Delay in Commercial Introduction. The WPS 1000 product is
currently in the preproduction, prototype stage. The Company currently projects
that it will commence the commercial introduction of this product in the first
quarter of 1997. However, the Company's ability to commence such commercial
introduction within the projected time frame may be delayed by various
circumstances, including, among others, the risks described in the following
paragraph associated with transitioning the product from a prototype to one that
is mass produced, production or shipping delays and/or unforeseen technical
problems. Consequently, there can be no assurance that the Company will be able
commence the commercial introduction of WPS-1000 within the expected time frame
or at all. The failure by the Company to commence such commercial introduction
within the expected time frame would have a material adverse effect on the
Company's business and financial condition.

Risks Associated with Transition From Prototype Stage to Mass
Production. In order for the Company to commence the commercial introduction of
WPS-1000, it will be necessary to transition the product from a prototype to one

that is mass produced. Such transition process involves various risks, including
that in the course of the transition process the Company may discover that (i)
the performance of the prototype cannot be replicated in a mass produced product
or (ii) design changes are necessary in order to achieve the expected
performance. Any such discovery could result in a delay in the commercial
introduction of WPS-1000 or in the Company's complete inability to commercialize
the product. Any such occurrence would have a material adverse effect on the
Company's business and financial condition.

Possible Reduction in Potential Market for the WPS-1000. The WPS-1000
enables wireless printing from a laptop computer. Although there are existing
wireless printing products, the Company believes that there is a potential
market for the WPS-1000 because the WPS-1000 offers certain advantages that the
existing products do not offer (as described under 'Business--Wireless Printing
Product'). However, the Company estimates that the potential market for the
WPS-1000 may be significantly reduced or eliminated in the near future (by 1998
according to one market study commissioned by the Company). This is primarily
due to the growing trend to include 'built-in' wireless printing capability in
new laptop computers being sold. The Company believes that, as built-in wireless
printing capability becomes the norm, the demand for separate wireless printing
products may decrease, even if these separate products can offer certain
functional advantages (such as greater range). In addition, technological
advances relating to existing wireless printing products may eliminate or reduce
the advantages that the WPS-1000 offers when compared with such existing
products. In the event that the Company succeeds in successfully commercializing
the WPS-1000 and thereafter the market for such product contracts, such
occurrence would have a material adverse effect on the Company's business and
financial condition if the Company fails to generate profits from other products
to offset any lost profits resulting from such market contraction.

CUSTOMER CONCENTRATION

The Company anticipates that a significant portion of the Company's
revenues and accounts receivable may be accounted for by Gemini (as described
under '--Certain Risks Specific to CompuNet 2000--Dependence on New Relationship
with Gemini Industries') and by a limited number of other key customers, the
identity of which may vary from period to period. See Note 8 of Notes to
Consolidated Financial Statements. To the extent

<PAGE>

the Company continues to depend upon a limited number of key customers for a
material percentage of its net sales and accounts receivable, the loss of one or
more of these key customers or any significant reduction in orders by such
customers could have a material adverse effect on the Company's business and
financial condition. See 'Business--End Users, Distribution, Sales and
Marketing.'

RISK OF PRODUCT RETURNS AND RISK ARISING FROM PRICE PROTECTION PROVISIONS

As is common in the industry for PCs and PC peripherals, the Company is
exposed to the risk of product returns from distributors and retailers. Product
returns may be based upon a contractual right of return that a particular
customer may have. Product returns may also be based upon a determination by the
Company that it is in the Company's long-term interest to voluntarily assist
particular customers in managing inventories. The contractual right of return,
if any, that the Company grants to customers varies from customer to customer.
Such right may allow a customer to return product for any reason or only upon
the occurrence of specific events. Such specific events may include, among other
things, termination of a distributors's distribution agreement (which in many
cases can be effected by a distributor at any time or upon short notice),
inability of the customer to resell the product and/or in the event that the
Company makes technological changes to the product. Although the Company has
established reserves for product returns, there can be no assurance that such
reserves will be adequate or that future product returns will not have a
material adverse effect on the Company's business and financial condition.

The Company includes in certain of its agreements with distributors and
other customers price protection clauses, pursuant to which the Company is
required to grant specified credits to the customer in the event that the
Company reduces current selling prices on products previously purchased by such
customer. There can be no assurance that future price protection claims will not
have a material adverse effect on the Company's business and financial
condition.

The Company generally permits customers to return products for repair or
replacement if the product does not conform to the Company's warranty. The
Company seeks to limit its costs relating to warranty claims by generally
seeking to obtain a corresponding warranty from each contract manufacturer that
manufactures any of the Company's product. However, there can be no assurance
that the Company will always be successful in this regard or that a contract
manufacturer will not fail to honor its warranty. Consequently, there can be no
assurance that future warranty claims will not have a material adverse effect on
the Company's business and financial condition.

DEPENDENCE ON CONTRACT MANUFACTURERS

The Company currently outsources substantially all of its manufacturing and
assembly requirements and expects that it will continue to do so for the
foreseeable future (other than software production which the Company expects
will be done at the Company's Israeli facilities). In general, the Company's
policy is to rely upon a single contract manufacturer to produce each of its
products (or related product groups), until sales of any particular product
reach a level that would permit the Company to qualify a second contract
manufacturer and still be capable of negotiating reasonable prices based on
volume. Reflecting this policy, the Company currently uses a single contract
manufacturer with facilities in Taiwan and the People's Republic of China to
manufacture CompuPhone 2000 and CompuNet 2000. The Company expects to use a
contract manufacturer with facilities in the People's Republic of China to
manufacture WPS-1000. The Company does not currently have long-term agreements
with any contract manufacturer that it uses. Accordingly, any such contract
manufacturer could elect at any time to terminate its relationship with the
Company or reduce the manufacturing capacity that it allocates to the Company.

The Company estimates that six months or more would be required in order for it
to qualify an alternate manufacturer for any product. There can be no assurance
that the Company will be able to obtain its requirements for any product from
any contract manufacturer that the Company uses for the manufacture of such
product. The events and circumstances that may interfere with the Company's
ability to obtain its product requirements from a contract manufacturer include:
(i) the Company's requirements may increase above the capacity that the contract
manufacturer has (or that it is willing to allocate to the Company), (ii) a
contract manufacturer may terminate its relationship with the Company or reduce
the manufacturing capacity that it allocates to the Company and/or (iii) a
contract manufacturer's manufacturing capacity may be reduced or eliminated as a
result of a casualty or technical problems. Furthermore, in view of the
Company's use of foreign-based contract manufacturers, the Company's ability to
obtain its product requirements from a contract manufacturer may be

<PAGE>

negatively impacted by a variety of additional factors, including political or
economic instability in a region, changes in diplomatic and trade relationships,
tariffs and other barriers and restrictions, and restrictions on the transfer of
funds. Any inability on the part of the Company to obtain its product
requirements in a timely manner and in sufficient quantities from any contract
manufacturer that it is using would have a material adverse effect on the
Company's business and financial condition, particularly in view of the
following: (i) the Company does not expect to have an alternate contract
manufacturer qualified for any product, (ii) the same contract manufacturer is
expected to manufacture both CompuPhone 2000 and CompuNet 2000, (iii) a long
lead time would be required in order for the Company to qualify an alternate
manufacturer for any product and (iv) the Company does not expect that it will
maintain sufficient inventory to allow it to fill customer orders without
interruption during the time that would be required to qualify an alternate
manufacturer. The Company's reliance on contract manufacturers involves several
other risks, including reduced control over delivery schedules, quality
assurance and costs. There can be no assurance that problems resulting from such
risks will not have a material adverse effect on the Company's business and
financial condition. See 'Business--Manufacturing.'

The process of ramping up production of a new product at a contract
manufacturer requires extensive exchange of product and process information
between the Company and the contract manufacturer, the production of prototypes
and test runs. This process is complex and can take a considerable amount of
time. The Company has not yet ramped up production of CompuNet 2000 or WPS-1000
and there can be no assurance that the Company will not encounter unanticipated
problems or delays in connection with the ramping up process that could have a
material adverse effect on the Company's business and financial condition.

POSSIBLE SHORTAGES OF COMPONENTS

A variety of components are required to manufacture the Company's products.
Although supplies for such components currently are adequate, shortages could
occur in the future in various critical components, particularly

microcontrollers, due to interruption of supply or increased industry demand.
Any such shortages could result in higher costs or production delays, any of
which could have a material adverse effect on the Company's business and
financial condition. The microcontrollers incorporated into the Company's
current products are purchased by the Company's contract manufacturers
principally from Intel Corp. and/or Philips Electronics, NV. The Company's
contract manufacturers (rather than the Company) purchase the components
required to manufacture the Company's products. The fact that the Company has no
direct relationship with such suppliers may exacerbate the risks described above
relating to potential shortages.

CERTAIN RISKS RELATED TO INTERNATIONAL SALES

International sales have accounted for a significant portion of the
Company's sales of CompuPhone 2000 in recent periods. See 'Managements'
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Information Concerning International Sales.' International business
operations may be negatively impacted by a variety of factors, including
political or economic instability in a region, changes in diplomatic and trade
relationships, tariffs and other barriers and restrictions, restrictions on the
transfer of funds, currency fluctuations, potentially adverse tax consequences
and the burdens of complying with a variety of foreign laws. For example, the
Company has been required to make certain modifications to its CompuPhone 2000
product in order to bring it into compliance with applicable foreign regulations
(the required modifications varying depending on the country). Although the
Company has not to date experienced any material adverse effect on its
operations as a result of such factors, there can be no assurance that such
factors will not materially adversely impact the Company's business and
financial condition in the future or require the Company to modify its current
business practices.

HIGHLY COMPETITIVE MARKETS

<PAGE>

substantially the same as the Company's CompuPhone 2000 product. There can also
be no assurance that the Company's competitors will not be able to offer
customers more competitive pricing or to adapt more quickly than the Company to
new technologies and evolving customer requirements. Consequently, there can be
no assurance that the Company will be able to compete successfully in its target

markets or that competition will not have a material adverse effect on the
Company's business and financial condition.

DEPENDENCE ON KEY PERSONNEL

The Company's future success depends to a significant degree upon the
continued contributions of its senior management and on the continued service of
its key sales and marketing and research and development personnel. The Company
believes that its future success will also depend in large part on its ability
to attract and retain additional managerial, sales and marketing, and research
and development personnel. There is, however, considerable competition for the
services of qualified personnel in these areas and, consequently, there can be
no assurance that the Company will be able either to retain its present
personnel or to attract additional qualified personnel as and when needed. The
loss of the services of one or more of the Company's key personnel, particularly
senior management and certain hardware and software engineers, or the inability
of the Company to attract additional personnel as and when needed could have a
material adverse effect on the Company's business and financial condition. See
'Business--Employees' and 'Management--Executive Officers, Directors and Key
Employees.'

IMPORTANCE OF PROTECTION OF PROPRIETARY TECHNOLOGY

The Company's success depends significantly upon its ability to protect its
proprietary technology. The Company relies upon a combination of patents, trade
secrets, copyright and trademark law, confidentiality procedures and contractual
provisions to protect its proprietary technology. However, there can be no
assurance that (i) such steps will be adequate to prevent misappropriation of
the Company's technology or (ii) the Company's competitors will not develop
products that are substantially equivalent or superior to the Company's products
without infringing upon the Company's proprietary rights. (As described under
'Competition,' there is a company in the Federal Republic of Germany that is
currently marketing outside the United States a product that is substantially
the same as the Company's CompuPhone 2000 product.) In addition, the laws of
certain foreign countries in which the Company's products are, or may be,
developed, manufactured or sold, including various countries in Asia, may not
protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely.

POSSIBILITY OF THIRD PARTY INFRINGEMENT CLAIMS

The Company believes that its products and their use do not infringe the
proprietary rights of third parties and, to date, there has been no litigation
commenced against the Company relating to any infringement claims. However, the
Company has from time to time in the past received, and may receive in the
future, communications from third parties claiming that the Company's products
infringe, or may infringe, the proprietary rights of third parties. There can be
no assurance (i) that any such claims will not require the Company to enter into
license arrangements or result in protracted and costly litigation, regardless
of the merits of such claims, (ii) that any necessary licenses will be available
or that, if available, such licenses can be obtained on commercially reasonable
terms or (iii) that any such claims will not be upheld.

CERTAIN RISKS ASSOCIATED WITH USE OF FOREIGN CURRENCIES

A substantial portion of the Company's business is conducted in the State
of Israel through two Israeli subsidiaries (the 'Israeli Subsidiaries'). See
'--Considerations Relating to the Company's Operations in Israel.' As a result,
the Company incurs expenses in New Israeli Shekels ('NIS'). Consequently, an
increase in the value of the NIS in relation to the dollar would increase the
Company's expenses in dollar terms. In addition, the Company's expenses in
dollar terms could increase in the event that inflation in Israel is not offset
(or is offset on a lagging basis) by the devaluation of the NIS in relation to
the dollar. During 1995 and the first nine months of 1996 inflation in Israel
and the change in the value of the NIS in relation to the dollar were: 1995 (the
inflation rate was 8.10% while the NIS was devalued by 3.88%); and first nine
months of 1996 (the inflation rate was 8.19%, not annualized, while the NIS was
devalued by 2.71%). There can be no assurance that the Company will not be
materially adversely affected in the future if inflation in Israel continues to
exceed the devaluation of the NIS against the dollar or if the timing of such
devaluation lags behind increases in inflation in Israel.

<PAGE>

The Israeli Subsidiaries maintain their accounts in NIS, while the
Company's consolidated financial statements are reported in dollars.
Accordingly, the Israeli Subsidiaries' assets and liabilities are translated to
dollars based on the exchange rate at the end of the reporting period and their
income and expense items are translated to dollars based on the average exchange
rates prevailing during the reporting period. Such currency translations may
result in gains or losses (which are recorded directly into a separate component
of stockholders' equity). Although to date the effects of such currency
translations have not been material, there can be no assurance that in the
future such currency translations will not have a material adverse effect on the
Company's financial condition.

The Company currently denominates its international sales in dollars, but
may in the future denominate certain of such sales in foreign currencies. In
such event, fluctuations in the rates of exchange between the dollar and other
currencies may effect the Company's financial condition or results of
operations. For example, an increase in the value of a particular currency
relative to the dollar will increase the dollar reporting value for transactions
in such currency. Conversely, a decrease in the value of such currency relative
to the dollar will decrease the dollar reporting value for transactions in such
currency.

BROAD DISCRETION OVER APPLICATION OF IPO PROCEEDS

Management of the Company has broad discretion in determining the manner in
which the net proceeds of the IPO are applied.

CONSIDERATIONS RELATING TO THE COMMON STOCK

CONCENTRATED CONTROL

The executive officers and directors of the Company (together with entities
affiliated with certain of such individuals and a trust for the benefit of
certain family members of one of such individuals) beneficially own
approximately 27% of the outstanding Common Stock (after giving effect to the
exercise of all options held by such persons that are currently exercisable) and
may be deemed to have effective control of the Company. See 'Principal
Stockholders.'

NO DIVIDENDS

The Company has never paid any dividends on its Common Stock and has no
plans to pay dividends on its Common Stock in the foreseeable future. See
'Dividend Policy.'

NO ASSURANCE OF PUBLIC TRADING MARKET; POSSIBLE VOLATILITY OF COMMON STOCK AND
PUBLIC WARRANT PRICES

There can be no assurance that an active trading market for any of the
Public Securities will be sustained. The trading price of the Public Securities
could be subject to wide fluctuations in response to, among other things,
announcements of technological innovations or new products by the Company or its
competitors, developments or disputes concerning patents or proprietary rights,
quarterly variations in the Company's and its competitor's quarterly results,
changes in earnings estimates by analysts, market conditions in the industry,
and general economic conditions.

SHARES ELIGIBLE FOR FUTURE SALE

No prediction can be made as to the effect, if any, that future sales of
Common Stock, or the availability of Common Stock for future sale, will have on
the market price of the Public Securities prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon exercise of
warrants or options), or the perception that such sales could occur, could
adversely affect prevailing market prices for the Public Securities. See 'Shares
Eligible For Future Sale.'

REPRESENTATIVE'S INFLUENCE ON THE MARKET

A significant amount of the Public Securities offered in the IPO may have
been sold to customers of the Representative (as defined under 'Certain
Information Concerning Initial Public Offering--Underwriting Arrangements
Relating to the IPO'). Such customers may engage in transactions for the sale or
purchase of such Public Securities through or with the Representative. If it

participates in the market, the Representative may exert a dominating influence
on the market for the Public Securities. The price and liquidity of the Common
Stock and the Public Warrants may be significantly affected by the degree, if
any, of the Representative's participation in such market. See 'Description of
Securities.'

<PAGE>

POTENTIAL ISSUANCE OF PREFERRED STOCK

Although the Company has no present intention of issuing any preferred
stock (and has contractually agreed not to do so until the first anniversary of
the Effective Date), the Company's Certificate of Incorporation provides that
the Board of Directors has the authority, without first obtaining the approval
of the holders of Common Stock, to issue from time to time preferred stock
having rights superior to the Common Stock. Such authority may have the effect
of delaying, deferring or preventing a change of control of the Company, even if
such event would be beneficial to the stockholders of the Company.

CONSIDERATIONS RELATING TO THE COMPANY'S OPERATIONS IN ISRAEL

One of the Company's Israeli Subsidiaries participates in certain Israeli
government programs that provide certain significant tax benefits. To be
eligible for these tax benefits, such Israeli Subsidiary must continue to meet
certain conditions. These conditions include, among others, completing certain
investment programs, fulfilling certain requirements as to capitalization,
making sales to ITI USA only on market terms, and filing periodic compliance
reports. Although the Company believes that such Israeli Subsidiary will be able
to satisfy such conditions, there can be no assurance of this. Should such
Israeli Subsidiary fail to meet such conditions in the future, such tax benefits
could be canceled, in whole or in part, and such Israeli Subsidiary might be
required to refund the amount of the canceled benefits, together with certain
additional amounts and interest. There can be no assurance that such programs
and tax benefits will be continued in the future at their current levels or
otherwise. In the event that such tax benefits are no longer available to such
Israeli Subsidiary for any reason, certain income (if any) of such Israeli
Subsidiary that would otherwise have been tax-exempt will be subject to
taxation, which may have the effect of increasing the Company's effective income

tax rate. See 'Israeli Taxation' and 'Conditions in Israel.'

<PAGE>

USE OF PROCEEDS

The Company will not receive any proceeds from the sale of the Resale
Shares by the Selling Security Holders. The Company may, in the future, receive
proceeds from the exercise of the Bridge Warrants, but only if such warrants are
exercised and then only in an amount equal to the exercise price thereof ($0.60)
multiplied by the number of warrants exercised. The Company expects to use any
such proceeds for working capital and general corporate purposes.

CERTAIN INFORMATION CONCERNING INITIAL PUBLIC OFFERING

GENERAL

On October 7, 1996, the Company completed an initial public offering (the
'IPO') of 3,000,000 shares of Common Stock and 3,000,000 Public Warrants. In
November 1996, the Company issued an additional 360,082 Public Warrants upon
exercise of the over-allotment option granted to the underwriters in connection
with the IPO as described below. See 'Description of Securities' for certain
information concerning the Common Stock and the Public Warrants.

The initial public offering price (the 'IPO Price') for the Public
Securities offered in the IPO was $6.00 per share of Common Stock and $0.10 per
Public Warrant, and the underwriting discount and commissions were $0.48 per
share of Common Stock and $0.008 per Public Warrant. Such underwriting discounts
and commissions do not include (i) additional compensation paid to the
Representative in the form of a non-accountable expense allowance equal to 2.5%
of the gross proceeds of the IPO and (ii) the value of the Representative's
Warrants that was sold to the Representative at a nominal price as described
below.

UNDERWRITING ARRANGEMENTS RELATING TO THE IPO

The IPO was effected pursuant to an Underwriting Agreement (the
'Underwriting Agreement') entered into by the Company with National Securities
Corporation, as representative (the 'Representative') of the underwriters (the
'Underwriters') named in the Underwriting Agreement.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the 'Securities Act'), or to contribute to payments that the Underwriters may
be required to make.

In connection with the IPO, the Company granted to the Underwriters an
over-allotment option, exercisable within 45 days of October 1, 1996, to
purchase up to an additional 450,000 shares of Common Stock and/or 450,000
additional Public Warrants at the IPO Price per share of Common Stock and Public
Warrant, respectively, less underwriting discounts and the non-accountable
expense allowance. In November 1996, the Company issued 360,082 Public Warrants
upon exercise of such over-allotment option.

In connection with the IPO, the Company sold to the Representative, for
nominal consideration, warrants to purchase from the Company up to 300,000
shares of Common Stock and\or 300,000 warrants (the 'Representative's
Warrants'). The Representative's Warrants are initially exercisable at a price
of $9.90 per share of Common Stock and $0.165 per warrant for a four-year period
commencing on the first anniversary of the issuance of such warrants. The
warrants issuable upon exercise of the Representative's Warrants are the same as
the Public Warrants, except that they are exercisable at a price of $14.85 per
share of Common Stock. The Representative's Warrants may not be sold,
transferred, assigned or hypothecated for a period of one year following October
1, 1996, except to officers of the Representative, Underwriters or members of
the selling group. The Representative's Warrants provide for adjustments in the
number of shares of Common Stock and warrants issuable upon the exercise thereof
and in the exercise price of the Representative's Warrants as a result of
certain events, including subdivisions and combinations of the Common Stock. The
Representative's Warrants grant to the holders thereof certain rights of
registration for the securities issuable upon exercise of the Representative's
Warrants.

The Company has agreed that, for a period of three years after October 1,
1996, the Company shall use its best efforts to cause an individual designated
by the Representative to be elected as a member of the Board of

<PAGE>

Directors of the Company. Such person may be a director, officer, employee or
affiliate of the Representative. See 'Management--Executive Officers, Directors
and Key Employees.' In the event that the Representative elects not to designate
a person to serve on the Board of Directors of the Company, the Representative
shall have the right to designate one person to attend meetings of the Board of
Directors of the Company. Such person shall be entitled to attend all such
meetings and to receive all notices and other correspondence and communications
sent by the Company to members of its Board of Directors. The Company has agreed
to reimburse the designee of the Representative for such designee's

out-of-pocket expenses incurred in connection with such designee's attendance of
meetings of the Company's Board of Directors.

Prior to the IPO, there was no public market for the Common Stock or the
Public Warrants. Consequently, the IPO Price was determined by negotiation
between the Company and the Representative and does not necessarily bear any
relationship to the Company's asset value, net worth, and other established
criteria of value. The factors considered in such negotiations, in addition to
prevailing market conditions, included the history of and prospects for the
industry in which the Company competes, an assessment of the Company's
management and the prospects of the Company, the Company's capital structure and
certain other factors as were deemed relevant.

PRICE RANGE OF COMMON STOCK

The Common Stock is listed on the AMEX under the symbol ITH. During the
period from October 1, 1996, the date of the commencement of the Company's IPO,
through December 22, 1996 the high and low reported sales prices of the Common
Stock on the AMEX were $5 3/8 and 2, respectively. As of December 2, 1996, there
were 73 holders of record of the Common Stock.

<PAGE>

DIVIDEND POLICY

The Company intends to retain all earnings for the foreseeable future for
use in the operation and expansion of its business and, accordingly, the Company
currently has no plans to pay dividends on its Common Stock. The payment of
future dividends will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings, if any, capital
requirements, financial condition and requirements, business conditions,
restrictions in financing agreements and such other factors as are considered to
be relevant by the Board of Directors from time to time.

CAPITALIZATION

The following table sets forth as of September 30, 1996: (i) the actual
capitalization of the Company and (ii) the pro forma capitalization of the
Company as adjusted to give effect to (x) the sale of the Public Securities in
the IPO (not including 360,082 Public Warrants subsequently issued upon exercise
of the underwriters' over-allotment option) and deduction from the gross
proceeds of the underwriting discounts and commissions and estimated offering
expenses and (y) the application of a portion of the net proceeds to repay the
Bridge Notes and accrued interest thereon as described under 'Certain
Information Concerning Initial Public Offering--Use of IPO Proceeds.'

<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
-----------------------------
PRO FORMA AS
ACTUAL ADJUSTED
---------- ------------
<S> <C> <C>
Short-term debt.............................. $1,032,067(1) $ 63,138
Stockholders' equity:
Common Stock, $.01 par value, 40,000,000
shares authorized; 2,930,178 shares
issued and outstanding(2); 5,930,178
shares issued and outstanding, pro forma
as adjusted(2).......................... 29,812 59,812
Preferred Stock, $.01 par value, 5,000,000
shares authorized; none issued and
outstanding............................. -- --
Additional paid in capital................. 6,171,006 21,441,006
Treasury stock............................. (165,000) (165,000)
Accumulated deficit........................ (6,989,346) (7,232,121)(1)
Cumulative translation adjustment.......... 195,618 195,618
---------- ------------
Total stockholders' equity (net capital
deficiency)........................... (757,910) 14,299,315(1)
---------- ------------
Total capitalization.................... 274,157 14,362,453
---------- ------------
---------- ------------
</TABLE>

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

(1) Actual short-term debt includes the proceeds from the Bridge Financing of
$1,175,000 less the amount of such proceeds allocated to the Bridge
Warrants. In connection with the Bridge Financing, the Company recorded loan
discount of $458,000 and deferred financing costs of $77,000. Upon repayment
of the Bridge Notes from the net proceeds of the IPO prior to the scheduled
maturity of such notes (which was December 15, 1996), the unamortized
portion of the loan discount and deferred financing costs was recognized as
an extraordinary loss. The pro forma as adjusted accumulated deficit
reflects the extraordinary loss that would have been recorded had such
repayment been effected on September 30, 1996. Both actual stockholders'
equity and pro forma as adjusted stockholders' equity include the portion of
the net proceeds of the Bridge Financing allocated to the Bridge Warrants.
See 'Management's Discussion and Analysis of Financial Condition and Results
of Operations--Bridge Financing.'

(2) Does not include (i) the shares of Common Stock covered by this Prospectus
that are issuable upon exercise of the Bridge Warrants (or that were issued
subsequent to September 30, 1996 upon exercise of the Bridge Warrants), (ii)
3,360,082 shares of Common Stock issuable upon exercise of the Public
Warrants sold in connection with the IPO, (iii) 300,000 shares of Common
Stock issuable upon exercise of the

(Footnotes continued on next page)

19
<PAGE>

(Footnotes continued from previous page)

Representative's Warrants (as defined under 'Certain Information Concerning
Initial Public Offering') issued in connection with the IPO, (iv) warrants
to purchase 300,000 shares of Common Stock issuable upon exercise of the
Representative's Warrants, (v) 915,988 shares issuable upon exercise of
outstanding options (257,322 of which provide for an exercise price of
approximately $.01 per share, 133,111 of which provide for an exercise price
of approximately $1.64 per share and 525,555 of which provide for an
exercise price equal to $6.00 per share) and (vi) 307,778 shares reserved
for possible future grants of options under the Company's 1996 Stock Option
Plan.

<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The balance sheet data presented below as of December 31, 1995 and 1994 and
the income statement data presented below for each of the years in the
three-year period ended December 31, 1995 are derived from the Consolidated
Financial Statements of the Company, which have been audited by Price Waterhouse
LLP, independent accountants, and are included elsewhere in this Prospectus. The
report of Price Waterhouse LLP, which is also included elsewhere in this
Prospectus, contains an explanatory paragraph relating to the uncertainty of the
Company's ability to continue as a going concern. The balance sheet data
presented below as of September 30, 1996, and the income statement data
presented below for the nine month periods ended September 30, 1996 and
September 30, 1995, have not been audited by independent accountants, but in the
Company's opinion reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial condition and
results of operations of the Company as of the dates and for the periods
presented. The information presented below should be read in conjunction with
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and the Consolidated Financial Statements and related Notes thereto
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------------------- --------------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $ 76,877 $ 85,610 $ 803,705 $ 547,508 $ 634,158
Cost of products sold......... 72,767 80,874 491,315 324,910 448,556
Selling, general and
administrative expenses..... 595,004 1,723,929 1,634,164 1,134,581 1,321,318
Research and development
expenses, net............... 30,023 291,970 357,117 145,045 261,297
--------- ----------- ----------- ----------- -----------
Loss from operations.......... (620,917) (2,011,163) (1,678,891) (1,057,028) (1,397,013)
Interest income (expense),
net......................... (935) 33,535 (4,173) 23,954 (391,725)
--------- ----------- ----------- ----------- -----------
Net loss...................... (621,852) (1,977,628) (1,683,064) (1,033,074) (1,788,738)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Net loss per share(1)......... $ (.34) $ (.71) $ (.54) $ (.34) $ (.57)
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996
---------- -------- -------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)....... $ 780,018 $179,494 $ (799,764)
Total assets....................... 1,312,029 829,546 1,353,933
Total liabilities.................. 400,058 531,322 2,111,843
Stockholders' equity (net capital
deficiency)...................... 911,971 298,224 (757,910)
</TABLE>

- ------------------
(1) For information concerning the computation of net loss per share, see Note 2
of Notes to consolidated Financial Statements.

<PAGE>

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

On October 7, 1996, the Company completed an underwritten initial public
offering (the 'IPO'). For additional information concerning the IPO, see
'Certain Information Concerning Initial Public Offering.'

Since it was formed in 1990, the Company has been incurring significant
expenses intended to provide benefits in future periods, as the Company executes
its strategy of developing and bringing to market new products. These expenses
include (i) research and development ('R&D') expenses incurred by the Company in
connection with developing new products, (ii) selling, general and
administrative expenses ('SG&A') incurred by the Company in connection with
establishing a portion of the management, administrative, sales and distribution
capability that it believes will be required in future periods in order to
enable it to successfully commercialize the products that it develops and (iii)
SG&A expenses incurred in connection with attempting to commercialize the three
products that the Company has developed to date: CompuPhone 2000, CompuNet 2000
and WPS-1000. During the period from January 1, 1993 through September 30, 1996,
the Company incurred aggregate R&D expenses (net of contributions by the
Government of Israel Chief Scientist) and SG&A expenses of $6.21 million ($0.94
million of R&D and $5.27 million of SG&A).

At the same time, during the period January 1, 1993 through September 30,
1996, the Company had only limited revenues ($1.6 million in the aggregate,
substantially all of which was generated subsequent to 1994). The Company's
limited revenues to date reflect a number of factors, including: (i) the Company
first commenced sales of CompuPhone 2000 in 1995, (ii) a predecessor version of
CompuPhone 2000 that lacked many features of the current product and was more
expensive was introduced in 1992 but did not gain market acceptance, (iii) the
Company first commenced sales of CompuNet 2000 in September 1996, (iv) the
Company has not yet commenced sales of WPS-1000 and (v) the Company's sales and
promotional efforts relating to CompuPhone 2000 and its ability to bring its
other two products to market were limited due to financial constraints prior to
completion of the IPO.

Reflecting the disparity between the Company's expenses and revenues
described above, the Company has had net losses in each period since its
inception and, as of September 30, 1996, had an accumulated deficit of $6.99
million.

In order for the Company to achieve profitability, the Company must
significantly increase its revenues. The Company's near-term plan for increasing

revenues has two primary components. First, the Company commenced sales of
CompuNet 2000 in September 1996 and is seeking to commence sales of WPS-1000 in
the first quarter of 1997. Second, the Company intends to use a portion of the
net proceeds of the IPO to significantly increase its advertising and marketing
efforts relating to all its products. There can be no assurance, however, that
the Company will succeed in making any additional sales of CompuPhone 2000 or
CompuNet 2000 within the contemplated time frames or at all; that the Company
will succeed in commencing sales of WPS-1000 within the contemplated time frame
or at all; that any of the Company's products will achieve market acceptance (or
sufficient market acceptance to make the product profitable); or that the
allocation of significant additional resources to advertising and marketing
efforts will result in increased sales. See 'Risk Factors--Considerations
Relating to the Business of the Company.'

When used for conventional telephone calls, CompuNet 2000 has the same
functionality as CompuPhone 2000. See 'Business--Internet Telephony Product.' As
a result, the Company expects that the introduction of CompuNet 2000 will reduce
the market for CompuPhone 2000 somewhat. The Company cannot at present quantify
the extent of this reduction. However, the Company believes that a viable
potential market for CompuPhone 2000 will remain because CompuPhone 2000 will be
priced substantially lower than CompuNet 2000. Specifically, the Company
believes that CompuPhone 2000 may remain attractive to users that (i) are
engaged in functions that do not require the Internet Telephony features of
CompuNet 2000 (such as telemarketing, order processing, customer service and
support, market research, and emergency dispatching) or (ii) are not willing to
pay the additional cost required to obtain such features. There can be no
assurance, however, that the introduction of CompuNet 2000 will not result in
there being an insufficient market for CompuPhone 2000 to make sales of this
product profitable.

<PAGE>

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995

Net Sales. Net sales in the first nine months of 1996 were $634,000,
representing an increase of approximately 15.8% over net sales of $548,000 in
the first nine months of 1995. This increase in net sales was attributable to
the introduction of the Company's new CompuNet 2000 product in the third quarter
of 1996. As described below, net sales attributable to CompuNet 2000 offset a
decrease in net sales attributable to CompuPhone 2000.

The Company commenced sales of CompuNet 2000 in September 1996 and sold

3,660 units in such month. All such sales were made pursuant to the Company's
distribution agreement with Gemini Industries, Inc. (described under '-Certain
Information Concerning Distribution Agreement with Gemini'). Such sales of
CompuNet 2000 accounted for approximately $313,000 of net sales, representing
approximately 49.3% of the Company's net sales for the first nine months of
1996.

The number of CompuPhone 2000 units sold (before taking into account the
potential returns described in the following paragraph) decreased to 4,225 units
in the first nine months of 1996 compared with 7,499 units in the first nine
months of 1995. Reflecting such decrease in unit sales and the reserve described
in the following paragraph, the amount of net sales attributable to sales of
CompuPhone 2000 decreased to $309,000 in the first nine months of 1996 compared
with $544,000 in the first nine months of 1995. International sales accounted
for 31% of the CompuPhone 2000 units sold in the first nine months of 1996
compared with 19% in the first nine months of 1995.

The Company has established a specific reserve for returns of CompuPhone
2000 in the amount of $35,000 (in addition to the general reserve for returns
that the Company normally establishes). Such specific reserve reduced net sales
by $35,000 in the first nine months of 1996. The Company established such
reserve in response to indications that (i) a customer that had purchased over
600 CompuPhone 2000 units in periods prior to the third quarter of 1996 may wish
to return a substantial number of such units and (ii) that a customer that
purchased approximately 130 units in the third quarter of 1996 may wish to
return a substantial number of such units. Both of the aforementioned customers
operate major retail chains that carry, among other products, personal computers
and peripherals. The first of the aforementioned customers accounted for
approximately 12% of the Company's net sales in the first six months of 1996.

Gross Profit. Gross profit margin in the first nine months of 1996
decreased to 29.3% from 40.7% in the first nine months of 1995. This decrease in
gross profit margin primarily reflected the fact that the gross profit margin
from CompuNet 2000 sales (which first commenced in September 1996 as described
above) has been lower than the historical gross profit margin from CompuPhone
2000.

The first 5,000 CompuNet 2000 units that were produced (including all units
sold in third quarter of 1996) were produced by retrofitting CompuPhone 2000
units that the Company had in inventory. Such retrofitting process increased the
manufacturing cost of such units in comparison to what such cost would have been
had such units been initially produced as CompuNet 2000 units. The Company
expects that additional CompuNet 2000 units will in general not be produced
through retrofitting.

SG&A. SG&A for the first nine months of 1996 includes an aggregate of
$100,000 of payments made by the Company to settle certain claims. (See Note 11
of Notes to Consolidated Financial Statements.) Excluding such payments, SG&A
was $87,000 higher in the first nine months of 1996 compared with the first nine
months of 1995. Such increases reflected compensation increases to certain
employees and the hiring of additional marketing personnel.

R&D, Net. R&D expense in the first nine months of 1996 increased to
$261,000 from $145,000 in the first nine months of 1995. This increase primarily
reflected increased research and development activities relating to commencing
production of CompuNet 2000 and preparing to commence production of WPS-1000, as
well as compensation increases to certain employees involved in research and
development.

<PAGE>

Interest income (expense), net. The Company completed a bridge financing
in the second and third quarters of 1996. As part of such financing, the Company
issued certain promissory notes and warrants and, in connection therewith,
recorded loan discount and deferred financing costs of $458,000 and $77,000,
respectively. (For information concerning such bridge financing, see '-Bridge
Financing.') The Company's interest expense, net, in the first nine months of
1996 represents interest on such notes and amortization of such loan discount
and deferred financing costs.

YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

Net Sales. Net sales in 1995 increased to $804,000 from $86,000 in 1994 and
$77,000 in 1993. This increase primarily reflected the fact that the Company
commenced sales of CompuPhone 2000 in early 1995 and sold 11,130 units of
CompuPhone 2000 at an average sales price of approximately $70.00 per unit. The
minimal net sales in 1994 and 1993 were attributable to sales of a predecessor
version of CompuPhone 2000. This predecessor version, which was introduced by
the Company in 1992, lacked many features of the current product and was more
expensive. This product did not gain market acceptance, and the Company
discontinued sales of this product in late 1994.

Gross Profit. Gross profit in 1995 was 38.8% of net sales. In view of the
fact that the Company had minimal net sales in 1994 and 1993 and such sales
related to a discontinued product, the Company believes that the gross profit
amounts for such periods are not meaningful in the context of the Company's
current business operations.

SG&A. SG&A expenses were $1.63 million, $1.72 million and $0.60 million in
1995, 1994 and 1993, respectively. The significant increase in SG&A expenses in
1995 and 1994 compared with 1993 primarily reflected expenses incurred in

anticipation of, and as a result of, the commercial introduction of CompuPhone
2000. Such expenses related primarily to (i) hiring additional staff for sales,
administration, technical support and warehouse operations, (ii) leasing
warehouse space and (iii) regulatory compliance matters. Although the Company
first commenced sales of CompuPhone 2000 in early 1995, the Company began
incurring expenses in anticipation of such sales in early 1994 because
originally the Company had planned to commence such sales in mid-1994. However,
the Company's ability to commence sales was delayed for approximately six months
due to the fact that the original contract manufacturer of the product did not
perform in accordance with the Company's expectations and, as a result, the
Company had to seek a replacement. The increase in SG&A expenses in 1995 and
1994 compared with 1993 also reflected the recognition of non-cash compensation
expense of $196,000 and $588,000 in 1995 and 1994, respectively, compared with
no such expense in 1993. Such non-cash compensation expense resulted from the
grant of options that provided for an exercise price that was less than the fair
market value of the Common Stock at the time of grant.

The Company in 1996 paid to a customer that accounted for approximately 18%
of net sales in 1995 approximately $72,000 as an allowance, and this payment is
reflected in 1995 SG&A. The Company determined to make this payment after the
customer indicated to the Company that it wished to return certain of the
CompuPhone 2000 units that it had purchased but had not yet paid for. In fact no
units were returned. Although the Company believes that the customer had no
contractual right to return the units, the Company nevertheless determined that
it would be in the Company's long-term interest to support sales of the
Company's product by this customer.

R&D, Net. R&D expenses were $357,000, $292,000 and $30,000 in 1995, 1994
and 1993, respectively. Such amounts are net of contributions by the Government
of Israel Chief Scientist in the amount of $2,000, $47,000 and $35,000 in 1995,
1994 and 1993, respectively. The significant increase in R&D expenses in 1995
and 1994 compared with 1993 primarily reflected the fact that the Company (i) in
1994 increased its research and development efforts in connection with
developing CompuPhone 2000 and WPS-1000 and (ii) in 1995 increased its research
and development efforts in connection with developing CompuNet 2000 and
potential enhancements for CompuPhone 2000. In addition, such increase reflected
compensation increases in 1994 and 1995 to certain employees involved in
research and development. The decline in the amount of contributions made in
1995 by the Government of Israel Chief Scientist reflects the fact that such
grants relate to specific approved projects that

<PAGE>

the Company has ceased to be actively engaged in. See 'Israeli Taxation--Law for
the Encouragement of Industrial Research and Development, 1984.'

CERTAIN TAX CONSIDERATIONS

A substantial amount of the Company's business is conducted in the State of
Israel through the Company's Israeli Subsidiaries. For certain information
concerning the taxation of the Israeli Subsidiaries under Israeli law, see
'Israeli Taxation.'

Each of the Israeli Subsidiaries is a controlled foreign corporation (a
'CFC') for United States tax purposes. As a result, ITI USA will be required to
include in its income its pro rata share of each such subsidiary's subpart F
income, and may also be required to include certain additional amounts if such
subsidiary has investments in United States property or passive assets in excess
of certain levels (in each case irrespective of whether such subsidiary has made
any distributions to ITI USA). For this purpose 'subpart F income' includes
certain income derived from transactions with related parties and certain types
of passive income such as dividends, interest, rents, royalties, and annuities,
but does not include, among other things, rents and royalties derived in the
active conduct of a trade or business. The Company does not currently expect
that any of the Israeli Subsidiaries will have any material amount of subpart F
income, or any material investments in United States property or any passive
assets materially in excess of the prescribed levels. However, no assurance can
be given in this regard. If any Israeli Subsidiary were to have any subpart F
income, or any investments in the United States property or passive assets in
excess of the prescribed levels, ITI USA could be subject to income tax relating
to an Israeli Subsidiary's earnings or assets, irrespective of whether such
subsidiary has made any distributions to ITI USA. This may have the effect of
increasing the Company's effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

As described above, the Company has had only limited revenues to date and
had an accumulated deficit of $6.99 million as of September 30, 1996. As a
result, the Company has had negative cash flow from operations during each year
since it commenced operations and during the first nine months of 1996. The
amount of cash used by the Company for operating activities was $0.60 million,
$1.40 million, $1.72 million and $0.96 million during 1993, 1994, 1995 and the
first nine months of 1996, respectively. Prior to the IPO, the Company funded
its cash requirements primarily through the private placement of Common Stock.
In addition, the Company funded a portion of its cash requirements during 1996
through the bridge financing described under '--Bridge Financing.'

On October 7, 1996, the Company completed an IPO. The estimated net
proceeds to the Company from the IPO was approximately $15.3 million. The
Company used approximately $1.2 million of such proceeds to repay certain
promissory notes issued in connection with the bridge financing referred to
above. For additional information concerning the IPO, see 'Certain Information
Concerning Initial Public Offering.'

The Company expects that its principal cash requirements over the next 12
months will be to fund operating activities and working capital. The Company
expects that the cash required for such purposes will increase significantly
primarily as a result of the Company's plans to (i) ramp up production and sales
of CompuNet 2000 and commence production of WPS-1000, (ii) increase its sales

and marketing personnel and research and development personnel and (iii)
increase advertising. To the extent that the Company does not generate
sufficient cash flow from operations to fund the Company's cash requirements,
the Company expects to fund such requirements from the net proceeds of the IPO.
The Company does not have any bank or other lines of credit available to it at
present.

The Company estimates that the remaining net proceeds from the IPO and cash
generated from operations will be sufficient to fund its cash requirements for
at least the next 12 months, although there can be no assurance of this. As
described under 'Risk Factors,' there are numerous future developments or events
that may have a material adverse effect on the Company's business and financial
condition. The occurrence of one or more of these events or developments, as
well as the occurrence of other unanticipated events or developments may cause
the foregoing estimate to be inaccurate. In addition, management may determine
that it is in the best interest of

<PAGE>

the Company to expand more rapidly than currently intended, in which case
additional financing may be required. If additional financing is required, there
can be no assurance that the Company will be able to obtain such additional
financing on terms acceptable to the Company and at the times required by the
Company, or at all.

BRIDGE FINANCING

During the period April 30, 1996, through July 30, 1996, the Company
completed a bridge financing (the 'Bridge Financing'). The gross proceeds from
the Bridge Financing were $1,175,000 and the net proceeds to the Company from
such financing (after deduction of commissions and the estimated expenses of
such financing) were approximately $1.06 million. The Company used the net
proceeds of the Bridge Financing to fund working capital requirements, general
corporate purposes and the Company's financing plans.

In connection with the Bridge Financing, the Company issued promissory
notes (the 'Bridge Notes') in the aggregate principal amount of $1,175,000. The
Bridge Notes accrued interest at the rate of 10% per annum and were due and
payable, together with accrued interest, on the earlier of (i) 10 days after
completion of the IPO or (ii) December 15, 1996. The Company repaid the Bridge
Notes from the net proceeds of the IPO.

aggregate principal amount of the Bridge Note issued to such recipient by (ii)
the IPO Price per share of Common Stock in the IPO. The Bridge Warrants also
include warrants (the 'Other Bridge Warrants') issued to the Representative and
another party that assisted the Company in connection with the Bridge Financing.
By mutual agreement of the Company and the Representative, the Other Bridge
Warrants issued to the Representative were cancelled without recourse to the
Company in September 1996. An aggregate of 3,334 shares of Common Stock are
issuable upon exercise of the Other Bridge Warrants that remain outstanding. The
Bridge Warrants provide for an exercise price of $0.60 per share.

The gross proceeds from the Bridge Financing were allocated 61% to the
Bridge Notes and 39% to the Investor Bridge Warrants based on their relative
fair values at the dates of such Bridge Financing. The fair value of the Bridge
Notes represents the present value of the future cash flows related to such
notes calculated using a discount rate of 10%. The fair value of the Bridge
Warrants represents $7.00 (which was the midpoint of the estimated range of the
initial public offering price contemplated by the preliminary prospectus
relating to the IPO) less a twenty-five percent discount less the exercise price
of the Warrants. Management of the Company believes that the aforementioned 25%
discount used in valuing the Bridge Warrants is appropriate to reflect the
limited market for the Common Stock at the time the Bridge Warrants were sold
and the fact that at such time there could be no assurance that the IPO would be
completed.

In connection with the Bridge Financing, the Company recorded (i) loan
discount of $458,000 (representing the portion of the gross proceeds from the
Bridge Financing that was allocated to the Bridge Warrants) and (ii) deferred
financing costs of $77,000 (representing the portion of the expenses of the
Bridge Financing that was allocated to the Bridge Notes). Upon repayment of the
Bridge Notes in October 1996, the Company recognized an extraordinary loss of
approximately $240,000, representing the unamortized portion of the loan
discount and deferred financing costs at such time.

CERTAIN INFORMATION CONCERNING DISTRIBUTION AGREEMENT WITH GEMINI

The Company has entered into a distribution agreement with Gemini
Industries, Inc. ('Gemini'). Gemini is a supplier of consumer electronics
accessories, including an extensive line of computer and telephone products,
that has been in business for over 30 years and had consolidated sales of over
$150 million in 1995. (The foregoing is based upon information provided by
Gemini to the Company.) The distribution agreement with Gemini provides Gemini
with the exclusive right to distribute CompuNet 2000 in the United States
through retail stores to end users during the term of the agreement. The Company
has retained the right to distribute the product through other distribution
channels in the United States and without any limitations outside the United
States.

<PAGE>

Under the terms of the distribution agreement, Gemini has committed to purchase
from the Company a minimum of 10,000 units of CompuNet 2000 in 1996 (subject to
the condition that the Company is able to make the product available in a timely
manner and in the quantities requested by Gemini for particular time periods,
including traditional selling seasons). Thereafter, Gemini must purchase at
least 10,000 units per month in order to maintain its exclusivity right (but it
is not contractually obligated to do so). As of November 30, 1996, Gemini had
purchased 5,000 CompuNet 2000 units from the Company. The term of this agreement
commences on June 1, 1996 and extends until the end of 1997 (subject to
extension by mutual agreement). Gemini has the right to terminate the agreement
under certain circumstances, including if (i) the Company fails to comply with
its material obligations under the agreement (subject to specified notice
provisions and cure rights) or (ii) if any competitive product is offered in the
market place and the Company fails to keep Gemini competitive in price and
quality.

CERTAIN INFORMATION CONCERNING INTERNATIONAL SALES

International sales of the Company's products accounted for 23% of net
sales in 1995 and 23% of net sales in the first nine months of 1996.
International business operations may be negatively impacted by a variety of
factors, including political or economic instability in a region, changes in
diplomatic and trade relationships, tariffs and other barriers and restrictions,
restrictions on the transfer of funds, currency fluctuations, potentially
adverse tax consequences and the burdens of complying with a variety of foreign
laws. For example, the Company has been required to make certain modifications
to its CompuPhone 2000 product in order to bring it into compliance with
applicable foreign regulations (the required modifications varying depending on
the country). Although the Company has not to date experienced any material
adverse effect on its operations as a result of such factors, there can be no
assurance that such factors will not materially adversely impact the Company's
business and financial condition in the future or require the Company to modify
its current business practices.

<PAGE>

BUSINESS

Integrated Technology designs, develops and markets innovative products for
two rapidly emerging computer-related markets: Internet Telephony (the
transmission of voice communications over the Internet) and computer/telephone
integration. The Company has also developed a wireless printing product that the
Company believes has certain advantages over products currently on the market.

With the introduction by various companies of software that enables
Internet Telephony, the Company has focused on developing add-on products that,
when used with such software, can expand the potential benefits of Internet
Telephony, make Internet Telephony more productive and efficient, and simplify
the ancillary hardware devices required for Internet Telephony. The first
product developed by the Company for this market is CompuNet 2000. This product
is a PC keyboard that also functions as a conventional telephone and enables the
conferencing together of an Internet and conventional telephone call. This
feature allows each party on an Internet call that is using CompuNet 2000 to add
an additional party that is using a conventional telephone. In addition, a
handset or optional headset attached to CompuNet 2000 functions as the sound
transmitting hardware device required for Internet Telephony (rather than a
microphone and external speakers which are the devices typically being
utilized). This feature enables CompuNet 2000 users to employ a single handset
or headset for both conventional and Internet calls, thereby eliminating desktop
clutter and enabling parties to an Internet call to conduct private
conversations. Furthermore, when used for conventional telephone calls, CompuNet
2000 has the same functionality as the Company's CompuPhone 2000 product
described below.

For the computer/telephone integration market, the Company has developed
CompuPhone 2000. This product is a PC keyboard that enables users to make and
receive telephone calls using the PC keyboard (together with a headset that is
provided with the product or an optional handset) without the need for a
conventional telephone or modem. Included with CompuPhone 2000 is proprietary
telephone management software that integrates the telephone function with the
computer. This software enables a number of features for enhancing productivity
and efficiency, including the ability to dial from a screen or data base (rather
than manually dialing), automatic logging of information concerning each call,
and the ability to record notes regarding each call in a 'note box' that can
appear automatically. CompuPhone 2000 also interfaces with most widely used
personal information management programs.

BACKGROUND

INTERNET TELEPHONY

Over the past one and one-half years, various companies have developed and
released software that enables voice and audio communications over the Internet.
By employing this type of software, users can conduct unlimited long distance
and international conversations over the Internet for the price of an Internet
connection. Based upon current cost structures, the cost of a long distance or
international Internet call can be substantially lower than the cost of a
comparable conventional telephone call, making Internet Telephony a potentially
attractive alternative or supplement to a conventional telephone call. In view
of the emergence of Internet Telephony as a potentially significant medium for
voice communications, the Company believes that the market for products that can
broaden and expand the potential of Internet Telephony, make Internet Telephony
more productive and efficient, and simplify the ancillary hardware devices
required for Internet Telephony has the potential for significant growth. The
CompuNet 2000 developed by the Company is an example of this type of product.

COMPUTER/TELEPHONE INTEGRATION

There has emerged in recent years a growing market for products that
integrate computers with telephones. This market has been driven by the
recognition that such integration has the potential to enhance user productivity
and efficiency in a wide range of activities. For example, in connection with
many activities involving telephone communications it is important that a caller
have the ability to place calls accurately and quickly and/or that one party to
a call have the ability to access or collect data concerning the other party.
These include activities such as telemarketing, order processing, customer
service and support, market research, and emergency dispatching. The efficiency
and productivity of the personnel involved in these activities can potentially
be significantly increased by solutions that (i) integrate computer data base
capabilities and other computer capabilities with the telephone function and/or
(ii) integrate and simplify the hardware required in order

<PAGE>

to place and receive telephone calls while simultaneously working with a
computer. The CompuPhone 2000 developed by the Company is an example of a
product that provides both of these solutions.

INTERNET TELEPHONY PRODUCT

BACKGROUND

In order to make an Internet call using Internet Telephony enabling
software, a user must employ hardware devices that transmit sound from the user
to a sound card in the computer (or other device in the computer providing audio
capability) and from the computer to the user. The hardware devices that are
typically being employed to perform these functions are a microphone for
transmitting sound and speakers for receiving sound. However, the use of these
devices as the enabling hardware for Internet Telephony has significant
limitations. First, the use of a microphone and speakers for Internet Telephony
does not permit the easy conferencing of an Internet telephone call with a
conventional telephone call. Second, three separate hardware devices (a
conventional telephone, a microphone and speakers) are required in order for a
user to have both conventional telephone and Internet Telephony capability. This
leads to clutter and confusion on the desktop and requires the user to switch
between different devices, leading to reduced productivity. Third, the use of a
microphone and speakers does not permit the parties to conduct a private
conversation.

COMPUNET 2000

CompuNet 2000 is a new product that the Company has developed in order to
address the limitations that are inherent in using a microphone and speakers as
the enabling hardware for Internet Telephony. The Company commenced sales of
this product in September 1996 pursuant to a distribution agreement with Gemini
Industries, Inc. See ' --End Users, Distribution, Sales and
Marketing--Distribution Channels.'

CompuNet 2000 is a PC keyboard that has special features specifically
designed for use in connection with Internet Telephony. In addition, CompuNet
2000 allows users to make and receive conventional telephone calls using the PC
keyboard (without the need for a conventional telephone or modem) in the same
manner as the Company's CompuPhone 2000 product. CompuNet 2000 also includes the
same telephone management software as the Company's CompuPhone 2000 product.
(For a description of CompuPhone 2000 and the Company's proprietary telephone
management software, see '--Computer/Telephone Integration Product' below.)
CompuNet 2000 is designed to operate with IBM and IBM compatible PCs.

The CompuNet 2000 has the following features that are designed specifically
for use in connection with Internet Telephony.

Enables Conferencing of Internet and Conventional Calls. The CompuNet
2000 enables the conferencing together of an Internet and conventional
telephone call. This feature allows each party on an Internet call that is
using CompuNet 2000 to conference in an additional party that is using a
conventional telephone. Such conferencing can be effected by the CompuNet
2000 user employing the keyboard/telephone to either place a conventional
telephone call to the party to be added or answering an incoming
conventional telephone call from such party.

Enables Elimination of Multiple Hardware Devices and Enables Private
Conversations. The CompuNet 2000 enables a handset or headset that is
plugged into the keyboard/telephone to transmit and receive sound from the
computer's sound card (in addition to being able to function directly with
a conventional telephone line). This allows the CompuNet 2000 to be used,
instead of a microphone and speakers, as the sound transmitting hardware
required for Internet Telephony. This feature, coupled with the
conventional telephone capabilities of CompuNet's keyboard/telephone,
enables a CompuNet 2000 user to employ a single hardware device for both
conventional and Internet telephone calls (rather than requiring a
conventional telephone, a microphone and speakers). This simplifies the
making of both types of calls and eliminates clutter and confusion on the
desktop. In addition, the use of a handset or headset (rather than a
microphone and speakers) as the sound transmitting hardware for Internet
Telephony enable the parties to an Internet call to conduct a private
conversation.

The Company believes that these features have the potential to broaden and
expand the uses of Internet Telephony; make Internet Telephony more productive
and efficient; and simplify the ancillary hardware devices required for Internet
Telephony.

<PAGE>

PRODUCT ENHANCEMENTS AND EXTENSIONS

The Company intends to devote significant research and development
resources in order to continue to develop enhancements to its CompuNet 2000
product and extensions of this product. Among the new features and functions
that the Company may seek to develop are:

o multiple-party conferencing capability (the current product allows each
CompuNet user to conference in a single party);

o enhanced telephone management software that is integrated with both
Internet and conventional telephone calls (the Company's proprietary
telephone management software that is included with CompuNet 2000
currently works only with conventional telephone calls); and

o remote access capability (i.e., the ability to access Internet Telephony
features remotely).

In addition, certain of the enhancements that the Company is considering
developing for CompuPhone 2000 (as described under '--Computer/Telephone
Integration Product--Product Enhancements and Extensions') may, if successfully
developed, also be incorporated into CompuNet 2000.

The Company is currently in the process of evaluating which product
enhancements and/or extensions it will seek to develop and has not made any
final determination with regard thereto. No assurance can be given that the
Company will seek to develop any of the above-described new features or
functions or that it will succeed in developing any new feature or function that
it seeks to develop.

COMPUTER/TELEPHONE INTEGRATION PRODUCT

For the computer/telephone integration market, the Company has developed
CompuPhone 2000. The Company commenced sales of this product in early 1995.
CompuPhone 2000 is a PC keyboard that enables users to make and receive
telephone calls using the PC keyboard (together with a headset that is provided
with the product or an optional handset) without the need for a conventional
telephone or modem. Included with CompuPhone 2000 is telephone management
software (named 'Autodial Software') developed by the Company to integrate the
telephone function with the computer. CompuPhone 2000 also interfaces with most
widely used Windows-based personal information manager programs ('PIMs'). The
CompuPhone 2000 is designed to operate with IBM and IBM compatible PCs.

A CompuPhone 2000 keyboard generally has the same appearance as a
conventional keyboard but has two additional keys (one labeled 'phone' and one
labeled 'line'). The keyboard (together with a headset or handset) performs all
the functions of a conventional, single-line telephone, as well as all the
normal PC keyboard functions. Incoming calls are indicated by ringing (or, at
the user's option, by only a flashing light on the keyboard). Pressing the
'line' key answers an incoming call. Pressing the 'line' key also hangs up a
completed call. An outgoing telephone call can be initiated by pressing the
'phone' key and manually dialing with the keyboard's numeric keypad (which is
designed to resemble the keys of a conventional telephone). In addition, a call
may be initiated through use of the Autodial Software (Windows version) as
follows:

Highlighting Number. A call can be initiated by highlighting a
telephone number in any Windows or Windows 95 application and pressing
designated keys on the keyboard.

Dialing From Card File. Any number stored in 'Cardfile' (an accessory
included with Windows 3.X) can be dialed by opening Cardfile, choosing the
card containing the desired number and pressing a designated key. The
'CompuPhone 2000 Autodial Box' then appears with the selected number
inserted and the call can be completed by choosing 'OK'.

Dialing Using CompuPhone 2000 Autodial Box. Pressing specified keys
causes the 'CompuPhone 2000 Autodial Box' to appear. Once this box appears,
a call can be initiated by typing the number to be dialed and choosing
'OK'.

Dialing Using Personal Information Manager Programs. By making
certain adjustments through Autodial Software, any call that is placed
through most Windows-based PIMs or other contact management programs (using
the normal procedures for placing calls with these programs) will dial
through the CompuPhone 2000 telephone line rather than through a modem.

The CompuPhone 2000 keyboard also enables the following telephone features
to be controlled through pressing a designated key (or keys) on the keyboard:
volume; redial; mute; call forwarding; and call waiting.

<PAGE>

(The call forwarding and call waiting features only work to the extent that the
local telephone line being used enables these features.)

The Autodial Software, in addition to facilitating dialing, automatically
creates a log that records the date, time, duration and telephone number of each
telephone call that is initiated through CompuPhone 2000. A similar log is
created for incoming calls, except that the number of the caller is not
recorded. The Autodial software also enables a user to enter notes regarding a
call in a 'note box' that appears whenever a call is made or received.

The use of the CompuPhone 2000 keyboard to conduct a telephone call does
not interfere with the simultaneous running of other applications (except during
the time when the call is being dialed or disconnected). In order for a user to
employ the keyboard to enter data while simultaneously using it to conduct a
telephone conversation, the user simply presses the 'phone' key. This enables
the user to access all conventional keyboard functions while continuing the
telephone conversation without interruption.

Installation of CompuPhone 2000 involves a simple process: (i) unplug the
existing keyboard from the computer and substitute the CompuPhone 2000 keyboard,
(ii) connect one end of a telephone cable to the CompuPhone 2000 keyboard and
the other to any single-line, analog telephone outlet, (iii) plug a headset or
handset into the CompuPhone 2000 keyboard and (iv) install the Autodial
Software.

The Company believes that its CompuPhone 2000 keyboard/telephone and
related Autodial Software offers users many potential advantages, including:

Improves Productivity and Customer Service. There are many business

activities that require high-volume telephone contacts and the simultaneous
use of a computer. These include activities such as telemarketing, order
processing, customer service and support, market research, and emergency
dispatching. The use of CompuPhone 2000, rather than a conventional
telephone, in connection with these activities offers several benefits,
including:

o Use of CompuPhone 2000 eliminates the need to continuously switch between
two separate devices (i.e., the keyboard and the telephone). This saves
time and reduces stress.

o The features of the Autodial Software that enable dialing from the screen
or a data base (rather than manually dialing) speeds the dialing process
and reduces dialing errors that waste time and resources.

o Conducting a telephone call via the CompuPhone 2000 keyboard does not
interfere with the running of computer applications or the use of the
keyboard for conventional keyboard functions. As a result, a user of
CompuPhone 2000 can conveniently conduct a telephone conversation while
simultaneously accessing or entering data relevant to the conversation.
In addition, the 'note box' feature of the Autodial Software enables a
user to enter notes regarding each call.

Enables Call Pattern Monitoring. The call logging feature of the
Autodial Software can provide a user with information concerning call
patterns. This information can be a valuable asset for business planning
and decision making. In addition, this information can assist management in
reducing waste by providing a simple mechanism for monitoring employee
calling records.

Saves Desktop Space. Because CompuPhone 2000 performs all of the
functions of a conventional, single-line telephone, a user may have no need
to maintain a separate telephone instrument on the desktop.

Allows Use of Touch Tones. Interactive voice response applications
(such as a voice mail) enable callers to use 'touch tones' to navigate
through a process or data base. Because CompuPhone 2000 works directly
through conventional telephone lines without use of a modem, it has the
same touch tone capability as a conventional telephone. By contrast, if a
telephone call is placed through use of a modem, touch tone capability
generally is lost.

The above description of CompuPhone 2000 and the related Autodial Software
is based upon the Windows version of the software. The Company also makes
available a DOS version of the software. The DOS version operates differently
than the Windows version (e.g., the mechanics and instructions for dialing using
the software are different) but overall it provides substantially the same
general functionality as the Windows version (with certain exceptions, including
that it does not support interfacing with PIMs or other contact management
programs).

<PAGE>

PRODUCT ENHANCEMENTS AND EXTENSIONS

The Company intends to devote significant research and development
resources in order to continue to develop enhancements to its CompuPhone 2000
product and extensions of this product. Among the new features and functions
that the Company may seek to develop are:

o multiple-line capability (the current product is a single-line
telephone);

o a speaker phone option;

o a standby power supply that will enable the product to be used even when
the computer is shut down;

o automatic call answering and message recording capability;

o integrated caller-ID and 'screen popping' capability (i.e., caller-ID
identifies the caller and relevant data base information then
automatically 'pops' up on the screen);

o automatic dialing capability for telemarketing and similar functions; and

o enhanced capability to be integrated with PBX and other telephone systems
(the current product can only be used on the analog port of PBX systems).

WIRELESS PRINTING PRODUCT

The Company has developed a relatively low-priced product that enables
wireless printing from a laptop computer (i.e., printing without the need to
attach cables between the computer and the printer). The Company plans to market
this product under the name WPS-1000. This product, which uses diffuse infrared
technology, is effective at a distance of approximately 15 feet and does not
require line-of-sight alignment with the printer. Although there are existing
products that enable wireless printing, the Company believes that these products
are either significantly more expensive (such as products based on RF
technology) or are only effective at much shorter distances (approximately three
feet for products based on IRDA technology). The WPS-1000 is currently in the
preproduction, prototype stage. The Company expects to commence the commercial
introduction of this product in the first quarter of 1997, although there can be
no assurance of this. See 'Risk Factors--Considerations Relating to the
Business of the Company--Certain Risks Specific to the WPS-1000 Product.'

The WPS-1000 is comprised of two small devices, a receiver (approximately
4.5' by 4.25' by 2.75') and a transmitter (approximately 4.5' by 3' by 1'). When
the receiver is plugged into a printer and the transmitter into a laptop

computer's parallel port and PS/2 port, a user can print wirelessly by executing
the normal print command. No special software drivers or additional
configuration is required. The back of the receiver is equipped with a port into
which a printer cable can be plugged. This feature permits a user to keep the
receiver permanently plugged into the printer, while retaining the ability to
link the printer and a desktop computer via a conventional cable. Consequently,
the WPS-1000 can be used as a 'printer sharing device' that enables a single
printer to print wirelessly from one computer and via a cable from a second
computer.

END USERS, DISTRIBUTION, SALES AND MARKETING

END USER MARKETS

The Company believes that the potential end user markets for its products
include home PC users (both for personal and business functions), small offices
and large corporations. However, sales of these products to end user markets has
been limited or has not yet commenced and, consequently, there is insufficient
historical data upon which to base an assessment as to the nature of the end
user markets, if any, that will develop for these products.

<PAGE>

DISTRIBUTION CHANNELS

The Company currently markets its products directly and through independent
representatives and distributors. The Company's independent representatives
market the Company's products to customers, but any sales that are generated by
independent representatives are made directly by the Company to the customer.
The Company's distributors purchase products from the Company on a wholesale
basis for resale to customers. Both the Company and its distributors may sell
products (i) directly to end user customers and (ii) to retailers and mail order
vendors for resale to end user customers.

The Company's objective is to expand its distribution capability. In order
to achieve this objective, the Company intends to increase its marketing
capability by expanding the Company's internal sales and marketing force,
establishing relationships with additional independent representatives and
distributors, and significantly increasing advertising. In addition, the Company
is seeking to enter into arrangements with OEMs (original equipment
manufacturers), such as computer manufacturers, pursuant to which OEMs will
incorporate the Company's products into their finished hardware products.

The Company has entered into a distribution agreement with Gemini
Industries, Inc. ('Gemini'), and a bundling agreement with VocalTec, Ltd.

('VocalTec'), relating to CompuNet 2000. Additional information concerning these
agreements is provided below.

Distribution Agreement with Gemini. The Company has entered into a
distribution agreement with Gemini. Gemini is a supplier of consumer electronics
accessories, including an extensive line of computer and telephone products,
that has been in business for over 30 years and had consolidated sales of over
$150 million in 1995. (The foregoing information has been provided by Gemini to
the Company.) The distribution agreement with Gemini provides Gemini with the
exclusive right to distribute CompuNet 2000 in the United States through retail
stores to end users during the term of the agreement. The Company has retained
the right to distribute the product through other distribution channels in the
United States and without any limitations outside the United States. Under the
terms of the distribution agreement, Gemini has committed to purchase 10,000
units of CompuNet 2000 in 1996 from the Company (subject to the condition that
the Company is able to make the product available in a timely manner and in the
quantities requested by Gemini for particular time periods, including
traditional selling seasons). Thereafter, Gemini must purchase at least 10,000
units per month in order to maintain it exclusivity right (but it is not
contractually obligated to do so). As of November 30, 1996, Gemini had purchased
5,000 CompuNet 2000 units from the Company. The term of this agreement commences
on June 1, 1996 and extends until the end of 1997 (subject to extension by
mutual agreement). Gemini has the right to terminate the agreement under certain
circumstances, including if (i) the Company fails to comply with its material
obligations under the agreement (subject to specified notice provisions and cure
rights) or (ii) if any competitive product is offered in the market place and
the Company fails to keep Gemini competitive in price and quality.

Bundling Agreement with VocalTec. The Company has entered into a bundling
agreement with VocalTec that extends until January 3, 1998. VocalTec is a
publicly traded company that is a provider of software that enables Internet
Telephony. The shares of VocalTec are quoted through the Nasdaq Stock Markets'
National Market. Under the terms of the bundling agreement with VocalTec, the
Company may bundle an OEM version of VocalTec's Internet Telephony enabling
software with CompuNet 2000 and is required to pay VocalTec a fee for each unit
of such software that it bundles. The OEM version of VocalTec's software does
not have all the functionality of more advanced versions of such software that
VocalTec markets. The Company expects that it will include with CompuNet 2000 a
'coupon' that will allow the purchaser to upgrade to a more advanced version of
VocalTec's software by paying a specified fee to VocalTec. The Company is
entitled to receive a sales assistance fee from VocalTec with regard to each
purchaser of CompuNet 2000 that pays for such an upgrade.

SALES

The Company sells its products both in the United States and in
international markets. Sales in the United States accounted for approximately
77% and 77% of the Company's net sales in 1995 and the first nine months of
1996, respectively, and international sales for the balance.

The Company anticipates that a significant portion of the Company's
revenues and accounts receivable may be accounted for by a limited number of key
customers, the identity of which may vary from period to period. In the first
nine months of 1996, sales to Gemini (pursuant to the distribution agreement
described above) accounted for approximately 49.3% of the Company's net sales.
See Note 8 of Notes to Consolidated Financial Statements.

<PAGE>

MARKETING

In view of the recent introduction of the Company's products and the
innovative nature of the technology incorporated therein, the Company believes
that in order to drive end user demand it is critical that the Company devote
significant resources to increasing awareness of its products and the many
advantages which they provide. The Company's promotional efforts may include
general advertising, advertising in trade publications, in-store advertising,
catalogue advertising, targeted direct mail campaigns, participation in trade
shows, and advertising on the Internet.

MANUFACTURING

The Company currently employs Monterey International Corp. ('Monterey'), a
contract manufacturer with facilities in Taiwan and the People's Republic of
China, to manufacture CompuPhone 2000 and CompuNet 2000. An independent testing
company retained by the Company performs final product testing prior to the
shipping of the products by Monterey.

The Company expects to use General Research of Electronics, Inc. (a
Japanese-based contract manufacturer that uses manufacturing facilities in The
People's Republic of China) to manufacture the Company's WPS-1000 wireless
printing product. This product is currently in the preproduction, prototype

stage. See 'Risk Factors--Considerations Relating to the Business of the
Company--Certain Risks Specific to the WPS-1000 Product.'

The Company does not currently have long-term agreements with any contract
manufacturer that it uses or expects to use as described above. Accordingly, any
such contract manufacturer could elect at any time to terminate its relationship
with the Company or reduce the manufacturing capacity that it allocates to the
Company. The Company estimates that six months or more would be required in
order for it to qualify an alternate manufacturer for any product.

RESEARCH AND DEVELOPMENT

The Company intends to devote significant research and development
resources in order to develop enhancements to its existing products, extensions
of these products, and new products for its target markets. See '--Internet
Telephony Product--Product Enhancements and Extensions' and
'--Computer/Telephone Integration Product--Product Enhancements and Extensions.'
The Company's research and development team is principally located in Israel
and, as of November 30, 1996, was comprised of five hardware and software
engineers and support staff.

COMPETITION

The markets for Company's products are characterized by intense competition
and rapid change, and the Company expects that competition will increase. The
Company's current and prospective competitors include many companies that have
substantially greater name recognition and financial, technical and marketing
resources than the Company. There can be no assurance that the Company's
competitors will not be able to develop products comparable or superior to those
offered by the Company. For example, there is a company in the Federal Republic
of Germany that is currently marketing outside the United States a product that
is substantially the same as the Company's CompuPhone 2000 product. There can
also be no assurance that the Company's competitors will not be able to offer
customers more competitive pricing or to adapt more quickly than the Company to
new technologies and evolving customer requirements. Consequently, there can be
no assurance that the Company will be able to compete successfully in its target
markets or that competition will not have a material adverse effect on the
Company's business and financial condition.

<PAGE>

PROPRIETARY RIGHTS

The Company relies upon a combination of patents, trade secrets, copyright
and trademark law, confidentiality procedures and contractual provisions to
protect its proprietary rights. Certain of the specific steps taken by the
Company to protect its proprietary rights are described below.

The Company has secured a United States patent covering certain features of

the Company's CompuPhone 2000 product and has filed patent applications, which
are pending, relating to such features in certain foreign countries. The Company
has also filed applications, which are pending, for a United States patent
covering certain of the technology underlying the Company's CompuNet 2000
product and for a United States patent covering certain of the technology
underlying the Company's WPS-1000 product. However, no assurance can be given
that any patents will be issued on the basis of any such applications or, if
patents are issued, that the claims allowed will be sufficiently broad to
protect the Company's technology. In addition, no assurance can be given that
any patents issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted under the patents will provide
significant benefits to the Company.

In order to safeguard its unpatented proprietary knowhow, trade secrets and
technology, the Company relies primarily upon trade secret protection. In that
connection, the Company generally enters into non-disclosure agreements with
employees and other persons to whom it reveals its proprietary information.

The Company has obtained a trademark registration in the United States for
the name CompuPhone 2000. In addition, the Company has filed an application,
which is pending, for a trademark registration for the name CompuNet 2000. No
assurance can be given that any trademark registration will be obtained on the
basis of such application.

Although the Company has taken the steps described above to protect its
proprietary information, there can be no assurance that (i) such steps will be
adequate to prevent misappropriation of the Company's technology or (ii) the
Company's competitors will not develop products that are substantially
equivalent or superior to the Company's products without infringing upon the
Company's proprietary rights. (As described under 'Competition,' there is a
company in the Federal Republic of Germany that is currently marketing outside
the United States a product that is substantially the same as the Company's
CompuPhone 2000 product.) In addition, the laws of certain foreign countries in
which the Company's products are, or may be, developed, manufactured or sold,
including various countries in Asia, may not protect the Company's products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of the Company's technology and
products more likely.

The Company believes that its products and their use do not infringe the
proprietary rights of third parties. However, there can be no assurance that
third parties will not assert infringement claims against the Company in the
future or that any such claims, if asserted, will not be upheld. See 'Risk
Factors--Considerations Relating to the Business of the Company--Possibility of
Third Party Infringement Claims.'

LEGAL PROCEEDINGS

The Company is not involved in any material legal proceedings.

EMPLOYEES

At November 30, 1996, the Company had 19 employees, including five in

research and development, seven in finance and administration and seven in sales
and marketing. Approximately 13 of such employees are based in Israel. The
Company considers its relationship with its employees to be satisfactory.

The Company's Israeli Subsidiaries are subject to various Israeli labor
laws and labor practices, and may be subject to administrative orders extending
certain provisions of collective bargaining agreements between the Histadrut
(Israel's General Federation of Labor) and the Coordinating Bureau of Economic
Organizations (the Israeli federation of employers' organizations) to private
sector employees. For example, mandatory cost of living adjustments, which
compensate Israeli employees for a portion of the increase in the Israeli
consumer price index, are determined on a nationwide basis. Israeli law also
requires the payment of severance benefits upon the termination, retirement or
death of an employee. The Company covers a portion (but not all) of the
potential costs to the Company of paying such severance benefits by contributing
on an ongoing basis towards 'managers' insurance' funds with respect to certain
of its employees. Such funds combine severance pay benefits, tax-efficient
savings plans and disability insurance. In addition, Israeli employers and
employees are required to pay specified percentages of wages to the National
Insurance Institute, which is similar to the United States Social

<PAGE>

Security Administration. The payments to the National Insurance Institute are
approximately 14% of wages (up to a specified amount), of which the employee
contributes approximately 66% and the employer approximately 34%.

PROPERTIES

The Company leases the following properties: (i) approximately 1,000 square
feet of space in Teaneck, New Jersey, which is used primarily for office space,
(ii) approximately 1,000 square feet of space in Teaneck, New Jersey, which is
used primarily for warehouse space and (iii) approximately 3,780 square feet of
space in Jerusalem, Israel, which is used primarily for office space and for
research and development activities. All of the foregoing premises are currently
leased on a month-to-month basis, except for the premises in Jerusalem, Israel,
which are leased until May 31, 1997. The Company does not lease any such
properties from a lessor that is affiliated with the Company or any of its
officers or directors.

The Company believes that its facilities are adequate for its current and
immediately foreseeable operations and that additional facilities are available
on competitive market terms for such future expansion of the Company's
operations as may be warranted.

<PAGE>
MANAGEMENT

OFFICERS AND DIRECTORS

The following table sets forth information regarding the officers and
directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ---------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Alan P. Haber........................... 40 Chairman of the Board; President; Chief
Executive Officer and Director
Barry L. Eisenberg...................... 49 Secretary; Treasurer and Director
Simon M. Kahn........................... 40 Executive Vice President; Chief Financial
Officer; Director of Research and Development
and Director
Edward Y. Abramson...................... 49 Director of Communications
Bernard S. Appel........................ 64 Vice Chairman of the Board and Director
Nicole R. Kubin(1)...................... 42 Director
Morton L. Landowne...................... 48 Director
Noah Perlman............................ 46 Director
Morris J. Smith......................... 39 Director
William Spier........................... 62 Director
</TABLE>

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

(1) As described under 'Certain Information Concerning Initial Public
Offering--Underwriting Arrangements Relating to the IPO,' the Company has
agreed that, for a period of three years after October 1, 1996, the Company
will use its best effort to cause an individual designated by the
Representative to be elected to the Company's Board of Directors. The
Representative has designated Ms. Kubin to be elected to the Company's Board
of Directors.

Alan P. Haber, has been Chairman of the Board, President and Chief
Executive Officer of the Company since its inception in 1990. From 1989 to 1990,
Mr. Haber was Chief Executive Officer of an Israeli subsidiary of Intafile
International Incorporated, a computer research and development company. Prior
to 1989, Mr. Haber founded and served as President of an import/export company
dealing in stationery and entertainment products (1985-1989) and as President of
a company that operated a chain of restaurants in New York and New Jersey
(1979-1985).

Bernard S. Appel has been a Director of the Company since 1993. Since 1993,
Mr. Appel has been President of Appel Associates, a marketing consulting firm.
Prior thereto, for a period of more than five years, Mr. Appel held a series of
positions at Tandy Corporation and its Radio Shack division, including Senior
Vice President of Tandy Corporation and President and Chairman of Radio Shack.
Mr. Appel also serves as a director of Curtis Mathes Holding Corporation.

Barry L. Eisenberg has been a Director of the Company since 1990 and
Secretary and Treasurer of the Company since 1993. Since 1995, Mr. Eisenberg has
been an active investor and director of private companies in Israel. Prior
thereto, Mr. Eisenberg was, for a period of more than five years, a partner in
the Roseland, New Jersey law firm of Lasser, Hochman, Marcus, Guryan & Kuskin.

Simon M. Kahn became a director of the Company in October 1996 upon
completion of the IPO. Mr. Kahn has been Executive Vice President and Chief
Financial Officer of the Company since March 1996 and Director of Research and
Development of the Company since 1993. From 1982 to 1992, Mr. Kahn was Chief
Financial Officer of Empire Steel Trading Co., Inc., a metals trading company.
Prior thereto, Mr. Kahn was an engineer at Loral Electronic Systems. Mr. Kahn
holds a M.S. degree from the Columbia University School of Engineering and an
M.B.A. degree in corporate finance from the Columbia University School of
Business.

<PAGE>

Edward Y. Abramson has been Director of Communications of the Company since
1991. Mr. Abramson holds a B.A. in English from Yeshiva College.

Nicole R. Kubin became a director of the Company in October 1996 upon
completion of the IPO. Ms. Kubin is President of Cornerstone Capital Advisors, a
corporate advisory firm and, since 1993, Ms. Kubin has been an active investor
and a consultant to public and private companies. For more than two years prior
to 1993, Ms. Kubin was a marketing consultant to various Fortune 500 companies.
Ms. Kubin was formerly Vice President, International Sales for Salomon Brothers,
Inc.

Morton L. Landowne became a director of the Company in October 1996 upon
completion of the IPO. Since 1984, Mr. Landowne has been Director of Sales and
Marketing of Plaza Packaging Corp., a manufacturer of set-up boxes for the
cosmetics industry.

Noah Perlman became a director of the Company in October 1996 upon

completion of the IPO. Since 1982, Mr. Perlman has been Vice President for
Research and Development and Marketing of Total Systems Support/Semtech Ltd., an
Israel-based developer of systems software.

Morris J. Smith has been a member of the Board of Directors since January
1994. Since 1993, Mr. Smith has been a private investor and investment
consultant. Prior thereto, Mr. Smith was employed for a period of more than five
years by Fidelity Investments as a portfolio manager.

William Spier became a director of the Company in October 1996 upon
completion of the IPO. Since 1991, Mr. Spier has been Chairman and Chief
Executive Officer of DeSoto, Inc., a manufacturer and distributor of cleaning
products. Since 1989, Mr. Spier has also been Chairman and President of Sutton
Holding Corp., a private investment company. From 1980 to 1981, Mr. Spier was
Vice Chairman of Salomon Inc. Mr. Spier also serves as a Director of Geotek
Communications, Inc., EA Industries, Inc., Holmes Protection Group, Inc. and
Video Lottery Technologies, Inc.

Upon completion of the IPO, the number of directors comprising the entire
Board of Directors was increased from four to ten. There is currently one
vacancy in the Board of Directors.

All directors hold office until the next annual meeting of stockholders or
until their successors are elected and qualify. Executive officers hold office
until their successors are chosen and qualify, subject to earlier removal by the
Board of Directors.

Pursuant to the listing requirements of AMEX, the Company is required to
maintain a minimum of two independent directors and to establish an audit
committee, a majority of whose members are independent directors. A failure by
the Company to comply with these requirements may result in the delisting of the
shares from AMEX. The Company intends to comply with these requirements.

The Board of Directors has established an audit committee and a
compensation committee. The members of the audit committee are Mr. Appel, Ms.
Kubin, Mr. Kahn, Mr. Smith and Mr. Spier, and the members of the compensation
committee are Mr. Landowne and Mr. Perlman. The responsibilities of the audit
committee include reviewing the scope and results of the audits conducted by the
Company's independent accountants. The responsibilities of the compensation
committee include establishing and reviewing employee compensation policies and
related matters.

COMPENSATION OF DIRECTORS

Each director who is not an employee of the Company is paid $500 for
attendance (in person or by telephone) at meetings of the Board and all
directors are reimbursed for out-of-pocket expenses incurred in connection with
attendance at Board meetings.

As described under '--Options Granted in Connection with the IPO,'
immediately prior to completion of the IPO, the Company granted options to
purchase an aggregate of 390,001 shares to directors of the Company (including
directors who are executive officers). All such options provide for an exercise
price of $6.00 per share. In addition, the Company granted the following options
to directors in 1994: Mr. Haber (options to purchase 133,111 shares at an
exercise price of approximately $1.64 per share); Mr. Eisenberg (options to
purchase 38,032 shares at an exercise price of approximately $.01 per share);
Mr. Appel (options to purchase 99,933 shares at an

<PAGE>

exercise price of approximately $.01 per share and options to purchase 12,756
shares at an exercise price of approximately $2.74 per share); and Mr. Smith
(options to purchase 83,533 shares at an exercise price of approximately $.01
per share). All of such options are currently exercisable or have been exercised
(except that the 12,756 options granted to Mr. Appel that provided for an
exercise price of $2.74 per share have terminated).

Mr. Appel provided consulting services to the Company from August 1993
though November 1995. He received compensation for such services at the rate of
$24,000 per annum, during the period from August 1993 through May 1994, and at
the rate of $30,000 per annum thereafter through November 1995. He also received
options from the Company as described above.

Since February 1996, Mr. Eisenberg has been providing consulting services
to the Company under an arrangement pursuant to which he is compensated by the
Company at the rate of $80,000 per annum. Such arrangement can be terminated by
the Company or Mr. Eisenberg at any time. Mr. Eisenberg does not receive any
additional compensation for serving as Secretary and Treasurer of the Company.
Prior to February 1996, Mr. Eisenberg provided consulting services to the
Company from time to time. In connection therewith, he received options from the
Company as described above.

EXECUTIVE COMPENSATION

The following table provides certain information concerning the
compensation earned by the Company's Chief Executive Officer for services
rendered in all capacities to the Company during 1994 and 1995. No other
executive officer of the Company received compensation in excess of $100,000
during 1994 or 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
NAME AND PRINCIPAL ------------------------------------------ NUMBER OF ALL OTHER
POSITION YEAR SALARY OPTIONS COMPENSATION
- ------------------------- ------------------- ------------------- ------------ ------------
<S> <C> <C> <C> <C>
Alan P. Haber............ 1995 $ 116,900 -- $2,488(1)
Chairman and Chief 1994 $ 105,047 133,111 2,864(1)
Executive Officer
</TABLE>

- ------------------
(1) Represented contributions to severance and pension funds.

No options were granted in 1995 to the individual named in the above table.

<PAGE>

The following table sets forth certain information with respect to stock
options held by the officer named in the above table at the end of 1995. There
were no option exercises by such officer in 1995.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT FISCAL
FISCAL YEAR-END(#): YEAR-END($)(1):
----------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Alan P. Haber....... 133,111 -- $ 713,076(1) --
</TABLE>

- ------------------
(1) Solely for purposes of calculating the value of the indicated options at the
end of 1995 as required by this table, the Company has assigned to the
Common Stock a value of $7.00 per share (which was the midpoint of the
estimated range of the initial public offering price contemplated by the
preliminary prospectus relating to the IPO). However, the Company has not
actually valued the Common Stock as of the end of 1995 and, accordingly, the
actual value of the Common Stock as of such time may in fact have been
significantly less than $7.00 per share.

EMPLOYMENT CONTRACTS

The Company has entered into an employment agreement (the 'Employment
Agreement') with Mr. Haber. Certain information regarding the Employment
Agreement is set forth below:

Term. The scheduled term of the Employment Agreement commenced upon
completion of the IPO and extends through December 31, 1999. However, the
salary and benefits described below have been paid retroactive to July 1,
1996.

Base Salary. Base salary is payable at a rate per annum equal to the
NIS equivalent of $190,000 (calculated as of the date the IPO was
completed). Such base salary is linked to the Israeli cost of living index.

Bonus. The Employment Agreement does not provide for a specific
bonus, but contemplates that the Company will adopt a bonus plan based upon
performance goals to be established.

Benefits. The Company is required to (i) pay an amount equal to
15.83% of Mr. Haber's gross salary to obtain for Mr. Haber a 'manager's
insurance policy' (which provides certain severance and disability benefits
and a savings plan), (ii) pay an amount equal to 7.5% of such gross salary
into a savings fund for Mr. Haber's benefit, (iii) provide Mr. Haber with
use of an automobile and pay the maintenance and other expenses related
thereto and (iv) pay any taxes that Mr. Haber may be liable for as a result
of receiving any of the foregoing benefits (other than the car). Upon
cessation of Mr. Haber's employment with the Company for any reason
(including resignation or firing), Mr. Haber has the right to retain the
insurance policy, savings fund and automobile referred to in the preceding
sentence (except that if his employment is terminated for Cause, as defined
in the Employment Agreement, he has no right to the automobile). Mr. Haber
may, at his option, agree to forego one or more of the benefits
contemplated by the Employment Agreement. In such event, the Company would
be required (subject to certain exceptions) to increase Mr. Haber's salary
by the amount of the savings (including tax savings) that the Company
realizes as a result of not having to provide such benefit.

Termination Compensation. The Company is required to pay Mr. Haber
specified compensation in the event that (i) at the end of the term of the
Employment Agreement, Mr. Haber desires to extend the term and the Company
elects not to do so, (ii) Mr. Haber terminates his employment with the
Company for Good Reason (as defined in the Employment Agreement) or (iii)
the Company terminates Mr. Haber's employment for any reason other than
Cause or Disability (as such terms are defined in the Employment
Agreement). Such specified compensation consists of (a) a lump-sum payment
equal to 150% of Mr. Haber's annual base compensation in effect in the year
during which the event giving rise to the obligation to make such payment
occurs, (ii) an additional payment in the amount of $25,000 for legal fees

to be used

<PAGE>

as Mr. Haber sees fit and (iii) payment (not in excess of $10,000) for an
appropriate office for Mr. Haber and his secretary for a period of six
months.

Right of Company to Terminate Employment Agreement. Subject to the
Company's obligation to pay termination compensation to the extent provided
in the preceding paragraph, the Company may terminate Mr. Haber's
employment at any time (i) for Cause or Disability (as defined in the
Employment Agreement) or (ii) at will if such termination is approved by a
two-thirds majority (simple majority after October 1, 1997) of the entire
membership of the Board of Directors at a meeting called and held for such
purpose.

Indemnification. The Company is required to indemnify Mr. Haber
against various liabilities and expenses that arise in connection with his
being made, or threatened to be made, a party in any civil or criminal
action or proceeding by reason of the fact that he is or was a director or
officer of the Company or served any other enterprise in any capacity at
the request of the Company (subject to certain exceptions). In addition,
the Company is required to advance certain expenses as incurred by Mr.
Haber pending the final disposition of any such action or proceeding.

The compensation committee of the Board of Directors has approved an
employment agreement between the Company and Simon Kahn. The term of the
agreement commences effective November 14, 1996 and continues until at least
December 31, 1997. After such date, either party may terminate the agreement
upon at least 60 days notice. The agreement provides for a minimum annual salary
of $110,000 and certain benefits, including (i) contributions of approximately
23% of the employee's gross salary to certain severance/disability and savings
plans and (ii) the use of a car.

LIMITATION OF DIRECTORS' LIABILITY

As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation contains a provision that eliminates the personal
liability of directors to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except that the foregoing does not
apply to any such breach that involves (i) a breach of the director's duty of
loyalty to the Company, (ii) any act or omission not in good faith or which
involves intentional misconduct or a knowing violation of law, (iii) a
transaction from which the director derives an improper personal benefit or (iv)
the payment of dividends or the approval of stock repurchases or redemptions
that are unlawful under Delaware law.

STOCK OPTION PLAN

In July 1996, the Board of Directors adopted the Company's 1996 Stock
Option Plan (the 'Stock Option Plan') which provides for the granting of options
to purchase not more than an aggregate of 833,333 shares of Common Stock. Some
or all of such options may be 'incentive stock options' within the meaning of
the Internal Revenue Code of 1986, as amended. All officers, directors and
employees of the Company and other persons who perform services on behalf of the
Company are eligible to participate in the Stock Option Plan. No options may be
granted under the Stock Option Plan after July 29, 2006.

The Stock Option Plan provides that it is to be administered by the Board
of Directors (or by a committee appointed by the Board). The Board of Directors
(or any such committee) has full power and authority to interpret the
provisions, and supervise the administration, of the Stock Option Plan. The
Board of Directors (or any such committee) determines, subject to the provisions
of the Stock Option Plan, to whom options shall be granted, the number of shares
of Common Stock subject to an option, whether an option shall be incentive or
non-qualified, the exercise price of each option (which, other than in the case
of incentive stock options, may be less than the fair market value of the shares
on the date of grant), the period during which each option may be exercised and
the other terms and conditions of each option.

OPTIONS GRANTED IN CONNECTION WITH THE IPO

Immediately prior to completion of the IPO, the Company granted options,
pursuant to the Stock Option Plan, to purchase an aggregate of approximately
543,944 shares of Common Stock (18,389 of which subsequently terminated). Such
options have an exercise price per share equal to the IPO Price per share of
Common Stock in the IPO ($6.00) and vest in two installments: (one-half in
November 1997 and one-half in

<PAGE>

February 1999). Of such options, options with respect to 390,001 shares were
granted to current directors of the Company (including directors who are
executive officers) as follows: Mr. Haber (options for 133,333 shares), Mr.
Eisenberg (options for 66,667 shares), Mr. Kahn (options for 66,667 shares), Mr.
Appel (options for 31,667 shares), Ms. Kubin (options for 15,000 shares), Mr.
Landowne (options for 15,000 shares), Mr. Perlman (options for 15,000 shares),
Mr. Smith (options for 31,667 shares) and Mr. Spier (options for 15,000 shares).

CERTAIN TRANSACTIONS

Mr. Eisenberg's father-in-law and a brother-in-law of Mr. Eisenberg
purchased $50,000 and $100,000, respectively, of Bridge Notes in the Bridge
Financing on the same terms as the other participants in the Bridge Financing.
Mr. Eisenberg is a director and executive officer of the Company and
beneficially owns more than 5% of the outstanding Common Stock of the Company.

Certain relatives of Alan P. Haber are employed by the Company. Alan P.
Haber is a director and chief executive officer of the Company and beneficially
owns more than 5% of the outstanding Common Stock of the Company. Philip Haber,
a brother of Alan Haber, has served as warehouse manager since January 1995 and,
in addition, as accounts receivable manager since June 1996. Philip Haber
received compensation of $41,000 in 1995 and is currently receiving compensation
at a rate per annum of approximately $48,000. Deena Haber, a sister-in-law of
Alan Haber, has served as assistant controller since December 1994. Deena Haber
received compensation of $28,000 in 1995 and is currently receiving compensation
at a rate per annum of approximately $55,000. Carol Haber, Alan Haber's wife,
serves as a graphic artist and is currently receiving compensation at a rate per
annum of approximately $14,500.

The Company has issued options to purchase Common Stock to certain of its
directors and executive officers. See 'Management--Compensation of Directors.'

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information with respect to
beneficial ownership (as defined in Item 403 of Regulation S-B under the
Securities Act) of the Company's Common Stock as of December 18, 1996 by (i)
each executive officer of the Company, (ii) each director of the Company, (iii)
all directors and executive officers of the Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
NAME AND ADDRESS OF ------------------- PERCENTAGE
BENEFICIAL OWNER(2) NUMBER OWNED(1)
- ------------------------------ ------------------- ----------------
<S> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
Alan P. Haber................. 986,972(3) 16.07%
Barry L. Eisenberg............ 284,839(4) 4.71%(4)
Simon M. Kahn................. 40,928(5) *
Bernard S. Appel.............. 99,933(6) 1.84%
Nicole R. Kubin............... 4,167(7) *
Morton L. Landowne............ 11,410(8) *
Noah Perlman.................. 30,426(9) *

Morris J. Smith............... (10) --(10)
William J. Spier.............. 54,669(9) *
All directors and executive
officers as a group (9
persons).................... 1,513,344(11) 23.96%
</TABLE>

(Footnotes on next page)

<PAGE>

The Company is not aware of any person or entity, other than Mr. Haber, that is
the beneficial owner of more than 5% of the Common Stock.

(Footnotes from previous page)

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

(1) Unless otherwise indicated, each person has sole investment and voting
power with respect to the shares indicated. For purposes of this table, a
person or group of persons is deemed to have 'beneficial ownership' as of a
given date of any shares which such person has the right to acquire within
60 days after such date. For purposes of computing the percentage of
outstanding shares held by each person or group of persons named above on a
given date, any security which such person or persons has the right to
acquire within 60 days after such date is deemed to be outstanding for the
purpose of computing the percentage ownership of such person or persons,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person.

(2) Where no address is indicated, the address is in care of the Company.

(3) Consists of (i) 830,471 shares held by Mr. Haber, (ii) 133,111 shares
underlying currently exerciseable options held by Mr. Haber, (iii) 21,298
shares held by Mr. Haber's wife and (iv) 2,092 shares underlying currently
exerciseable options held by Mr. Haber's wife. Mr. Haber disclaims any
beneficial ownership of any stock owned by his wife.

(4) Consists of 246,807 currently outstanding shares and 38,032 shares
underlying currently exerciseable options held by 241 Associates LLC, a
limited liability company. Shafrira Wiener is the sole manager of 241
Associates LLC and as such has voting and investment power with respect to
such shares. Ms. Wiener is the daughter of Barry L. Eisenberg. A majority
of the ownership interest of 241 Associates LLC is owned by Mr. Eisenberg
and his wife and, as a result of such ownership interests, Mr. Eisenberg
may influence the voting and disposition of the shares of Common Stock held
by 241 Associates LLC. Mr. Eisenberg disclaims beneficial ownership of such
shares.

(5) Consists of (i) 7,607 currently outstanding shares held by Mr. Kahn and
(ii) 33,321 shares underlying currently exerciseable options held by Mr.
Kahn.

(6) Consists of shares underlying currently exerciseable options held by the
indicated person.

(7) Consists of shares underlying Bridge Warrants held by Ms. Kubin.

(8) Consists of currently outstanding shares held by Landowne & Co., a
corporation controlled by Mr. Landowne.

(9) Consists of currently outstanding shares held by the indicated person.

(10) The Brook Road Nominee Trust, nominee for the Morris Smith Family Trust, is
the owner of 163,653 outstanding shares of Common Stock. Esther Smith, the
mother of Morris J. Smith, is the sole trustee of the Morris Smith Family
Trust and as such has voting and investment power with respect to such
shares. The Morris Smith Family Trust is a discretionary trust, the
potential beneficiaries of which are Mr. Smith and members of his family.
Mr. Smith disclaims any beneficial ownership of any and all shares owned by
the Brook Road Nominee Trust.

(11) Does not include 163,653 shares that Mr. Smith disclaims beneficial
ownership of as described in footnote 10 above.

DESCRIPTION OF SECURITIES

RECAPITALIZATION

On September 10, 1996, the Company amended its Certificate of Incorporation
to (i) authorize the issuance of 40,000,000 shares of Common Stock, par value
$.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01 per
share, and (ii) convert each outstanding share of common stock, without par
value, of the Company into 760.6291 shares of Common Stock, par value $.01 per
share. All information set forth below gives effect to such amendment.

<PAGE>

GENERAL

The Company is authorized by its Certificate of Incorporation to issue an
aggregate of 40,000,000 shares of Common Stock, par value $.01 per share, and
5,000,000 shares of preferred stock, par value $.01 per share (the 'Preferred
Stock'), which Preferred Stock may be issued with such rights, designations and
privileges (including redemption and voting rights) as the Board of Directors
may from time to time determine.

COMMON STOCK

As of December 2, 1996, there were outstanding 6,005,179 shares of Common
Stock. These shares were held of record by approximately 73 record holders.

Holders of the Common Stock are entitled to one vote per share and, subject
to the rights of the holders of the Preferred Stock, if and when issued, to
receive dividends when and as declared by the Board of Directors, and to share
ratably in the assets of the Company legally available for distribution in the
event of the liquidation, dissolution or winding up of the Company. Holders of
the Common Stock do not have subscription, redemption or conversion rights, nor
do they have any preemptive rights. The shares of Common Stock offered hereby
will be, when issued and paid for, fully-paid and not liable for further call or
assessment. Holders of the Common Stock do not have cumulative voting rights,
which means that (subject to the rights of the holders of the Preferred Stock,
if any) the holders of a majority of the shares voting for election of directors
can elect all of the Company's directors, if they choose to do so. In such
event, the holders of the remaining shares would not be able to elect any
directors.

PREFERRED STOCK

The Company is authorized by its Certificate of Incorporation to issue a
maximum of 5,000,000 shares of Preferred Stock, in one or more series and
containing such rights, privileges and limitations, including voting rights,
conversion privileges and/or redemption rights, as may from time to time be
determined by the Board of Directors of the Company. Preferred Stock may be
issued in the future in connection with acquisitions, financings or such other
matters as the Board of Directors deems to be appropriate. In the event that any
such shares of Preferred Stock shall be issued, a Certificate of Designation,
setting forth the series of such Preferred Stock and the relative rights,
privileges and limitations with respect thereto, is required to be filed with
the Secretary of State of the State of Delaware. The effect of having such
Preferred Stock authorized is that the Company's Board of Directors alone,
within the bounds and subject to the federal securities laws and the Delaware
General Corporation Law, may be able to authorize the issuance of Preferred
Stock, which may adversely affect the voting and other rights of holders of
Common Stock. The issuance of Preferred Stock may also have the effect of
delaying or preventing a change in control of the Company.

PUBLIC WARRANTS

The following is a brief summary of certain provisions of the Public
Warrants. For a more complete description of the Public Warrants, reference is
made to the actual text of the Warrant Agreement between the Company and
American Stock Transfer & Trust Company (the 'Warrant Agent'), a copy of which
has been filed as an exhibit (through incorporation by reference) to the
Registration Statement of which this Prospectus is a part. See 'Additional
Information.'

Exercise Price and Terms. Each Public Warrant entitles the registered
holder thereof to purchase, at any time during the four year period commencing
October 1, 1997, one share of Common Stock at a price of $9.00 per share,
subject to adjustment in accordance with the anti-dilution and other provisions
referred to below. The holder of any Public Warrant may exercise such Warrant by
surrendering the certificate representing the Warrant to the Warrant Agent, with
the subscription form thereon properly completed and executed, together with
payment of the exercise price. Commencing October 1, 1997, the Public Warrants
may be exercised at any time in whole or in part at the applicable exercise
price until expiration of the Public Warrants. No fractional shares will be
issued upon the exercise of the Warrants.

Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon the exercise of the Public Warrants are subject to adjustment
upon the occurrence of certain events, including stock

<PAGE>

dividends, stock splits, combinations or reclassifications of the Common Stock.
Additionally, an adjustment would be made in the case of a reclassification or
exchange of Common Stock, consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the surviving corporation) or sale of all or substantially all of the assets
of the Company, in order to enable Public Warrant holders to acquire the kind
and number of shares of stock or other securities or property receivable in such
event by a holder of the number of shares of Common Stock that might have been
purchased upon the exercise of the Public Warrant.

Redemption Provisions. Commencing April 1, 1998, the Public Warrants are
subject to redemption by the Company, in whole but not in part, at $0.01 per
Warrant on 30 days' prior written notice to the warrantholders, if the average
closing bid price of the Common Stock as reported on AMEX equals or exceeds
$15.00 per share (subject to adjustment for stock dividends, stock splits,
combinations or reclassifications of the Common Stock) for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. In the event that the Company
exercises the right to redeem the Public Warrants, such Public Warrants will be
exercisable until the close of business on the business day immediately
preceding the date for redemption fixed in such notice. If any Public Warrant
called for redemption is not exercised by such time, it will cease to be
exercisable and the holder will be entitled only to the redemption price.

BRIDGE WARRANTS

As described under 'Management's Discussion and Analysis of Financial
Condition and Results of Operations--Bridge Financing,' the Company issued
Bridge Warrants in connection with a Bridge Financing completed by the Company
during the period April 30, 1996, through July 30, 1996. As of December 2, 1996,
the aggregate number of shares issuable upon exercise of outstanding Bridge
Warrants is approximately 124,173 and the exercise price per share is $0.60.

<PAGE>

REPRESENTATIVE'S WARRANTS

In connection with the IPO, the Company sold to the Representative for
nominal consideration, Representative's Warrants to purchase from the Company up
to 300,000 shares of Common Stock and/or 300,000 warrants. For a description of
the terms of the Representative's Warrants, see 'Certain Information Concerning
Initial Public Offering--Underwriting Arrangements Relating to the IPO.'

OPTIONS

There are currently outstanding options to purchase an aggregate of 915,988
shares of Common Stock, 257,322 of which provide for an exercise price of
approximately $.01 per share, 133,111 of which provide for an exercise price of
approximately $1.64 per share, and 525,555 of which provide for an exercise
price of $6.00 per share. The aforementioned options that provide for an
exercise price of $6.00 per share will vest in two installments (one-half in
November 1997 and one-half in February 1999). All of the other outstanding
options are currently exercisable. The Company has also reserved 307,778 shares
of Common Stock for possible future grants of options under the Stock Option
Plan.

TRANSFER AGENT

The Transfer Agent and Registrar for the Common Stock and the Warrant Agent
for the Warrants is American Stock Transfer & Trust Company, 40 Wall Street, New
York, New York 10005.

SHARES ELIGIBLE FOR FUTURE SALE

GENERAL

No prediction can be made as to the effect, if any, that future sales of
Common Stock, or the availability of Common Stock for future sale, will have on
the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon exercise of
warrants or options), or the perception that such sales could occur, could
adversely effect prevailing market prices for the Common Stock. Set forth below
is certain information concerning certain shares of Common Stock that are
potentially available for sale (in addition to the 199,174 shares that may be
sold pursuant to this Prospectus).

Shares of Common Stock Sold in the IPO. The 3,000,000 shares of Common
Stock sold in the IPO are freely tradeable without restriction under the
Securities Act, except for any shares purchased by 'affiliates' of the Company,
as that term is defined under the rules and regulations of the Securities Act
('Affiliates'), which are subject to the resale limitations of Rule 144 under
the Act. For information concerning Rule 144, see
'--Rule 144.'

Shares Underlying Public Warrants sold in the IPO. The Public Warrants are
not exercisable until October 1, 1997. Thereafter, up to 3,360,082 shares may be
issued upon exercise of the Public Warrants (subject to adjustment as described
under 'Description of Securities--Public Warrants'). Any shares of Common Stock
acquired upon exercise of the Public Warrants will generally be freely tradeable
to the same extent as the shares of Common Stock sold in the IPO (as described
above).

Outstanding Shares of Common Stock issued prior to the IPO. Immediately
prior to the IPO, there were outstanding 2,930,178 shares of Common Stock. Such
shares are 'restricted securities' for purposes of Rule 144 under the Securities
Act and may not be resold in a public distribution except pursuant to Rule 144
or in compliance with the registration requirements of the Securities Act.
Certain holders of such currently outstanding shares have entered into lock-up
agreements as described below under '--Lock-up Agreements.' Approximately
2,430,749 of such shares have been held for the two-year holding period
prescribed by Rule 144 and will, subject to such lock-up agreements, be eligible
for sale in accordance with Rule 144 approximately 90 days after October 1,
1996. Substantially all of the balance of such currently outstanding shares
will, subject to such lock-up agreements, be eligible for sale in accordance
with Rule 144 in the first four months of 1997.

Shares Underlying Options. There are currently outstanding options to
purchase an aggregate of approximately 915,988 shares of Common Stock. Of such
options, approximately 390,433 are fully vested and

<PAGE>

the balance will vest in two installments (one-half in November 1997 and
one-half in February 1999). Certain holders of such outstanding options have
entered into lock-up agreements as described below under '--Lock-up Agreements.'
The Company plans to file a Registration Statement on Form S-8 registering (i)
the issuance by the Company of up to 1,223,766 shares of Common Stock that may
be issued upon exercise of the stock options (representing the 915,988 shares
underlying the currently outstanding options plus 307,778 shares reserved for
possible future grants of stock options under the Company's Stock Option Plan)
and (ii) the resale of such shares by the holders thereof (to the extent that
registering such resale is required by the Securities Act). Such Registration

Statement will become effective immediately upon filing. Upon the effectiveness
of such Registration Statement, shares of Common Stock covered by such
Registration Statement that are acquired upon the exercise of options will,
subject to the lock-up agreements described below, either be freely tradeable
without restriction under the Securities Act (in the case of shares that are
acquired by persons who are not Affiliates of the Company) or eligible for
resale in the public market pursuant to such Registration Statement (in the case
of shares that are acquired by Affiliates of the Company).

Shares Underlying Representative's Warrants. The Representative's Warrants
are not exercisable until October 1, 1997. Thereafter, up to 300,000 shares of
Common Stock may be issued upon exercise of the Representative's Warrants
(subject to adjustment) and up to an additional 300,000 shares may be issued
(subject to adjustment) upon exercise of warrants that may be acquired pursuant
to the Representative's Warrants. All such shares may be eligible for resale in
the public market pursuant to certain registration rights provided for in the
Representative's Warrants.

RULE 144

In general, under Rule 144, as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned for at
least two years shares of Common Stock which are treated as 'restricted
securities,' including persons who may be deemed Affiliates of the Company,
would be entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the then outstanding shares of Common
Stock or the average weekly reported trading volume in the Common Stock during
the four calendar weeks preceding the date on which notice of such sale is
given, provided certain manner of sale and notice requirements and requirements
as to the availability of current public information about the Company are
satisfied (which requirements as to the availability of current public
information are expected to be satisfied commencing 90 days after October 1,
1996). In addition, Affiliates of the Company must comply with the restrictions
and requirements of Rule 144, other than the two-year holding period
requirement, in order to sell shares of Common Stock which are not 'restricted
securities' (such as shares acquired by Affiliates in the IPO). Under Rule
144(k), a stockholder who is deemed not to have been an affiliate of the Company
at any time during the 90 days preceding a sale by him, and who has beneficially
owned for at least three years shares of Common Stock which are treated as
'restricted securities,' would be entitled to sell such shares, without regard
to the foregoing restrictions and requirements.

LOCK-UP AGREEMENTS

The Company and certain holders of Common Stock and/or other securities of
the Company have entered into lock-up agreements as described below.

Company. The Company has agreed that, during the period commencing on

October 1, 1996 and ending on the first anniversary of such date, the Company
will not, without the prior written consent of the Representative, directly or
indirectly, issue, offer to sell, sell, grant an option for the sale of, assign,
transfer, pledge, hypothecate or otherwise encumber or dispose of (all the
foregoing being collectively referred to as 'Transfer') any securities issued by
the Company, including common stock or securities convertible into or
exchangeable or exercisable for or evidencing any right to purchase or subscribe
for any shares of common stock (the 'Covered Securities'), except that the
Company may (i) issue shares upon the exercise of the Bridge Warrants, (ii)
grant options pursuant to its 1996 Stock Option plan (described under
'Management--Stock Option Plan'), provided that the optionee is subject to (or
upon receipt of the option agrees to be subject to) one of the lock-up
arrangements described in the following two paragraphs, and (iii) issue shares
upon the exercise of stock options that are currently outstanding or that are
hereafter granted in accordance with clause (ii) immediately above.

<PAGE>

Two-Percent Holders. Each Two-Percent Holder (as hereinafter defined) has
agreed that, until October 1, 1997 such holder will not, without the prior
written consent of the Representative, directly or indirectly, Transfer any
Covered Securities, except that (i) a Two-Percent Holder may Transfer Covered
Securities in a private placement, provided that the transferee agrees to be
bound by the terms of the foregoing agreement; and (ii) from and after the 270th
day after October 1, 1996, a Two-Percent Holder may Transfer Common Stock of the
Company (in one or more transactions), provided that the aggregate shares of
Common Stock of the Company that may be Transferred by a Two-Percent Holder
pursuant to this clause (ii) may not exceed 10% of the number of shares of
Common Stock of the Company owned by such Two-Percent Holder immediately
preceding the 270th day after October 1, 1996. (For purposes of clause (ii) of
the preceding sentence, the ownership or sale of any Covered Securities
convertible into or exchangeable or exercisable for or evidencing any right to
purchase or subscribe for any shares of Common Stock is deemed the ownership or
sale, as the case may be, of the number of shares of Common Stock that may be
acquired pursuant to such Covered Securities). Immediately following completion
of the IPO, the Two-Percent Holders held in the aggregate 1,782,561 shares of
Common Stock and options to purchase 751,973 shares of Common Stock. As used
herein, a 'Two-Percent Holder' means any person or entity that immediately prior
to the IPO owned a number of shares of Common Stock (calculated on a pro forma
basis giving effect to the exercise of all outstanding options) that constituted
2% or more of the outstanding Common Stock immediately prior to the IPO
(calculated on a pro forma basis as aforesaid).

Other Holders of Common Stock or Options. Certain of the holders of Common
Stock and/or options who are not Two-Percent Holders have agreed that, until the
270th day following October 1, 1996, such holder will not Transfer any Covered
Securities, except that any such holder may Transfer Covered Securities in a
private placement, provided that the transferee agrees to be bound by the terms

of the foregoing agreement. Immediately following completion of the IPO, such
holders held in the aggregate 1,096,857 shares of Common Stock and options to
purchase 190,160 shares of Common Stock.

Holders of Bridge Warrants. Each holder of Bridge Warrants has agreed
that, during the three-month period commencing on October 1, 1996, such holder
will not, without the prior written consent of the Representative, sell assign,
transfer or otherwise dispose of, any such warrant or any shares of Common Stock
acquired upon exercise thereof.

<PAGE>

ISRAELI TAXATION

A substantial portion of the Company's business is conducted in the State
of Israel through two Israeli subsidiaries: I.T.I. Innovative Technology Ltd.
('Innovative') and CompuPrint Ltd. ('Compuprint'). See 'Conditions in Israel.'
Set forth below is a summary of certain Israeli laws and regulations currently
in effect that are applicable (or potentially applicable) to such subsidiaries
(the 'Israeli Subsidiaries') relating to certain tax matters, government
programs and currency controls. Such summary is not intended, and should not be
construed as, legal or professional advice and does not purport to cover all
considerations relating to the matters discussed. Since such summary is based on
legislation and regulation subject to judicial or administrative interpretation,
there can be no assurance that the views expressed herein will accord with any
such interpretation in the future. The Company cannot at present predict the
portion of future income (if any) that will be allocable to the Israeli
Subsidiaries as opposed to ITI USA.

ISRAELI TAXATION OF INCOME OF THE ISRAELI SUBSIDIARIES

Israeli taxation of income of the Israeli Subsidiaries will vary depending
on the source of the income. Income not derived from an Approved Enterprise (as
defined below) will be subject to different treatment than income derived from
an Approved Enterprise. The Company cannot at present predict the portion of
future income (if any) of the Israeli Subsidiaries that will be derived from an
Approved Enterprise.

INCOME NOT FROM AN APPROVED ENTERPRISE

Israeli companies are subject to income tax at the rate of 36% on income
not derived from an Approved Enterprise. Retained income is not subject to
further taxation. Under the Income Tax Law (Adjustment for Inflation), 1985,
income for tax purposes is measured in terms of earnings in NIS adjusted for the
increase in the Israeli consumer price index.

INCOME FROM AN APPROVED ENTERPRISE

The Law for the Encouragement of Capital Investments, 1959, as amended (the
'Investment Law') provides that an investment program may, upon application to
the Israel Investments Center, be designated as an 'Approved Enterprise.' Each

certificate of approval for an Approved Enterprise relates to a specific
investment program delineated both by its financial scope, including its capital
sources, and its physical characteristics (e.g., the equipment to be purchased
and utilized pursuant to the program).

Innovative's investment program relating to the software component of its
keyboard telephone products has been granted Approved Enterprise status under
the Investment Law. Innovative's Approved Enterprise is in the so-called 'state
guarantees' benefits path. Approved Enterprises in that path are potentially
entitled to state-guaranteed commercial loans (as described under '--Approved
Enterprise Benefits Other than Tax Benefits') and to certain tax benefits. Such
tax benefits are limited to taxable income attributable to the specific Approved
Enterprise (which, in Innovative's case, is the software component of
Innovative's keyboard telephone products). Such tax benefits are further limited
in any year to the portion of such taxable income that is attributable to sales
of such software component that are in excess of the amount of such sales in the
year immediately preceding the year in which the Approved Enterprise commences
operation. (Any reference herein to income derived from Innovative's Approved
Enterprise refers only to the portion of such income to which the tax benefits
apply as described above.)

The tax and other benefits available to an Approved Enterprise are
contingent upon the fulfillment of various conditions, including (i) conditions
stipulated by the Investment Law and (ii) conditions stipulated by the
certificate of approval for the specific investment program relating to the
Approved Enterprise (including various conditions relating to capitalization).
In the case of Innovative, such conditions include, among others, completing
certain investment programs, fulfilling certain requirements as to
capitalization, making sales to ITI USA only on market terms, and filing
periodic compliance reports. In the event of Innovative's failure to comply with
such conditions, the tax and other benefits could be canceled, in whole or in
part, and the Company might be required to refund the amount of the canceled
benefits, plus inflation adjustments and interest.

The undistributed income derived from Innovative's Approved Enterprise is
tax-exempt for a ten year consecutive period, beginning with the first year in
which it generates otherwise taxable income provided that (i) 12 years have not
elapsed from the year of commencement of production and (ii) 14 years have not
elapsed from the year during which the Approved Enterprise status was granted.

<PAGE>

Distributed income derived from Innovative's Approved Enterprise will be
subject to Company income tax at the rates described below. Such income tax is
in addition to the withholding tax applicable to dividends as described under
'--Israeli Taxation on Dividends Received from the Israeli Subsidiaries by ITI
USA.' Company income tax will be imposed on distributed income which is derived
from Innovative's Approved Enterprise at the reduced rate of 25% (or lower if
Innovative is deemed to be a Foreign Investors' Company, as described below),
until the earlier of (i) seven consecutive years (or ten in the case of a
Foreign Investors' Company) commencing in the year in which the Approved
Enterprise first generates taxable income, (ii) 12 years from the year of

commencement of production or (iii) 14 years from the year during which the
Approved Enterprise status was granted. The year in which the Approved
Enterprise first generates taxable income will be determined by isolating the
income and expense from the software component of Innovative's keyboard
telephone products from the other income and expenses of the Israeli
Subsidiaries. The Company income tax rate on distributed income derived from
Innovative's Approved Enterprise will be lower than 25% if Innovative qualifies
as a 'Foreign Investors' Company.' Subject to certain conditions, a 'Foreign
Investors' Company' is a company which has more than 25% of its combined
shareholders' investment in share capital (in terms of rights to profits, voting
and the appointment of directors) and in long-term shareholders' loans made by
persons who are not residents of Israel. Foreign investment in the Israeli
Subsidiaries will be determined by looking to the foreign investment in ITI USA.

The Investment Law also provides that an Approved Enterprise is entitled to
accelerated depreciation on its property and equipment that are included in an
approved investment program.

ISRAELI TAXATION ON DIVIDENDS RECEIVED BY ITI USA FROM THE ISRAELI SUBSIDIARIES

Dividends paid by the Israeli Subsidiaries to ITI USA will be subject to
Israeli withholding tax at the rate of 12 1/2%, unless the dividends are
attributable to income derived from an Approved Enterprise, in which case the
rate of withholding will be 15%.

LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

Pursuant to the Law for the Encouragement of Industry (Taxes), 1969 (the
'Industry Law'), a company qualifies as an 'Industrial Company' if it is a
resident of Israel and at least 90% of its gross income in any tax year
(exclusive of income from defense loans, capital gains, interest and dividends)
is derived from an 'Industrial Enterprise' that it owns. An 'Industrial
Enterprise' is defined for purposes of the Industry Law as an enterprise the
major activity of which, in a given tax year, is industrial production.

Both of the Israeli Subsidiaries qualify as Industrial Companies. As
Industrial Companies, the Israeli Subsidiaries are entitled to certain tax
benefits, including a deduction of 12.5% per annum on the purchase of patents or
certain other intangible property rights (other than goodwill) beginning with
the year in which such rights were first used and a deduction of 33% per annum
on expenses incurred in connection with a public stock issuance.

Eligibility for benefits under the Industry Law is not contingent upon the
approval of any Government agency. No assurance can be given that the Israeli
Subsidiaries will continue to qualify as Industrial Companies, or will be able
to take advantage of any benefits under the Industry Law in the future or that
Industrial Companies will continue to enjoy such tax benefits in the future.

LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984

Under the Law for the Encouragement of Industrial Research and Development
(the 'Research Law'), research and development programs approved by the Research
Committee of the Office of the Chief Scientist of the Ministry of Industry and
Trade of the State of Israel ('OCS') are eligible for grants in return for the

payment of royalties from the sale of the product developed in accordance with
the program. Once a project is approved, OCS will award grants of up to 50% of
the project's expenditures in return for royalties, usually at the rate of 3% of
sales of products developed with such grants, up to a dollar-linked amount equal
to 100% or 150% of such grants. There is no further liability for payment.
Recipients of funding from the OCS are restricted from transferring any knowhow
derived from research and development funded by the OCS without the consent of
the OCS. In addition, such recipients must manufacture in Israel any products
that are developed as a result of research and development funded by the OCS,
unless they receive the consent of the OCS to manufacture elsewhere.

<PAGE>

In the past, the Israeli Subsidiaries have received funding from the OCS
for two research and development projects. One project involved the development
of a device that would be located between the keyboard and a personal computer
and enable the computer to perform certain telephone functions. The other
project involved the development of a wireless printing product that uses radio
frequency technology (in contrast to the Company's WPS-1000 product that uses
diffuse infrared technology). The Company has not commercialized either of these
projects and is currently not actively engaged in these projects. The Company
may in the future determine to apply for grants under the Research Law for
additional projects. There can be no assurance, however, that any such
application will be approved in whole or in part.

APPROVED ENTERPRISE BENEFITS OTHER THAN TAX BENEFITS

In addition to providing tax-benefits for income derived from Approved
Enterprises (some of which benefits are described above under '--Israeli
Taxation of Income of the Israeli Subsidiaries'), the Investment Law also
provides for various other benefits to Approved Enterprises, where such benefits
vary according to the benefits path chosen. As noted above, Innovative has an
Approved Enterprise with regard to the software component of its keyboard
telephone products and it has chosen the 'state guarantees' path. Approved
Enterprises in that path are entitled to commercial loans (at interest rates
somewhat higher than market), 70% of which are guaranteed by the State of
Israel. Such guarantees may be given for up to 59.5% of the total approved
project expenditures (the total project expenditure approved in the case of
Innovative was $1,215,000). The entitlement to such guarantees is contingent on
the conditions of the certificate of approval and of the law being met. However,
in practice, many companies with Approved Enterprises which are entitled to
state guarantees have found it difficult to get the loans to which they are in
principle entitled. Innovative has encountered such difficulties, though it is
still in negotiations with several commercial banks as to the possibility of
receiving such state guaranteed loans. No assurance can be given that it will be
successful in receiving such state guaranteed loans from any of the commercial
banks with which it is in contact.

FOREIGN CURRENCY REGULATIONS

Israel maintains a series of regulations that are designed, among other
things, to limit outflow of foreign currency. However, in general, a foreign

resident, such as ITI USA, which has paid foreign currency for the shares it
received in an Israeli company, such as each of the Israeli Subsidiaries, is
entitled to receive dividends in foreign currency and is further entitled to
convert to foreign currency any payments that it receives in NIS upon the sale
of its shares in the Israeli company or as a result of the liquidation of such
company.

CONDITIONS IN ISRAEL

A substantial amount of the Company's business is conducted in the State of
Israel through the Israeli Subsidiaries. The functions that are primarily
conducted in Israel include research and development, international marketing
and sales, administration and finance. The net assets of the Israeli
Subsidiaries accounted for approximately 31% of the Company's consolidated net
assets as of December 31, 1995, and the net capital deficiency of the Israeli
Subsidiaries accounted for approximately 16% of the Company's consolidated net
capital deficiency as of September 30, 1996. In addition, substantially all of
the executive officers of the Company reside in the State of Israel or spend
significant amounts of time working there. Consequently, the Company is directly
influenced by the political, economic and military conditions affecting Israel,
and any major hostilities involving Israel or the interruption or curtailment of
trade between Israel and its present trading partners could have a material
adverse effect on the Company's operations. Set forth below is certain
information concerning certain conditions in Israel.

Economic Conditions in Israel. During 1994 and 1995 Israel's gross
domestic product increased by 3.4% and 6.5%, respectively, and during the first
six months of 1996 Israel's gross domestic product increased by 1.5% (not
annualized). During 1995 and the first nine months of 1996 inflation in Israel
and the change in the value of the NIS in relation to the dollar were: 1995 (the
inflation rate was 8.10% while the NIS was devalued by 3.88%); and first nine
months of 1996 (the inflation rate was 8.19%, not annualized, while the NIS was
devalued by 3.88%). There can be no assurance that economic growth and relative
price and exchange rate stability in Israel will continue.

Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. In response to these problems, the Israeli Government has
intervened in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency

<PAGE>

restrictions and controls of wages, prices and foreign currency exchange rates.
The Israeli Government frequently has changed its policies in all these areas.

Political Environment. Since the establishment of the State of Israel in

1948, a state of hostility has existed, varying in degree and intensity, between
Israel and the Arab countries. In addition, Israel and companies doing business
with Israel have been the subject of an economic boycott by the Arab countries
since Israel's establishment. Furthermore, following the Six-Day War in 1967,
Israel commenced administering the territories of the West Bank and the Gaza
Strip and, since December 1987, increased civil unrest has existed in those
territories. Although Israel has entered into various agreements with Arab
countries and the Palestine Liberation Organization and various declarations
have been signed in connection with efforts to resolve some of the
aforementioned problems, no prediction can be made as to whether a full
resolution of these problems will be achieved or as to the nature of any such
resolution. To date, these problems have not had a material adverse impact on
the financial condition or operation of the Company, although there can be no
assurance that continuation of these problems will not have such an impact in
the future.

Army Service. All male adult permanent residents of Israel under the age
of 50 are, unless exempt, obligated to perform approximately up to 48 days of
military reserve duty annually. Additionally, all such residents are subject to
being called to active duty at any time under emergency circumstances. Some of
the employees of the Company (including its Chief Executive Officer) currently
are obligated to perform annual reserve duty. While the Company has operated
effectively under these requirements in the past, no assessment can be made of
the full impact of such requirements on the Company in the future, particularly
if emergency circumstances occur.

Demographics. Since the beginning of 1990, Israel has been experiencing a
new wave of immigration, primarily from the former Soviet Union. Although the
increased immigration to Israel from the former Soviet Union may benefit Israel
and its economy in the long term by providing highly educated, cost-competitive
labor and by stimulating economic growth, it has placed an increased strain on
government services and national resources. The Israeli Government has found it
necessary to raise additional revenue and to dedicate substantial funds to
support programs, including housing, education and job training, designed to
assist in the absorption of new immigrants. No prediction can be made as to the
policies that will be adopted in the future or their effect on these and other
government spending programs.

Assistance from the United States. The State of Israel receives
approximately $3 billion of annual grants for economic and military assistance
from the United States and has received approximately $10 billion of United
States Government loan guarantees, subject to reduction in certain
circumstances. The United States Government loan program guarantees were granted
over a period of five years ($2 billion per annum) commencing in 1993. The
Israeli economy could suffer material adverse consequences if such aid or
guarantees are reduced significantly. There is no assurance that foreign aid
from the United States will continue at or near amounts received in the past.

Trade Agreements. Israel is a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from the United States, Australia, Canada and
Japan. These preferences allow Israel to export the products covered by such
programs either duty-free or at reduced tariffs.

Israel and the European Economic Community (known now as the 'European
Union') signed a Free Trade Agreement, which became effective on July 1, 1975.
Pursuant to such agreement and subject to rules of origin, Israel's industrial
exports to the European Union are exempt from custom duties and other non-tariff
barriers (e.g., import restrictions). In 1985, Israel and the United States
entered into an agreement to establish a Free Trade Area ('FTA') which is
intended ultimately to eliminate all tariff and certain nontariff barriers on
most trade between the two countries. Under the FTA agreement, most products
(except with respect to certain agricultural products) received duty-free status
as of January 1, 1995. On January 1, 1993, an agreement between Israel and the
European Free Trade Association ('EFTA'), which presently includes Austria,
Norway, Finland, Sweden, Switzerland, Iceland, and Liechtenstein, established a
free-trade zone between Israel and the EFTA nations. Under the agreement with
the existing EFTA countries, manufactured goods and some agricultural goods and
processed foods are exempt from customs duties, while duties on other goods have
been reduced. Israel is the only country which has free-trade area agreements
with the United States as well as with the European Union and the EFTA states.

<PAGE>

SELLING SECURITY HOLDERS

The Selling Security Holders are the persons identified in the table below
(and any successor or transferee of any of such persons that hereafter acquires
in a private placement any of the Resale Shares, or any warrants pursuant to
which Resale Shares may be acquired, and is identified in a Prospectus
Supplement hereto). The shares of Common Stock to which this Prospectus relates
are shares that have been acquired, or may hereafter be acquired, by the Selling
Security Holders pursuant to the exercise of the Bridge Warrants that were
issued to the Selling Security Holders in connection with the Bridge Financing.
See 'Management's Discussion and Analysis of Financial Condition-Bridge
Financing,' for information concerning the Bridge Financing.

Based upon information currently available to the Company, the table below
indicates with respect to each Selling Security Holder the number of shares of
Common Stock that such Selling Security Holder has acquired, or may hereafter
acquire, pursuant to the exercise of the Bridge Warrants that were issued to
such Selling Security Holder. This Prospectus covers all shares of Common Stock
shown in the table below.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF
NAME COMMON STOCK(1)(2)
- ------------------------------------------------------------------------- -------------------
<S> <C>

Alcamin Anstalt.......................................................... 16,667
Central Investments Ltd.................................................. 8,334
Charles H. Bendheim...................................................... 8,334
CPS Capital Ltd.......................................................... 20,834
Forward Issue Ltd........................................................ 8,334
Gottdiener Associates, L.P............................................... 8,334
J.C. Bendheim............................................................ 16,667
Julius Hess.............................................................. 4,167
Linton Lake S.A.......................................................... 8,334
Mates Ventures........................................................... 8,334
Nicole R. and Michael Kubin(3)........................................... 4,167
Paul Morris.............................................................. 3,334
Sentex Sensing Technology................................................ 16,667
Union Bancaire Privee.................................................... 66,667
</TABLE>

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

(1) The shares indicated with respect to Union Bancaire Privee and Forward Issue
Ltd. are outstanding shares that have heretofore been issued upon exercise
of Bridge Warrants. All other shares indicated are authorized and unissued
shares that may hereafter be acquired upon exercise of outstanding Bridge
Warrants.

(2) Mr. Morris assisted the Company in connection with the Bridge Financing and
received the Bridge Warrants held by him in consideration of such
assistance. Each other Selling Security Holder acquired his/its Bridge
Warrants in connection with purchasing Bridge Notes sold by the Company in
the Bridge Financing. See 'Management's Discussion and Analysis of Financial
Condition-Bridge Financing.'

(3) Ms. Kubin is a director of the Company. See 'Management.'

As of December 2, 1996, Gottdiener Associates, L.P. was the holder of
record of 28,524 shares of outstanding Common Stock. This Prospectus does not
cover such shares. As of such date, none of the other Selling Security Holders
held of record any outstanding shares of Common Stock, except as indicated in
the table above. Assuming that the Selling Security Holders dispose of all
shares covered by this Prospectus (and assuming no additional acquisitions or
dispositions of shares of Common Stock by such Selling Security Holders), none
of the Selling Security Holders would continue to own of record any shares of
Common Stock (except that Gottdiener Associates, L.P. would own of record 28,524
shares of Common Stock).

PLAN OF DISTRIBUTION

The Selling Security Holders are offering shares of Common Stock for their
own account, and not for the account of the Company.

The Common Stock offered by the Selling Security Holders (the 'Resale
Shares') may be sold from time to time by the Selling Security Holders directly
to purchasers or, alternatively, may be offered from time to time through
agents, brokers, dealers or underwriters, who may receive compensation in the
form of concessions or commissions from the Selling Security Holders or
purchasers of the Resale Shares (which compensation may be in excess of
customary commissions). Sales of the Resale Shares may be made in one or more
transactions through the AMEX, in the over-the-counter market, or in privately
negotiated transactions or otherwise, and such

<PAGE>

sales may be made at the market price prevailing at the time of sale, a price
related to such prevailing market price or a negotiated price.

Under the Exchange Act and the regulations thereunder, any person engaged
in a distribution of the shares of Common Stock of the Company offered by this
Prospectus may not simultaneously engage in market making activities with
respect to the Common Stock of the Company during the applicable 'cooling off'
periods prior to the commencement of such distribution. In addition, and without
limiting the foregoing, each Selling Security Holder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder including, without limitation, Rules 10b-6 and 10b-7, which
provisions may limit the timing of purchases and sales of Common Stock by the
Selling Security Holders.

To the extent required, the Company will use its best efforts to file,
during any period in which offers or sales are being made, one of more
supplements to this Prospectus to describe any material information with respect
to the plan of distribution not previously disclosed in this Prospectus or any
material change to such information in this Prospectus.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Ehrenreich & Krause, New York, New York.

EXPERTS

The consolidated financial statements of the Company as of December 31,
1994 and 1995 and for each of the three years in the period ended December 31,
1995, included in this Prospectus have been so included in reliance on the
report (which contains an explanatory paragraph relating to the Company's
ability to continue as a going concern as described in Note 1 to such financial
statements) of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the 'Exchange Act') and in accordance therewith files

reports, proxy statements and other information with the Securities and Exchange
Commission (the 'Commission'). Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at the principal office of the
Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Midwest Regional Office of the Commission at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511 and at the Northeast Regional
Office of the Commission at Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Room 1204, Washington, D.C.
20549 at prescribed rates.

The Company makes certain filings with the Commission electronically. The
Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission.

The Company has filed with the Securities and Exchange Commission (the
'Commission') in Washington, D.C. a Registration Statement on Form SB-2
(together with all amendments thereto, the 'Registration Statement'), under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all the information set forth in the Registration Statement and
the exhibits and schedules filed therewith, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding the
contents of any contract or other document referred to are not necessarily
complete and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement, each such
statement being deemed to be qualified in its entirety by such reference. The
Registration Statement, including all exhibits and schedules thereto, may be
inspected without charge at the principal office of the Commission located at
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Midwest Regional
Office of the Commission located at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and at the Northeast Regional office of
the Commission located at Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material may be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Room 1204, Washington, D.C.
20549, at prescribed rates.

<PAGE>
INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and
September 30, 1996 (Unaudited)......................................... F-3
Consolidated Statement of Operations for the years ended December 31,
1993, 1994 and 1995 and the nine-month periods ended September 30, 1995
and 1996 (Unaudited)................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity for the years
ended December 31, 1993, 1994 and 1995 and the nine-month period ended
September 30, 1996 (Unaudited)......................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1993, 1994 and 1995 and the nine-month periods ended September 30, 1995
and 1996 (Unaudited)................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and
Board of Directors of
Integrated Technology USA, Inc.

In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Integrated Technology USA, Inc. and its subsidiaries
at December 31, 1995 and 1994 and the results of their operations and their
cash flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audits 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, the Company has suffered recurring
losses from operations and has experienced a net cash outflow from
operations since its formation that raise substantial doubt about its
ability to continue as a going concern. As such, the Company is dependent
upon capital infusions from existing and from new investors to fund
operations. Management's plans with regard to these matters are also
described in Note 1. The accompanying consolidated financial statements, do
not include any adjustments that might result from the outcome of this
uncertainty.

PRICE WATERHOUSE LLP

New York, New York
March 29, 1996, except as to the recapitalization
described in Note 10, which is as of September 10, 1996,
and the initial public offering described in Note 9, which is
as of October 1, 1996

F-2

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 893,997 $ 33,473 $ 152,540
Accounts receivable (net of allowance
for doubtful accounts and sales
returns of approximately $11,000,
$17,000 and $60,000 at December 31,
1994 and 1995 and September 30,
1996, respectively)................ 18,105 146,875 138,166
Inventories........................... 212,234 467,562 320,037
Deferred financing costs.............. -- -- 577,452
Prepaid expenses and other current
assets............................. 25,410 34,514 37,606
---------- ---------- -------------
Total current assets.......... 1,149,746 682,424 1,225,801
Fixed assets, net..................... 142,120 127,109 106,965
Security deposits..................... 20,163 20,013 21,167
---------- ---------- -------------
Total assets.................. $1,312,029 $ 829,546 $ 1,353,933
---------- ---------- -------------
---------- ---------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft and short-term loans... $ 10,173 $ 21,026 $ 63,138
Accounts payable...................... 204,816 239,015 528,892
Notes payable......................... -- -- 968,929
Payables to officers.................. 6,499 30,949 --
Accrued expenses...................... 128,529 199,258 464,606
Other current liabilities............. 19,711 12,682
---------- ---------- -------------
Total current liabilities..... 369,728 502,930 2,025,565
Provision for severance payments........ 30,330 28,392 86,278
---------- ---------- -------------
Total liabilities............. 400,058 531,322 2,111,843
---------- ---------- -------------

Commitments and contingencies (Note 9)

Stockholders' equity:

Preferred stock $.01 par value,
5,000,000 shares authorized; none
issued and outstanding............. -- -- --
Common stock, $.01 par value;
40,000,000 shares authorized;
2,430,753, 2,930,178, and 2,930,178
shares issued and outstanding at
December 31, 1994, 1995, and
September 30, 1996, respectively... 24,818 29,812 29,812
Additional paid-in capital............ 4,524,924 5,535,863 6,171,006
Treasury stock........................ (165,000) (165,000) (165,000)
Accumulated deficit................... (3,517,544) (5,200,608) (6,989,346)
Cumulative translation adjustment..... 44,773 98,157 195,618
---------- ---------- -------------
Total stockholders' equity
(net capital deficiency).... 911,971 298,224 (757,910)
---------- ---------- -------------
Total liabilities and
stockholders' equity........ $1,312,029 $ 829,546 $ 1,353,933
---------- ---------- -------------
---------- ---------- -------------
</TABLE>

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

F-3

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
---------- ----------- ----------- ----------- -----------
(UNAUDITED)

<S> <C> <C> <C> <C> <C>
Net sales..................... $ 76,877 $ 85,610 $ 803,705 $ 547,508 $ 634,158

Cost of products sold......... 72,767 80,874 491,315 324,910 448,556
---------- ----------- ----------- ----------- -----------

Gross profit........ 4,110 4,736 312,390 222,598 185,602

Operating expenses:

Selling, general and
administrative.............. 595,004 1,723,929 1,634,164 1,134,581 1,321,318

Research and development,
net......................... 30,023 291,970 357,117 145,045 261,297
---------- ----------- ----------- ----------- -----------

Total costs and
expenses............ 625,027 2,015,899 1,991,281 1,279,626 1,582,615
---------- ----------- ----------- ----------- -----------

Loss from
operations.......... (620,917) (2,011,163) (1,678,891) (1,057,028) (1,397,013)

Interest income (expense),
net......................... (935) 33,535 (4,173) 23,954 (391,725)
---------- ----------- ----------- ----------- -----------

Net loss............ $ (621,852) $(1,977,628) $(1,683,064) $(1,033,074) $(1,788,738)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------

Net loss per share............ $ (.34) $ (.71) $ (.54) $ (.34) $ (.57)
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------

Weighted average shares
outstanding................. 1,846,237 2,798,907 3,095,361 3,084,927 3,134,198
---------- ----------- ----------- ----------- -----------

---------- ----------- ----------- ----------- -----------
</TABLE>

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

F-4

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)

<TABLE>
<CAPTION>
TOTAL
STOCKHOLDER'S
COMMON STOCK ADDITIONAL STOCK CUMULATIVE EQUITY (NET
------------------- PAID-IN SUBSCRIPTION TREASURY ACCUMULATED TRANSLATION CAPITAL
SHARES AMOUNT CAPITAL RECEIVABLE STOCK DEFICIT ADJUSTMENT DEFICIENCY)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1993................... 1,407,378 $14,074 $1,247,843 $ (340,000) -- $ (918,064 ) $ 18,278 $ 22,131
Issuance of common stock,
net of expenses........ 40,923 409 169,591 -- -- -- -- 170,000
Issuance of stock
pursuant to anti-
dilution provisions.... 6,028 -- -- -- -- -- -- --
Proceeds from 1992 stock
subscriptions.......... -- -- -- 340,000 -- -- -- 340,000
Repurchase of common
stock.................. (8,086) -- -- -- $ (35,000) -- -- (35,000)
Change in cumulative
translation
adjustment............. -- -- -- -- -- -- 21,496 21,496
Net loss for 1993........ -- -- -- -- -- (621,852 ) -- (621,852)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
BALANCE AT DECEMBER 31,
1993................... 1,446,243 14,483 1,417,434 -- (35,000) (1,539,916 ) 39,774 (103,225)
Issuance of common stock,
net of expenses........ 1,033,472 10,335 2,519,736 -- -- -- -- 2,530,071
Repurchase of common
stock.................. (48,962) -- -- -- (130,000) -- -- (130,000)
Compensatory stock
options issued to
officers, directors and
employees.............. -- -- 587,754 -- -- -- -- 587,754
Change in cumulative
translation
adjustment............. -- -- -- -- -- -- 4,999 4,999
Net loss for 1994........ -- -- -- -- -- (1,977,628 ) (1,977,628)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
BALANCE AT DECEMBER 31,
1994................... 2,430,753 $24,818 $4,524,924 -- $(165,000) $(3,517,544) $ 44,773 $ 911,971
Issuance of common stock,
net of expenses........ 415,892 4,159 815,991 -- -- -- -- 820,150
Exercise of compensatory
stock options.......... 83,533 835 (725) -- -- -- -- 110
Compensatory stock

options issued to
officers, directors and
employees.............. -- -- 195,673 -- -- -- -- 195,673
Change in cumulative
translation
adjustment............. -- -- -- -- -- -- 53,384 53,384
Net loss for 1995........ -- -- -- -- -- (1,683,064 ) -- (1,683,064)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
BALANCE AT DECEMBER 31,
1995................... 2,930,178 29,812 5,535,863 -- (165,000) (5,200,608 ) 98,157 298,224
Compensatory stock
options issued to
officers, directors and
employees.............. -- -- 202,963 -- -- -- -- 202,963
Proceeds from issuance of
Bridge Warrants, net of
expenses............... -- -- 419,180 -- -- -- -- 419,180
Issuance of Other Bridge
Warrants............... -- -- 13,000 -- -- -- -- 13,000
Change in cumulative
translation
adjustment............. -- -- -- -- -- -- 97,461 97,461
Net loss for the nine
months ended September
30, 1996............... -- -- -- -- -- (1,788,738 ) -- (1,788,738)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
BALANCE AT SEPTEMBER 30,
1996 (Unaudited)....... 2,930,178 $29,812 $6,171,006 -- $(165,000) $(6,989,346) $195,618 $ (757,910)
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
--------- ------- ---------- ------------ --------- ----------- ---------- -------------
</TABLE>

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

F-5

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------- -------------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows used for operating
activities:
Net loss......................... $(621,852) $(1,977,628) $(1,683,064) $(1,033,074) $(1,788,738)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and
amortization................ 2,235 24,465 41,541 30,923 30,942
Amortization of loan
discount.................... -- -- -- -- 292,054
Non-cash compensation
expense..................... -- 587,754 195,673 80,380 202,963
Changes in assets and
liabilities:
Accounts receivable........... (22,444) 9,768 (128,760) (256,687) 21,045
Inventories................... 3,573 (158,187) (256,790) (385,490) 180,336
Deferred financing costs...... -- -- -- -- (539,452)
Other assets.................. (46,887) 3,877 (5,557) (69,316) (18,299)
Accounts payable.............. (29,419) 113,964 35,314 (8,021) 321,542
Accrued expenses and other
liabilities................. 122,993 6,566 83,486 55,488 334,796
--------- ----------- ----------- ----------- -----------
Net cash used for
operating activities... (591,801) (1,389,421) (1,718,157) (1,585,797) (962,811)
--------- ----------- ----------- ----------- -----------
Cash flows used for investing
activities:
Capital expenditures............. (18,150) (145,400) (30,872) (28,183) (13,404)
--------- ----------- ----------- ----------- -----------
Net cash used for
investing activities... (18,150) (145,400) (30,872) (28,183) (13,404)
--------- ----------- ----------- ----------- -----------
Cash flows from financing
activities:
Increase (decrease) in bank
overdraft..................... 41,878 (31,606) 11,695 22,655 41,895
Proceeds from bridge financing
net of expenses............... -- -- -- -- 1,062,500
Repurchase of treasury stock..... (35,000) (130,000) -- -- --

Proceeds from issuance of stock,
net of expenses............... 510,035 2,570,071 820,260 820,340 --
--------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities... 516,913 2,408,465 831,955 842,995 1,104,395
--------- ----------- ----------- ----------- -----------
Effect of exchange rate changes on
cash............................. 16,067 5,027 56,550 (16,750) (9,113)
Net increase (decrease) in cash and
cash equivalents................. (76,971) 878,671 (860,524) (787,735) 119,067
Cash and cash equivalents,
beginning
of year.......................... 92,297 15,326 893,997 893,997 33,473
--------- ----------- ----------- ----------- -----------
Cash and cash equivalents, end of
year............................. $ 15,326 $ 893,997 $ 33,473 $ 106,262 $ 152,540
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Supplemental schedule of cash paid
during the period for interest... $ 1,481 $ 4,029 $ 14,014 $ 1,126 $ 9,953
</TABLE>

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

F-6

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995
AND FOR EACH NINE MONTH PERIOD THEN ENDED)

1. ORGANIZATION

Integrated Technology USA, Inc. (the 'Company') was incorporated in 1990.
The Company designs, develops and markets products for two emerging
computer-related markets: the transmission of voice communications over the
Internet and computer/telephone integration. Through September 30, 1996, the
Company has generated revenues from the sale of its products, CompuPhone 2000
(and a predecessor product) and CompuNet 2000 (the 'products'). The Company
currently outsources substantially all of its manufacturing and assembly
requirements.

The Company has incurred substantial, recurring losses and a net cash
outflow from operations since its incorporation. These losses have been funded
primarily from the sale of the Company's common stock. The Company is in the
process of attempting to raise additional funds through the sale of its common
stock, either by means of a public offering or private placements or a
combination thereof, and the private placement of its debt. There is no
assurance that the Company will be able to obtain sufficient funds to support
its operations. As a result of the foregoing, there remains substantial doubt as
to the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, I.T.I. Innovative Technology Ltd.
('Innovative') and CompuPrint Ltd. ('Compuprint'), both of which are
incorporated and conduct business in Israel. All significant intercompany
transactions and account balances have been eliminated in consolidation.

Assets and liabilities of the Company's Israeli subsidiaries are translated
to United States dollars based on exchange rates at the end of the reporting
period. Income and expense items are translated at average exchange rates
prevailing during the reporting period. Translation adjustments are accumulated
in a separate component of stockholder's equity. Transaction gains or losses are
included in the determination of income.

Approximately 6%, and 9% of consolidated net sales for the year ended
December 31, 1995 and for the nine months ended September 30, 1995,

respectively, are comprised of sales in Israel. There were no significant sales
in Israel for the years ended December 31, 1993 and 1994 and the nine months
ended September 30, 1996. The net assets of the Company's Israeli subsidiaries
accounted for 35%, 31% and 23% of the consolidated net assets at December 31,
1994, 1995 and September 30, 1995, respectively. The net capital deficiency of
the Company's Israeli subsidiaries accounted for 16% of the consolidated net
capital deficiency at September 30, 1996.

Revenue Recognition and Warranties

Revenues are recognized on shipment of the products. For products shipped
on consignment, revenues are recognized when the products are sold by the
consignee. The Company provides for estimated returns on all sales.

The Company provides purchasers of the products with certain warranties.
The Company covers the potential costs associated with such warranties by
obtaining corresponding warranties from the contract manufacturers that
manufacture the products.

Cash Equivalents

The Company considers all money market accounts and investments with
original maturities of three months or less to be cash equivalents. Included in
cash and cash equivalents are $676,851, $7,619 and $15,339 of time deposits at
December 31, 1994 and September 30, 1995 and 1996, respectively.

F-7

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995
AND FOR EACH NINE MONTH PERIOD THEN ENDED)

Fair Values of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable and
payable, accrued expenses, bank overdraft and short-term loans approximate fair
value due to the short-term maturities of these assets and liabilities.

Inventory

Inventory is valued at the lower of cost or market. Cost is determined by
the first-in, first-out method.

Depreciation and Amortization

Fixed assets are recorded at cost and depreciated, using the straight-line
method, over the assets' estimated useful lives ranging from 5 to 17 years.
Expenditures for major renewals and betterments that extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.

Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 121-Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of ('SFAS
121')-was adopted in 1995. Assessment of the recoverability of long-lived assets
are conducted when events or changes in circumstances occur that indicate that
the carrying value of the asset may not be recoverable. The measurement of
possible impairment is based on the ability to recover such carrying value from
the future undiscounted cash flows of related operations. The policy on
impairment prior to the adoption of SFAS 121 was not materially different.

Research and Development

Research and development costs are expensed as incurred and are reported
net of contributions by the Government of Israel Chief Scientist which amounted
to $34,807, $46,714, $2,477 and $2,477 for the years ended December 31, 1993,
1994, 1995 and for the nine months ended September 30, 1995, respectively. There
were no contributions for the nine month period ended September 30, 1996.

Income Taxes

The Company follows the asset and liability approach for deferred income
taxes. This method provides that deferred tax assets and liabilities are
recorded, using currently enacted tax rates, based upon the difference between
the tax bases of assets and liabilities and their carrying amounts for financial
statement purposes.

Net Loss per Share

Net loss per share is computed using the weighted average number of common
shares outstanding and dilutive common share equivalents. Common shares issued,
and options and warrants granted, by the Company during the twelve months
preceding the IPO (see Note 9) have been included in the calculation of common
and common equivalent shares outstanding as if they were outstanding for all
periods presented using the treasury stock method and an estimated initial
public offering price (the 'estimated IPO Price'). Options and warrants granted
prior to the aforementioned twelve month period have been included in the
calculation of common and common equivalent shares outstanding when dilutive.

Stock-Based Compensation

The Company continues to measure compensation cost using the accounting
prescribed by Accounting Principles Board Opinion No. 25-Accounting for Stock
Issued to Employees. However, the Company has adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123-Accounting
for Stock Based Compensation ('SFAS 123').

F-8

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995
AND FOR EACH NINE MONTH PERIOD THEN ENDED)

Use of Estimates

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amount of revenues and
expenses during the reported period. Actual results could differ from these
estimates.

Concentration of Credit Risk

Financial instruments which subject the Company to concentration of credit
risk consist principally of trade receivables. At December 31, 1994 and 1995 and
September 30, 1996, trade receivables from retailers accounted for approximately
25%, 63% and 28% of total trade receivables, respectively.

Interim Financial Information

The consolidated financial information presented as of September 30, 1996
and for each of the nine months ended September 30, 1995 and 1996 is unaudited,
but in the opinion of management contains all adjustments (which consist of only
normal recurring adjustments) necessary for a fair presentation of such
financial information. Results of operations for interim periods are not
necessarily indicative of those to be achieved for full fiscal years.

3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>

<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Computer equipment................. $140,253 $155,231 $ 167,924
Furniture and fixtures............. 19,603 32,229 29,675
Vehicles........................... 41,753 40,195 39,134
Leasehold improvements............. 52,043 50,101 48,328
-------- -------- -------------
253,652 277,756 285,061
Less: accumulated depreciation..... 111,532 150,647 178,096
-------- -------- -------------
$142,120 $127,109 $ 106,965
-------- -------- -------------
-------- -------- -------------
</TABLE>

Depreciation expense for the years ended December 31, 1993, 1994 and 1995
and the nine months ended September 30, 1995 and 1996 was $2,235, $24,465,
$41,541, $30,923 and $30,636, respectively.

4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
<S> <C> <C> <C>
Accrued payroll and benefits....... $ 44,552 $ 75,431 $ 207,153
Accrued professional fees.......... 40,000 83,828 74,732
Finders fee payable................ 40,000 40,000 --
Accrued settlement expenses........ 100,000
Other.............................. 23,688 12,681 82,721
-------- -------- -------------
$148,240 $211,940 $ 464,606
-------- -------- -------------
-------- -------- -------------
</TABLE>

F-9

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995
AND FOR EACH NINE MONTH PERIOD THEN ENDED)

5. PROVISION FOR SEVERANCE PAYMENTS

Under Israeli law, Innovative and Compuprint are obligated to make
severance payments to dismissed employees and employees leaving employment in
certain other circumstances, on the basis of the employee's latest monthly
salary and years of service. Payment is made on termination of the employees'
services. Such obligations are partially funded by the payment of premiums to
insurance companies under approved plans (the 'Plans'). The amounts so funded
are not reflected on the balance sheet since they are controlled by the
insurance companies and are not under the control of Innovative and Compuprint.
The liability for severance payments in these financial statements represents
the obligations of Innovative and Compuprint not funded under the plans. For the
years ended December 31, 1993, 1994 and 1995 and the nine months ended September
30, 1995 and 1996, estimated expenses/(recoveries) relating to employees'
severance rights were $10,698, $20,140, $(1,203), $(4,741) and $86,766,
respectively.

6. INCOME TAXES

There was no provision for income taxes at December 31, 1993, 1994 and 1995
and September 30, 1995 and 1996.

Losses before United States and Israeli income taxes were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ SEPTEMBER 30,
1993 1994 1995 1996
-------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
United States...................... 395,757 1,347,761 1,005,063 947,337
Israel............................. 226,095 629,867 678,001 841,401
-------- ---------- ---------- -------------
621,852 1,977,628 1,683,064 1,788,738
-------- ---------- ---------- -------------
-------- ---------- ---------- -------------
</TABLE>

Deferred income tax assets comprise the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1994 1995 1996
---------- ---------- -------------
<S> <C> <C> <C>
Compensatory stock options......... $ 272,650 $ 259,285 $ 313,408
Net operating loss
carryforwards--U.S............... 739,812 1,140,622 1,425,500
Net operating loss
carryforwards--Israel............ 284,000 315,000 496,000
Other.............................. 83,490 119,378 210,688
---------- ---------- -------------
1,379,952 1,834,285 2,445,596
Valuation allowance................ (1,379,952) (1,834,285) (2,445,596)
---------- ---------- -------------
-- -- --
---------- ---------- -------------
---------- ---------- -------------
</TABLE>

Net operating loss carryforwards of approximately $3,500,000 at September
30, 1996, are due to expire in the years 2006 to 2011. Internal Revenue Code
Section 382 places a limitation on the utilization of Federal net operating loss
carryforwards when an ownership change, as defined by tax law, occurs.
Generally, an ownership change, as defined, occurs when a greater than 50
percent change in ownership takes place. The annual utilization of net operating
loss carryforwards generated prior to such changes in ownership will be limited,
in any one year, to a percentage of fair market value of the Company at the time
of the ownership change. Such an ownership change will most likely occur upon
completion of the proposed IPO (see Note 9) and may have already resulted from
the additional equity financing obtained by the Company since its formation.

At September 30, 1996, the net operating loss carryforwards for Innovative
and Compuprint in the State of Israel, which do not expire, amounted to
approximately $834,000 and $545,000, respectively.

Financial Accounting Standard No. 109-'Accounting for Income
Taxes'-requires that a valuation allowance be recorded when it is more likely
than not that deferred tax assets will not be realized. Since the

F-10

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995
AND FOR EACH NINE MONTH PERIOD THEN ENDED)

Company has incurred significant losses since its formation and future income is
uncertain, and due to the possible limitation in the utilization of the net
operating loss carryforwards described above, the Company has recorded a
valuation allowance against all deferred tax assets at December 31, 1994, 1995
and September 30, 1996.

7. COMMON STOCK

Stock Options

The following is a summary of stock option activity:

<TABLE>
<CAPTION>
EXERCISE
NUMBER PRICE FAIR
OF SHARES PER SHARE VALUE
--------- --------------- ---------------
<S> <C> <C> <C>
Options outstanding at December 31, 1993..... 11,410 $0.01 $3.00
Granted in 1994.............................. 133,111 1.643 3.00
Granted in 1994.............................. 12,756 2.744 3.00
Granted in 1994.............................. 283,110 0.01 2.00 - 3.00
---------
Options outstanding at December 31, 1994..... 440,387 0.01 - 2.744 2.00 - 3.00
Exercised in 1995............................ (83,533)
---------
Options outstanding at December 31, 1995..... 356,854 0.01 - 2.744 2.00 - 3.00
Granted in 1996.............................. 46,335 0.01 5.25
---------
Options outstanding at September 30, 1996.... 403,189 0.01 - 2.744 2.00 - 5.25
---------
---------
</TABLE>

11,410, 283,404, 329,010 and 375,345 options were exercisable at December
31, 1993, 1994, 1995 and September 30, 1996, respectively.

Fair value of options granted in 1994 were determined, by the Board of
Directors, primarily on the basis of the price received from the issuance of the
Company's common stock to unrelated purchasers on or about the dates of grant of
such options. Such options are all currently vested, except for options with

respect to 27,844 shares which vest on the earlier of completion of the IPO and
January 1, 1997.

For options granted in 1996, fair value of such options approximated the
market value (equal to 75% of the then estimated IPO price) of the Company's
common stock at the date of grant as determined by the Board of Directors.
Accordingly, had the Company adopted the accounting provisions of SFAS 123, no
additional non-cash compensation would be required to be recorded by the
Company. In determining fair value, the Company assumed zero volatility, no
expected growth, no expected dividends and a risk free interest rate of five and
one half percent. Such options were immediately exercisable and expire two years
after completion of the IPO (see Note 9).

The Company recognized $587,754, $195,673, $80,380 and $202,963 in non-cash
compensation expense with respect to the granting of stock options for the years
ended December 31, 1994 and 1995, and the nine months ended September 30, 1995
and 1996, respectively.

8. MAJOR CUSTOMERS AND EXPORT SALES

For the year ended December 31, 1993, sales to two customers were 26% and
18% of consolidated net sales. For the year ended December 31, 1994, sales to
four customers were 12%, 13%, 23% and 16% of consolidated net sales. For the
year ended December 31, 1995, sales to one customer was 18% of consolidated net
sales. For the nine months ended September 30, 1995 sales to two customers were
11% and 9% of consolidated net sales. For the nine months ended September 30,
1996 sales to one customer was 49% of consolidated net sales.

F-11

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995
AND FOR EACH NINE MONTH PERIOD THEN ENDED)

Export sales, excluding sales by the Company's Israeli subsidiaries,
Innovative and Compuprint, aggregated approximately 28%, 16%, 16%, 19% and 23%
of consolidated net sales for the years ended December 31, 1993, 1994 and 1995
and the nine months ended September 30, 1995 and 1996, respectively.

9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

Purchase Commitments

At December 31, 1995 and September 30, 1996, the Company had outstanding
purchase orders for the products and a wireless printing product amounting to
approximately $1,600,000 for delivery in 1996 and 1997.

Leases

The Company leases all of its facilities under operating lease agreements.
None of the leases contain renewal options. All facilities are leased on a month
to month basis except for the Jerusalem, Israel facility which is leased until
May 31, 1997 and which lease provides for future minimum rental payments at
September 30, 1996 as follows:

Rent expense for the years ended December 31, 1993, 1994 and 1995 and the
nine months ended September 30, 1995 and 1996 was $24,479, $42,912, $75,713,
$44,580 and $56,643, respectively.

Royalty Commitment

Pursuant to an agreement dated December 5, 1990 (the 'Royalty Agreement'),
the Company is required to pay royalties of 1% on sales of certain of its
products, up to a maximum of $150,000. At September 30, 1996, the Company is
committed to pay royalties of up to approximately $143,000 on future sales of
such products (see Note 11).

Proposed Initial Public Offering

On October 1, 1996, the Company commenced an initial public offering of
3,000,000 shares of the Company's Common Stock and warrants to acquire 3,000,000
shares of its Common Stock (the 'IPO'). In addition, the Company has granted the
underwriters of the IPO an option exercisable within 45 days of October 1, 1996,

to purchase up to 450,000 additional shares of the Company's Common Stock and/or
450,000 warrants (the 'over-allotment option'). The warrants will be exercisable
at $9.00 per share of common stock, subject to adjustment under certain
circumstances, at any time during the four-year period commencing October 1,
1997. There is no assurance that the IPO will be consummated. In connection
therewith, the Company has incurred expenses which, if the IPO is not
consummated, will be charged to operations in 1996.

In connection with the IPO the Company has agreed to sell to an underwriter
of the IPO, for nominal consideration, warrants to purchase up to 300,000 shares
of the Company's Common Stock and/or 300,000 warrants (the 'Representative
Warrants'). The Representative Warrants are initially exercisable at a price of
$9.90 per share of Common Stock and approximately $0.17 per warrant for a four
year period commencing on the first anniversary of the issuance of such
warrants. The warrants issuable upon the exercise of the Representative Warrants
are exercisable at a price of $14.85 per share of Common Stock. The
Representative Warrants provide for adjustments in the number of shares of
Common Stock and warrants issuable upon the exercise of the Representative
Warrants as a result of certain events.

F-12

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995
AND FOR EACH NINE MONTH PERIOD THEN ENDED)

10. RECAPITALIZATION

In connection with the proposed IPO, the Company amended its Certificate of
Incorporation to, among other matters, change the authorized share capital of
the Company from 10,000 shares of common stock, no par value, to 40,000,000
shares of common stock, par value of $.01 per share, and 5,000,000 shares of
preferred stock, par value $.01 per share. The Company also converted each
outstanding share of its common stock, no par value, into 760.6291 shares of
common stock, par value $.01 per share.

All applicable share and per share data have been adjusted for the above
recapitalization.

11. SUBSEQUENT EVENTS (UNAUDITED)

Bridge Financing

During the period from April 30, 1996, through July 30, 1996, the Company
completed a bridge financing (the 'Bridge Financing'). The gross proceeds from
the Bridge Financing was $1,175,000 and the net proceeds to the Company from

such financing (after deduction of commissions and the estimated expenses of
such financing) was approximately $1,063,000.

In connection with the Bridge Financing, the Company issued promissory
notes (the 'Bridge Notes') in the aggregate principal amount of $1,175,000. The
Bridge Notes accrue interest at the rate of 10% per annum and were due and
payable, together with accrued interest, on the earlier of (i) 10 days after
completion of the IPO or (ii) December 15, 1996. The Bridge Notes were repaid in
October 1996.

In connection with the Bridge Financing, the Company also issued certain
warrants (the 'Bridge Warrants'). The Bridge Warrants include warrants (the
'Investor Bridge Warrants') issued to each recipient of a Bridge Note to
purchase an aggregate of 195,840 shares of Common Stock. The Bridge Warrants
also include warrants (the 'Other Bridge Warrants') issued to a party that
assisted the Company in connection with the Bridge Financing. The aggregate
number of shares issuable upon exercise of the Other Bridge Warrants is 3,334.
The Bridge Warrants provide for an exercise price per share of $0.60 and contain
certain demand and piggyback registration rights.

The gross proceeds from the Bridge Financing were allocated to the Bridge
Notes and to the Investor Bridge Warrants based on their relative fair values at
the dates of such Bridge Financing. The fair value of the Bridge Notes
represents the present value of the future cash flows related to such notes
calculated using a discount rate of 10%. The fair value of the Bridge Warrants
represents the estimated IPO price less a twenty-five percent discount (which
management of the Company has determined is appropriate to reflect the limited
market for the Common Stock prior to the IPO and the fact that there was no
assurance that the IPO would be completed) less the exercise price of the
warrants. In connection with the Bridge Financing, the Company recorded (i) loan
discount of $458,000, representing the portion of the gross proceeds from the
Bridge Financing that was allocated to the Bridge Warrants, and (ii) deferred
financing costs of approximately $77,000, representing the portion of the
expenses of the Bridge Financing that was allocated to the Bridge Notes. Such
loan discount and deferred financing costs are being amortized over the
estimated terms of the Bridge Notes. For the nine months ended September 30,
1996, the Company recognized approximately $292,000 of non-cash interest
expense. Upon repayment of the Bridge Notes in October 1996 from the net
proceeds of the IPO, the Company recognized an extraordinary loss of
approximately $240,000, representing the unamortized portion of the loan
discount and deferred financing costs.

1996 Stock Option Plan

In July 1996, the Board of Directors adopted the Company's 1996 Stock

Option Plan (the 'Stock Option Plan') which provides for the granting of options
to purchase not more than an aggregate of 833,333 shares of Common Stock. All
officers, directors and employees of the Company and other persons who perform
services

F-13

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995
AND FOR EACH NINE MONTH PERIOD THEN ENDED)

for the Company are eligible to participate in the Stock Option Plan. Some or
all of the options may be 'incentive stock options' within the meaning of the
Internal Revenue Code of 1986, as amended. The Company granted options to
purchase approximately 543,944 shares under the Stock Option Plan immediately
prior to completion of the IPO (18,389 of which were subsequently forfeited),
including an aggregate of approximately 390,001 options to executive officers
and directors of the Company. These options have an exercise price of $6.00 per
share of the Company's Common Stock.

The Stock Option Plan provides that it is to be administered by the Board
of Directors, or by a committee appointed by the Board, which will be
responsible for determining, subject to the provisions of the Stock Option Plan,
to whom options are granted, the number of shares of Common Stock subject to an
option, whether an option shall be incentive or non-qualified, the exercise
price of each option (which, other than in the case of incentive stock options,
may be less than the fair market value of the shares on the date of grant), the
period during which each option may be exercised and the other terms and
conditions of each option. No options may be granted under the Stock Option Plan
after July 29, 2006.

INITIAL PUBLIC OFFERING

On October 7, 1996, the Company completed the IPO. The Company realized net
proceeds of approximately $15,300,000, a portion of which was used to repay the
Bridge Notes. In November 1996 the Company issued 360,082 warrants to the
underwriters of the IPO upon the exercise of the over-allotment option.

In connection with the IPO, the Company completed the sale of the
Representative Warrants.

AGREEMENT TO LICENSE SOFTWARE PRODUCTS

Effective July 3, 1996, the Company entered into a 'Bundling and Sales
License Fee Agreement' (the 'Agreement') with a software company that provides
for the bundling of certain software (the 'software') with one of the Company's
products. Pursuant to the Agreement the Company is required to pay such software
company a fee with respect to each unit of the software that it bundles. Upon
execution of the Agreement, the Company was committed to place an order for
software units for which the Company is obligated to pay $30,000 in three equal
installments commencing with the shipment of such order. The Agreement expires
on January 3, 1998.

EMPLOYMENT AGREEMENTS

The Company entered into an employment agreement (the 'Employment
Agreement') with a director/officer of the Company. The Employment Agreement is
retroactive to July 1, 1996 and the scheduled term of the Employment Agreement
extends to December 31, 1999. The Employment Agreement provides for payment of a
minimum salary of $190,000 per annum and certain benefits over the term of the
Employment Agreement as follows:

(i) insurance premiums equal to approximately 16% of the officer's
gross salary

(ii) contributions to a savings plan equal to approximately 8% of the
officer's gross salary

(iii) the use of an automobile and the payment by the Company of
associated maintenance expenses

(iv) the payment by the Company of any taxes payable by the officer as
a result of receiving any of the foregoing benefits

In addition, pursuant to the Agreement, the officer is entitled to receive
severance payments (under certain circumstances provided in the Agreement) equal
to 150% of the officer's minimum annual salary in the year of severance, $25,000
in legal fees, and payment not in excess of $10,000 for office space for a
period of six months after termination.

F-14

<PAGE>

INTEGRATED TECHNOLOGY USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED WITH RESPECT TO SEPTEMBER 30, 1996 AND 1995
AND FOR EACH NINE MONTH PERIOD THEN ENDED)

The compensation committee of the Board of Directors has approved an
employment agreement between Innovative and a director/officer of the Company.
The term of the agreement commences effective November 14, 1996 and continues
until at least December 31, 1997. The agreement provides for a minimum annual
salary of $110,000 and certain benefits including contributions of approximately
23% of the director/officer's gross salary to certain severance/disability and
savings plans.

SETTLEMENT OF CLAIMS

On September 26, 1996, the Company entered into an agreement with a
stockholder pursuant to which the Company agreed to pay such stockholder $50,000
(plus up to an additional $10,000 under certain circumstances). In exchange,
such stockholder released all claims and rights against the Company, including
certain preemptive rights with respect to the Company's capital stock.

On September 30, 1996, the Company entered into an agreement pursuant to
which the Company agreed to pay $50,000 to the other party to the Royalty
Agreement (see Note 9). In exchange, such party has agreed to release all claims
and rights against the Company, including any right to receive royalties based
upon future sales of the Company's products.

The Company has accrued $50,000 with respect to each of the above claims at
September 30, 1996.

F-15

<PAGE>

PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Pursuant to specific authority granted by Section 102 of the Delaware
General Corporation Law (the 'DGCL'), the Registrant's Certificate of
Incorporation contains the following provision regarding limitation of liability
of directors and officers:

A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, except for liability (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law (iii) under Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit. If the Delaware General
Corporation Law is amended after approval by the stockholders of this
Articles to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.

The Registrant, as a Delaware corporation, is empowered by Section 145 of
the DGCL, subject to the procedures and limitation stated therein, to indemnify
any person against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with any threatened, pending or completed action, suit or proceeding in which
such person is made a party by reason of his being or having been a director,
officer, employer or agent of the Registrant. The statute provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any by-law, agreement,
vote of stockholders or disinterested directors, or otherwise.

The Company has obtained directors' and officers' liability insurance. Such
insurance may insure against any liability asserted against any present or past
director or officer incurred in the capacity of director or officer arising out
of such status, whether or not the Company would have the power to indemnify
such person.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth various expenses, other than, the
underwriters' fees, discounts and commissions, which will be incurred in
connection with the Offering. All amounts except the SEC registration fee are
estimates.

<TABLE>
<S> <C>
SEC registration fee............................................. $ 353
Blue Sky fees and expenses....................................... 1,000
Printing and engraving expenses.................................. 1,000
Accounting fees and expenses..................................... 7,000
Legal fees and expenses (other than Blue Sky fees and
expenses)...................................................... 10,000
Miscellaneous.................................................... 647
--------
Total.......................................................... $20,000
--------
--------
</TABLE>

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES

Set forth below is certain information concerning sales by the Company of
unregistered securities within the past three years. Such information with
respect to the Company's Common Stock has been adjusted for a 760.6291 for 1
stock split to be effected on September 10, 1996. The issuances by the Company
of the securities sold in the transactions referenced below were not registered
under the Securities Act, pursuant to the exemption contemplated in Section 4(2)
thereof for transactions not involving a public offering. The Company believes
that each of the issuances made pursuant to Section 4(2) was made to a
sophisticated investor, who had the financial resources to bear the risk of the
investment and who had the means and opportunity to obtain information
concerning the Company. The consideration paid to the Company in respect of each
issuance was cash, unless otherwise indicated.

II-1

<PAGE>

A. Common Stock

<TABLE>
<CAPTION>
NUMBER OF
DATE SHARES CONSIDERATION PURCHASER
- -------------------- ---------- ------------------------------ --------------------------------------

<S> <C> <C> <C>
December 31, 1993 2,412 No consideration--issued Bernard Friedson
pursuant to antidilution
rights relating to earlier
purchase

1,206 No consideration--issued Bjorn Banberger
pursuant to antidilution
rights relating to earlier
purchase

2,412 No consideration--issued Carol Katz
pursuant to antidilution
rights relating to earlier
purchase
</TABLE>

<TABLE>
<S> <C> <C> <C>
January 1994 18,223 $50,000 Berl Eckstein
18,223 50,000 Richard Fentin
18,223 50,000 Stanley & Saradee Fortgang
190,158 521,750 Gila Green
36,511 100,176 David Hauser
54,669 150,000 Arnold Hiatt
19,016 52,175 Richard Hochstein
19,016 52,175 Michael Hochstein
54,669 150,000 Robert Kraft
36,446 100,000 Lerna, Inc.
19,016 52,175 Nathan Low
9,111 25,000 Ellen Marcus
6,086 16,696 Matthew Maryles IRA
12,931 35,479 Maot Group Partners
72,892 200,000 Ezra Merkin
109,339 300,000 Jack Nash
72,892 200,000 George Noble
38,032 104,350 Raphael Pfeffer
15,213 41,740 Laurie Shahon
54,766 150,264 Brook Road Nominee Trust
54,669 150,000 William Spier
</TABLE>

II-2

<PAGE>

<TABLE>
<CAPTION>
NUMBER OF
DATE SHARES CONSIDERATION PURCHASER
- -------------------- -------------------- --------------------------------------
<S> <C> <C> <C> <C>
30,426 $ 83,480 Tertiare Investissement
36,446 100,000 Manny Weiss
36,511 100,176 Michael Weiss
February 1995* 25,355 50,000 Kane Management
(originally sold to FMR Computers &
Software LTD.)
25,355 50,000 Yecheskiel Gonczarowski
50,709 100,000 Peach Management
50,709 100,000 Kane Management
April 1995* 10,583 20,870 241 Associates
(originally sold to Barry Eisenberg)

10,583 20,870 Alan Haber
12,678 25,000 Stanley & Saradee Fortgang
20,284 40,000 Shmuel Brandman
25,761 50,802 Nathan Kahn
12,678 25,000 Robert Kraft
31,749 62,610 Clayton Lewis
25,355 50,000 Marc Mazur
12,678 25,000 Ezra Merkin
50,709 100,000 Jack Nash
25,355 50,000 George Noble
25,355 50,000 Brook Road Nominee Trust
November 1995 83,533 110 Brook Road Nominee Trust
November 1996 66,667 ** 40,000 Union Bancaire Privee
8,334 ** 5,000 Forward Issue Ltd.
</TABLE>

- ------------------
* 28.1265% of these shares were issued in December 1995 without additional
consideration pursuant to an agreement that provided for such issuance due to
the failure of the Company to meet specified goals.

** These shares were acquired upon exercise of Bridge Warrants, which were
issued as described below.

B. Bridge Financing

As described in Part I of the Registration Statement (under 'Management's
Discussion and Analysis of Financial Condition and results of Operations--Bridge
Financing'), during the period April 30, 1996, through July 30, 1996, the
Company sold certain promissory notes in connection with a bridge financing.
Certain information concerning the sale of such notes is set forth below:

<TABLE>
<S> <C>
PRINCIPAL AMOUNT OF NOTES PURCHASED PURCHASER
$100,000 .............................................. Alcamin Anstalt
50,000 .............................................. Central Investments Ltd.
50,000 .............................................. Charles H. Bendheim
125,000 .............................................. CPS Capital Ltd.
50,000 .............................................. Forward Issue Ltd.
50,000 .............................................. Gottdiener Associates, L.P.
100,000 .............................................. J.C. Bendheim
25,000 .............................................. Julian Hess
50,000 .............................................. Linton Lake S.A.
50,000 .............................................. Mates Ventures
25,000 .............................................. Nicole R. and Michael Kubin
100,000 .............................................. Sentex Sensing Technology
400,000 .............................................. Union Bancaire Privee
</TABLE>

As described in the above-referenced section of Part I of the Registration
Statement, each purchaser of such notes also received Bridge Warrants (as
defined in such section). In addition, as described in such section, the Company
issued Bridge Warrants to certain parties that assisted the Company in
connection with the Bridge Financing. These parties are National Securities
Corporation and Mr. Paul Morris (a registered representative registered with
Gaines, Berland Inc.) By mutual agreement of the Company and National Securities
Corporation,

II-3

<PAGE>

the Bridge Warrants issued to National Securities Corporation were cancelled
without recourse to the Company in September 1996.

C. Options

The Company has heretofore issued options to purchase an aggregate of
934,377 shares of Common Stock (not including options with respect to 31,145
shares which have terminated) to directors, employees and consultants.

ITEM 27. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant**
3.2 Amended and Restated By-Laws of the Registrant**
4.1 Specimen Common Stock Certificate**
5.1 Opinion of Ehrenreich & Krause*
10.1 Form of the Subscription Agreement entered into by the Registrant with each person or entity that
provided funds to the Company in connection with the Bridge Financing (as defined in the Registration
Statement), having attached thereto the form of Bridge Note and Bridge Warrant (as such terms are
defined in the Registration Statement)**
10.2 Form of Underwriting Agreement between the Company and National Securities Corporation, as
Representative of the several Underwriters listed therein (the 'Representative') (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 1996)
10.3 Employment Agreement dated as of July 1, 1996 between the Registrant and Alan Haber**
10.4 Distribution Agreement entered into in 1996 between the Registrant and Gemini Industries, Inc.**
10.5 Bundling and Sales License Fee Agreement dated July 3, 1996 between the Registrant and VocalTec Ltd.**
10.6 Registrant's 1996 Stock Option Plan**
10.7 Form of Representative's Warrant Agreement between the Company and National Securities Corporation, as
representative of the several Underwriters (the 'Representative'), including form of Representative's
Warrant Certificate (incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended September 30, 1996)
10.8 Form of Warrant Agreement between the Company, the Representative and American Stock Transfer & Trust

Company, including form of Warrant Certificate (incorporated by reference to Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1996)
10.9 Form of Employment Agreement dated November 14, 1996, between the Registrant and Simon Kahn*
10.10 Form of Employment Agreement dated November 15, 1996, between the Registrant and Ed Abramson*
11.1 Statement re: computation of per share earnings (incorporated by reference to Exhibit 11.1 to the
Registrant's Registration Statement on Form SB-2 Commission File No. 333-9697 and Exhibit 11.1 to the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1996)
21.1 List of Subsidiaries of the Registrant**
23.1 Consent of Price Waterhouse LLP*
23.2 Consent of Ehrenreich & Krause (included in the Opinion filed as Exhibit 5.1)*
</TABLE>

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

* Filed herewith

** incorporated by reference to the correspondingly numbered Exhibit to the
Registrant's Registration Statement on Form SB-2 Commission File No.
333-9697

II-4

<PAGE>

ITEM 28. UNDERTAKINGS.

(a) Rule 415 Offerings.

The undersigned small business issuer hereby undertakes that it will:

(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(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 notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
'Calculation of Registration Fee' table in the effective registration
statement.

(iii) Include any additional or changed material information on the

plan of distribution.

(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.

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

(b) Request for acceleration of effective date.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the 'Act'), may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer 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.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceedings) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the small business issuer 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 Act and will be governed by the final
adjudication of such issue.

The undersigned small business issuer hereby undertakes that it will:

(1) For determining any liability under the Securities Act of 1933, as
amended, treat the information omitted from the form of prospectus filed as
part of the registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under Rule
424(b)(1) or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.

(2) For determining any liability under the Securities Act of 1933, as
amended, 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 that offering of the securities at that
time as the initial bona fide offering of those securities.

II-5

<PAGE>

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 has authorized this Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned in
Jerusalem, Israel, on the 23rd day of December, 1996.

INTEGRATED TECHNOLOGY USA, INC.
By: ALAN P. HABER
----------------------------------
Alan P. Haber
President and Chief Executive
Officer

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- -------------------
<S> <C> <C>
ALAN P. HABER Chairman of the Board; President; December 22, 1996
- ------------------------------------------ Chief Executive Officer and Director
Alan P. Haber (Principal Executive Officer)

BARRY L. EISENBERG Director December 22, 1996
- ------------------------------------------
Barry L. Eisenberg

SIMON KAHN Chief Financial Officer and Director December 22, 1996
- ------------------------------------------ (Principal Financial and Principal
Simon Kahn Accounting Officer)

BERNARD S. APPEL Director December 22, 1996
- ------------------------------------------
Bernard S. Appel

NICOLE R. KUBIN Director December 17, 1996
- ------------------------------------------
Nicole R. Kubin

Director December , 1996
- ------------------------------------------
Morton L. Landowne

Director December , 1996
- ------------------------------------------
Noah Perlman

MORRIS J. SMITH Director December 22, 1996
- ------------------------------------------
Morris J. Smith

Director December , 1996
- ------------------------------------------
William Spier
</TABLE>

II-6

<PAGE>

EXHIBIT INDEX

3.2 Amended and Restated By-Laws of the Registrant**

4.1 Specimen Common Stock Certificate**

5.1 Opinion of Ehrenreich & Krause*

10.1 Form of the Subscription Agreement entered into by the Registrant with each person or entity that
provided funds to the Company in connection with the Bridge Financing (as defined in the Registration
Statement), having attached thereto the form of Bridge Note and Bridge Warrant (as such terms are
defined in the Registration Statement)**

10.2 Form of Underwriting Agreement between the Company and National Securities Corporation, as
Representative of the several Underwriters listed therein (the 'Representative') (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 1996)

10.3 Employment Agreement dated as of July 1, 1996 between the Registrant and Alan Haber**

10.4 Distribution Agreement entered into in 1996 between the Registrant and Gemini Industries, Inc.**

10.5 Bundling and Sales License Fee Agreement dated July 3, 1996 between the Registrant and VocalTec Ltd.**

10.6 Registrant's 1996 Stock Option Plan**

10.7 Form of Representative's Warrant Agreement between the Company and National Securities Corporation, as
representative of the several Underwriters (the 'Representative'), including form of Representative's
Warrant Certificate (incorporated by reference to Exhibit 10.7 to the Registrant's Quarterly Report on
Form 10-QSB for the quarterly period ended September 30, 1996)

10.8 Form of Warrant Agreement between the Company, the Representative and American Stock Transfer & Trust
Company, including form of Warrant Certificate (incorporated by reference to Exhibit 10.8 to the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1996)

10.9 Form of Employment Agreement dated November 14, 1996, between the Registrant and Simon Kahn*

10.10 Form of Employment Agreement dated November 15, 1996, between the Registrant and Ed Abramson*

11.1 Statement re: computation of per share earnings (incorporated by reference to Exhibit 11.1 to the
Registrant's Registration Statement on Form SB-2 Commission File No. 333-9697 and Exhibit 11.1 to the
Registrant's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1996)

21.1 List of Subsidiaries of the Registrant**

23.1 Consent of Price Waterhouse LLP*

23.2 Consent of Ehrenreich & Krause (included in the Opinion filed as Exhibit 5.1)*
</TABLE>

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

* Filed herewith

** incorporated by reference to the correspondingly numbered Exhibit to the
Registrant's Registration Statement on Form SB-2 Commission File No.
333-9697

<PAGE>

Exhibit 5.1

December 19, 1996

Integrated Technology USA, Inc.
545 Cedar Lane
Teaneck, NJ 07666

Re: Registration Statement on Form SB-2
Relating to 199,174 Shares of Common Stock

Gentlemen:

You have requested our opinion in connection with the
above-referenced registration statement, as amended (the "Registration
Statement"), relating to up to 199,174 shares of Common Stock, par value $.01
per share, of Integrated Technology USA, Inc. (the "Company") that may from time
to time be sold by the holders thereof (the "Selling Security Holders"). These
shares include (i)124,173 authorized and unissued shares of Common Stock that
may hereafter be acquired by Selling Security Holders pursuant to certain
outstanding warrants (such shares being referred to as the "Underlying Shares")
and (ii)75,001 currently outstanding shares (such shares being referred to as
the "Outstanding Shares").

We have reviewed copies of the Amended and Restated
Certificate of Incorporation of the Company, the By-laws of the Company, the
Registration Statement and exhibits thereto and have examined such corporate
documents and records and other certificates, and have made such investigations
of law, as we have deemed necessary in order to render the opinion hereinafter
set forth. As to certain questions of fact material to our opinion, we have
relied upon the certificate of an officer of the Company and upon certificates
of public officials.

Based upon and subject to the foregoing, we are of the opinion
that the Outstanding Shares are duly authorized, validly issued, fully paid and
non-assessable, and the Underlying Shares will, when issued and paid for in
accordance with the terms of the applicable warrant, be duly authorized, validly
issued, fully paid and non-assessable.

We hereby consent to the reference to us under the caption
"Legal Matters" in the Registration Statement and to the use of this opinion as
an exhibit to the Registration Statement. In giving this consent, we do not
hereby admit that we come within the category of persons whose consent is
required

<PAGE>

under Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.

Very truly yours,

Ehrenreich & Krause

<PAGE>

EMPLOYMENT AGREEMENT

Made and Signed in Jerusalem this 14th day of November, 1996

BETWEEN: I.T.I. Innovative Technologies Ltd.

Digital Building
HaMarpe St.
Har HaHotzvim
Jerusalem

(hereinafter: the "Company")

of the First Part

AND: Simon (Shlomo) Kahn
of 28/15 Shaulson St.
Jerusalem 95400
(hereinafter: "the Employee")

of the Second Part

WHEREAS: the Company and the Employee desire to define the conditions of the
Employee's employment by the Company in accordance with the terms and
conditions following;

NOW THEREFORE THE PARTIES AGREE AS FOLLOWS:

Preamble

1. The Preamble hereto constitutes an integral part hereof.

Employment

2. The Company hereby continues the employment of the Employee and the
Employee hereby agrees to continue his employment upon the terms and
conditions contained herein.

3. The Employee is engaged as an executive vice president of the Company.*
In that capacity the Employee may be required to provide services to
the Company's related companies though the Employee will be employed
only by the Company. The Employee's responsibilities will include
functioning as the Company's chief technical officer, managing the
Company's research and development program, aiding the Company's
President and Chief Executive Officer to manage the Company and plan
for its future development and oversee the work of the Chief Financial
Officer of the Company. The precise services of the Employee may be
extended or curtailed, from time to time, at the direction of the
Company. The Employee shall devote the Employee's entire working time,
attention and energies to the business of the Company, and shall
assume and perform such further reasonable responsibilities and duties
as may be assigned to him from time to time by the Company. The

Employee is aware that his position is a senior management position

* Kahn may also serve as the executive V.P for the parent company

<PAGE>

which requires that the Company place special reliance on the
Employee's personal responsibility and therefore that the Overtime and
Weekly Rest Law, 5711-1951 shall not apply to the employment of the
Employee. The Employee is also aware that his position may require
travel, which at times may be extensive.

Salary

4. For the services rendered by the Employee to the Company, the Company
shall pay the Employee a gross salary at the rate of US$9,166.67 per
month, or as otherwise shall be agreed upon from time to time by the
parties hereto. Payments of salary shall be made monthly by the 2nd of
the calendar month (or if that day is not a business day, on the next
business day) for the month preceding and shall be made in New Israeli
Shekels according to the Representative Rate known as of the morning
of the 1st of the calendar month during which they are being paid.
Such linkage to the US Dollar shall be on account of and deductible
from any cost of living index increment (Tosefet Yoker) which the
Company may be obligated to pay to the Employee. The Parties will
review the Employee's salary and benefits package annually near the
beginning of every January beginning January 1, 1998. The Company's
undertaking to conduct such review shall not be interpreted as
imposing an obligation on the Company to increase the Employee's
salary as a result thereof.

Other Benefits

5. The Company shall open a Bituah Menahelim policy which it will own but
which will be in the name of the Employee, which will be funded -
except where indicated otherwise - by the Company and which will
contain the following elements:

a) 8 1/3 % of Employee's gross salary , as savings on account of
severance pay (Pitzuei Piturin) for the Employee;

b) 10% of the Employee's gross salary, in a savings plan (Kupat
Gemel). Half of the 10% (5%) will be deducted from the
Employee's gross salary;

c) 2 1/2% of the Employee's gross salary, as disability
insurance of which the Employee will be the beneficiary.
Should the Employee be entitled to receive payments as a
result of his disability at a time during which he is also
entitled to receive Dmei Mahala from the Company, the
payments to which he is entitled will be regarded as on
account of the Company's concurrent obligation to pay him

Dmei Mahala.

6. a) Upon the cessation of the Employee's employment with the
Company, as a result of firing or as a result of the
Employee's resignation, the Company will transfer to the
Employee the

<PAGE>

ownership of the portion of the policy mentioned in
Sub-Clause 5(b) which was contributed by the Employee.

b) Further, upon the cessation of the Employee's employment with
the Company, as a result of firing, the Company will transfer
to the Employee the ownership of the portion of the policy
mentioned in Sub-Clause 5(a) and of the half of the portion
of the policy mentioned in Sub-Clause 5(b) which was paid by
the Company, provided that the Employee was not fired in
circumstances in which the Company would not be obligated
under law to pay Pitzuei Piturin or under circumstances which
involved a serious violation of the Employee's obligations to
the Company, and further provided, that prior to such
transfer the Employee sign a declaration in the following
form:

"I hereby declare that after receiving the transfer of the
ownership of the Keren Pitzuim portion of the Bituah
Menahelim policy maintained by I.T.I. Innovative Technology
Ltd. with regard to me, I shall have no further claims of any
kind against I.T.I. Innovative Technology Ltd. for any sum to
which I might be entitled as a result of the cessation of my
employment, including Pitzuei Piturin."

c) Further, upon the cessation of the Employee's employment with
the Company, as a result of the Employee's resignation, the
Company will decide - in its exclusive discretion (the
reasonableness of which the Employee will not be entitled to
dispute) - whether to transfer to the Employee the ownership
of the portion of the policy mentioned in Sub-Clause 5(a) and
of the half of the portion of the policy mentioned in
Sub-Clause 5(b) which was paid by the Company. The Employee
will have no cause of action against the Company should it
decide not to transfer the aforementioned portions of the
policy to the Employee. Should the Company decide to transfer
the aforementioned portions, it will do so only if prior to
such transfer the Employee signs a declaration in the
following form:

"I hereby declare that after receiving the transfer of the
ownership of the Bituah Menahelim policy maintained by I.T.I.

Innovative Technology Ltd. with regard to me, I shall have no
further claims of any kind against I.T.I. Innovative
Technology Ltd. for any sum to which I might be entitled as a
result of the cessation of my employment, including Pitzuei
Piturin."

7. The Company shall open a Keren Hishtalmut for the Employee. The
Employee shall contribute 2 1/2% of his gross salary (which will be
deducted from his gross salary) and the Company shall contribute 7
1/2% of the Employee's gross salary. The Employee shall be entitled to
make such disposition of the Keren Hishtalmut as he may desire.

<PAGE>

8. In the event that any payment or part of a payment to be made by the
Company or deducted from the Employee's salary in accordance with
Clauses 5(b), 5(c) or 7 above requires additional withholding from the
Employee's salary in order for the Company to satisfy its obligations
under law to the tax authorities, then the Company shall be entitled
to reduce such payment such that the total cost to it will equal the
percentage of the Employee's gross salary which is specified in those
Clauses. In such case, the Company will accept instructions from the
Employee as to the ways in which such payments will be made (including
payment directly to the Employee instead of to the policy or the Keren
Hishtalmut), provided that such instructions will not increase the
total cost to it beyond the percentage of the Employee's gross salary
which is specified in those Clauses. It is specifically stated that
this Clause does not apply to payments in accordance with Clause 5(a)
above.

9. The Employee will be entitled to the use of a car the purchase price
of which to the Company will be roughly US$20,000 plus VAT and the
Company will bear the cost of gas, insurance, and maintenance of the
car. Should a claim be made on the car's insurance which is subject to
a "deductible" by the insurance company, the amount of such deductible
up to NIS 2,000 will be refunded to the Company by the Employee.
Should the Employee decide to add members of his family other than
himself as insured drivers under the car's insurance, and should such
addition increase the cost of such insurance, then the Employee will
bear the incremental increase. The Parties have agreed that the issue
as to whether the Employee's benefits under this Clause will be net of
any taxation to him (and that, therefore, the Company will have to
gross-up his salary) or not will be decided between them as soon as
possible after the signature of this Agreement.

entitled to rely on the employment policy in force at the time of the
beginning of his employment or at any later time. The Employee will
take vacation only after receiving the Company's approval.

11. Other than as expressly provided herein or as mandated by law, the
Employee shall not be entitled to any other rights or benefits.

Taxation

12. The Company will deduct taxes at source from the Employee's gross
salary, including the employee's portion of payments to the National
Insurance Institute, as required by law.

Term

<PAGE>

13. This Agreement shall commence on the date hereof. The Employee
undertakes to continue his employment with the Company, and the
Company undertakes to continue the employment of the Employee, until
at least December 31, 1997. After the aforesaid date, either party
shall be entitled to terminate this Agreement by giving the other
party notice of termination at least sixty (60) days prior to the
effective date of termination. The date of mailing of the notice shall
constitute commencement of the notice period.

Non-Disclosure of Confidential Information

14. The Employee agrees, during the term of employment and forever
thereafter, to keep confidential and not to use himself all
information provided by or related to the Company including, without
limitation (i) information relating to the software, algorithms,
computer processing systems and techniques with which the Employee
becomes familiar as an employee of the Company, (ii) information and
material relating to any customer, vendor, licensor, licensee, or
other party transacting business with the Company, (iii) information
as to sources of, and arrangements for, hardware supplied to customers
or clients of the Company, (iv) customer or contact lists, (v) all
records, files, memoranda, reports, price lists, drawings, plans,
sketches, documents, equipment, and the like, relating to the business
of the Company, or (vi) any other confidential information or trade
secrets respecting the business or affairs of the business of the
Company, or affairs of the Company which the Employee may acquire or
develop in connection with or as a result of the performance of his
services hereunder ("Confidential Information"), excepting only such
information as is already known to the public, and not to release, use
or disclose the same except with the prior written permission of the
Company.

The Employee recognizes that the disclosure or use by himself of

Confidential Information by the Employee may give rise to irreparable
injury to the Company, which may not be adequately compensated by
damages. Accordingly, in the event of a breach or threatened breach by
the Employee of the provision of this paragraph, the Company shall be
entitled to an injunction restraining the Employee from using the
Confidential Information himself, from disclosing, in whole or in
part, the Confidential information, or from rendering any services to
any person, firm, corporation, association or other entity to whom
Confidential Information, in whole or in part, has been disclosed or
is threatened to be disclosed. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies available to
the Company for such breach or threatened breach, including the
recovery of damages from the Employee. The within undertakings shall
survive the termination or cancellation of this Agreement or of the
Employee's employment.

Non-Competition

<PAGE>

15. During the period during which this Agreement is in force and for a
period of two years from the date of its termination (whether the
Employee resigns or is fired), the Employee will not, engage in the
creation, production, sale or marketing of software or hardware one of
the main functions of which is the integration of telephone (including
Internet telephony) and computer functions or wireless printing - in
any business or for any enterprise, whether as a salaried employee, an
independent contractor, a shareholder, a director, a partner, or in
any other capacity.

Possession

16. The Employee agrees that upon request by the Company, and in any event
upon termination of employment, he shall turn over to the Company all
documents, papers or other material in his possession or under his
control which may contain or be derived from Confidential Information,
together with all documents, notes or other work product which is
connected with or derived from Employee's services to the Company
whether or not such material is at the date hereof in Employee's
possession.

Disclosure and Assignment of Inventions.

17. During the term of his employment with the Company and for a period of
six (6) months thereafter, the Employee shall promptly and fully
disclose to the Company (and to any persons designated by it) all
discoveries, developments, designs, improvements, inventions,
formulae, processes, techniques, computer programs, strategies,
specific computer-related know-how and data, computer hardware,
software and firmware techniques, ,and document coding techniques,

whether or not patentable or registrable under patent, copyright or
similar statues, generated or conceived or reduced to practice or
learned by the Employee, either alone or jointly with others, that in
any way relate to the business of the Company, or result from tasks
assigned to the Employee by the Company, or result from the use of
premises or property (including equipment, hardware, software,
firmware, supplies, facilities or the Company's Confidential
Information) owned, leased, licensed or contracted for or by the
Company (collectively "Inventions").

The Employee agrees that his services on behalf of the Company are
works made for hire and all Inventions shall be the sole property of
the Company, and the Company shall be the sole owner of all patents,
copyrights, trademarks, trade secrets, and other rights and protection
in connection therewith. The Employee hereby assigns to the Company
any and all rights he may now have or may hereafter acquire in such
Inventions.

<PAGE>

secrets, and other rights and protection relating to said Inventions
in and all countries, and applying for and obtaining such patents,
copyrights, trademarks, trade secrets and other rights and protection
on and enforcing such Inventions, as the Company may desire, together
with any assignments thereof to the Company or persons designated by
it. Such obligation to assist the Company shall continue beyond the
termination of the Employee's employment by the Company, but the
Company shall compensate the Employee at a reasonable rate after
termination of employment for time actually spent by the Employee at
the Company's request on such assistance. In the event the Company is
unable, after reasonable effort, to secure the Employee's signature on
any document or documents needed to apply for or prosecute any patent,
copyright, trademark, trade secret, or other right or protection
relating to an Invention, whether because of the Employee' physical or
mental incapacity or for any other reason whatsoever, the Employee
hereby irrevocable designates and appoints the Company and its duly
authorized officers and agents as his agent coupled with an interest
and attorney-in-fact, to act for and in his behalf and stead to
execute and file any such application or applications and to do all
other lawfully permitted acts to further the prosecution and issuance
of patents, copyrights, trademarks, trade secrets, or similar rights
or protection thereon with the same legal force and effect as if
executed by the Employee.

General Provisions

18. The Employee agrees that the Company shall be entitled to set off from
any sum including but not limited to salary, severance pay, advance
notice and vacation redemption - which it owes the employee, any sums
which the employee may from time to time owe the Company, including
but not limited to damages for violation of this Agreement and for
violation of the Employee's other obligations under other agreements
or under the law.

19. The failure of the Company to terminate this Agreement for the breach
of any condition or covenant herein by the Employee shall not affect
the Company's right to terminate for subsequent breaches of the same
or other conditions or covenants. The failure of either party to
enforce at any time or for any period of time any of the provisions of
this Agreement shall not be construed as a waiver of such provisions
or of the right of the party thereafter to enforce each and every such
provision.

20. Any notice hereby required or permitted to be given shall be
sufficiently given if in writing and mailed by registered mail,
postage prepaid, to either party at the address of such party set
forth above or at such other address as shall have been designated by
written notice by such party to the other party.

<PAGE>

21. This Agreement shall constitute the entire contract between the
parties and supersedes all existing agreements between them,
whether oral or written, with respect to the subject matter
hereof except for the agreement of 24th June 1996 according to
which the Employee received options to purchase the shares of
the Company's parent company, which shall remain in effect.. No
change, modification or amendment of this Agreement shall be of
any effect unless in writing signed by the Employee and by the
President or any Vice President of the Company.

22. This Agreement shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the laws of the State
of Israel.

23. Should any provision of this Agreement not be enforceable in any
jurisdiction, the remainder of the Agreement shall not be affected
thereby.

IN WITNESS WHEREOF THE PARTIES HEREUNTO PLACE THEIR HANDS

- -------------------------- ---------------------------
The Company The Employee

By:
----------------------
Name:
Title:

<PAGE>

EMPLOYMENT AGREEMENT

Made and Signed in Jerusalem this ___ day of December, 1996

BETWEEN: I.T.I. Innovative Technologies Ltd.
Digital Building
HaMarpe St.
Har HaHotzvim
Jerusalem
(hereinafter: the "Company")

of the First Part

AND: Ed Abramson
of
Jerusalem
(hereinafter: "the Employee")

of the Second Part

WHEREAS: the Company and the Employee desire to define the conditions of the
Employee's employment by the Company in accordance with the terms and
conditions following;

NOW THEREFORE THE PARTIES AGREE AS FOLLOWS:

Preamble

1. The Preamble hereto constitutes an integral part hereof.

Employment

2. The Company hereby continues the employment of the Employee and the
Employee hereby agrees to continue his employment upon the terms and
conditions contained herein. The Partiesk state that the Employee's
employment with the Company began May 1, 1991.

3. The Employee is engaged as director of public relations of the
Company. In that capacity the Employee may be required to provide
services to the Company's related companies though the Employee will
be employed only by the Company. The Employee's responsibilities will
include investor relations, trade shows, press relations and liason
with persons dealing with marketing and advertising for the Company.
The precise services of the Employee may be extended or curtailed,
from time to time, at the direction of the Company. The Employee shall
devote the Employee's entire working time, attention and energies to
the business of the Company, and shall assume and perform such further
reasonable responsibilities and duties as may be assigned to him from
time to time by the Company. The Employee is aware that his position
is a senior management position which requires that the Company place
special reliance on the Employee's personal responsibility and

therefore that the

<PAGE>

Overtime and Weekly Rest Law, 5711-1951 shall not apply to the
employment of the Employee. The Employee is also aware that his
position may require travel, which at times may be extensive. The
Employee will report directly to the Company's Chief Executive Officer
or to such other person as the Company may appoint for this purpose
form time to time.

Salary

4. For the services rendered by the Employee to the Company, the Company
shall pay the Employee a gross salary at the rate of US$7,500 per
month, or as otherwise shall be agreed upon from time to time by the
parties hereto. Payments of salary shall be made monthly by the 2nd of
the calendar month (or if that day is not a business day, on the next
business day) for the month preceding and shall be made in New Israeli
Shekels according to the Representative Rate known as of the morning
of the 1st of the calendar month during which they are being paid.
Such linkage to the US Dollar shall be on account of and deductible
from any cost of living index increment (Tosefet Yoker) which the
Company may be obligated to pay to the Employee. The Parties will
review the Employee's salary and benefits package annually near the
beginning of every January beginning January 1, 1998. The Company's
undertaking to conduct such review shall not be interpreted as
imposing an obligation on the Company to increase the Employee's
salary as a result thereof.

Other Benefits

a) 8 1/3 % of Employee's gross salary , as savings on account of
severance pay (Pitzuei Piturin) for the Employee;

b) 10% of the Employee's gross salary, in a savings plan (Kupat
Gemel). Half of the 10% (5%) will be deducted from the
Employee's gross salary;

Dmei Mahala.

6. a) Upon the cessation of the Employee's employment with the
Company, as a result of firing or as a result of the
Employee's resignation, the Company will transfer to the
Employee

<PAGE>

the ownership of the portion of the policy mentioned in
Sub-Clause 5(b) which was contributed by the Employee.

"I hereby declare that after receiving the transfer of the
ownership of the Keren Pitzuim portion of the Bituah
Menahelim policy maintained by I.T.I. Innovative Technology

Ltd. with regard to me, I shall have no further claims of any
kind against I.T.I. Innovative Technology Ltd. for any sum to
which I might be entitled as a result of the cessation of my
employment, including Pitzuei Piturin."

<PAGE>

9. The Employee will be entitled to the use of a car the purchase price
of which to the Company will be roughly US$20,000 plus VAT and the
Company will bear the cost of gas, insurance, and maintenance of the
car. Should a claim be made on the car's insurance which is subject to
a "deductible" by the insurance company, the amount of such deductible
up to NIS 2,000 will be refunded to the Company by the Employee. The
Company will deduct from the Employee's salary any tax which it is
obligated to withhold as a result of this Clause. Should the Employee
decide to add members of his family other than himself as insured
drivers under the car's insurance, and should such addition increase
the cost of such insurance, then the Employee will bear the
incremental increase.

10. The Employee shall be entitled to vacation, sick pay, holidays and
payment for periods of reserve duty in accordance with the Company's
published employment policy. The Company shall be entitled to change
that policy from time to time and the Employee shall not be entitled
to claim that such change does not apply to him and that he is
entitled to rely on the employment policy in force at the time of the
beginning of his employment or at any later time. The Employee will
take vacation only after receiving the Company's approval.

11. Other than as expressly provided herein or as mandated by law, the
Employee shall not be entitled to any other rights or benefits.

Taxation

12. The Company will deduct taxes at source from the Employee's gross
salary, including the employee's portion of payments to the National
Insurance Institute, as required by law.

Term

13. This Agreement shall commence on the date hereof. The Employee
undertakes to continue his employment with the Company, and the

<PAGE>

Company undertakes to continue the employment of the Employee, until
at least December 31, 1997. After the aforesaid date, either party
shall be entitled to terminate this Agreement by giving the other
party notice of termination at least sixty (60) days prior to the
effective date of termination. The date of mailing of the notice shall
constitute commencement of the notice period.

Non-Disclosure of Confidential Information

The Employee recognizes that the disclosure or use by himself of
Confidential Information by the Employee may give rise to irreparable
injury to the Company, which may not be adequately compensated by
damages. Accordingly, in the event of a breach or threatened breach by
the Employee of the provision of this paragraph, the Company shall be

entitled to an injunction restraining the Employee from using the
Confidential Information himself, from disclosing, in whole or in
part, the Confidential information, or from rendering any services to
any person, firm, corporation, association or other entity to whom
Confidential Information, in whole or in part, has been disclosed or
is threatened to be disclosed. Nothing herein shall be construed as
prohibiting the Company from pursuing any other remedies available to
the Company for such breach or threatened breach, including the
recovery of damages from the Employee. The within undertakings shall
survive the termination or cancellation of this Agreement or of the
Employee's employment.

For clarity's sake, it is stated that disclosure of Confidential
Information by the Employee with the Company's approval - written or
oral - during

<PAGE>

the course of his fulfillment of his obligations under this Agreement
will not constitute a violation of this Clause.

Non-Competition

Possession

Disclosure and Assignment of Inventions.

specific computer-related know-how and data, computer hardware,
software and firmware techniques, ,and document coding techniques,
whether or not patentable or registrable under patent, copyright or
similar statues, generated or conceived or reduced to practice or
learned by the Employee, either alone or jointly with others, that in
any way relate to the business of the Company, or result from tasks
assigned to the Employee by the Company, or result from the use of
premises or property (including equipment, hardware, software,
firmware, supplies, facilities or the Company's Confidential
Information) owned, leased, licensed or contracted for or by the
Company (collectively "Inventions").

<PAGE>

and all rights he may now have or may hereafter acquire in such
Inventions.

The Employee further agrees as to all such Inventions to assist the
Company in every proper way (but at the Company's expense) to obtain
and from time to time enforce patents, copyrights, trademarks, trade
secrets, and other rights and protection relating to said Inventions
in and all countries, and applying for and obtaining such patents,
copyrights, trademarks, trade secrets and other rights and protection
on and enforcing such Inventions, as the Company may desire, together
with any assignments thereof to the Company or persons designated by
it. Such obligation to assist the Company shall continue beyond the
termination of the Employee's employment by the Company, but the
Company shall compensate the Employee at a reasonable rate after
termination of employment for time actually spent by the Employee at
the Company's request on such assistance. In the event the Company is
unable, after reasonable effort, to secure the Employee's signature on
any document or documents needed to apply for or prosecute any patent,
copyright, trademark, trade secret, or other right or protection
relating to an Invention, whether because of the Employee' physical or
mental incapacity or for any other reason whatsoever, the Employee
hereby irrevocable designates and appoints the Company and its duly
authorized officers and agents as his agent coupled with an interest
and attorney-in-fact, to act for and in his behalf and stead to
execute and file any such application or applications and to do all
other lawfully permitted acts to further the prosecution and issuance
of patents, copyrights, trademarks, trade secrets, or similar rights
or protection thereon with the same legal force and effect as if
executed by the Employee.

General Provisions

<PAGE>

21. This Agreement shall constitute the entire contract between the
parties and supersedes all existing agreements between them, whether
oral or written, with respect to the subject matter hereof except for
the agreement of ____________ according to which the Employee received
options to purchase the shares of the Company's parent company, which
shall remain in effect.. No change, modification or amendment of this
Agreement shall be of any effect unless in writing signed by the
Employee and by the President or any Vice President of the Company.

22. This Agreement shall be construed and enforced in accordance with, and
the rights of the parties shall be governed by, the laws of the State
of Israel.

23. Should any provision of this Agreement not be enforceable in any
jurisdiction, the remainder of the Agreement shall not be affected
thereby.

IN WITNESS WHEREOF THE PARTIES HEREUNTO PLACE THEIR HANDS

- -------------------------- ---------------------------
The Company The Employee

By:
----------------------
Name:
Title:

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated March 29, 1996 (except
as to the recapitalization described in Note 10, which is as of September 10,
1966, and the initial public offering described in Note 9, which is as of
October 1, 1996) relating to the consolidated financial statements of Integrated
Technology USA, Inc., which appears in such Prospectus. We also consent to the
references to us under the headings 'Experts' and 'Selected Financial Data' in
such Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such 'Selected Financial Data.'

Price Waterhouse LLP
New York, New York
December 19, 1996